Nvidia Snubbed

In this issue of the peel:

• The stock that cried earnings is back again, and… the market ain’t believing them anymore. Nvidia’s earnings blew the roof off once again, but it no longer impresses Wall Street. Get the full rundown below.
• Pets are eating good and middle schoolers are still looking fly after Chewy and Nordstrom crushed their quarterly earnings. But, not all retailers are made the same as Abercrombie & Fitch shares tumbled despite a stellar Q2. Lastly, Super Micro got shot by Hindenburg Research… only to grab the gun then and shoot themselves too.
• Rate cuts are coming, but does that mean gains are locked in? Given the 25x leverage on my portfolio, I hope so, but that’s unfortunately not what the data says. Check it out below.

Market Snapshot

Banana Bits

• Berkshire Hathaway (rightfully so) becomes the first U.S. non-tech company to hit a $1tn valuation.
• It was fun while it lasted. Get ready for logo-covered jerseys and a lot less fun in the NFL as the private equity barbarians have been allowed in the gates.
• U.S. consumer confidence just hit a 6-month high while Chinese consumer confidence just tied its all-time low.
• The SEC just hit NFT marketplace OpenSea with a Wells notice, informing the firm to lawyer tf up because they’re about to get sued.
• The “most watched person in the world,” MrBeast (a.k.a. Jimmy Donaldson), is celebrating hitting 300mn subscribers by… fighting the worst kinds of allegations and losing viewers to a surge in competition.

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Macro Monkey Says

Earnings Spotlight: The Holy Grail

Big turning points in human history are few and far between.

The discovery of fire, the adoption of agriculture and writing, and the invention of the printing press are a few that come to mind.

But honestly, I don’t think any come close to the one we just witnessed yesterday—Nvidia’s Q2’25 earnings report. After all—what’s more important than shareholder value?

Let’s get into it.

The Numbers

Apparently, Nvidia doesn’t give a damn about shareholder value. It’s 6:53pm EST as I write this, and shares are down more than 6.7% after hours already.

Getting into the high-level results, Nvidia once again beat on revenue, raking in $30.04bn. However, at just 7.52%, it’s their smallest beat since starting to carry the market in late 2022.?

Growth clocked in at 15.3% quarterly and 122% for the year.

Putting the team on your back is a lot of work. Plus, the theory of diminishing marginal returns—meaning (in this case) that as revenue rises enormously, eventually growth has to slow due to non-infinite demand—is weighing.

Net income beat estimates as well, coming in at $16.6bn or $0.67/sh. Consensus expectations were looking at $0.64/sh, meaning the company beat by 4.7%.

Those three words, “diminishing marginal returns,” are sure to keep CEO Jensen Huang up tonight. We can see the growth slowdown across almost every key operating metric.?

Take a look:?

It’s not like anyone is surprised by this slowdown, but markets clearly weren’t expecting growth to slow that much.

Operating income still grew a ridiculous 174% annually and a handsome 10.2% for the quarter, reaching $18.64bn.?

Moving to the bottom line, net income was up 168% for the year and 11.3% quarterly to $16.56bn. That’s more than Nvidia made in REVENUE for the same quarter last year.

Feels illegal to grow that fast. But free cash flow didn’t get the message. At a measly, pathetic little $13.5bn, free cash flows fell 9.97% from Q1. However, I don’t think anyone’s crying about this, given that it’s up 123% annually.

Data center revenue, the company’s crown jewel and the sector every other chip company is horny for, clocked in at $26.3bn, up 16% quarterly and 154% annually. In fact, that’s more than the company made in total revenue last quarter.

This segment is like the Alec Baldwin of the group—it’s the one everyone knows and cares about.?

Meanwhile, the firm’s three other segments are more like Alec’s siblings, Daniel, William, and Stephen—they’re there, but hardly anyone knows that, and absolutely no one gives a f*ck.

Regardless of how much we care, top-line growth was healthy across the board.

Guidance came in upbeat but was lower than the last few quarters. Nvidia expects $32.5bn in Q3, while analysts were looking for $31.7bn. Apparently, the Street hasn’t started to factor in a “ridiculousness” multiple as they probably should.

After the firm’s Q1 report, we released this video, projecting revenue to reach $30.1bn in Q2. We were off, but closer than the Street. Now, our expectation is for ~35bn next quarter. Stay tuned…

The Takeaway?

Nvidia crushed it. Objectively, this was another installment in an earnings saga that will be passed down for generations.

BUT…

It didn’t live up to the market’s expectations. Much like the boy who cried wolf, Nvidia is like the stock who cried earnings—they kept crushing it when not enough people believed them, and then, when everything’s priced in, the results weren’t enough.

With CapEx spending from big tech companies like Meta, Amazon, Apple, Microsoft, etc., going seemingly exclusively to Nvidia, it’s not like shares are ready to fall apart. It’s just about figuring out the proper valuation.

