NVIDIA Posts Earnings. Wall Street Says “That’s It?”

0:04Tyler Crowe:Tyler Crowe, Come on. You knew we were going to talk about NVIDIA earnings. This is Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe, and today I'm joined by longtime Fool contributors Matt Frankel and Jon Quast. Earnings are still the topic of the week, and some investor favorites are certainly reporting. We're going to get into the results of the Trade Desk, and I'm going to pester John and Matt about MercadoLibre's most recent quarter. But first, it would be hard to be taken seriously as an investing podcast and not discuss NVIDIA's earnings right at the top. So, we're going to get right into it here. Shares of NVIDIA are down about 4 % as we taped today after the company reported fourth quarter and full year 2025 results.

0:58Tyler Crowe:It's been a minute since we've seen NVIDIA report earnings that didn't blow analysts and investors away. And it looks like based on the stock market reaction, that was kind of the case today because apparently 73 % year over year growth for revenue doesn't wow anyone anymore, John.

1:17Matt Frankel:Well, it wows this guy. I mean, look, here's what wowed me. Somehow, NVIDIA's growth is still accelerating. You pointed to the 73 % revenue growth in its most recent quarter. That's insane as it is. But next quarter, it expects around 77 % growth. I mean, let's just put these numbers into a little bit of more tangible, contextualized perspective here. NVIDIA for the year, it just reported$216 billion in revenue. It added$85 billion in revenue compared to the previous year. There are companies that have existed for decades and never reached$85 billion, period. And that's what NVIDIA just reported that it added to revenue in a single year.

2:01Matt Frankel:It's absolutely mind-blowing. That comes with$120 billion in net income on top of that. I don't know how to even say that out loud. It's so incredible. And here's something that's even more wow. If we need some more wow here, these results don't include any revenue from China. That could come online soon as that gets worked out. Then you have other drivers such as Sovereign AI. That's a potential revenue driver over the long term here. Sovereign AI revenue tripled to 30 billion. A lot of countries are seeing this as a national security issue. And so we could see more countries investing more money into NVIDIA's products to build their own infrastructure.

2:39Matt Frankel:So very wow results as far as I'm concerned.

2:42Jon Quast:Yeah, I will say that this is not the first time that NVIDIA has beat earnings estimates and issued strong guidance only to see its stock fall the next day. I agree with John, the numbers look strong to the point where they're tough to put into words. But NVIDIA trades for about 46 times earnings, about 24 times sales. And although revenue grew by 73 % year-over-year, not taking anything away, to about$68 billion, that's clearly not sustainable year after year, even though they're expecting it to accelerate into the first quarter. For example, a large part of the hundreds of billions of dollars that we've heard in CapEx, Plan by Meta, Amazon, Alphabet, etc., it's earmarked for data center chips, specifically NVIDIA chips.

3:23Jon Quast:And data center chips are most of NVIDIA's business today. Those three companies alone are spending about$500 billion this year between them, primarily to build out their AI infrastructure. A 73 % growth rate, just to go full math guy on you right now, implies$4.5 trillion in spending in the year 2030, if we keep that growth rate up. Clearly, that's not likely to happen. This is a long way to say that unless NVIDIA posts blowout numbers, which I'd call this quarter good, not a blowout. It's not too surprising to see the stock pull back a little bit just on valuation and sustainability concerns.

4:04Tyler Crowe:John, apparently Matt is not impressed with 73 % growth and hasn't read the McKinsey report that they do expect to be spending somewhere in like$7 trillion between now and 2030 on all this stuff. But I digress. I mean, this could easily become the finance version of that SNL skit from the Chris Farley show where we just kind of go around the room and say how great NVIDIA is. But let's kind of poke and prod some of the soft spots in NVIDIA and maybe we can see where this conversation goes. Because look, we can say how great it is, but people want to buy this company and they should know upsides and downsides.

4:37Tyler Crowe:One Reuters report that I read about today's earnings and it's kind of discussing some of the shifting demand in compute power and made me think a little bit and kind of talking through this a little bit here. As more AI companies shift from training models to actually deploying models to customers, they will need more of the generalized computing power from CPUs versus the lots of smaller tasks all running in parallel that our NVIDIA GPU processors were known for and worked incredibly well for training models. Also, some of the big hyperscalers are starting to develop their own proprietary equipment.

