Chart of the Month (January 2024)
Chart Description
- The chart above shows the Wall Street consensus earnings estimates for NVIDIA Corporation (NVDA) for fiscal years 2023, 2024 and 2025.
- The blue line shows how the estimate for FY 2023 earnings (ending in Jan 2024) has fluctuated over the last two years (Jan 2022 to Jan 2024).
- For example, one-year ago (Jan 2023), analysts were estimating that NVDA would earn just over $3 per share in fiscal 2023.
- The blue line accelerated dramatically in May of 2023, and now as we close in on the 4th quarter earnings report, analysts believe NVDA made over $11/share for FY 2023.
- The yellow line shows the same relationship for earnings in fiscal 2024 (ending January 2025).
- The maroon line shows the same relationship for earnings in fiscal 2025 (ending in January 2026).
- The vertical yellow line shows that analysts have increased their estimates for fiscal 2025 from $3.05/share in January 2023 to $21.53/share today, representing an increase of over 600%.
Our Take
Needless to say, NVDA’s stock has performed extremely well over the last year as earnings estimates exploded higher. The stock is up over 250% on a trailing 12-month basis, and NVDA is now the 4th largest stock in the S&P 500, measured by market capitalization, at just under $1.3 trillion dollars.
With such a dramatic move in both the stock price and earnings estimates, we continually think about how accurate the forward estimates are likely to be. For general guidance, we look to an excerpt from arguably the greatest investment book ever written, The Intelligent Investor by Benjamin Graham:
There is a fine passage near the beginning of Aristotle’s Ethics that goes: “It is the mark of an educated mind to expect that amount of exactness which the nature of the particular subject admits. It is equally unreasonable to accept merely probable conclusions from a mathematician and to demand strict demonstration from an orator.” The work of a financial analyst falls somewhere in the middle between that of a mathematician and of an orator.
Clearly, Graham believed that it was unreasonable to expect laser-like precision for Wall Street earnings estimates, and who are we to argue with Graham (or Aristotle for that matter). Therefore, if the “educated minds” can agree that NVDA’s fiscal 2025 earnings will almost certainly differ somewhat from the current estimate of $21.53/share, the question then becomes in which direction will it differ.
Even the greatest NVDA bull would have to admit that current sentiment and enthusiasm for the company (and future stock price) is through the roof. If the company delivers actual earnings in 2025 that are near or above current estimates, then it is reasonable to assume the continuation of strong stock price performance. However, if the company delivers something closer to $16.70 in FY 2025, representing a 50% increase above expected 2023 earnings, it would be another story altogether and would likely result in a significant downside move for the stock.
On the surface, it may seem strange to think that the stock could go down in value after growing earnings by over 50% in two years, but it is important to keep in mind that the stock market is a discounting mechanism. Current expectations of almost 100% growth over the next two years are already baked into the price. A 50% increase, while impressive from a nominal standpoint, would be a major disappointment, and likely result in a significant sell-off in the stock.
Why is this important to all investors, even those who don’t own NVIDA? Well, NVDA, and its role in the artificial intelligence boom, was a dominant theme of 2023 driving stock prices higher. As investors, we continually make the mistake of believing that there is an exactness to stock prices and earnings figures because they are quoted in numbers. We often fail to appreciate the role of sentiment, expectations and investor emotions. Overall market sentiment has been moving in a positive direction for over 12 months. Excitement over artificial intelligence as well as the assumption that inflation is now under control have been the two dominating themes that have gotten us to this point. We saw a similar example with the internet bubble of the late 1990s. The internet did indeed prove to be a world changing technology that impacts our lives so much in 2024 that it would be difficult to imagine living without it. However, the Nasdaq index, that primarily tracks technology stocks, lost just under 80% of its value between March of 2000 and October of 2002 as actual near-term profits did not live up to the wildly optimistic expectations. In a similar fashion, we believe that any slight disappointment to the broadly accepted narrative pertaining to AI technology would result in increased volatility and a significant stock sell-off that would have broader market implications. To quote Graham once again, “the really dreadful losses (have been) realized in those common stocks where the buyer forgot to ask, How much?” “How much” is a factor of expectations. The expectation pendulum has swung hard in one direction, and therefore we chose to remain patient.
JPS Financial, LLC is registered as an investment adviser with the SEC. All information is believed to be current and should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. All investments and strategies have the potential for profit or loss.
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