Blowout earnings not enough to bolster AI stock
What happened to Nvidia stock this week?
Nvidia delivered what, on paper, was another monster quarter. Revenue came in at $68.13 billion, up 73% year-over-year, beating estimates by $2.2 billion. Data centre revenue hit $62.31 billion, up 75%. Adjusted earnings per share were $1.62 versus the expected $1.53. Gross margin (the company’s profits after production costs) came in at 75.2%. Free cash flow (the money generated after covering its operating expenses and capital expenditure) was an astonishing $34.9 billion, more than double last year.
The company’s forecast of future financial performance was even stronger: a Q1 revenue midpoint of $78 billion, more than $5 billion above the consensus. Gross margin is expected to hold at around 75%. Supplies have been secured for several quarters. And these forecasts don’t include revenue from China. Plus, a $500 billion pipeline going into the 2027 fiscal year is still intact.
Just monster, perfect results. And yet…
The stock lost its post earnings gains and went down in value by 5%. Comments from the company’s chief financial officer that Chinese competitors are “making progress” did not help. Investors also want more clarity around the company’s Blackwell and Rubin ramp platforms.
This is what late-cycle leadership looks like; blowout numbers are no longer enough. The market is shifting from “How big is demand?” to “How sustainable is dominance?” With Nvidia at nearly 8% of the S&P 500, the reaction matters for everyone. The fundamentals are not cracking. The expectation bar just keeps rising.
How is the AI sector performing?
For the year to date, AI sector performance has diverged sharply. The early leaders of the AI cycle (software, semis and platform models) are no longer clearly leading. Meanwhile, industrials, energy, materials and parts of financials have quietly strengthened. This is a rotation from asset light to asset heavy.
Asset light businesses trade on duration and margins. Their value sits far in the future. Asset heavy sectors are different. They own infrastructure. They own energy. They own physical capacity. They benefit from capital expenditure cycles, reshoring (an increase in domestic manufacturing jobs), defence spending and commodity tightness.
AI’s growth is capital intensive. Data centres require steel, power, cooling, copper and grid upgrades. In other words, even if AI enthusiasm cools, the physical investment cycle will continue. This was very evident this week, but we may have hit a level of peak AI disruption fear and are now seeing the beginnings of a comeback for the stocks that were hit the hardest. We shall see if this continues into next week.
How did Diageo perform?
The liquor and alcohol beverage company Diageo fell 7.5% after cutting its forecast expectations for the second time this fiscal year. Organic sales are now expected to decline by 2-3%, versus prior guidance that forecast flat sales. First half organic sales fell by 2.8%. North American operating profit dropped by 15%. Net sales of U.S. spirits fell by 9.3%.
From its 2021 peak, Diageo’s stock is down more than 50%; it now trades near 2015 levels.
Its performance in Europe was stronger, but the company’s core issue is the U.S. and China. Younger consumers are drinking less. Lower income consumers are squeezed. Premiumization is slowing. Even with cost efficiencies, revenue pressure is hard to offset.
What will manufacturing data tell us?
Looking ahead, next month will bring a slew of new economic data, including ISM Manufacturing data, which will prove very interesting considering the latest gross domestic product data out of the U.S. was extremely disappointing. Will manufacturing point to that number being an outlier or will it confirm weakness? We'll discuss this next week.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