5:16Tyler Crowe:I know we were just talking about their big spending, but Alphabet, for example, has its application-specific tensor processing units that it claims are better designed to accelerate machine learning workloads when deploying these things into the real world. Look, NVIDIA isn't just a GPU company. It has CPUs as part of its product suite, and it has other ways to monetize a lot of what's going on here. So it's not like I'm saying the company is cooked from here. But I do wonder if NVIDIA's pricing power might start to take it on the chins lightly as competitors start to find ways around paying that massive premium for an NVIDIA product.

5:56Tyler Crowe:I mean, that, if anything, would be my concern from here going forward. Are either of you considering this when looking at NVIDIA? Or maybe I'm missing a bigger challenge here that you guys have identified?

6:07Jon Quast:No, I love that you brought this up. I've said before that unless you've tried to talk yourself out of an investment, you should have make it. You're absolutely right. It's one of the biggest reasons why I own AMD in my portfolio, not NVIDIA, although I completely acknowledge that NVIDIA is an amazing business. Obviously, if Alphabet and others develop their own processors, it doesn't help either of the companies I just mentioned. But you're right, the pricing power could be under pressure, and the premium nature of NVIDIA's GPUs could certainly be less in demand in a couple of years. AMD, just to kind of talk about my own investment, has a 12 % net margin versus 53 % for NVIDIA.

6:45Jon Quast:That's due to its markups because of the premium nature of its products, like you mentioned. But for AMD, I see margin compression as being less of an issue. For one thing, data center GPUs are a much smaller percentage of its business. Second, AMD's GPUs, they don't command the pricing premiums that NVIDIA does. And third, AMD doesn't just have CPUs, as you put it, with NVIDIA. They're a core product for the business. So, that's a very legitimate concern, and it's why I want another direction.

7:16Matt Frankel:Yeah, I think both Matt and Tyler are hitting it on the head here. You look at NVIDIA's margin, it's essentially doubled over the past five years, over 50 % now, as Matt pointed out. I think it's unreasonable to expect the margins to stay this high until kingdom come. At some point, I'd expect the margins to go back from otherworldly right now to just great in the future. And that margin compression could impact this as an investment. It's one of the reasons that I'm personally not buying NVIDIA, even though I'm wowed. I'm wowed, as we pointed out. But how much higher can the revenue go? I can't answer that to my own satisfaction.

7:57Matt Frankel:And how much longer before that margin goes back down to just a great margin and not a otherworldly margin? I don't know that either. The situation has prevailed and lasted way longer than I ever originally thought possible. So I'm already way in the wrong here, but I can't really predict it into the future. And so that's why I'm on the sideline.

8:19Tyler Crowe:I like the way you frame that, too. and perhaps an important message as we discuss these sort of things was talking about adding to a position or buying something today is very different from owning the stock. I'm sure that people who own the stock are pretty satisfied with what's going on here. But when trying to make that next capital allocation decision, you know, based on valuation, based on where you think the company is going to be going, it can drastically change the way you frame the thought on a company, whether it's adding to or continuing to hold. So I think something investors in NVIDIA will want to consider when we talk about these things, because there is some nuance here.

8:57Tyler Crowe:And now after the break, I'm going to play a little devil's advocate here for two Mercado Libre investors. Introducing Fidelity Trader Plus, the next generation of advanced trading from Fidelity. Customize your tools and charts and access them seamlessly across desktop web and mobile. For faster trades, anywhere you go. Try the all new Fidelity Trader Plus. Learn more about our most powerful trading platform yet at fidelity.com slash trader plus. Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC. Member NYSE SIPC. If you haven't figured it out by now, I do like to be a little antagonistic and kind of play the devil's advocate from time to time, especially with Matt and John, because we've been doing this for a long time.

9:43Tyler Crowe:They don't mind it. Their blood doesn't boil when we do these sort of things. So in that vein, I want to talk about MercadoLibre and their most recent earnings report. Shares dropped about 8 % after announcing earnings yesterday. And over the past five trading days, shares are down like 12.8 % as we are recording this. Now, if I remember right, John, you said on one of our other group chats before we discussed this here that it is trading at its cheapest valuation since the Great Recession. Did I read that right?

10:14Matt Frankel:Yeah. So in that group chat, I want to acknowledge I was referencing basically the dumbest of all valuation metrics, and that is the price to sales ratio. Now, the reason I do look at the price to sales ratio, it's not my entire valuation process, but it's part of the picture. I like that it's smooths out some inconsistencies potentially in the profits, but right now it trades at just three times its sales. If you go back to the absolute height of the Great Recession market crash, it traded at 2.6 times sales. So it's only trading for a hair above what it traded for during one of the worst market crashes of our investing careers.

