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How big is too big?
That’s the question on a lot of investors’ minds Wednesday as they wait for Nvidia to report its earnings for the fourth quarter of 2023 after the market closes.
The California-based chipmaker has quickly become the third largest company on Wall Street, behind Microsoft and Apple, largely because of its critical role in the artificial intelligence boom — Nvidia makes up nearly all of the AI chipmaking market in the United States.
But with a market cap of $1.7 trillion and a year-to-date return of about 40% (the best in the S&P 500), the company has a lot to live up to.
Investors expect Nvidia to report earnings of $4.59 a share and $20.378 billion in revenue, up from just $6.05 billion a year before.
“There’s a very realistic and probable chance they beat expectations but zero percent chance they meet the sentiment of those expectations,” said Daniel Newman, CEO of The Futurum Group, a tech advisory and research firm, noting that investors have come to expect huge earnings beats and the outsized hype around the company.
Still, there’s some concern about whether this can last.
Shares of Nvidia have quintupled since the end of 2022 as the AI revolution took hold, and it’s hard to imagine that such stratospheric growth can go on forever.
“It’s the law of large numbers,” said Newman. “If you keep posting these remarkably strong quarters they start to look smaller.” Plus, he said, competition is emerging, albeit slowly. There’s plenty of room for growth ahead, just maybe not at the sky high rate investors have grown used to.
Too big to fail: For the time being, Nvidia is the “most sophisticated and deployed” chipmaker in the world, and its output is one of national importance, said Newman.
“From a national security standpoint, [the US] needs to be the leader in AI,” said Newman. “The economic future of the world depends on AI, and we can’t let China have the most advanced chips.”
That’s the reason the US has invested $200 billion into the CHIPS and Science Act.
While there’s competition from companies like Intel and AMD, Nvidia remains the biggest game in town for now.
And because of its rapid growth, so many retirement savings accounts, institutions and life savings are heavily invested in the company’s success.
At the recent World Government Summit in Dubai, Nvidia CEO Jensen Huang even suggested that governments should consider instituting sovereign AI infrastructure.
That’s the idea that states should control the development of AI technology to best protect their national security, economy and culture as opposed to leaving corporations in charge.
TL;DR: “Nvidia is robust and will continue to grow,” said Newman. “But it needs to continue at a rate that’s eye watering or investors will start looking at other plays.”
What’s next: Wednesday is Nvidia’s big day, but Intel also has plans to share the spotlight.
OpenAI founder Sam Altman, who is reportedly working on his own chip-making venture, will join Intel CEO Pat Gelsinger on stage at a company event. Investors will certainly be watching closely for any announcements.
What’s in your wallet? Capital One is making a $35 billion bet that the answer will soon be: more of its credit cards.
The bank announced Monday evening it is acquiring Discover Financial Services (DFS) in a $35.3 billion all-stock deal, reports my colleague Elisabeth Buchwald. If approved by regulators and shareholders, Capital One’s (COF) acquisition will create the biggest US credit card company by loan volume.
So what does that mean for you?
For now, not a lot. Given that the deal isn’t expected to be finalized until late 2024 or early 2025, Discover and Capital One customers shouldn’t anticipate any immediate changes.
And antitrust regulators could push that deadline even further out: The Biden administration has established a strong anti-merger stance by attempting to block consolidation of corporate giants, from tech companies to airlines.
But, down the road, there could be significant transformations.
For starters, all Capital One debit cards will be switched from Mastercard to the Discover network “within the first few years” from when the deal is finalized, Richard Fairbank, founder and CEO of Capital One, said in a Tuesday morning investor call.
Discover cards are already accepted at 99% of all US merchants that allow customers to make credit card purchases, according to the company. But Fairbank said people mistakenly believe that share is a lot lower.
Consumers could also end up paying higher interest rates.
Compared to other major credit card issuers, Capital One has historically catered to customers with credit scores in the 600s range, which is considered subprime. Given these borrowers are considered riskier, they tend to get charged higher interest rates compared to higher-scoring individuals.
Capital One is among 15 credit card issuers that have at least one card with a maximum interest rate above 30%, according to a recent report published by the Consumer Financial Protection Bureau.
Walgreens Boots Alliance is getting the boot from the 30-stock Dow Jones Industrial Average and Amazon is taking its place, reports my colleague Samantha Delouya.
S&P Dow Jones Indices, which manages the index, said in a statement Tuesday that the change is intended to reflect “the evolving nature of the American economy” by increasing the Dow’s consumer retail exposure.
The change means that investors who bet on the Dow Jones Industrial Average will now have exposure to Amazon’s stock performance.
Amazon joins Apple and Microsoft as the third company from the “Magnificent Seven,” a group of high-performing tech stocks, to join the Dow 30. The other four companies in the group — Meta, Nvidia, Tesla, and Alphabet — are not included in the index, though all seven stocks are included in the much larger S&P 500 index.
Historically, getting added to or dropped from the Dow hasn’t had a significant impact on companies’ stock performances. But presence in the index, which began in 1896, comes with a certain level of cachet. The exclusive group traditionally tries to mirror the most important companies in the US economy. That is why the index is so heavily dominated by technology stocks today.
The change will occur before the US stock market’s opening on Monday, February 26.
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