Nvidia Soars After Earnings, and Markets Skittish as Debt Deadline Approaches 5/24/23

0:00Right now on Fast, can't stop, won't stop. Shares of Nvidia roaring higher after hours. The stock up nearly 20 % after blowing the doors off earnings and telling the street AI is going to keep the party rolling. The move, the conference call highlights, and the ripple effect on the market straight ahead. Plus, the Tesla tumble, Elon Musk's EV brand taking a massive hit in a closely watched brand reputation poll. The company falling 50 spots from just outside the top 10 to number 62. The details behind the plunge and the potential stock impact coming up. And later, a 90s fashion favorite making a monster stock comeback today.

0:33Toll Brothers talking about a potential M &A land grab and a look at the energy names. Goldman thinks could be very undervalued. I'm Melissa Lee. This is Fast Money. We're live with the Nasdaq MarketSight on the desk tonight. Tim Seymour, Courtney Garcia, Steve Grasso and Guy Adami. We start off with an earnings alert on NVIDIA. Shares hitting all-time highs in the after hours after the chipmaker posted a top and a bottom line beat. The stock adding$150 billion and counting to its market cap after this report. That call just getting underway. Let's get straight to Christina Parks Nebulas with the latest.

1:03Christina. Well, market cap over Berkshire Hathaway, an already high valuation trading at 70 times forward P.E. And the stock, like you said, is still soaring above 20%, hitting an all-time high, inching closer and closer to that trillion-dollar market cap, which is pretty substantial for a chipmaker. Although, let's talk about the revenues for Q1. Down year-over-year, Q1 revenues were actually up 19 % quarter-over-quarter, with, what, data center sales hitting a record up 18%, sequentially led by, you guessed it, growing demand for generative AI and large language models. Data center sales encompass that all-important H100 AI chip.

1:39And then we've got to talk about gaming revenue. Also, an important segment was down 38 % year-over-year, which kept gross margins lower than last year. But the segment was still up double digits sequentially. The launch of new gaming graphic cards helped. And then last but not least on your screen, you're seeing auto sales also kept growing up 114 % year-over-year. So a lot of what we're seeing in this name was riding on the guidance. And it did not disappoint. expecting Q2 revenues of$11 billion with higher than expected gross margins. Lots of wins, including its biggest revenue beat in five and a half years.

2:14And the stock now is 21.5 % higher. Wow. Christina, thank you. Keep us posted on this conference call, which is underway as we speak. This is the stock everybody wanted to short for fundamental reasons, for technical reasons, Guy. And here we are, all-time highs. Yeah, I'm guilty of that for sure. It's the second quarter revenue. You got$11 billion off what the street was looking. The midpoint was about$7.2 billion. I think even the high on the street was$9 billion. So it's a pretty remarkable guide. But it's still a very expensive stock. Even with that guide, this subsequent move, I mean, you're paying up for NVIDIA here.

2:49And maybe you should pay up. I mean, maybe I just have it flat and wrong in terms of valuation. They'll grow into the valuation and stuff. But you're still talking about a company, even with this move, even with this guide, This 25 times revenue, I don't know, 55 and a 55 times EPS and stuff at trading at an all time high. Let's see how it performs. But congratulations if you've owned this stock for the run. If you think that all these stocks that have moved the market so far this year have been based on AI. So NVIDIA holds 90 percent of the market share of AI. So, by the way, let's get it out of the way.

3:20There's nobody. Maybe you could say I would have thought it would have been a sell. So I think everyone collectively thought it was overpriced, overvalued. It's still not overvalued when you look at it in hindsight. But when you think about what you have to do with all of that computing data, you need NAND. You need memory. What gets us back to Micron? I'd be a buyer of Micron on the back of NVIDIA's results. I know it doesn't sound right, but you're going to need something unsexy like Micron for something sexy like NVIDIA. So just the fact that these numbers, even for the current quarter, blew away guidance that management had given so recently.

4:0150 % increase. That's insane. You've never heard of that before. These were cartoonish numbers. And then, you know, you read stuff like we're significantly increasing our supply to meat. Surging demand for the entire data center family of products. We're not even talking about even the stuff that's the pixie dust. So it's, you know, their core business is strong. You mentioned gaming. Their auto design pipeline is$14 billion in surging. You know, so it's just at what point and this is where the technical guys out there will say, you know, fundamentals are a function or technicals are a function of good fundamentals.

