Nvidia (NASDAQ:NVDA) unveiled its fiscal third-quarter 2024 earnings on Tuesday night, surpassing Wall Street’s expectations for both Q3 results and forward-looking guidance. Despite the positive surprise, the market response has been unexpected, with Nvidia shares experiencing a more than 3% decline midway through today’s trading session.

The previous quarter saw Nvidia shares reaching new record highs after the Q2 report, but the positive momentum was short-lived. Now, with the stock facing a downturn despite impressive Q3 revenues and guidance, it’s crucial to dissect the factors influencing the post-earnings price action.

Analyzing Nvidia’s Post-Earnings Trends

Examining Nvidia’s post-earnings price movements reveals intriguing insights. The company has outperformed earnings estimates in 19 out of the last 20 quarters, with revenues surpassing Wall Street estimates for 18 consecutive quarters. Despite this, the stock has risen only 14 times and fallen on six occasions in the past 20 earnings reports, highlighting the inherent volatility in Nvidia’s post-earnings performance.

Nvidia typically exhibits significant volatility after earnings, with an average price move of 6.1% in the preceding 20 quarters. In the current fiscal year, Nvidia shares surged after the Q1 release but faced a loss of momentum following the Q2 report, despite beating expectations on both the top and bottom lines.

Factors Contributing to Nvidia’s Stock Decline

The current decline in Nvidia stock, despite robust earnings, can be attributed to three main reasons:

1. Mammoth stock rally in 2023: Nvidia’s stock reached record highs just before the earnings release, having been the best-performing S&P 500 Index ($SPX) stock of 2023 with a remarkable gain of 229%. Such sharp increases often diminish the probability of a post-earnings rally, a key factor contributing to the current downturn.
2. Conservative Street estimates: Wall Street estimates for Nvidia have been conservative, and the company’s guidance tends to follow suit. However, retail investors, constituting a significant portion of the market, often hold higher expectations for Nvidia, making the impressive earnings beat and optimistic guidance seem less remarkable in comparison.
3. Cautious outlook on China: Nvidia expressed optimism in its overall outlook but sounded a note of caution regarding its business in China following the U.S. chip export ban. Colette Kress, Nvidia’s CFO, mentioned that 20%-25% of its Data Center revenues are derived from products subject to licensing requirements due to export controls. She anticipated a significant decline in sales to these destinations in the fourth quarter of fiscal 2024, offset by growth in other regions.

Long-Term Challenges and Investor Guidance

Nvidia is actively working with customers in the Middle East and China to secure licenses from the U.S. government, but the outcome remains uncertain. Kress acknowledged the potential negative impact on Nvidia’s China business due to export controls, with concerns about long-term competitiveness in the Chinese market. The ongoing U.S.-China rivalry adds a layer of risk for companies with substantial exposure to the mainland.

Investors, particularly growth-focused ones interested in AI, the metaverse, and autonomous driving, are encouraged to carefully consider Nvidia’s position in their portfolios. Despite concerns about the sustainability of revenues from high-end AI chips, Nvidia has consistently outperformed competitors and remains a strong player in emerging growth opportunities.

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