10:52Matt Frankel:If you look, though, at other valuation metrics, right now it trades at about 16 times its free cash flow, which is actually quite reasonable when you consider how much it's investing into its infrastructure, which naturally suppresses its free cashflow generation. You can look at cash from operations. It trades at eight times its cash from operations. That is absolutely incredible for a business that just turned in its seventh consecutive year of greater than 30 % growth.

11:17Tyler Crowe:Look, we're setting the table here. We have an seemingly cheap stock based on historical metrics and things like that. Matt, run us through the fourth quarter numbers. And then I'm going to, as I put on my devil's costume to ask a couple of questions here.

11:31Jon Quast:On the surface, things look really solid. I'm not saying the stock's down for no reason, as we're going to get to in just a little while. But just consider the headline numbers. Gross merchandise volume, this is their e-commerce platform, was up 37 % year-over-year, and 43 % more items were sold on the platform. The Mercado Pago fintech business, which I'd call kind of like a stripe, I guess, in Latin America, was up 53%. The credit portfolio, which is credit cards, business loans, and other kinds of lending grew by 90 % to$12.5 billion. All of this produced a combined 47 % revenue growth year over year.

12:10Jon Quast:It's clear this is still a rapidly growing business. The big concern, which I'm sure we're about to get into, is profitability. The net margin fell to 6.4 % from over 10 % a year ago. Now go for it.

12:24Tyler Crowe:Yeah, it sounds like you see the headlights coming down the road here. So here's kind of my antagonistic view on this a little bit. But I do genuinely believe this as an investor. Not all growth is created equal. Not all growth is good. I don't always think that it's worth pursuing those extra few percentage points of growth if it erodes things like margins and rates of return. and margins and rates of return for MercadoLibre peaked in 2023. It's, and one of the things I've really kind of picked up on is that charges for bad or questionable accounts, you know, things that they've written down because they aren't sure people are going to pay them back.

13:04Tyler Crowe:That's now equivalent to 25 % of its gross profits this past quarter. Now I'm not a MercadoLibre shareholder. I know both of you are, and many have done incredibly well with this stock as have many other investors at The Molly Fool, both members and analysts. But things like this would give me pause, especially the questionable account credit provisions, things like that. To me, it looks like the company's growth isn't as quality as it looks on paper. And so, I want you guys to kind of convince me and the audience here, it's like, am I just shouting at clouds here?

13:38Jon Quast:No, it's a valid concern. Of the nearly four percentage points of net margin compression that I mentioned a minute ago, More than 3 % of that was directly due to rising costs. That includes loss reserves. It includes CapEx, which rose by 53 % year-over-year, faster than revenue. But we've seen the similar story with other companies that I follow, like Klarna, for example, where U.S. banking services are growing over 100 % year-over-year, where some forms of growth, especially in the financial sector, where people are borrowing money from you and then paying it back, it doesn't need to happen quite so fast.

14:17Jon Quast:It's easier to assess risk on, say,$100 million of loans than it is on$12 billion worth of loans. And it's easier to handle it when things go bad. So, I'm not too concerned yet. This is still a profitable business. It's still doing well. As John mentioned, it's grown over 30 % for the seven consecutive years. That includes during the COVID years. But it's something that needs to be monitored for sure. So I'm a shareholder. I'm a happy shareholder, but I'm watching this very closely.

14:47Matt Frankel:One quick comment I would add to that is this is a Latin American business. When I lived in Latin America, I was appalled at the interest rates when it comes to borrowing. That was particularly true of mortgages, but credit cards as well. There is higher credit risk in these markets. A lot of people don't have a credit history. So that can be really hard to assess the risk as the lender. So reserves naturally are higher, but the income potential from the accounts not in default is higher because they're charging higher rates. So we need to make sure that we're running this through a Latin America grid and not a U.S.

15:22Matt Frankel:grid when it comes to looking at its credit portfolio. The other thing I'll say is this. Another reason that margins are down for MercadoLibre is because it recently lowered the threshold for free shipping in Brazil. We can open up our history books here and see what can happen in a situation like this. I agree with you, Tyler, that not all growth is good. You do need to think about long-term margins. But if we look back at 2005 at Amazon, it started offering free two-day shipping for its Prime members. Now, from 2005 through 2010, Amazon's operating margin dropped by about 30%. So that doesn't look good at first, but revenue soared 400 % during that time.