4:33In other words, that they they're not here to tell you what to buy. They usually will say, tell me where to buy it. But that ultimately this really is a story where even technical guys who see this breakout say that's a function of fundamentals. Now, the stock's not cheap and there are some shorts out there that are scrambling. And there's some look, a lot of people. It's been easy to say that this stock was expensive, was. And I certainly have said that many times on this show. But this is one of those stories that unfortunately for fundamentals, you just haven't really seen them line up. And I think the demand and the opportunities out there.

5:08But their core business is better than people thought. And that's what's amazing here. So, I mean, with all that said, I mean, are we maybe looking at a re-rating? In the case, in the scenario of a re-rating of the stock, where we do think things look a lot better and guidance is going up a lot, maybe it's fair to say that it should trade at this multiple at this point. I don't know. I mean, they're definitely a lot more than their competitors, really uniquely positioned to take advantage of AI, which we've seen with every company that's reported. If you mention AI or you're in AI, that is what it's going to benefit you right now.

5:39And so I think that is a beneficiary for NVIDIA. They were expensive coming into this. They're still expensive now. So, no, it wasn't something that I was jumping into. This is also important to know as an investor, even if you're not necessarily a buyer of NVIDIA, we have a lot of people who are just investing in the S &P 500, maybe in index funds. It's a very large portion that's only getting bigger. And this is one of the stocks that has really led the entire S &P return this year. And a lot of people are starting to get overexposed in that. So just know what you own. So even if you don't own this outright, you probably have exposure to this.

6:07So just keep that in mind. And data centers where Christina led off on the report, it does have a lot to do with AI. So I think we have to, to your point, you have to re-rate, not only re-rate it, you have to look under the hood and see everything has to do with AI and then figure out where, to Guy's point, where you grow into those earnings. It's interesting, though. I mean, it's going to drag up the rest of the sector, I'm sure. I mean, AMD is probably significantly higher. I'm sure even Microsoft gets a boost on the back of this as well. It's going to be interesting to see if Intel goes up or down.

6:39I mean, their data center number right now. Exactly. I mean, it just shows that Intel is still well behind the eight ball here in terms of data center. Everybody else is winning. At least you can make a compelling case in valuation for Intel, although that's been a loser's argument for a while. I'm interested to see what it does to the broader market tomorrow. Obviously, I'm sure Nasdaq futures are going to be significantly higher. The S &P under pressure today. This flies in the face of all the other things we'll talk about on tonight's show. But for a day, at least, this is a pretty incredible report.

7:08What does this tell us about market mentality? We're seeing a day where, you know, it's day two of markets being under pressure because of these debt ceiling talks. You see the volatility index finally 20 and above. Finally, finally going higher. And yet we have whatever touches AI going higher as well, Tim. And we've talked about this sort of AI potential bubble forming in the market. Is this case in point of it? Well, again, you're breaking out to a new high, a fresh new high in a stock. And so this is maybe leading the entire market to start to make that challenge. And if you think about even the backdrop of today's debt ceiling negotiations, which were seen as negative and certainly a negative for the market, this is another reason why big cap tech should rally.

7:54And so and then I get back to where I see record short positions in E-minis and S &P futures. I certainly see an institutional world that is underinvested. I see hedge funds and CTIs, CTAs, commodity trading accounts that are significantly underweight, the S &Ps. And this is the part of this that tells me we go higher. I know we debated was the debt ceiling, you know, get it done. And that's actually a sell the news effect. But I think positioning is so bearish right now. I know it's hard to believe at forty two hundred on the S &P when we're at the top end of a range for a year. But but really positioning is bearish.

8:25And this is the kind of stuff that tells people, hey, these these these blow up tops from. pre-COVID or from COVID days, we can actually increase upon them. Think about large cap tech stocks where you used to have disruptors be able to enter the market. If rates stay where they're at now, you can't get a startup, knock someone off the hill anymore. So that moat around all those large cap names has grown bigger. So it's even better. Banks collapsed. So it should be even more of a premium. So you're just making the case for more money to go into this. That's the reason why people are undervested in these large cap tech names.

