Walmart earnings top estimates, Nvidia stock pops after earnings

Key Concepts

Nvidia Earnings: Strong Q3 results and increased Q4 revenue predictions, driving tech stock performance.
AI Boom: The underlying driver of demand for Nvidia's chips.
AI Bubble: Discussion on whether current valuations are sustainable or indicative of a bubble.
Blackwell Chip: Nvidia's new, more energy-efficient chip with high demand.
Hyperscalers: Large tech companies utilizing AI, expected to see revenue growth.
Interest Rates & Economy: Concerns about potential economic weakness and the Fed's stance on rate cuts.
Jobs Report (September): Crucial data for the Fed's decision on interest rates.
Walmart Earnings: Q3 beat across the board, but stock down in pre-market.
Crypto Market: Significant drop in market capitalization, with Bitcoin falling to a seven-month low.
UAE & Saudi Arabia AI Chip Sales: Commerce Department approval for significant chip sales.
Nvidia Stock Trading: Analysis of historical performance around earnings, price targets, and volatility.
Memory Chips (HBM vs. DDR): Explanation of rising prices for High Bandwidth Memory due to AI demand and diversion of capacity from standard DRAM.
Market Performance: Impact of Nvidia's results on US, Asian, and European markets.

Nvidia's Dominance and the AI Effect

Nvidia's latest earnings report has significantly boosted the tech sector, with the company exceeding Wall Street's forecasts for both Q3 and its Q4 predictions. In Q3, Nvidia reported a 62% revenue increase to $57 billion. For the current quarter, the company anticipates revenue to reach approximately $65 billion, which is $3 billion more than Wall Street's estimates. This strong performance has led to a surge in Nvidia's share price in pre-market trading.

Despite recent volatility in tech stocks, with hundreds of billions wiped off their value, Nvidia's CEO, Jensen Huang, has dismissed concerns about an "AI bubble." Nvidia's market capitalization briefly surpassed $5 trillion last month and currently stands at $4.5 trillion. The positive impact of Nvidia's results has extended beyond its own stock, lifting other tech stocks globally.

Chris Batti, Chief Investment Officer at SWBC, commented on the AI bubble, stating it's "definitely not upon us at the moment" and that Nvidia's results are "very positive news and constructive for Nvidia along with all the other chip makers out there."

Sales to China and Future Revenue Streams

Regarding sales to China, Jensen Huang expressed a lack of significant concern. Batti believes that if sales to China are permitted by the US, it would be an "additive to the ultimate prize" for Nvidia and its investors, as China is a "very large player in the space that can use the chips."

The discussion also touched upon the delayed revenue generation from companies utilizing Nvidia's AI chips. Batti anticipates that revenue growth from these data centers, which began construction around two years ago, will start to materialize within 18 to 24 months. While revenue from the new Blackwell chip might take longer, it is "definitely coming down the pike."

Blackwell Chip Demand and Supply

Jensen Huang described sales of the Blackwell chip as "off the charts." Batti is optimistic about the continuation of this demand, citing the chip's energy efficiency as a key benefit for users, leading to improved efficiencies and cost savings. He believes the Blackwell chip has "more runway."

Broader Market Impact and Economic Concerns

Batti expressed general bullishness on the major hyperscalers utilizing AI, stating that "a rising tide lifts all shifts." However, he also voiced slight concern about other economic factors, particularly interest rates and signs of economic weakness. He does not expect a rate cut from the Fed at the upcoming meeting due to a "void of information" but anticipates a continued push towards lower rates, which would benefit investors and technology companies.

Key Economic Data and Fed Commentary

September Jobs Report

The delayed September jobs report is a critical piece of data for investors and the Federal Reserve. Consensus forecasts anticipate a modest rebound in the job market, with an addition of 50,000 non-farm payrolls. The unemployment rate and hourly wages are expected to hold steady at 4.3% and 0.3% (month-over-month), respectively. This report is the last set of data the Fed will receive before its next meeting, and its findings will be crucial in determining the likelihood of a December rate cut. There are growing tensions among Fed members regarding the direction of monetary policy.

Fed Commentary

A significant batch of Fed commentary is expected, following remarks from Richmond Fed President Tom Barkin, who expressed "cause for caution on the labor market" and suggested it might be weaker than current data indicates. The probability of a rate cut next month, according to the CME Fed Watch tool, has fallen to just over one-third.

Retail Sector Earnings: Walmart

Walmart, the world's largest retailer, reported its Q3 earnings, beating expectations across the board. Revenue reached $179.5 billion, with earnings per share of 62 cents. The company highlighted a 27% global growth in its e-commerce business. Despite the strong results, Walmart's shares were down 2% in pre-market trading, suggesting investor disappointment for reasons not immediately clear from the report. Walmart has also increased its full-year sales outlook, indicating its success in attracting price-sensitive shoppers and capturing digital spending. The company is also shifting towards an AI-equipped work environment and plans to integrate AI super agents into the shopping experience, working with OpenAI.

Crypto Market Downturn

The cryptocurrency market has experienced a significant downturn, with $1 trillion wiped off its total market capitalization. Bitcoin fell to its lowest point in seven months, trading as low as $88,552, before recovering slightly. The total crypto market cap peaked at around $4.3 trillion on October 6th and now stands at approximately $3.2 trillion. The earlier surge in Bitcoin, which reached over $126,000, was attributed to expectations of Fed rate cuts and growing institutional adoption, both of which have stalled recently.

