fbpx

Nvidia's Q2 Earnings vs the Fed

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Nvidia Inc has received a lot of attention in the Year To Date (YTD). As an earlier article indicated, the company’s stock was labeled a key member of America’s “Magnificent Seven”, i.e., one of seven stocks subjected to intense investor crowding relative to, say, the other 493 constituents of the S&P 500. This crowding did have some hand in the stock’s meteoric 217% price increase in the YTD as of its Q2 earnings date.

However, as other articles have indicated, high valuations generally divorce the stock’s valuation from the company’s business performance. While Nvidia isn’t exempt from this truism, it must be said that the latest Q2 earnings release at least somewhat justifies why the company is so well-regarded.

Line Item Trends

The company’s latest earnings release relative to that of past full years clearly highlights the company’s excellent performance:

The company’s Compute & Networking segment – which encompasses its “Data Center” accelerated computing platform, networking, automotive vehicle services, robotics and other embedded platforms, enterprise solutions and cryptocurrency mining processors (CMP) – has witnessed a sea change by accounting for nearly 74% of the company’s revenues in the first half of the year (H1 ’24), which is a significant rise from 47% in FY ’21. “Data Center” alone accounts for 70% of the company’s revenue as opposed to 40% in FY ’21 and has delivered nearly as much revenue in these past six months than it did in the entirety of FY 23. At this stage, Nvidia isn’t just a company for gamers.

The company’s Graphics segment – which encompasses Graphical Processing Units (GPUs) for gaming and related services, enterprise visualization services, metaverse and 3D internet applications – has halved its revenue share from nearly 53% in FY ’21 to 26% in H1 ’24. Gaming remains the major driver of this segment.

While the revenue share contribution from “Graphics” is largely trending to be around par relative to the previous year, “Compute & Networking” is trending strongly above par. Virtually every subsegment is above 50% in H1 ’24 versus the previous year, with “Data Center” outpacing all others by a large margin.

Some media coverage immediately after the earnings release indicates that the company’s “automotive” subsegments – once touted by CEO Jenson Huang as the company’s “next billion-dollar business” – haven’t done quite as well as it did in the previous quarter. Forward outlook is cloudy due to downward revisions of sales forecasts for high-end vehicles in the coming two quarters. Among those affected are NIO and XPeng – major clients of Nvidia’s in China’s crowded automobile market. This is to be expected: as an earlier article indicated, China is undergoing a quiet economic crisis.

Be that as it may, the “Automotive” segment has performed above par in H1 ’24. Even with a slowdown, it can be expected to close somewhere around par by the end of the year. Furthermore, it bears noting that “Data Center” seems poised to go from strength to strength: with the GH200 Grace Hopper Superchip for complex AI and HPC workloads shipping in Q2, the universal data center GPU L40S made available in a broad range of platforms, and the release of the server reference design MGX for the quick buildout of server variations for AI, HPC and Omniverse applications, the company is developing consistent client-oriented support capabilities that will likely secure dedicated clients who could turn into legacy customers in the future.

Despite these factors and the hype around earnings, market players are rather cool to affording the company’s stock any further tailwinds. The reason: no stock exists in a vacuum and virtually no large-ticket investor is a single-ticker player.

Cool Hands in the Market

An examination of traded volumes of the company’s stock versus its price over the past seven years underlie some interesting market player trends:

  • H2 2016 through Q1 2017 saw very high volumes of the stock traded with relatively little effect on the stock’s performance. This is highly suggestive of a “strong disaggregated convergence”, i.e., while there was a high variety of players – institutional, tactical and retail – the overall consensus price remained quite tight.

  • Q3 2017 through Q4 2020 saw relatively low to moderate traded volumes with a “weak disaggregated divergence”, i.e., players differed on consensus price but with an upward trajectory largely commensurate with decent earnings (no surprises here: the company has traditionally been a decent earner).

  • Q1 2021 through Q4 2021 saw relatively low volumes of the stock traded with a “strong disaggregated convergence” primarily due to retail and tactical investors driving up the hype around the stock on the back of strong earnings.</p

  • Q1 2022 through Q3 2022 saw relatively low traded volumes with a “strong aggregated convergence” as large volumes of retail investors exited, tactical players turned bearish and institutional investors held steady.

  • Q4 2022 through Q2 2023 was the stock’s “Magnificent Seven” phase through “strong aggregated convergence”: AI hype brought in a (relatively) small contingent of retail investors at a time when most continued to stay out of markets, tactical investor strategies and (initial) institutional investor buy-ins.

In Q3, i.e., weeks before the Q2 update rolled in, institutional investors (typically long-term holders) indicated a move towards sector rotation (which was also discussed in a recent article) while tactical players and retail investors both continued to remain in play. Nonetheless, given that institutional investors are periodic bulk drivers of volume and framers of outlook, the stock’s trajectory begins to find growing resistance.

Overall outlook among tactical investors is fairly balanced. In the 30-day outlook, the Put-Call Ratio was nearly perfectly balanced at 1. On the day after (i.e. the 25th), this changed:

The 10-day Put Call Ratio edged up less bullish/more balanced from 0.7338 to 0.8433 while the 30-day outlook went up to 1.3519 (i.e. quite bearish).

The idea that Nvidia would rise (given its now-customary strong earnings) and then rationalize on account of sector rotation seems to be the prevalent outlook among short sellers: overall short interest perked up in the month of August and the weeks leading up to the earnings release.

