What to Make of NVIDIA's Latest Earnings Report

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Mann about the latest headlines and earnings reports from Wall Street. They break out the latest earnings from NVIDIA (NVDA 6.14%). They've got results from a 125-year-old American mainstay retailer to share, some fascinating developments from the markets, and much more.

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This video was recorded on November 19, 2020.

Chris Hill: It's Thursday, November 19th. Welcome to MarketFoolery. I'm Chris Hill, joining me from a great distance, Mr. Bill Mann. Good to see you, my friend.

Bill Mann: How are you, Chris?

Hill: I'm doing well, I'm doing well. We were talking right before we started, your audio quality might be a little well below what we typically do, because you've got a new computer, so hopefully, the dozens of listeners will bear with us as we're going to get some earnings. We've got a fascinating development going on that The Wall Street Journal just reported. We'll get to that. Let's start with Nvidia.

It was another big quarter for Nvidia. Third quarter profits and revenue both higher than expected for the chipmaker. Shares down a little bit today though. I'm assuming it is around the guidance they gave on their datacenter division, which to be fair, they came out and said, yeah, this number is going down. [laughs]

Mann: I always caution people not to spend too much time worrying about what happens right around earnings with companies. And I think in 2020, we've gotten the exact wrong lesson, whenever companies beat by just a little bit, their stock goes up 20%, whenever they lose by a little bit, their stock goes down 20%. That's actually weird, that's actually weird, it doesn't usually work that way. You're exactly right that, generally speaking, stocks are driven by guidance. So, now that they've reported those earnings, those are in the bag.

But Nvidia stock has gone up by $230 billion in market cap this year, $230 billion. So, what happened on this day is really nothing, they're crushing it on certain fronts, their chips are in the Twitch by Nintendo, which sold 7 million units last. You know, they are absolutely doing great. So, the earnings report was fabulous. The stock is doing its thing, it's probably ahead, the stock was ahead of itself and that's all you need to know.

Hill: Yeah, it did seem like, you look at the gains, I mean, the stock up 150% in the past 12 months. You can absolutely see, particularly on Wall Street, maybe some of the traders saying, OK, we've made some money, we're going to take a little off the table here. But is Nvidia, in your mind, a more predictable business than it was, say, four years ago? I don't pay as close attention to it as you do, but my memory of Nvidia is, it was a little bit more of a rollercoaster with the stock a while back, and now given the size, given their dominance, it seems like they're steadier than they used to be.

Mann: Yeah, simply because they have gone from being mainly a play on graphics chips to being a much broader company. Nvidia, by market cap, is now the largest semiconductor company in the U.S., it surpassed Intel, which blows my mind. I mean, that is not a bet I would have made, that Intel would have been the second place to anybody in the U.S. on the semiconductor front. So, yes, it is a much more predictable company by virtue of the various markets that it's in. You know, it's the guts of the Nintendo system, it's the guts of the Xbox. It is now a much more broad company in terms of the market that it is gone into. Jensen Huang and his team have done a fabulous job turning this into, not just a monster of a company, but one that has much more resilience than it had even five years ago.

Hill: Yesterday on the show we talked about Target's amazing third quarter. Macy's (M 0.11%) third quarter was kind of the opposite. Same-store sales down 20%, digital sales were up 27%, but, Bill, that is just not the -- I mean, in normal times Macy's increasing their digital sales 27% would be a reason to pop champagne, but in this environment with store closings, with all of the problems, that's just not going to get it done.

Mann: No, the problem with -- so, their same-store sales were down more than 20%; that is the physical stores. So, their online sales were up 27%; do I have that right? I've got my notes, but I'm trying to scroll through instead -- I'm being offered ads, so that's wonderful. [laughs] What I would say about that is that, Macy's says loss, right? When you see what's happening at Best Buy, when you see what's happening at all of these, you know, at Walmart. Walmart, and Best Buy, and Target are taking share from Amazon, much less from Macy's. Macy's online sales or for people who can't get into a Macy's, they are self-cannibalizing, and it's sad. This is a 125-year-old company in the U.S., it is a mainstay of main street in a lot of the largest cities in this country, the anchor for malls all around the country. They've lost; they really have, and it's all over.

You know, there are companies that have made recoveries that are bigger than this, I've talked about Best Buy before as being one of those that really pulled a rabbit out of the hat; I don't know that Macy's has a rabbit.

Hill: It's interesting, because you're right, you think of the heritage of this business, you think of the brand association, there is some value there, but it's almost like they are trapped inside themselves. And what I mean by that is, for everything that Macy's sells, there is probably a better option from some competitor out there. They're not going the value route, so they're losing out to the Kohl's of the world. And this is a business that sadly is still optimized for a world in which people go to department stores, and that's not the world we live in anymore.