8:59And that's an element that just hit me in the last couple of weeks, that that could be more insulative than we first thought. No, it's fair. I mean, so let's say off of this guide for the second quarter, let's be extraordinarily constructive. Let's say it's a 50 billion dollar revenue company, which is a stretch, by the way. We're now approaching a trillion dollars in market cap. I mean, you can even so even with the best case scenario for revenues, I mean, approaching a trillion dollars, still an expensive stock. I mean, again, could it grow into it? Absolutely. Is it the most important company in the world right now?

9:32Well, it certainly trades that way. The question is, they're being priced as if, and I realize Intel, NVIDIA, not so much. Completely different. But the presumption that NVIDIA maintains the pole position in generative AI and even just the data center chips that are so critical is, I think, a bit of a stretch. Why? Who's knocking at the door? I mean, AMD has some ability to compete there. I mean, I just believe that it's not a one-horse race. Well, they have 90 % market share right now. So, yes, it could change, but right now they are the one. It's their share to lose. It's their share to lose, but, again, where we've seen people close the gap on technology so quickly, especially in the semiconductor land, to a place where things start to become somewhat commoditized.

10:17I realize we're very far away from that, but I just think it's extraordinary that, you know, They're seen to be the ones without any type of threat to their competitive mode. Courtney, does this move in NVIDIA make you more optimistic about the markets and specifically tech, or does it make you question where we are even more? I think it would make you question where we are more just because these valuations are getting so, I mean, outrageous. I really don't know a better word for it. But on the flip side, I think to play devil's advocate, what is a beneficiary of AI is it is going to make the economy in general a lot more productive.

10:48And I think that is where you can, to a certain extent, justify these higher valuations. To the extent that you're seeing that with NVIDIA, a company's already up over 105 percent this year before this jump after hours today. Not a stock I'm jumping into by any means. But, I mean, it definitely could be a good thing in the long run. Yeah. Guy, what do you want to know on the conference call, which is 11 minutes in right now? How many times they say AI? I mean, last time it was like in the 30s, I think. I'm being at somewhat. But I mean, the difference between this quarter and last quarter, NVIDIA, actually, to Tim's earlier point, their core business did extraordinarily well.

11:22Last quarter was sort of Metsch, but the fact that they mentioned AI all those times got them over the threshold. This, their core business is doing well. Can margins hang in there? I mean, we're talking about margin expansion, which is good. But, you know, can margins continue to move? And how concerned are they? And they talked about it. About China. Yeah. Yeah, because NVIDIA actually made reference to that, I think, earlier this week. Well, that seems like the sort of wild card out there that I don't want to say black swan because we know it exists in terms of a risk, but sort of the outlier risk that could really knock this valuation down very quickly, either that or some sort of a lockdown which could affect production.

11:59Yeah, except for the fact that they haven't really haven't talked about that. And I realize this was also another one of these days where we started to hear about China getting ready to shut down again. So, yeah, I just think that the story here is that there is such a tailwind behind this entire space, as I've just argued that I don't believe they should hold this competitive threat forever, edge forever. But I do think that there's nobody else in their space. And it's a case where NVIDIA, even last year, we found three other things that they were also the front runner. Remember when it was just gaming and graphics chips?

12:31And this is the reason why you own NVIDIA. And it was crypto. And, you know, so it's NVIDIA's game and everybody else is watching. Muppet News Flash. Yes. So Christina, who just she just texted me, they've mentioned AI 28 times so far in 12. I'm just I'm just 28 times in 12 minutes. He's just going on AI, AI, AI, it's on a loop. The stock is at after our session highs right now of 23 percent. So this is, of course, something that we will continue to monitor. Meantime, let's talk about the broader markets, looming debt default deadline. Lawmakers are still unable to reach agreement on spending, though House Speaker Kevin McCarthy just saying that some progress has been made.

13:12For more, let's bring in Joe Livornia, chief economist at SMBC, NICO Securities America. Joe, great to have you with us. Thanks, Melissa. Great to be with you guys. We're in single-digit days away from the X-State. I mean, does that matter? Are we going to start seeing the damage done to the U.S., the damage done to the economy, the damage done to the markets prior to June 1? If Yogi Bear, I think Melissa said it's deja vu all over again. It feels that way with the debt ceiling. We've been through this so many times. There are about five points where there's a lot of overlap and ability to compromise.

