Nvidia Drops A Bomb Sending Stocks Lower On January 28

The stock market fell today, are you surprised? I hope note, this is precisely what I had expected to happen and I noted it in Friday’s write-up.  Futures were already pointing to losses before the Caterpillar and Nvidia disasters. But the S&P 500 fell right to support around 2,630, held, bounced and finished the day at 2,642. The good news is that now there is a giant gap to fill on the upside around 2,660. How much you want to bet we are trading around 2,660 tomorrow at some point? I really hate to be overconfident, because that is when the market just makes you look like a complete fool. But based on the current trends in the market it would not surprise me the least.  Just look at the chart!

sp500, spx

Nvidia (NVDA)

Nvidia was the significant weight on stocks today after it pre-released what looks to be not a bad quarter, but a horrible quarter. Revenue is expected to be nearly 20% below their November guidance.  How bad is Nvidia? It is so bad that the company is guiding revenue to $2.2 billion down from its previous guidance of $2.7 billion. But before that November guidance, which was a major disappointment, analysts had been looking for fourth quarter revenue of $3.4 billion.  The revenue today is 35% below what investors had been forecasting just three months ago. You can see in the chart below with my annotations of course.

Then factor in the margins of 56%! That is down from prior guidance of 62.5%! So not only are they are selling fewer “widgets,” but it is costing them even more to make it. Or even worse than that,  they are making the same number of widgets and not adjusting their production for the slowing demand. Remember this is Gross Profit Margin, Revenue minus COGS = Gross Profit. Either way, it is a disaster in my opinion.

And for this mess, you get to pay 19 times next year earnings estimates for it! That is higher than the average PE ratio of the top 25 holdings in iShares PHLX Semiconductor ETF of about 13. But wait there is more because the lower revenue and lower margins mean EPS estimates are likely too high for this year and next year, and that means the valuation is going to go up! That is right, as earning go down PE ratio’s go up! Unless of course, the stock falls further. Here is what I wrote in my free SA today.

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Disclosure: Michael Kramer and the clients of Mott Capital own Apple

Disclaimer: This article is my opinion and expresses my views. Those views can change at a moment's notice when the ...

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