NVDA SMASHES Q2 Earnings and Q3 Guidance!

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Market News and Short-Term Predictions

All eyes were on NVDA earnings this week so let's dive right into the results for the poster child of the AI movement.

Shares soared nearly 10% in extended-hours trading on Wednesday after the semiconductor giant reported second-quarter results and guidance that smashed expectations.

For the period ending July 31, Nvidia earned an adjusted $2.70 per share on $13.51B in revenue ($2.09 EPS/$11B expected). Included in that was $2.49B in gaming revenue, above the $2.38B estimate. Data center sales surged to a record $10.32B, well above the $7.98B that analysts were looking for.

Adjusted gross margins were 71.2%, above the 70.1% estimate.

Looking ahead, Nvidia (NVDA) said it expects third-quarter sales at $16B, plus or minus 2%, well above the $12.5B that analysts were expecting.

This was by all means a MONSTER quarter as they destroyed both the quarterly results and forecasted a huge rise in revenue.

With all that positive news, the stock barely stayed up as it gave almost all of those gains it saw yesterday and this morning away.

So what gives? Valuation matters.

The valuation has growth already built into the stock. It has a P/E of 113 and a P/S ratio of 36.

Now I do have to hand it to them that when compared to their competition they have the higher growth rate expectations for both top and bottom lines over the next 5 years and they also have the highest margins.

So regardless of how amazing AI is and how it is the future, the valuation is baking in that growth. If the economy gets worse and rates stay higher, if companies can no longer focus on going all in on AI and buying up as many chips as possible, then their valuation multiples could easily get cut in half. So if you aren't comfortable with a 50% pullback in this name it may have a little bit too much risk for you.

For me, it is already in my portfolio. I'm holding, but definitely not adding more to the position at the current valuations.

I think a better play in the chip space as of right now would be looking at the company that makes the chips that NVDA designs which would be TSM. Or you could buy AMD as its valuation multiples are much softer compared to NVDA, so if the market gets bullish in the sector and looking for a catch-up play, AMD could be set up nicely.

As for the general market, it continues to churn as it passed the 50DMA and is trying to stabilize after pulling back 5%.

I'm not that worried as I think tech is just taking a breather dealing with similar issues as NVDA trying to get back to reasonable valuations before moving back up. And just your friendly reminder that 5% pullbacks happen on average about 3 times a year, so it is completely normal market action.

Lessons to Be Learned

I wanted to talk about AMC stock. And I promise it has nothing to do with dunking on long investors that sent me hate messages throughout the years as the stock hit all-time lows, but to discuss the mechanics of a 10-1 reverse stock split that they just went through.

You'll see in the chart above that the stock is currently trading at $14, but it was just trading at $2! What gives and why can the stock price magically jump up 7x, but the chart is showing a daily decline of 27%?

A reverse stock split is when a company has a certain amount of outstanding shares and increases the amount of shares. This shouldn't have any impact on the market cap of the company theoretically.

Here is a simplified explanation:

Company X has a $2 billion market cap (value of the company) and 1 billion shares. If you divided $2 billion by 1 billion shares you would get the share price of $2/share. Now if the company announces a 10-1 reverse stock split the amount of shares outstanding goes from 1 billion to 100 million. So now you have a $2 billion market cap divided by 100 million shares in which you get a $20/share.

In the above scenario, no value was created you are just changing the denominator of the equation. The opposite of the above scenario is a stock split where the outstanding shares get larger and the stock price comes down.

Historically when a company does a reverse stock split it tends to be negative and it's seen as a positive when a company does a stock split.

So now you know when you are scanning for huge 1-day swings of a stock price in either direction to always check for a reverse stock split or regular stock split first before freaking out!

Portfolio Update

Stock/Option Watchlist

Stocks: TSLA, LLY, CHDN, ROK, ADSK, PTLO, SBUX

Options: SPLG, PLTR, BAC, MPW, F, AAL, T, DISH

See premium membership for details on interested entry points/strike prices/current wheel positions.

Options Trading Portfolio

Closing Trades

No closing trades this week, but did buy 100 shares of AAL at $16/share due to getting assigned on a put I sold (see below for covered call details).

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