As Alphabet CEO Sundar Pichai said on AI-related spending, “the risk of underinvesting is dramatically greater than the risk of overinvesting…”?

In other words, Nvidia’s chilling. The question is—are investors?

What's Ripe

Chewy (CHWY) 11.06%

• All the dogs are eatin’ good. Chewy shares popped on a solid quarter despite relatively low sales growth of 2.6% and a 1.8% decline in active customers.
• The online pet retailer still beat EPS due to effective monetization and expanding margins driven by subscription growth to 78.4% of sales.
• Revenue of $2.86bn was in line with estimates as 6.2% growth in sales per customer compensated for the slight decline in active users.
• It’s been a volatile year as an uncertain macro backdrop created questions over the prioritization of pet spending. Now, the market has its answer.

Nordstrom (JWN) 4.21%

• Keeping suburban middle schoolers fresh since 1901, Nordstrom continued their tradition strong in Q2. The apparel retailer missed on sales but smoked EPS.
• Earnings clocked in at $0.96/sh on $3.89bn against estimates of $0.71/sh on $3.9bn. Off-price Nordstrom Rack locations did the heavy lifting, up 8.8%.
• Guidance was raised too, despite the irony of the report. Their strong results suggest weaker apparel spending is already underway as Rack outlets drove growth.

What's Rotten

Super Micro Computer (SMCI) 19.02%

• Stock serial killer Hindenburg Research chose Super Micro as its next victim. As the chase began, SMCI immediately tripped, sending shares falling off a cliff.?
• Hindenburg apparently sought to start a new religion by publishing this Bible-length piece flaming the firm for “accounting manipulation, sibling self-dealing and sanctions evasion.”
• That might have caused yesterday’s decision to delay their annual filing to “complete its assessment… of internal controls.” The market took it as evidence that Hindenburg was onto something.

Abercrombie & Fitch (ANF) 16.99%

• Not all retailers are made the same. But, after outperforming Nvidia in 2023 and then gaining 83% YTD, it’s no surprise that strong results failed to live up to the hype.
• 21% sales growth and strong performance across all brands and regions carried Abercrombie & Fitch to a beat across the board. But CEO commentary killed the vibe.
• “Increasingly uncertain environment” were the three little words that brought shares to their worst day in a long time. Similar to Nordstrom, it’s a difficult environment for apparel.

Thought Banana

The Receipts

We’re all about as excited for September’s rate cut as we are when you're at a work party and your favorite coworker taps their nose and points to the bathroom.

Now, it’s about to be fun.

But before we get too excited, let’s see what history has to say.?

The Data

Not all rate cuts are created equal.

Looking at market performance post-rate cut since 1957, we can see that returns are about as mixed as usual.?

Source

Of the 21 rate-cutting cycles since the Eisenhower administration, the high-level data shows that:

• 17 out of 21 times (81%), the S&P 500 is higher 1-year later, with or without a recession.
• 13 out of 21 times (62%), a recession has followed the Fed’s first cut.
• 9 out of 21 times (43%) the S&P 500 was higher a year later even though a recession followed.
• 1 out of 21 times (4.8%) the S&P 500 was lower a year later without a recession.
• Only 4 out of 21 times (19%) has the S&P 500 been lower a year later while also being in a recession.
• Of those 9 times, the S&P 500 was higher a year later, and the average 12-month return was 7%, even with a recession.
• The range of 12-month returns following a cut with a recession was -36% to 34%, while the range of returns following a cut with no recession was -5% to 19%.

So, some of the market’s best post-rate cut performance came while we entered a recession. After all, Mr. Market is a forward-looking guy, and he gets it right once in a while.

Source

The Takeaway?

The act of the rate cut itself doesn’t change much about returns.

Markets price in many of the risks to the economy before the Fed wakes up in the morning, as we’ve become all too aware of in recent years.

To paraphrase a certain fast-talking and often cringeworthy political commentator, “returns don’t care about your rate cuts.”

The Big Question: Will we get a recession in this rate-cutting cycle? How should everyday investors' portfolios be positioned to capitalize on approaching cuts?

Banana Brain Teaser

Previous

A window is in the shape of a regular hexagon, with each side length of 80cm. If a diagonal through the center of the hexagon is w centimeters long, then w = ?

Answer: 160

Today

If the volume of a ball is 32,490 cubic millimeters, what is the volume of the ball in cubic centimeters? (1 millimeter = 0.1 centimeter)

Send your guesses to [email protected]

?

As a leader, it is important to not just see your own success, but focus on the success of others.

Sundar Pichai

How Would You Rate Today's Peel?

?? All the bananas

?? Meh

?? Rotten AF

Happy Investing,

David, Vyom, Ankit & Patrick