13:45So a deal will get done. There won't be a technical default. But it doesn't mean, Melissa, we won't go to the last minute. And the last minute isn't necessarily June 1. I'm guessing it's somewhere between June 1 and June 9. The reality is Treasury has a lot of ability to make this deadline later. But it becomes all political. But there will be something done. Yeah, we are just putting up a screen, Joe, of how the markets reacted on the downgrade of the U.S. credit rating in 2011. But the reality is, is that there was a deal reached prior to this downgrade. It was reached overnight between August 1st and August 2nd.

14:19So, I mean, we can make a deal, but the damage could still come. Well, here's what I would tell you, Melissa, a couple of things. Number one, back in 2011, the rating agencies already put the U.S. on downgrade in the spring. That didn't happen this time around. Number two, John Boehner had 49-seat majority, whereas Speaker McCarthy only has nine. And that 49 seats that Boehner had were unruly Tea Party set of folks. And in 2011, the economy was weak. We worried about Greece and European sovereign debt, a lot of other factors at play. So a repeat to 2011 seems to be highly unlikely. doesn't mean that markets won't wobble between now and the X date, which I'm saying is by June 9, or for that matter, the bill market, which certainly is reflecting these risks, but also because investors can't be in some of these securities for the slim risk of a technical default.

15:10They're out of certain sectors in the bill market. But again, I firmly believe this will be resolved. Maybe the last minute will be resolved and we'll go on to the next thing. Hey, Joe, it's Tim. So I think you just answered what was going to be my question on Speaker McCarthy and how he comes into this and really the backing or lack of backing he's had for, you know, since he became speaker or since he the 15 times it took him to become speaker. Let's layer in where the Fed is right now, what's going on with interest rates and in terms of what this combination, though, means for your outlook on the economy.

15:43You've talked at different times on the show, you know, leading indicators, things that really have you very concerned. Does the debt ceiling do anything to any of that? No, no, it'll be. And again, it'll be solved by June 9th, say at the latest. When I look at leading economic indicators, Tim, I see they're down 13 months in a row. I see they're down 8 percent year over year. This feels eerily similar to the 06 to 08 period where people were looking for a recession. It took a long time to happen. And of course, when we got it, it was it was pretty ugly. And I fear that's what's going to happen again, because household borrowing costs, not financial conditions, but what it costs households to borrow.

16:20those are at 20-plus year highs. Record mortgage rates, credit card rates, auto loans, personal loans. That's 70 % of the economy. And I'm fearful that when the labor market turns, the economy will weaken quite sharply. And let me add one other thing that relates to equities, because you guys talk a lot about that. Over the past few weeks, we've seen a significant increase in real interest rates, well above 1%. I don't believe this economy has the dynamism and the potential growth to continue to grow in the face of 1 % real rates. In the past, when that happened, the economy abruptly slowed or the Fed cut rates very rapidly.

16:56That doesn't seem to be likely at the moment. Joe, here's one for you. I saw Melissa was on the squawk box this morning. You had that gentleman on from Duke who actually wrote, he was very... He did the model about the inversion, the yield inversion, saying that inversion signals recession. So here's one for you. Does the inversion signal recession or does it cause one? Both, because the inversions, look, the 10-year note, even at 370, wouldn't be where it is with inflation at 5 % if the market didn't believe the economy was going to slow rapidly. So that's one score. But the other guy is that the curve, when it's inverted, banks can't make money.

17:35And that's why they started tightening lending standards last year before we had this regional bank crisis. So it is both a predictor and cause of recession, because the credit and money and lending multiplier basically falls apart when that curve is inverted. Joe, do you think, you know, we were just talking about NVIDIA, jaw-dropping pop of 23 percent on the back of, you know, a crazy guide on Q2 revenues. And I'm just wondering, you know, it may be an outlier, but that kind of move, the kind of guidance, it's not what you hear when we're about to head into a recession. It doesn't feel like it, at least.

