Wall Street Roundup: Valuation Concerns And Uncharted Waters

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Nvidia report a mixed bag (0:20) Valuation concerns in tech (2:30) NIO and other earnings coming next week (7:40) Jobs report in uncharted waters (9:15).

Transcript

Rena Sherbill: Brian Stewart, Seeking Alpha’s Director of news. Welcome back to another week.

Brian Stewart: Thanks. Great to be here.

RS: NVIDIA (NVDA), is that where we’re starting? That’s what everybody’s talking about. I feel like we haven’t stopped talking about it this week on the podcast. And every analyst I know has something to say. What are you looking at when it comes to NVIDIA and what it means for the tech sector and the market at large?

BS: I think a mixed bag for NVIDIA. Just taking the the report at face value, I think it’s pretty strong. They beat expectations, both earnings and revenue. They had a pretty solid outlook.

I think the issue such as it is is just how far the stock has come in such a short period of time. I mean, it’s been a couple of years, but still, if you look at the rate of growth for the stock over that period of time, it’s pretty impressive.

Valuations are high. And so the question becomes for investors, whether or not it can keep up the earnings growth to justify its current valuations. And really, I’m sure you’ve seen this in the people you’ve talked to as well.

There’s really kind of a split decision on these earnings. There’s some signs of slowing growth. So for instance, the data center revenue, data center is the main AI hub within the company. Data center revenue up 5% quarter over quarter, up 56% year over year, which obviously will be pretty high for almost any other company, but 56% is down from, I think, around the 70% range for the previous quarter.

So you’re seeing a steady deceleration of that growth. So there’s worry that NVIDIA’s growth prospects are kinda capped. It relies on large US corporations as its main buyers.

Once they’ve eaten their fill in terms of AI infrastructure, NVIDIA might find trouble finding new places to grow, especially with the situation in China is unclear when the company will have an opportunity to see more growth there. And so with those kind of red flags on the horizon, investors are kinda taking a wait and see approach.

RS: And then broadly speaking, we have more news from some tech players. How would you feed that into this conversation, or what did you see out of the tech players outside of NVIDIA?

BS: The spectrum of big name earnings reports in the past week have been pretty narrow. So like you’re saying, tech’s been the main headline generator so far.

And there’s a lot of companies that I think would be more under the radar in some other weeks, but because NVIDIA is just the only real headline player this week, you have some of them coming out.

So Snowflake (SNOW) is an example. It’s a cloud based data platform provider. It’s jumping as we’re speaking now 19% after its earnings report. It’s a 32% product revenue growth, thanks at least in part in leveraging AI adoption.

Like we’ve already talked about with NVIDIA, and this is gonna become a common theme for all the tech names that we’re gonna mention. Valuation is a worry.

Another big name that we saw come out recently was CrowdStrike (CRWD) cybersecurity company. It initially dipped after its report was released in post market trading last night, but as we’re sitting now recording on Thursday, it’s up 3% on its earnings.

It beat expectations on earnings and revenue. The revenue forecast was a little soft, but that’s what sent it lower after the market. But, analysts have reassessed that a little bit in the more medium term wake of its earnings report.

And so it’s up now based on pretty strong ARR figure. So that’s another mixed bag like we’re talking about with NVIDIA. I think people are having a hard time figuring out how to take it.

I think there’s an idea that execution both at NVIDIA and CrowdStrike is pretty strong, but given the valuation situation, there’s sort of a sign of what’s coming next.

And then the other tech name that we we saw this week, MongoDB (MDB), up 38% after its earnings announcement. It beat expectations, raised guidance. It’s getting a lot of applause for implementing cost controls. It added a new CFO in April taking a a victory lap with with this first earnings report after that.

It’s also benefiting from AI adoption, so no surprise there that there’s a common theme among these companies, touting either in NVIDIA’s case providing the infrastructure for other companies’ AI and then for some of the other ones we’ve mentioned, they’re using that AI to improve their product.

So if you’re looking long term, so far, this week has been relatively positive in terms of tech continuing to be the engine for this market.

The only worry, especially as underlined by NVIDIA, is the valuation concerns, whether or not we outrun this first wave of growth and whether there’s a correction coming in the future.

