It’s difficult to quantify Taylor Swift’s impact on the stock market. But on the day her engagement was announced (26 August), the S&P 500 moved slightly higher. I suspect this positive reaction is coincidental, but ‘Swiftonomics’ appears to be a thing.
It’s been estimated that her ‘Eras’ tour boosted the US economy by $5bn. Her net worth is said to be $1.6bn.
Let’s get serious
But as impressive as these numbers might be, they pale into insignificance alongside anything to do with Nvidia (NASDAQ:NVDA).
And on Wednesday evening (27 August), the chip-maker released its results for the three months ended 27 July. With a market cap of around $4.4trn — approximately 30% more than the value of the UK’s 350 largest listed companies — it’s easy to see why the company’s announcements are so important.
Commentators frequently speculate as to whether we are seeing an artificial intelligence (AI) bubble. A bit like Swifties, they sometimes ask: “Is It Over Now?”. That’s because if Nvidia were to wobble, it’s likely to send shockwaves across the world’s stock markets.
With the tech giant beating analysts’ forecasts of both revenue and earnings, I suspect we probably are in some sort of bubble. However, there’s no immediate sign that it’s about to burst. Although as any child will tell you, all bubbles eventually go pop. It’s simply a case of when.
A strange reaction
In after-hours trading, the Nvidia’s stock fell around 2.5%.
Whenever a company does better than expected but its share price falls, I find it interesting to see how market observers explain this apparently contradictory position.
In this instance, they pointed to the group’s $200m miss on data centre revenue as the reason. But this doesn’t seem particularly consequential to me for a company that sells more than $500m of chips and related computer and hardware tools every day.
Encouragingly, the impressive result doesn’t include any revenue from the sale of semiconductors to China, which were banned by President Trump. The company reckons the market could be worth $50bn this year.
If the American government could be persuaded to change its mind, the Nvidia stock price is likely to continue its impressive run. Since August 2020, it’s increased over 1,200%. Ignoring the potential from China, analysts have a 12-month price target around 10% higher than its current (28 August) stock price.
What next?
Around half of the group’s data centre revenue comes from a relatively small number of cloud service providers. This is a useful reminder that if interest in AI technology does slow then Nvidia will suffer from the fallout.
Personally, I think the company’s well placed to continue its epic growth story. From Nvidia’s perspective, it doesn’t matter who the AI winners and losers are. Succeed or fail, it seems as though nearly everyone in the industry needs the company’s chips. That’s why it was able to achieve an impressive 72.4% margin during the quarter.
Over the past four quarters, it’s reported earnings per share of $3.51. This means the stock is trading on 51 times historic earnings. This isn’t cheap but it’s sustainable for a company that’s embedded itself in the AI revolution and one that’s growing rapidly.
On balance, I think there’s still some value in the stock and that investors could consider adding it to their portfolios.