One reason for institutional caution is the relative overvaluation of the company’s stock relative to its peers:

While it’s certainly true that Nvidia’s strong performance affords it a certain premium relative to its peers, what’s also true is that its peers have burnished their own niche within the electronics ecosystem. Nvidia trends substantially above the average in terms of price ratios. Institutional investment into a sector is sensitive to overvaluation as it displaces weightings away from other constituents and creates concentration risk.

All in all, without substantial retail investor hype, cooler heads have begun to prevail in the market with a distinct disinclination to push the hype further skywards.

The Economy

In addition to the aforementioned headwinds from China, Federal Reserve Chair Jerome Powell indicated on Friday (i.e. the day after the earnings release) that inflation is well above the Fed’s comfort and gave little indication that they will be easing rates any time soon:

We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.

The data-driven approach to battling inflation plaguing the American consumer as opposed to guaranteeing market stability is a return to form for the Federal Reserve. While the U.S. Consumer Price Index (CPI) is no longer displaying the historical Year-on-Year (YoY) highs exhibited a little over a year ago, there are early indications of YoY increases resuming an upward climb again.

The ongoing rate hike schedule has been creating new opportunities (with decreased downside risk) for institutional investors in the fixed income market. Earlier this month, Franklin Templeton highlighted the growing attractiveness of the fixed income market via instruments such as:

  • Corporate bonds that show solid fundamentals on account of current leverage, interest coverage, free cash flow and amortization schedules being at stronger levels than in the recent past.

  • High-yield bonds that offer a bridge for investors between the typical risk/return profiles of fixed income and equity, with yields near 8.5% and some capital appreciation potential.

  • Private credit in the form of highly diversified pool of mostly senior secured loans that offer yields ranging from 11.5% to 12.5%, strong risk-adjusted returns, lower leverage and tighter terms in exchange for some illiquidity.

The volatility inherent in overvaluation imputes a higher risk relative to the risk/reward balance in the higher tiers of the fixed income market. With higher rates also come higher interest payment from new U.S. Treasury issuances; this has helped increase the attractiveness of at least a section of the government bond market for some institutional investors (such as Nvidia itself).

In Conclusion

Investment in AI-relevant infrastructure is increasingly necessary to rationalize operational costs and structurally improve operational efficiency. It can be expected that the “Compute & Networking” segment will continue to be the primary breadwinner for the company. Its peers will undoubtedly be taking notes on integration best practices and advances.

With some institutional capital potentially shifting to other asset classes and equity-oriented capital intent on sector rotation, there’s a tangible possibility that the company’s price ratios will continue to rationalize until the company’s stock evolves from being a member of the “Magnificent Seven” to being a bellwether of the global economic machinery.

The ongoing rationalization of the stock is no reflection on the performance of the company. In fact, rationalization might even make the company’s stock an even more attractive choice for long-term investment. The fact that the stock already pays a dividend when so many other tech companies don’t is a mark of the company’s eligibility for such considerations. All in all, it’s a great company to own but the stock does carry a high degree of overvaluation risk.

Professional investors interested in monetizing the stock’s trajectory can consider NVD3 for a 3X daily-rebalanced exposure on the upside of the stock while NV3S does the same for the downside. For opportunities in US government debt, there is TLT5 which gives a 5X exposure to the upside of the iShares 20 Plus Year Treasury Bond ETF (TLT) or TL5S which does the same on the downside. Similarly, there is IEF5 which gives a 5X exposure to the upside of the iShares 7-10 Year Treasury Bond ETF (IEF) while IE5S does the same on the downside.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Related Posts

Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Violeta-540x540-1.jpg
Boyan Girginov
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
Violeta-540x540-1.jpg
Violeta Todorova
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
Violeta-540x540-1.jpg
Boyan Girginov
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
Investors can bet against Nvidia via different methods, including inverse ETPs.
Investors can bet against Nvidia via different methods, including inverse ETPs.
Violeta-540x540-1.jpg
Boyan Girginov
Investors can bet against Nvidia via different methods, including inverse ETPs.
Investors can bet against Nvidia via different methods, including inverse ETPs.
Investors can bet against Nvidia via different methods, including inverse ETPs.
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Violeta-540x540-1.jpg
Boyan Girginov
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
Inflation proves to be stubborn. End of the hiking cycle great opportunity to add bonds.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
Violeta-540x540-1.jpg
Violeta Todorova
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
The most popular ways to invest in AI is either via publicly traded shares or ETFs.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
Violeta-540x540-1.jpg
Boyan Girginov
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
From Magnificent 7 to Super Five. Inflation’s Threat to the Tech Rally.
Investors can bet against Nvidia via different methods, including inverse ETPs.
Investors can bet against Nvidia via different methods, including inverse ETPs.
Violeta-540x540-1.jpg
Boyan Girginov
Investors can bet against Nvidia via different methods, including inverse ETPs.
Investors can bet against Nvidia via different methods, including inverse ETPs.
Investors can bet against Nvidia via different methods, including inverse ETPs.

Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

S&P 500 Plunges on Rising Middle East Tension

Goldman Posts Unexpected Surge in Profits

JPMorgan Stock Plunges Despite Solid Earnings

What is an ETF? (Exchange Traded Fund)

How do Leverage Shares ETPs differ from other leveraged ETP issuers

How Do Leverage Shares ETPs Trade in Multiple Currencies

Build your own ETP Basket
Leverage Shares: Europe’s top leveraged and inverse ETP provider.
Main ETP benefits
Common investor questions

Get the Newsletter

Never miss out on important announcements. Get premium content ahead of the crowd. Enjoy exclusive insights via the newsletter only.

Welcome to Leverage Shares

Terms and Conditions

Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2. 

By clicking you agree to the Terms and Conditions displayed.