US Commerce Department Approves AI Chip Sales to UAE and Saudi Arabia

The Commerce Department has approved the sale of up to 70,000 AI chips to firms in the UAE and Saudi Arabia, according to The Wall Street Journal. This development occurred following a visit by Saudi Prince Mohammed bin Salman to the United States, which focused on joint ventures in areas like minerals and Saudi Arabia's civilian nuclear program, beyond defense agreements and human rights discussions.

Trading Nvidia Stock: Historical Probabilities and Expert Views

Jared Blikers' analysis of Nvidia stock trading around earnings reveals historical probabilities:

Median Returns (Last 10 Years/40 Reports):
- 1 day later: 2%
- 1 week later: 4%
- 1 month later: 2%
- 1 quarter later: 14%
- 1 year later: Doubling of stock price
Win Rate (Percent Positive):
- 1 day: 60%
- 1 week: 65%
- 1 month: 58%
- 1 quarter: 77%
- 1 year: 83%

Blikers suggests a "buy and hold" strategy is generally more effective for long-term gains, as shorter-term holding periods show win rates below 70%, which he considers "subpar."

Price Targets vs. Stock Price

Historically, Wall Street price targets for Nvidia have often lagged behind its stock price, with the market playing "catch-up." Over the last 90 days, Nvidia's stock price has been relatively flat, while the median price target has increased by 19% to $237. The question remains whether the stock price will catch up to these targets or if the targets will be adjusted downwards.

Post-Earnings Volatility

Average Daily Move (Since Last Earnings): 3.4%
Implied Move (Next Day After Earnings): 7% (more than double the average)
Average Post-Earnings Day Move (Last 10 Quarters): 10.7%

While volatility is expected around earnings, there has been a reduction in this volatility over the last few quarters.

Average Return (Post-Earnings, Last 10 Quarters): 3.6%
- Wins (6 out of 10): +9% on average
- Losses (4 out of 10): -4.5% on average

Nvidia is described as a "tricky one to play sometimes, especially in the short term," but a "long-term winner."

Trending Tickers and Market Movers

Several stocks are being directly impacted by Nvidia's strong performance:

TSMC (Taiwan Semiconductor Manufacturing Company): As the world's largest chip manufacturer producing Nvidia chips, including the Blackwell series, TSMC's New York-listed shares saw significant gains. Demand for these chips is described as "off the charts."
Samsung: The South Korean tech giant has increased production of bandwidth memory and semiconductors. A partnership with Nvidia was announced to build an AI chip factory and collaborate on the next generation of memory, HBM4.
Micron: Working with Nvidia on new technologies like SOCAM to improve AI workloads.
SK Hynix: Developing new high bandwidth memory (HBM) with Nvidia and using Nvidia chips to accelerate its own research.

These four companies are considered most closely tied to Nvidia's success.

Other Tickers to Watch:

CATL (China's battery technology leader): Shares are down sharply in Hong Kong due to a major shareholder planning to offload holdings. This could impact US markets due to potential restrictions on Chinese-made solar and grid components.
Palo Alto Networks: The cybersecurity giant fell over 5% in pre-market trading despite beating earnings expectations. Revenue came in at $2.5 billion versus an expected $2.46 billion. This might indicate that Nvidia has set an exceptionally high bar for market performance.

The Rising Cost of Memory Chips

Dan Howie, Tech Editor, explains the increasing cost of memory chips:

DRAM and HBM: Data centers use DRAM to create High Bandwidth Memory (HBM), which is essential for running AI.
Diverted Capacity: DRAM is also used in smartphones, laptops, medical equipment, and cars (as DDR). Memory makers are prioritizing HBM production due to higher margins, diverting capacity from DDR.
Price Increases: Prices for DDR have surged from approximately $100 to $250 in a matter of weeks.
Cyclical Market: The memory market is highly cyclical. The current situation is driven by an unprecedented build-out of AI data centers, leading to a rapid depletion of RAM.
Limited Suppliers: Only three major companies (SK Hynix, Micron, and Samsung) produce these memory chips.
Impact on Device Prices: The increased cost of memory is expected to start affecting consumer and commercial device prices within the next few weeks to a couple of months. Companies may pass on these costs, find alternative pricing structures, or reduce the power of their devices.

Market Overview and Conclusion

Bitcoin and Gold

Bitcoin is trading higher after an earlier fall to a seven-month low, but remains well below its October peak. Gold prices are edging lower, partly due to the reduced probability of a Fed rate cut next month.

Nvidia's Market Impact

Nvidia is up almost 5% in pre-market trading following its strong Q3 results. This has boosted Asian and European markets, particularly tech-heavy indices. US stock futures are also rising, indicating a rebound as Wall Street embraces Nvidia's earnings and renewed faith in the AI trade, at least temporarily stemming bubble fears.

Synthesis/Conclusion

The dominant theme of the morning is Nvidia's exceptional earnings report, which has not only propelled its own stock but also provided a significant tailwind for the broader technology sector, especially chip manufacturers. The AI boom continues to be the primary driver of this growth, with demand for advanced chips like Blackwell exceeding expectations. While concerns about an AI bubble persist, analysts suggest there is still room for growth.

However, the market is also keenly awaiting the September jobs report, which will be a key determinant of the Federal Reserve's interest rate policy. Any indication of economic weakness could temper the optimism generated by tech earnings.

In the retail sector, Walmart's Q3 beat was overshadowed by a pre-market stock decline, highlighting the nuanced investor reactions to earnings. The crypto market continues its downward trend, while significant AI chip sales to the UAE and Saudi Arabia signal ongoing geopolitical and technological developments.

Finally, the increasing cost of memory chips, driven by AI demand, is a notable trend that could soon impact consumer electronics prices, illustrating the ripple effects of the current technological surge. The market remains dynamic, with Nvidia's performance setting a high bar and all eyes on upcoming economic data.