On Aug. 10, graphics specialist NVIDIA (NASDAQ: NVDA) reported solid earnings results. Revenue was $2.23 billion, representing a 56% year-over-year surge. Operating and net income handily outpaced revenue growth, growing 117% and 123%, respectively, and earnings per share on a non-GAAP basis was $1.01, up 91% year over year.
Analyst consensus going into the report was for revenue of $1.96 billion and earnings per share of $0.70, so NVIDIA handily crushed analyst expectations.
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NVIDIA also provided robust financial guidance for the current quarter, calling for revenue of $2.35 billion, which handily tops analyst consensus of $2.13 billion (and even the "high" estimate of $2.25 billion).
So, with such good results, why did NVIDIA stock drop nearly 7% after hours?
There are expectations and then there are expectations
Typically, when people in the financial media talk about earnings "beats" and "misses," they are referring to a company's financial results relative to the estimates that sell-side analysts (this refers to the analysts that you see upgrading, downgrading, and rating stocks -- they aren't necessarily analysts that have "sell" ratings on the stock) put out there.
While the earnings estimates from the sell-side analysts are often used as benchmarks by both individual investors (also known as "retail investors") as well as professional investors (think mutual funds, hedge funds, and so on), the reality is that investors don't just blindly base their investment theses and hypotheses on work by the sell-side analyst community.
They do their own homework and come up with their own estimates and views of what the stock is ultimately worth, and sometimes there can be a significant divergence between sell-side analyst estimates and what the broader investor community expects.
Tying this in to the NVIDIA results
NVIDIA is a hot stock -- arguably the hottest stock in technology today. Over the last couple of years, investors have really gotten excited about the company's story, particularly as it has substantial exposure to many of the big trends in computing and tech in general (e.g., artificial intelligence, gaming, self-driving cars, and so on).
One could even argue that NVIDIA not only participates in these high-growth areas, but that it pioneered many of the technologies underpinning them.
This strong exposure to many of the great, high-value secular trends in computing, coupled with the company's nearly flawless execution in capitalizing on those trends, may have led to very high investor expectations.
As we can see in NVIDIA's results, those with high expectations – at the very least, higher than those of the analyst community -- weren't wrong: NVIDIA delivered really great results.
The problem, perhaps, is that the investment community at large seems quite aware of NVIDIA's story and many investors going into the report probably thought that NVIDIA would easily beat estimates.
If investors largely expect a company to "beat" estimates and then the company goes on to do just that, then nobody is "surprised." And it is "surprise" -- that is, the realization that broad investor expectations were lower or higher than expected -- that drives downside and upside moves in the near-term.
I suspect that many short-term speculators expected NVIDIA to "beat" by more than it ultimately did (though, again, the results were very good), which is leading to this sell-off.
However, if you're in NVIDIA for the long haul, there's plenty of reasons to find the results encouraging, not discouraging, as its revenue, operating profit, and earnings-per-share growth continue to be nothing short of excellent.
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