Was Nvidia Corp’s Friday share price flop a portent for the Big Tech earnings season currently getting underway?
The Silicon Valley chipmaking darling fell 10% in just one day and while a lot of this had to do with knife-edge tensions in the Middle East (which battered stocks across the board), it’s hard to brush off its steepest red candlestick since August 2022.
It was far from an isolated incident- the Magnificent Seven bunch of megacap US tech stocks – Alphabet (NASDAQ:GOOGL), Amazon, Apple, Meta Platforms, Microsoft (NASDAQ:MSFT), NVIDIA (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) – have lost $1.1 trillion in combined market value in just six trading days.
They’re now 8% lower than their combined all-time high of $14 trillion (thanks to AJ Bell for the tally) achieved earlier this month.
Make no mistake- this is far from a rout. The Magnificent Seven is still worth a couple of years' worth of Japan’s gross domestic product and still comprises 31% of the S&P 500 index (thanks again AJ Bell).
But the sudden plunge in Big Tech valuations can be read in two ways, and both have their negative connotations.
Overpriced or overcooked?
The first and probably most pragmatic hypothetical is that these companies have commanded substantially higher valuations than they deserve at this present point in time.
AJ Bell investment director Russ Mould alluded to this hypothetical on Monday: “Perhaps we are asking the wrong question, as we search for a reason for this sudden air pocket in the Magnificent Seven’s previously serene trajectory.
“As J.K. Galbraith wrote in his book The Great Crash, the issue may not be why stock prices are falling, but why they trade at such elevated levels and valuations in the first place.”
Nvidia is the poster child of these runaway valuations, having famously more than tripled in value in 2023 alone.
UBS analyst Jonathan Golub also concurs with this hypothetical. He noted that the ‘Big Six’ (that’s the Magnificent Seven, minus Tesla… another story altogether) has rallied a combined 117% since January 2023.
Due to these inflated valuations, UBS today downgraded the Big Six basket from overweight to neutral.
One could that UBS lacked the gumption to say this a month ago and is simply offering a knee-jerk reaction to Nvidia’s Friday flop, but the sentiment holds water regardless.
The other hypothetical represents a rather more existential problem for Big Tech: Is the earnings potential offered by artificial intelligence overcooked?
It’s a very real possibility if UBS’s estimated decline in earnings growth among the Big Six from 42% to 16% in the year ahead holds credibility.
Either way, it’s clear that earnings growth, both past and predicted, will be the number-one focus point in this earnings season.
To each their own
Another thing to consider in this Big tech earnings season is that the Magnificent Seven is not a monolith and their headwinds and tailwinds are all unique.
Tesla, for instance, is facing ever-increasing competition from Chinese EV makers hell-bent on eating Elon Musk’s lunch, while Meta has an eye-watering capital expenditure commitment to justify Zuckerberg’s big metaverse gamble.
Apple, meanwhile, has fallen behind in the great AI revolution and iPhone sales are flailing, while Nvidia could be about to face similar issues plaguing Tesla.
As Saxo’s head of equity strategy Peter Garnry explained: “Demand for AI chips remains strong and the outlook for Nvidia looks good, but equities are about changing expectations.
As we have recently told clients, Tesla’s plunge from its late 2021 high… reflect forces that were not adequately priced in the valuation.
“The market back then priced Tesla for 25-30% global market share domination including sustaining higher operating margin than the industry. Two years later competition is eroding Tesla’s profit margin and demand has hit an air pocket.
"A similar situation could happen to Nvidia. That in two years from now revenue and profits have doubled but the share price is down.
“The three biggest risks for Nvidia are increased competition, which we know is coming from many different directions, supply chain disruptions around Taiwan, and electricity production that cannot keep up with AI data centre demand.”
Alphabet and Microsoft seem the most bulletproof of the bunch, but who knows? This Big Tech earnings season could be full of surprises.
- Tesla Inc (NASDAQ:TSLA) reports on Tuesday, 23 April
- Facebook (NASDAQ:META) parent Meta Platforms Inc (NASDAQ:META, ETR:FB2A, SWX:FB) reports on Wednesday, 24 April
- Google parent Alphabet Inc (NASDAQ:GOOG) reports on Thursday, April 25
- Amazon.com Inc (NASDAQ:AMZN, ETR:AMZ) reports on Tuesday, 30 April
- Apple Inc (NASDAQ:AAPL, ETR:APC) reports on Thursday, 2 May
- Nvidia Corp reports on Wednesday, 22 May