Traders were on edge this week as Nvidia geared up to report Q2 earnings. In an interview with InvestorPlace.com contributor Michael Gayed, Shrey Dua summarizes how a bad quarterly report from Nvidia (NASDAQ:NVDA) could send the entire market down the drain. Here’s Gayed from the interview:
[This] is just one of those classic dynamics that’s no different than the crypto media, it’s no different than the metaverse media. This is just another example of manic overconfident trading that becomes a self-fulfilling Ponzi type of dynamic, which is not anchored on fundamentals and which end up being a structural risk to the entire market because it encourages the exact leverage that creates the margin call.
Fortunately, Nvidia didn’t just beat earnings…
… It trounced them.
The Silicon Valley chipmaker now expects revenues to rise 170% in the coming quarter and for profits to hit a record $7.3 million. As Luke Lango put it on Thursday, “the AI Boom has unequivocally arrived, and it will last for years to come.”
This removes one of the greatest concerns we’ve seen all summer. Markets have become jittery over a potential AI bubble. Even a slight sneeze by Nvidia CEO Jensen Huang during his firm’s earnings call would have been enough to give markets pneumonia.
But Nvidia’s second-quarter earnings should put those fears to rest for now. Huang’s talk about the beginning of “a new computing era” is true, despite sounding more like hyperbole than fact. Companies are belatedly realizing that they need an AI strategy, and that’s creating an enormous tailwind for other AI-focused firms.
This week, the writers at InvestorPlace.com, our free news site, dive into five of these companies set to surge on Nvidia’s blowout earnings…
5 Stocks Set to Surge on Nvidia’s Blowout Earnings: Microsoft (MSFT)
Microsoft is still pushing the boundaries of what’s possible with AI technology. Currently, the company is deploying AI functionalities to assist a range of frontline workers, including healthcare workers. … MSFT stock gets a confident “B” grade and should be appropriate for many investors’ portfolios.
Essentially, Nvidia’s results included two bright spots for Microsoft’s growth.
- Data Centers. Nvidia’s 141% increase in data center revenue suggests that demand for Microsoft’s Azure cloud computing is recovering faster than many realize. Data center investment tends to be a leading indicator of cloud demand.
- AI Demand. Chatbots are only the tip of the AI iceberg. During the quarter, Nvidia revealed almost a dozen partnerships across the AI ecosystem, including Cloud AI supercomputing, generative AI, and automotive. Microsoft’s cloud computing arm services most of these applications.
That makes Microsoft a high-quality AI play without the same eyewatering valuations as Nvidia. The tech giant’s shares sit at under 30 times forward earnings, far lower than the 61X multiple at Amazon.com (NASDAQ:AMZN) or Nvidia’s 117X. Investors should expect that gap to narrow as Microsoft finds its AI footing.
2. International Business Machines (IBM)
I’ve long been skeptical of second-rate companies. These struggling firms are typically outspent by their more successful rivals, which perpetuates the decline. (How to beat a rival that has a 10X larger marketing budget?)
The only time I consider turnarounds is when they follow the lessons of the late business guru Clayton Christensen and pursue less profitable corners of the market. It’s how companies like Tesla (NASDAQ:TSLA) succeed. Legacy car companies were so busy defending their hard-to-produce internal combustion engines that they failed to recognize the future was in simpler electric motors!
As investors navigate the ever-evolving realm of quantum computing stocks, it’s clear that IBM stands out as a beacon… IBM’s closure of a $4.6 billion Apptio acquisition and its venture to make Meta Platforms LLM available on the watsonx platform exemplify its relentless pursuit of innovation.
In short, IBM is pursuing quantum computing just as every other firm is piling into graphical processing units (GPUs). Quantum computing remains years away from commercial use, and few established firms are willing to lose money in the meantime.
At the same time, rising valuations (thanks to Nvidia) is helping firms like IBM keep a low cost of capital – an essential ingredient to funding future growth. The firm’s weighted cost of capital now sits at 5.3%, down from 8.2% in 2019. Though it could take years for quantum computing to pay off, Nvidia’s success is providing cover for IBM to pursue its dreams.
3. IonQ (IONQ)
This week, Michael Gayed and Louis Navellier both dive into IonQ (NASDAQ:IONQ), the small-cap leader in quantum computing. Gayed notes that the startup is on track for over 100% growth in new bookings and has raised its growth expectations by 25% already this year. In turn, Louis and his team point out that IonQ has significant exposure to the AI market.
Nvidia’s positive earnings now create an opening for IonQ to succeed. As a startup, IonQ consumes roughly $57 million in cash per year. A healthy stock price will make it easier to raise capital.
