Nvidia's 'secret sauce' isn't just its chips, strategist says

Nvidia (NVDA) is scheduled to report fiscal first-quarter earnings results after the market's closing bell on Wednesday, May 22. All eyes are on the chip maker as Wall Street analysts expect its latest figures could be the next big 2024 market catalyst.

Niles Investment Management Founder and Portfolio Manager Dan Niles joins Josh Lipton on Yahoo Finance's Asking for a Trend to talk about the trajectory of Nvidia's stock going into this earnings print — up already 98% year-to-date — and the timeline of its new Blackwell GPU.

"And if you think about the prior quarter, expectations were sky-high going into that as well and the stock still rallied about 16% after the print," Niles says. "Today was interesting in that you got a headline that I would have thought would have knocked the stock down, which was Amazon Web Services confirming through a spokesperson that they were taking some of the orders they had for the current generation of chips and moving those to the next generation of chips coming out called Blackwell, which comes out later this year."

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend.

This post was written by Luke Carberry Mogan.

Video transcript

More than 200%.

That's how much NVIDIA shares have climbed since May of last year.

And if history is any indication those games are just getting started.

Let's discuss with Dan Niles, founder and portfolio manager at Niles Investment manager, Dan.

It is great to see you on the show because you are Dan perfect guy to talk about this.

So NVIDIA Dan, I'm hard pressed to think of a name that's more loved on the street.

About 90% of financial analyst Dan who covered the video, tell me I should be buying the stock, the stock's gone up about 90% already this year.

These are some sky high expectations heading into this print, Dan, what are we gonna hear tomorrow after the bell?

What do you think the response is gonna be?

Well, I think you have two things going on, as you said, expectations are sky high and that's the biggest problem.

Everybody knows it's a beat and raise.

Everybody is expecting upside to the numbers that are gonna be reported relative to analyst expectations are expecting for numbers to go up a lot.

That's the negative.

The positive is valuation in the sense that Nvidia's Ford 12 month pe is 15% below its five year average.

And so that's the other side of this equation.

And if you think about the prior quarter expectations were sky high going into that as well, and the stock still rallied about 16% after the print today was interesting in that you got a headline that I would have thought would have knocked the stock down, which was Amazon Web Services um confirming through a spokesperson that they were taking some of the orders they had for the current generation of chips and moving those to the next generation of chips coming out called Blackwell, which comes out later this year, I would have guessed that would have knocked the stock down, but the stock actually closed at an all time record high.

The Intraday high is back in March um earlier this year, but it closed at an all time record high.

So that's a good sign that hopefully people are expecting a slowing in terms of sequential growth in the near term.

And they're expecting some of this order movement as the New York chips come out.

So we'll have to wait and see what happens tomorrow.

My my assumption is that given how it reacted to the Amazon Web services news today, the stock will rally a little bit off of this given it's at an all time record high and expectations are high being bounced by the low valuation.

So, so that's interesting.

I just want to pull on that for a second because I've heard that from, from some analysts and, and these are fans of NVIDIA, but they're talking about just the point you brought up that.

Listen, NVIDIA does have this new GP U platform, Blackwell.

It's coming in the fall.

The question has been to your point.

Do NVIDIA customers delay or cancel?

Because hey, they're waiting for the latest and greatest to come.

Your point is maybe you do expect to hear about that tomorrow.

Well, it, it's more nuanced than that.

What I would say is that I expect some period of digestion.

My belief is that customers in general and maybe Amazon's big enough to get away with this.

But customers in general want to get the new Blackwall chips so they don't wanna cancel the current chips orders that they have because that's gonna kick them to the back of the bus for the new chips coming out that are gonna be 2.5 times more powerful, but only cost you 20 to 30% more.

So my belief is that you really have a problem with digestion when Blackwell ships later this year and then the quarter after that is when you run into a problem and if you go back to Cisco and we haven't kind of gotten to that.

But if you go back to the analogies of the internet bubble, build out that ramp over five years wasn't linear.

Cisco had several corrections that were pretty uh ferocious.

During that period of time, the stock was down 26% in late 1995.

It was down 38% um uh within 1997 at one point and it was down 34% within 1998 for a period of time.

It didn't stop the stop from going up 4000% from the end of 94 which is when Netscape Navigator came out, which was the first internet browser to its ultimate peak for Cisco stock when it was the most valuable company in the world in March of uh 2000.

So that's the analogy I would draw with NVIDIA is expect a lot more volatility, but we're only five quarters into this A I build out.

The internet build out, took over five years.

And I think we have a lot more room to run in the A I.

Let me get you out of here on this, Dan, you, you talk to your clients and they say Dan, what worries you about NVIDIA?

What are the big risks?

What do you tell them?

Well, I mean, the big risk is the ones that people know the largest hyper scalars.

They're all trying to design their own chips, so they're all trying to devi design their own silicon.

In addition, Nvidia's real secret sauce, if you will is not the chips, it's the software called C A and they've been working on that for, I want to say at least a decade and that's really locked people into their silicon, which makes it very hard to get off.

But everybody's trying to develop an alternative to CU A that's open source.

But that's gonna take an awful lot of long time to get people to want to go figure that out when the volume is on the nvidia chips.

So those are the risks.

And you know, the big one is what we talked about with Cisco where I mentioned about Cisco just a minute ago, which is you're gonna go through these ferocious declines.

Everybody's gonna say, oh my God, it's over and then the stock will take off again and you're not gonna know until you get through it.

And so that's the, that's the balancing act you're gonna have to go through.

But the good news is unlike Cisco, you know, we talked about NVIDIA trading 15% below its five year average.

And it's multiple for this calendar year, you know, 40 times which will go down as soon as they report tomorrow because the numbers are gonna go up so much.

Cisco's pe compared to that 40 times for NVIDIA peaked out at 100 and 35 times for 60% growth.

NVIDIA is growing 100%.

So this stock is not overvalued by any stretch of the imagination.

And in fact, you could say it's undervalued by a lot relative to its growth rate.

And so that's something to keep in mind.

All right, valuation still looks supportive, Dan.

Thank you for joining us today.

Got a big earnings print after the bell tomorrow we're gonna be watching.

I know you will too.

Thanks Dan.