Head of Equity Strategy
Summary: In today's Earnings Watch we focus on NIO, Sea Ltd and NVIDIA which are all high growth companies that have been the darlings of investors this year. NIO shares are up 1,733% since the lows in March as investors are betting heavily on EVs and especially the Chinese market. Sea Ltd is the fastest growing gaming and e-commerce company in Southeast Asia and almost doubled its revenue in the previous quarter. NVIDIA is our prime focus as no other company has benefitted as much from the acceleration in technology over the past 10 years. NVIDIA grew revenue 50% y/y in the previous quarter driven by its Data Center segment so expectations are high.
The Q3 earnings season is almost done with 90% of the S&P 500 companies having reported already, but this week there are still some interesting earnings to watch. Today, earnings from Chinese companies such as Baidu, iQIYI and JD.com will be watched closely as China has bounced back from the Covid-19 crisis faster than most countries bolstering investor confidence in the Chinese equity market.
On Wednesday, earnings from the Chinese EV-maker NIO will grab the attention with the stock price up 1,733% since the lows in March as investors are betting heavily on the Chinese EV market and this company is the most pure expression an investor can get. But with Friday’s close the company has hit an enterprise value of $62bn which against expected revenue of $2.3bn in 2020 is a very high valuation, not only in general, but in particularly for a carmaker. On Wednesday, we will also get earnings from Walmart and Home Depot which we expect to deliver strong earnings driven by high disposable income in the US from Covid-19 transfers driving high consumer spending on home improvements and food. Sea Ltd also reports on Wednesday, and this fast growing Singapore-based gaming and e-commerce company saw almost a doubling of its revenue in Q2, so expectations are high going into this earnings release.
The list below shows all the most important earnings this week.
Can NVIDIA deliver 47% revenue growth?
There has probably not been any other company in the world that has benefitted more from the many converging trends of machine learning, cloud/datacenter, gaming and crypto. All applications go back to the graphics card which is better for many of this high computation tasks. But even more importantly, NVIDIA has managed to build aa eco-system around its graphics cards with its CUDA parallelization platform for fast parallel computing which is essential in many of these tasks. This merge between software and hardware strengthens the business and makes it more difficult for competitors to compete with NVIDIA.
Last quarter FY21 Q2 (ending on 26 July), NVIDIA delivered 50% revenue growth y/y while improving EBITDA margin to 40.9% up from 36.3% in the previous quarter and from 27.1% a year ago underscoring that the company has hit an aggressive scalability point in its operations. The key driver of growth has lately come from its Data Center segment which hit $1.75bn in revenue in the last quarter up from $655mn in FY20 Q2. Given we know that NVIDIA is the biggest provider of graphical cards to the crypto mining industry we are wondering whether the company has moved this estimated (we reason why it is an estimate is that NVIDIA likely do not know exactly the purposes from some of its buyers) business to its Date Center segment so the Gaming segment is now more “clean”. We are guessing that this is the main driver as crypto has heated up again the past year and that NVIDIA’s growth rates in the data center industry are too high versus competitors that something else must be driving the result.
Finally, analysts will focus on the $40bn acquisition of Arm which is a subsidiary of SoftBank Group and holds some of the most important patents in computer chip design. Many Chinse companies including Huawei have been complaining about the deal and it is still uncertain whether the entire deal can go through or whether the Arm China business will have to be spun out of the deal.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