18:09And I'm just wondering how much you think the Fed looks at that, looks at the markets. You're saying, you know what, the S &P around 4 ,200, too high. Melissa, I don't like the narrowness of growth in the economy. Right now, it's being cropped up by the consumer. Perhaps there's some excess savings. I don't see a lot of growth on the CapEx investment side. Housing's in a recession. Manufacturing's in a recession. Dividia is a great company, obviously. But when you look at the breadth of the equity market, it kind of parallels the breadth of the economy. It's very narrowly focused. That, to me, is not sustainable.

18:38I want to see breadth. I want to see a lot of different industries, a lot of different sectors of the economy participate in the growth. And again, let's not forget that monetary policy works with long and variable lags. We've raised rates a lot. QT is going to restart. It's possible we're going to get massive bill issuance. The liquidity will be sucked out of the market as the Treasury rebuilds its operating balance. I mean, this could be a very fraught environment for equities over the summer. So, no, I don't take solace that one particularly impressive company has done well. Joe, thank you.

19:12Thanks, Melissa. Thanks, everybody. What was behind that question? I'm just curious. Well, your interview this morning. Well, no, but I mean, what do you think? Well, I mean, Joe's answer was both. I think it's more predictive than anything else. So, I mean, that's my sense. And the fact that people say it's different this time. They say it's different this time predicated, I think, on the employment picture. But I happen to think it's mutually exclusive. I think the yield curve is telling a story the market doesn't want to hear. Yeah, but that narrowness that Joe is referencing is exactly why so many people, including you folks here, think the markets might be particularly vulnerable.

19:47I didn't say that. No, no, no. But I think history has shown that the market always has a narrow leadership. It's usually 20 percent ish. But it's not skewed to 30 percent of the market. Well, now it's 29. On average, it's been 20 percent. So, yes, it's skewed for where we started off the show for a host of different reasons. But if you and if you add communications and tech, you know, you're close to 40 percent. And I actually think that the factors that are pushing those stocks higher are not going to change. And therefore, it may push them higher. I mean, the market as a group, I think, can go higher.

20:28We know what's going on below the surface and it's not pretty. Right. And I just think you add positioning on top of that. Now, the other side of that, which is what had the market worried today, and you can make an argument it's been doing this since the early part of May, definitely the last two weeks. Rates have been moving higher and rates have not only been moving higher on the yield curve, but on Fed fund futures. In fact, we've almost priced in another hike. We hadn't done that. We're now at a place where if you look where we were out a year ago, Fed futures out to 24 at their peak, you know, four or five weeks ago, we're 120 basis points of cuts in a year.

21:00We're now inside of 85 and going lower. And so I just think that higher rates for equities, we kind of heard those Fed minutes. We know the Fed is divided. We heard Waller today. The Fed is divided. And if anything, rates are staying higher for longer. That's not great for equities. But it may still be good for high multiple tech, excuse me, for mega cap tech, which is not considered high multiple tech. But NVIDIA is high multiple. Pull up the chart in the after hours. It's up 29 percent right now. Twenty nine percent. So historically, higher rates are not good for high multiple stocks. And yet we have here the example of NVIDIA, which seems to levitate higher even in a high interest rate, higher for longer, higher for higher.

21:42I mean, whatever you want to say, it's high rates and you don't think that a stock like this should do well. Is NVIDIA now defensive? Has something changed? I mean, what does this say? I don't think the markets are pricing in the higher for longer. I think we all agree that that's probably going to happen. I don't think cuts are necessarily happening later this year. And, yeah, there is starting to get more and more of a possibility of actually another hike, which, you know, we'll see if that happens or not. But I don't think markets are pricing that in now. I think that's why a lot of these high multiple companies are continuing to do well, because people are expecting there are going to be cuts.

22:11But I would not discount that. And I think that's something you have to be cautious about. All right. Twenty two minutes into the conference call. The mentions of A.I., probably 20 and counting since 20 was hit like in the first 12 minutes. Was it called a Muppet News Flash? Remember that? No. You remember that? I don't remember that. I mean, I don't know. Was it Ernie? Was it Bird? Coming up. No, it is like sideline reporters in the Muppets, don't you know? Coming up. We've got more after-hours action shares of Snowflake dropping after posting results. We've got the details from the quarter next, plus a drill down on the energy space, the group lagging behind the broader market this year.

22:43But could there be a rebound in the works? We'll debate that when Fast Money returns.