Why Nvidia's earnings may not move the stock much

Nvidia reports its fiscal 2025 first quarter results on Wednesday, May 22, after the market close.

Aptus Capital Advisors Portfolio Manager David Wagner expects the chip giant will issue a "beat and raise" but that he doesn't think "a lot of the exuberance heading into this report is actually going to be shown in the stock price."

Wagner argues "Nvidia is absolutely going to incur some type of demand-driven air pocket over the next few years," but that doesn't necessarily mean the stock is overvalued.

Watch the video above to hear other ways Wagner recommends playing the AI trade.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

Video transcript

Well, another test to the market's momentum this week is NVIDIA, the A I darling is announcing its first quarter earnings results after the bell on Wednesday.

Capping off reports from America's biggest tech giants, NVIDIA shares have been performing well up 90% this year and its earnings report will certainly impact the A I trade.

So how can you set yourself up for success ahead of these big results?

For more?

I'm joined by David Wagner, who is the ACTIS Capital Advisors, Portfolio manager, David.

Great to see you.

Thanks so much for having everyone.

Absolutely.

Let's dive into this one here, NVIDIA, the bellwether for the A I trade.

What is the anticipation here?

And is this for what we're considering and expecting to be another goldilocks type of report they're gonna need to deliver?

Are they gonna be able to hit on all the metrics that Wall Street is looking for?

Yeah, Brad, obviously, you're right.

NVIDIA is the linchpin for the A I market narrative that we've witnessed for basically the last 12 to 16 months.

But really looking at this report, I'd actually probably flash back to the report just three months ago.

I think that there was a lot of optimism and exuberance really heading into the NAVIDI report just, just three months ago, but it really became a no style type of event.

That's kind of what I'm expecting out of this quarter right now.

I mean, we've been so accustomed with NVIDIA, having some type of beaten raise and an unbelievable revenue beat on the top line mechanism.

It's just become standard.

But that's also why that this is one of the most crowded names out there in the market right now.

So I think that the market's pricing in about an 8 to 9% move on the upside or the downside if you look at at all levels.

Uh I would probably be selling some short calls on this because I just don't think that um a lot of the exuberance heading into this report is actually gonna be shown in, in the stock price.

I think it's just gonna be a three wood right down the middle of the fairway.

It's gonna be a beat and raise.

But I think the commentary that we're gonna see from Jensen itself, especially on the transition from uh the Hopper to Blackwell is really what's gonna be the investor focus uh on Wednesday night?

All right, I can tell you while we're watching the uh PGA Championship over the weekend for sure, David.

So that's, that's a good thing.

Good one for Zander.

Thanks for noticing.

Ultimately, you know, one of the huge things that investors have to consider is where NVIDIA sits in terms of its value for any investors that are considering kicking the tires on buying in versus some of the rest of the A I annex names within the market right now.

What's your evaluation there?

Yeah, Brad, obviously that that's the big question right now.

And it really reminds me of Bill gates' observation that the impact of technology is often overestimated in the first two years, but then underestimated over the next 10 years.

But with that said, yeah, NVIDIA is absolutely gonna curse some type of demand driven air pocket over the next few years.

But that really doesn't mean that the stocks overvalued in my mind.

You know, I think we need as a investors need to be focusing on the denominator their earnings aspect of the pe multiple you're just talking about and not the the numerator with the price.

Now, this call on valuation was much easier heading into this year when NVIDIA was trading at 30 times forward earnings, which is about 15 turns below its largest pier A and D but not only that, it was trading very much in line with Intel, which is a company that in my mind continues to let investors down the no technological advancements over the past few years.

But if you fast forward to today, like NVIDIA does trade at a premium to Intel, it still trades at a discount to a MD.

So that makes me believe that this stock right now trading at 37 times for earnings, it's gonna be a little bit more fairly valued.

But like I said, I, I should state that investors should not focus on the valuation for NVIDIA right now.

They need to focus on the revenue growth and the continued demand for their products and the transition from Hopper to Black.

Well, that should occur later this year.

That should be the focus here.

If the stock were to material materially drop, I think it's gonna be due more to an earnings air pocket or an earnings with than just simply valuation.

We were just taking a look at the year to day chart for NVIDIA, of course, uh uh a landmark run for itself over the course of the past 52 weeks and, and during 2023 and then here year to date, adding on another 90% in gains here when we think about more broadly for where within the A I trade is still has the most upside potential.

Whether that is the chips, whether that is the language learning models that are gonna be set to come forward, whether that's just the utility companies that are set to make bank because of all the different data centers that they're gonna have to operate as well.

Where is the most compelling part of this?

Yeah.

Uh I agree with you that it's gonna be more on the picks and shovels aspect uh of the trade itself.

So that still will be in, you know, the intangible aspect of the chips themselves.

But again, on the utilities, I think the utilities are somewhat a mis number because it's really caught my eye here lately because, uh, you know, utilities and rates, they should have an inverse correlation yet, utilities have really caught a bid in the face of higher rates.

But utilities, they are very much a regulated um sector within the S and P 500.

But I think there's other ways to play proper utilities that are not as regulated more on the private side like uh uh Qantas Services PWR.

Basically, they're a private company that deal with the transmission lines are going from the utility location itself to the data center.

So it's not regulated by the government.

You know, they have basically a backlog that goes out 10 years from now and they have a lot of pricing power.

It's, it's a great company value may seem stretch if you look at it, you know, versus five year history.

But I think it's very much warranted for the amount of work that's gonna be really coming due, not just in a year or two for now, but 10 years down the road because these are projects that just can't be planned one year out.

They're playing 456 years out.

So there's a lot of visibility in the backlog of this company.

And I think that's another great way to play this A IA I narrative outside of, you know, your, your A nd your Nivea NVIDIA.

But I'd also look at like a stock like, like Verta, we were talking on morning brief about the number of companies that were mentioning A I on earnings calls in this most recent quarter and, and even going back to Q four of last year uh and the stock price increases that they've seen thereafter.

But what is the warning sign that investors should be looking for if there's too much exuberance from some of the companies that doesn't seem like it has anything to do with A I. Yeah, I guess there's that phrase pay to play.

But when it comes to a lot of these earnings calls, it's, it's say to play.

They want to say A I and they think that they can play in that narrative is itself but you know, you have to look through the force through the trees here to see who are the actual beneficiaries.

But coming out of earnings season Q 1 2024 earnings season Brad, I think my biggest takeaway was actually the amount of spending that is gonna be incurred by the magnificent seven names moving forward.

I mean, obviously the, the absolute number was supposed to be very high, but I think a lot of people are really taken back by the actually uh Capex revisions from this past quarter.

I think the magnificent seven are expected to spend $328 billion just in 2024 on Capex spend.

And that's basically through A I so my big takeaway here is, you know, I think over the last year, the market has focused on the magnificent seven and their profitability.

I mean, just look at med itself and its year of efficiency.

But the market is gonna have to really start to focus and recognize how it's going to warrant the valuation of these magnificent seven names.

As we transition from, you know, the years of profitability and focus on RO IC to the transition to this really heavy Capex spend that's really coming out of the these, these set the names and see if that can actually transition from Capex spend into incremental revenue growth and economies of scale for the profitability like the return on invested capital.

Yeah, some supreme spending that they're putting forward.

We'll see if it could uh actually generate some magnificent returns here going forward as well.

David Wagner, always a pleasure to speak with you and get some insights at this capital advisors, portfolio management.

Good to see you.

Absolutely.