The S&P 500 closed lower, marking the commencement of a crucial earnings week in the stock market on February 20, 2024.
The Nasdaq Composite fell by 0.9% and the S&P 500 by 0.6%, while the market’s volatility index, also referred to as the “fear gauge,” rose.
The technology giant Nvidia is set to announce its fourth-quarter earnings after the market closes on Wednesday, sparking curiosity among investors about its ability to maintain the growth surge that has driven its stock price to record levels in the past year.
Nvidia’s success is closely linked to the optimism surrounding artificial intelligence (AI) technologies. The company’s role in developing graphics processing units (GPUs) and high-end computer chips for supporting large language models and generative AI tools has been the key driver of this growth. Currently, Nvidia dominates approximately 80% of the market for advanced AI chips.
Based in Santa Clara, California, Nvidia’s stock has climbed over 44% year-to-date and surged by more than 236% in the past year, rising from $206.55 per share on Feb. 21, 2023, to $694.52 per share at the Tuesday market close.
Amid the AI boom, Nvidia’s significant rise placed it as the third-largest publicly traded U.S. company by market capitalization last week, surpassing Google’s parent company Alphabet and e-commerce giant Amazon. However, a sell-off on Tuesday caused Nvidia’s market cap to fall below those levels, with Microsoft and Apple currently holding higher market caps.
Market uncertainty over Nvidia’s upcoming earnings report and the sustainability of its considerable growth triggered a sell-off on Tuesday, leading to a decrease in Nvidia’s market cap to $1.72 trillion, slightly below Alphabet’s $1.76 trillion and Amazon’s $1.74 trillion.
Nvidia’s stock price dropped over 4.3% during Tuesday’s trading session, continuing to decline in after-hours trading by more than 1.9%, reaching $680.90 per share. This brings Nvidia’s stock price to the level it traded at in early February, about 7.9% lower than its all-time closing high of $739 per share on Feb. 14.
“The market may be cautious about whether [Nvidia] can provide guidance strong enough to propel the market even further,” stated Frank Lee, HSBC’s head of technology research, in remarks to Reuters.
Analysts expect Nvidia to report earnings of $4.56 per share, with revenue projected to increase to nearly $20.4 billion from just over $6 billion a year ago, according to LSEG’s projections.
Recent reports indicate that Nvidia has consistently exceeded analysts’ expectations in earnings per share (EPS) and revenue by double-digit percentage points. For example, the October 2023 earnings report beat EPS estimates by 18.7% and revenue estimates by almost 12.5%. The prior earnings report from July surpassed estimates by around 29.4% and 21.9%, respectively.
Despite the market anticipating another strong performance from Nvidia, concerns remain about its ability to outperform expectations.
Investors are gearing up for significant stock fluctuations after the earnings announcement. Nvidia options analyzed by the options analytics service ORATS suggest a potential swing of about 11% in either direction.
Nvidia shares fell by 5.4%, the largest percentage decline since May 31, 2023, when they dropped by 5.7%, as reported by Dow Jones Market Data. The company has experienced a decrease in value for four out of the last five days.
Despite this recent decline, the stock has shown an increase of 11.6% in February and a 39% rise in 2024. Over the past 12 months, Nvidia shares have surged by 232%.
During Tuesday morning’s trading session, the Nasdaq Composite dropped by 1.3% and the S&P 500 saw a 0.7% decrease. In contrast, the Dow Jones Industrial Average only decreased by 46 points, or 0.1%. Nvidia, a standout performer in the past year, put pressure on tech stocks, especially on Tuesday.
“I think what you’re seeing is just some hedging before the results are released,” commented Tom Essaye from Sevens Report Research in an interview with Barron’s. “I think that’s part of it. The other part is you’re still seeing some follow-through from Friday’s selling, as people are becoming a bit less certain about a continuous decline in inflation.”