Nvidia & Snowflake – Multiple compression

Small misses pressure multiples again

• Nvidia reported good FQ1 2023 results but the market is so sensitive to high-multiple stocks that the shares fell 10% due to weak guidance that was entirely due to China and Russia.
• FQ1 2023 revenues / adj-EPS were $8.3bn / $1.36 ahead of consensus at $8.1bn / $1.29 but guidance caused worries.
• China’s zero-Covid policy and self-sanctioning in Russia will cause the loss of around $500m in revenues which more than accounts for the shortfall in revenues that are expected in FQ2 23.
• FQ2 2023 revenues are expected to be around $8.1bn +/- 2% with gross margins of around 65% +/- 0.5% points which is below the consensus estimate of $8.4bn by around $400m.
• If one excludes Russia and China, then this would be guidance broadly in line with expectations.
• However, the market didn’t care and punished the shares in after-hours trading by around 10%.
• Snowflake also reported good Q1 results but then went on to guide weakly causing a 13% decline in the share price in after-hours trading.
• Q1 2022 revenues / EPS were $422m / LOSS$0.53 in line with expectations of $413m / LOSS$0.51 but again was cautious on the general outlook.
• Snowflake called out the macro environment as causing its customers to be a little more cautious in their expectations which it, in turn, has put into its guidance for 2022.
• Q2 2022 revenues are expected to be $435m – $440m while the full year is expected to be around $1.85bn representing 66% YoY growth.
• This compares unfavourably with Q2 revenues consensus of $468m and FY 2022 revenue consensus of $2.0bn.
• Both of these are good companies which are extremely well run and have a bright future ahead of them.
• The problem is that the multiples upon which their shares trade are demanding more than this and so what we are seeing is simply a reversion to reality rather than any material deterioration of fundamentals of either company.
• Even with the recent takedown of high-flying technology shares, Nvidia is still trading on 11.8x 2022 EV / Revenues and Snowflake is on 15.6x 2022 EV / Revenues.
• Nvidia is certainly worthy of a high sales multiple as the company is fantastically profitable, but it is still trading on a 2022 PER of 34x.
• This gives Nvidia’s high revenue multiple much more support than Snowflake which is still losing money.
• The problem at the moment is that there has been a rush for the exit by many investors which caused valuations of high multiple growth stocks to fall by 50% or more.
• Some shares are now at much more reasonable levels, but both of these companies could easily fall further before the market feels that reality has asserted itself.
• The selling pressure is also indiscriminate meaning that the shares of the good companies are being sold as hard as the shares of not-so-good companies and this will, in the end, create opportunity.
• These corrections almost always go way too far meaning that good assets will eventually be on sale at excellent prices.
• However, we are not there yet and for a lot of the technology sector, there may be more pain ahead.
• Companies which have already fallen to interesting levels include Palantir, Peleton, Nokia, Pinterest, Alibaba and a lot of the Chinese technology sector.
• Those that may have further to fall include Snowflake, Unity, Roblox, Uber, Tesla, Rivian, Lucid Motors Lyft and probably Nvidia.
• However, Nvidia’s fundamentals are very strong and I will be looking out for a time when they are properly on sale but we are not there yet.
• Snowflake has much, much further to fall in this environment.