Why Nvidia earnings are now must-see TV

Market Recap

• Equity markets were mixed this week alongside a stable of mostly positive U.S. economic data and some more earnings results.

• The S&P 500 rose 0.2%, while the Nasdaq shed 0.9%. Financials led the pack, while technology lagged, down 1.5% on the week.

• Nvidia’s hotly-anticipated earnings results came in better than expected, but the sector pulled back in classic sell-the-news fashion.

Nvidia Earnings

Nvidia earnings have become an event that everybody wants—and to an extent needs—to pay attention to. It is not unlike Apple previously, which gave the market an indication on the economy, the consumer and technology all at once. Nvidia is the clearest window into the artificial intelligence (A.I.) cycle: how much companies are spending on chips in terms of capex, where the consumer is at in their appetite for A.I. products and services, and the big-picture A.I. themes in general. What we got was another great quarter—revenue up 122% year-on-year to US$30-billion, net earnings of US$16.6 billion—both figures ahead of expectations.¹ And yet, we saw a pullback in the stock. The difference now compared to previous quarters is, those previous beats were so much higher than even the highest estimates that investors are no longer impressed by marginal beats on very high growth targets. The takeaway is, yes, we are starting to see a slowdown for Nvidia in exceeding enormous expectations, but investors should not get alarmed and be quite content with one of the highest growth stocks out there and potentially look at dips as potential buying opportunities. The report underscored that A.I. spending growth remains firm. It may have highlighted some supply chain issues, but that’s more of a deferral of deliveries not a stoppage. We are still very much of the view that it was a good report across the board. The company maintains a big lead over competitors, their chips are still in great demand and 50% of revenues comes from the biggest technology names. Those market leaders are sticking with the best, and that’s the chips that Nvidia makes.

Bottom Line: Nvidia continues to exceed expectations, just perhaps not excessively so. They remain the market leader with exceptional sales growth backed by demand from the world’s biggest technology companies.

Canadian Banks

It was a mixed bag for the Canadian banks in the most recent quarter—a few definitively had better earnings (and a better story behind them) relative to others. One universal positive was wealth management, which did pretty well across the sector. The issue to watch carefully, perhaps obviously, is the loan-loss provisions, which did increase at a few lenders. It highlights that the consumer is experiencing some hardship owing to higher interest rates, and to some extent companies, as well. That will need to get resolved. The good news is, rates are coming down with the expectation that they will continue to through next year, providing some relief. The rise in loan-loss provisions does suggest the banks expect some near-term headwinds (six to 12 months), and it could still be some time before you see those released. But once we get past this stretch, there’s a lot of opportunities for value creation based on current valuations. Dividend yields are secure. Some of those provisions are tied to U.S. operations, which in itself is an indication of the long-term prospects of the banks, which are much more North America-oriented now, as opposed to strictly Canadian businesses. It is important to keep an eye on the numbers, and investors may have to ride the rollercoaster for the next while—some names may do a little bit better than others near term—but yields and long-term potential are certainly attractive.

Bottom Line: It was a bumpy earnings season for Canadian banks characterized by increased loan-loss provisions. Dividend yields are stable however—and attractive at current valuations.

Trade Tensions

This is an important theme for Emerging Markets investors. We’ve seen Canada now join Europe and the United States in adding tariffs on China in the electric vehicle (EV) space. This can be viewed as a key indicator that governments are aligning in a collective desire to hold back China (or tap the breaks if you will) on its leadership in the industry—which is plainly an important one long term. China has a very, very low cost base in car manufacturing and its companies appear fine with working for low margins if it means they can export that out to the rest of the world. Chinese EV makers can produce a vehicle that sells for US$20,000 that is nearly equivalent to the Tesla Model S, which has an entry price of US$76,000.² So, governments are adding on significant tariffs to keep domestic industries competitive in a largely unified approach. For China, and by extension EM investors, this is yet another headwind they are facing, along with what’s been going on with the Chinese consumer and the property sector. And with a U.S. election not far away, it is likely to remain so. Both presidential candidates are on the same side on the issue of tariffs.

Bottom Line: Canada is aligning with the U.S. and other governments to curb China’s significant EV leadership, posing another headwind for that country’s economy.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Only fools rush in (or out): Caution calls for a rotation, not exit.