RS: I talked to Gary Vaughan this week who, if you want a good time and good insight, listen to that episode and anything that Gary has to say.

But the title of that episode is More volatility ahead in this AI bull market, which I think speaks to your point of this bullishness afoot, specifically when it relates to AI and tech, but there’s not necessarily that bullishness as you look across the market.

BS: I haven’t done a study on this, but just anecdotally looking through the headlines of the analysts on Seeking Alpha, I see a lot more red flags to look for volatility ahead.

Here’s the problem with the market now. AI bubble starting to deflate. Those kind of headlines, I think, are becoming more prominent.

As an investor, obviously, you have to weigh, okay, is that a sign of things to come or is that the wall of worry that the market’s gonna continue to climb?

Eventually, it’s always gonna come down to the fundamentals, right? Like whether or not these companies can execute.

RS: But, also, is it just gonna come down to the fundamentals? That’s the thing.

BS: Well, presumably, there’s the the old saw that the market can stay rational longer than you can stay solvent.

RS: But, valuation seems a tough needle to thread these days.

BS: Yeah, but eventually, you run out of unsustained optimism. You know? Eventually you need something in the real world to justify.

RS: Just look at the cannabis sector.

BS: So I think if you’re a tech investor and a market investor as a whole because tech has obviously been the main driver so far this year, I think that’s going to be the constant question is where valuations are and whether or not there’s going to be something that can kind of break.

If you believe it’s an AI bubble, kind of prick that bubble. And even if you don’t, take some of the air out of the market. And it could be unexpected events, a geopolitical event, something of that nature that just sort of disrupts the way things are going.

So it’s just a matter of managing those long term expectations with the medium term, I think.

RS: So next week, what do we have earnings wise to look forward to?

BS: No real big headline there, but a couple of interesting more sector plays. So Nio (NIO), which is a Chinese EV maker, they’re up 45% so far this year, 27% in the past month.

They got a big boost earlier this month when they announced a plan to expand their footprint. So they’re expanding their global distribution.

I think the main debate going into this earnings report is the margins for their cars versus their pretty lofty expansion plan. With the aggressive expansion comes new execution risks. Whether or not the company can fulfill expectations there.

This earnings report might be a little early to figure that out because they were just announcing that expansion, but certainly look for commentary about what’s next.

And then there’s no profit in sight. It’s been losses every quarter. Any update on when they might be able to see profits would be, I’m sure, well received by investors.

And then the other major earnings next week is Salesforce (CRM). They’re down 24% year to date. One of the outliers to the downside among the major technology plays.

People see them as having a strong market position and they should benefit from AI driven growth, but it hasn’t happened yet. Their sales growth has decelerated so far, which explains why the stock price has languished a bit.

So look for, if you’re an investor, look for signs that they’re starting to get some traction, starting to have some of the AI innovations that they’ve been touting drop to the bottom line.

RS: And macro wise, Cook was cooked this week. We saw a fired Fed governor. That seems to have been the main macro news.

Anything to say there or and or anything else to point to?

BS: We’re in uncharted waters, in terms of whether or not she’s actually fired. There’s also a Fed meeting on the horizon that’s coming up in mid September.

So whether or not she sits for that, whether or not she can participate in that process is going to be, I’m sure, part of the legal fights on the subject of Trump firings.

Next week, we’re also gonna see the jobs report famously or well documented, that Trump fired the head of the BLS after the last jobs report, which showed major revisions, major downward revisions for the previous couple months, was one of the worst jobs reports in a while.

Going to this jobs report, both looking to see whether or not the weakness in the labor market that we saw last time is gonna continue. But there’s also hanging over it, general concerns about how much we can trust the data.

I’m sure if there’s a snap back in the number of jobs, there’s gonna be a lot of people saying, well, Trump fired the old BLS head and now there’s a new one and he’s giving Trump what he wants.

So there’s an issue where you’re starting to undermine the trust and the data coming out. We’ll see how the market reacts, if it’s good news or bad news.

Good good thing to note is that, markets are closed on Monday for Labor Day. Enjoy the long weekend!

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.