Finance

A rising stock market may not need a catalyst, but it will get one

Published

2 months ago

May 17, 2024

A rising stock market may not need a catalyst, but it will get one

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With the Dow Jones (^DJI) nearing 40,000 and the S&P 500 (^GSPC) and Nasdaq (^IXIC) also nearing new all-time highs, investors could be looking for the next catalyst to further fuel the rally.

Chip manufacturer Nvidia arrives just in time. The company’s report comes well into the end of the regular earnings season – almost a month after Meta’s.

And Nvidia’s results have only become more important as the company’s value has soared.

Its market cap stands at $2.3 trillion, and it is now the third heaviest stock in the S&P 500, behind Microsoft and Apple. In what might be called the Nvidia-verse, a slew of semiconductor companies compete with or serve Nvidia with their stock.

Speaking of the stocks, their performance has left the other so-called Magnificent Seven stocks in the dust this year. (I know, I know, we don’t even call them that anymore.) But after rising an eye-watering 240% last year, Nvidia is on track to double again so far in 2024, making it the third becomes the best winner. in the S&P 500. (It’s behind Super Micro, another AI play, and Vistra, an energy supplier that’s also riding the AI demand wave.)

So the pressure is on again. While another big hit could push the stock higher, a miss could do the opposite.

And analysts generally think Nvidia can meet or exceed these high expectations. Sales are forecast to have grown 242% last quarter, following three quarters of triple-digit year-over-year sales increases.

Taking a step back, Piper Sandler’s Harsh Kumar pointed out in an earnings outlook that data center chips and software – largely fueled by demand for AI training – accounted for 83% of revenue last quarter.

Five years ago, Nvidia’s market cap was less than $100 billion and the company was best known for making video game chips before catching the crypto mining boom (a walk down memory lane prompted by my co-host Josh Lipton ). The transformation was extraordinary. And in 2016 it was even our Company of the Year.

This quarter may not blow expectations out of the water, especially given the extent to which stocks have recovered. Kumar writes that even if the company’s revenue were to increase by $1.9 billion – following the trend of recent quarters – shares will be “flat to high.” Citi’s Atif Malik writes: “We expect smaller beats compared to previous quarters on higher numbers.”

But it’s KeyBanc’s John Vinh who really caught my attention with another big number. He expects data center revenue to rise to $200 billion by 2025. That would represent an increase of 321% compared to 2023.

Let’s put into perspective how unusual it is for a company of this size to grow so much. Tesla sales increased 387% in 2013 to just over $2 billion. Amazon hasn’t seen triple-digit growth since 1998, when revenue grew 313% to $610 million.

In other words, Nvidia’s size relative to its growth is virtually unprecedented.

That’s why, as the price continues to rise, investors continue to wonder, “How long can this last?”