What Happened: Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) jumped 6.2% in the afternoon session after markets rallied, with the Nasdaq up 2.1%, while the S&P rose 1.1%, following strong earnings from big tech companies including Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL). Notably, the earnings highlighted the strong demand for AI solutions, including cutting-edge AI chips that power most AI applications. These chips are developed by Nvidia and its peers.
For example, during its Q1'2024 earnings call, Meta (NASDAQ:META) raised its forecasted operating expenses and capital expenditures for the full year. The increased costs are related to the company's AI infrastructure. It also released its AI assistant, Meta AI. This product was rolled out across its family of apps and is powered by Llama 3, an open-source large language model that is a ChatGPT competitor.
Also, during its earnings, Microsoft noted that its operating cash flow was impacted by higher capital expenditures to support cloud and AI offerings, and guided for "capital expenditures to increase materially on a sequential basis driven by cloud and AI infrastructure investments." Lastly, Alphabet struck a similar tone, adding during its earnings, "You can see that from the increases in our capital expenditures. This will fuel growth in cloud help us push the frontiers of AI models."
Overall, the future looks promising for Nvidia as it continues to meet growing market demand within the AI space.
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What is the market telling us: Nvidia's shares are very volatile and over the last year have had 10 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 7 days ago, when the company dropped 10% after major indices declined with the Nasdaq down 2.1% while the S&P 500 fell by 0.9%. Netflix (NASDAQ:NFLX) reported mixed results to kick off the new earnings season. The video-streaming giant provided underwhelming sales guidance for the full year and guided for growth to decelerate in the second half of the year. Also, Netflix surprisingly announced it will stop disclosing subscriber count (starting in the first quarter of 2025), and this is contributing to the market's concerns about the business. The company's post-earnings stock decline is likely dampening the sentiment toward tech stocks.
Also, it was a challenging week for most risk assets following news of escalating tension between Israel and Iran, which increeased concerns among investors, given the potential disruptions to business supply chains, especially in the Middle East.
These add to the ongoing inflation worries after the March 2024 CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) report revealed inflation came in slightly hotter than expected.
On April 16, 2024, Fed Chair Jerome Powell echoed similar sentiment, adding, "The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence." This suggests the Fed might not lower its policy rates as fast as anticipated in 2024, with markets pricing in fewer rate cuts for the year.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
Nvidia is up 82.3% since the beginning of the year, and at $877.42 per share it is trading close to its 52-week high of $950.02 from March 2024. Investors who bought $1,000 worth of Nvidia's shares 5 years ago would now be looking at an investment worth $19,723.