The fact that Nvidia’s earnings were not a disaster now solidifies the investment case. IonQ remains years away from profitability, but the massive successes at Nvidia will go a long way to keeping IonQ investors patient. Nervous legacy chipmakers will also keep a floor on the startup’s share price, since buyers will undoubtedly swoop in if the stock falls too far.
4. Palantir (PLTR)
Larry Ramer notes this week at InvestorPlace.com that Nvidia’s earnings also thrusted red-hot Palantir Technologies (NYSE:PLTR) into the spotlight.
“In 20 years, Palantir has never turned an annual profit,” Ramer notes. “However, with Nvidia’s chips powering a new wave of AI tools, PLTR might finally manage to do it.”
Essentially, Palantir was previously stuck in a consulting-type business model. Projects were sizable, but high costs meant limited profits. Its sales team was also not particularly efficient, as measured by percent-of-revenues consumed.
However, the rise of Nvidia and AI has now turned Palantir profitable – in large part thanks to free marketing. In the first half of 2023, Palantir saw revenues rise 15% from a year earlier, while sales expenses rose only 2%.
Analysts now expect 2023 earnings per share () at the data analytics firm to hit 23 cents this year, a 7% upward revision over the past 30 days. 2024 figures have been revised up by a similar factor. As Louis Navellier often notes, these upgrades tend to signal even greater gains in the future, since analysts usually undershoot their revisions.
5. Splunk (SPLK)
Some companies have the misfortune of reporting at the same time as a tech giant. Shares of lithography firm ASML (NASDAQ:ASML), for instance, fell 6% (despite beating expectations) after Tesla offered negative guidance on the same day.
But cloud-based software firm Splunk (NASDAQ:SPLK) seems to have no such issue. Shares of the San Francisco-based firm surged 14% on Thursday after it announced a “beat-and-raise” quarter. The company now expects revenues to rise 13.2% sequentially in Q3 to $1.03 billion and for operating margins to improve.
That has InvestorPlace.com’s William White asking whether Splunk is the next AI giant.
Strong double-digit revenue growth has made Splunk’s valuation quite attractive. SPLK’s enterprise value is trading around 5x forward sales. And although the software as a service (SaaS) company’s shares are up more than 19% year to date, they are still trading below their 2023 peak above $112. Investors could take this as an opportunity to purchase shares.
I agree. Splunk is a top-tier leader in ingesting, indexing, and analyzing machine-generated data, the lifeblood of AI applications. It’s a sticky business that becomes harder to replace the longer a company uses it; no IT manager wants to uproot their entire information database if they can help it. Nvidia’s positive earnings is a plus for Splunk, because it shows how important AI and data management will become.
Splunk is also well managed, unlike many other growing tech firms. The company is laser focused on cost containment, and these efforts show in the company’s unusually fast-growing operating margins. Analysts now expect Splunk to generate $796 million of operating profits this year, up 23.5% from last year.
When Will the AI Party End?
Michael Gayed does have a point with his bearish take. Much like overplanning a vacation, getting overenthusiastic for anything tends to leave a trail of disappointment. Flights get delayed… restaurants run out of food…
… and not every technology company lasts forever.
Already, many Wall Street analysts are noting that Nvidia’s valuation is well above anything they can justify. One went as far as to call the chipmaker the “stock market’s new Tesla, where the market blindly assigns a ridiculously high and unrealistic valuation.”
But knowing when Nvidia’s share price will fall back to Earth is tricky at best. Cisco Systems (NASDAQ:CSCO) saw its share price rise for another three years after the 1997 dot-com bubble began in earnest; there were almost no solvent bears left in the market by the time 2000 rolled around. And Tesla remains worth more than the next seven legacy automakers combined. The EV maker’s “bubble” has yet to burst after more than a decade on public markets.
In other words, these “self-fulfilling Ponzi type of dynamics” that Gayed talks about tend to last far longer than classical finance suggests. Momentum-based investors see rising stock prices and continue to pile in.
That’s why I believe Nvidia’s premium prices will last at least through the end of the year, if not longer. Investors know that Nvidia has an enormous lead in GPU technology and that its closest competitors are at least five years behind. They also realize AI still has a massive runway of growth ahead.
There will be a time to turn bearish on Nvidia’s stock. But until then, as Luke says, the greater risk is getting left behind in a world that’s surging ahead.
We’re still in the early innings of this boom, as Nvidia just confirmed. And if you join in, you could make a lot of money in AI stocks over the next several years – just like the folks who made fortunes in internet stocks in the 1990s.
But if you miss it, you could miss out on the best moneymaking opportunity in 30 years.
Luke has discovered a “loophole” that allows you to take your very own stake in the AI Boom… and make sure you’re positioned for those AI-driven gains.
As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.