16:03Matt Frankel:And eventually that greater scale was important because it was able to monetize in new ways. So all I'm saying is I think that MercadoLibre is playing the long game here, just as Amazon was playing the long game 20 years ago.

16:15Tyler Crowe:Let's just put it this way, because again, I like to be antagonistic. Whenever MercadoLibre quarterly earnings report is, we'll do our check in and see if things are trending in the right direction. After the break, we'll go and see if TradeDesk can pull out of its nosedive. Introducing Fidelity Trader Plus, the next generation of advanced trading from Fidelity. Customize your tools and charts and access them seamlessly across desktop, web, and mobile. For faster trades anywhere you go, try the all-new Fidelity Trader Plus. Learn more about our most powerful trading platform yet at fidelity.com slash trader plus.

16:54Tyler Crowe:Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC. Member NYSE SIPC. I'm going to do my best to not be that the podcast host equivalent of, has this ever happened to you person on those like gimmicky as seen on TV commercials as we go through trade desks earnings? Because this is not a company I follow much, but I know both of you do. And so I'm going to lean on you to make everyone smarter about the trade desk here. Shares of the trade desk are down about 6 % as we tape and down 67 % over the past year. And there's been lots of chatter about turnover at the executive level and a cursory glance from me.

17:29Tyler Crowe:There's been a drastic change in valuation for this company. So what is the market reacting to here in this most recent earnings report? And did the trade desk's most recent earnings for you at least change some of that narrative that we've seen?

17:42Matt Frankel:The market is reacting to the fact that growth is decelerating for the trade desk, plain and simple. It just reported 14 % growth, which I believe is the slowest growth. It's reported as a publicly traded company. And its guidance for the next quarter implies 10 % growth. And so there's a real chance that it dips into the single digits in 2026. And the market is reacting to it being a low growth business now. Now, what's interesting is there's competition, at least competition in the narrative. And we're talking about Amazon. What's so interesting is that the Trade Desk's management called out Amazon by name in the call saying, Hey, our product is better than Amazon's.

18:19Matt Frankel:And so, it's almost like it called attention to the elephant in the room and told investors that it wasn't an elephant. Here's the thing. Amazon just turned in 22 % advertising growth at a higher scale. And I know it's not apples to apples, but still, growth accelerated in advertising for Amazon in the past year, whereas it's decelerating for the trade desk. And I think that that is something that investors are very cognizant of.

18:45Jon Quast:Yeah. As John said, for the time being, this is a slower growth business right now for a few reasons. Investors want reassurance on a few things. They want to know why they couldn't keep a CFO more than a few months. They want to know when the company's growth might accelerate again with Amazon putting 22 % advertising growth. When can we expect that? and we want to know whether companies like Amazon are truly a disruptive threat to the business or not. We haven't seen that yet, at least to the extent that investors would like. Having said that, this is a business that is still growing. It's still profitable.

19:17Jon Quast:Right now, it's trading for 11.4 times forward earnings estimates. I don't think AI or any of the big tech companies are truly an existential threat to the trade desk. Plus, I think it might be appealing as a takeover target at this point. It's cheaper than it would cost someone to build this. Bottom line is, I don't think investors would be making a bad move if they bought the stock today. But I'd certainly expect this rollercoaster ride to continue for a little while.

19:43Tyler Crowe:Any mention of a takeover target makes for a fun topic, especially for talking heads in financial media. So, it's going to be a fun way to close out. Matt, if this really is a takeover target, as you might be suggesting here, let's play a little game. You guys get to make your best case as analysts or somebody on one of the larger financial TV shows or something like that, who would you like to see acquire the Trade Desk?

20:10Matt Frankel:Well, I'm not sure how much I would necessarily care. But speaking of Amazon, I know that Walmart loves to stay step for step with Amazon. And so I think that Walmart might be an interesting acquirer here of the Trade Desk. Interesting, importantly, the Trade Desk already powers Walmart's retail media products. So there There is already some relationship there. I think a more compelling idea, in my view, would be Roku. That would probably be more of a merger than an acquisition. So Roku, of course, the connected TV platform, the trade desk has a large presence in connected TV. Roku is excelling with adoption, but struggling with monetization.