Mann: That's right. And you think about what Best Buy did to survive, is that they finally said, OK, even if we lose money on certain SKUs, if there is a price online, we will match it. Macy's can't do that. You can't do that when most of your business is fashion, right; it's just not possible to have that same impact. And so, what Best Buy did is like, OK, we're going to lose money on certain things, but people are going to look and they'll say, OK, if I drive to the Best Buy that's two miles from me, I can get the price that I want, and I can have that device now. That's not something that's available to Macy's.

And you know, it's interesting, their revenues were some-$4 million. This is now a company that has a much larger mindshare than it actually does position in our economy anymore; it doesn't make me happy at all to say that, but it is definitely true.

Hill: The Wall Street Journal is reporting that the SEC is currently working on a plan that would require Chinese companies to use auditors overseen by the United States, if the companies don't comply, then under this proposal they would be shut out of exchanges in the U.S. that they are currently listed on. And we're talking about companies like Alibaba, Baidu, JD.com, just to name a few.

Mann: More than $1 trillion in market cap between the listed companies than the U.S., which are ...

Hill: So, there are a lot of moving parts to this, this is still in flux, according to The Journal's report. At some point, maybe in December, this is going to be available for public comment. But before we start digging into this a little deeper, what was your gut reaction when you read this story?

Mann: My gut reaction is that, and I don't want to be completely political, because, you know, at the point in time, we're still trying to figure out who the next President is going to be, we're pretty sure it's not going to be Donald Trump in, say, February of 2020. And we'll just leave it at that; we're pretty sure of this. This is something that is not going to be instant, it's going to take more than a year to institute, which means that the next administration will have to choose whether to go to fully implement it. So, that's one thing.

The other thing, this has been a longtime coming, and it's not, I think it's really important to state that this isn't the battle in between the United States or the SEC and these companies, it's a battle between the United States and the Chinese government. The Chinese government limits the access that foreign auditors have to Chinese company books. They can't come in and look at the source document, they can't come in and do a full audit, it has to be done within China. It's the only country in the world that's like that. And it's bad behavior. It's bad behavior.

So, on the one hand, we are seeing the nuclear option get pulled here in the U.S., and it really matters, but at the same time, this isn't just, you know, we're just throwing bombs at China because they're there and they're threatening or whatever, this hasn't come out of nowhere. The fix will be that China figures out how to open its book in a way that doesn't end up humiliating the Chinese Communist Party; that's what's going to happen.

Hill: So, your expectation, and I'm assuming the way you are investing, is that you believe this is going to happen, that there will be a requirement, and Chinese companies, in concert with the Chinese government, will agree to it?

Mann: Yeah, I do, because it's the only country of substance that matters that has a different set of rules than everybody else. A German company, American auditors can fully audit their books, Japanese companies, companies even in Hong Kong, it's just Mainland China. It's going to change, and they will figure out a way that everybody gets to declare victory and this happens. So, it is a reason why, I mean, ultimately, I think it's self-defeating for China. I mean, obviously $1.2 trillion in market cap here in the U.S., but there are a lot of investors, a lot of American investors, a lot of investors around the world, who say, I don't invest in, and I don't trust Chinese companies. And they're not wrong, right? This helps their argument.

Ultimately the argument has got to be a little bit more sunshine, and that's not something that's easy for the Chinese Communist Party to do, but it's the way it's going to have to be, you know, whether this goes through or not.

Hill: So, two questions in two different directions. First, let's say, just for the sake of argument, that you're wrong. [laughs] Let's say ...

Mann: No! [laughs] Right then my wife goes: As usual. [laughs]

Hill: Let's say you're wrong in this regard, let's say this goes through, and these Chinese companies -- you know, Alibaba recently did a listing, I think, in Hong Kong -- you know, these companies and the Chinese government say that's fine, we're not doing this, and we're taking our ball [laughs] and going home, and so, therefore they are no longer listed on exchanges. This is a little in the weeds, but like what happened. You know, if I'm a U.S. investor and I own shares of Baidu, or JD.com, or Alibaba and they're no longer listed -- you know, a year from now, it's like, well, they're no longer going to be listed, what happens to my shares? Do I still own them? Do they get liquidated? What happens then?

Mann: It's a really good question, and it's a bit of an open question, but what normally happens when a foreign company delists from the U.S., which has happened before, and plenty of times. What will end up, is there's either shares on the home market which are tradable, probably it would be in Hong Kong, which, you know, many brokers in the U.S. have an agreement with the Hong Kong stock exchange, so they would become tradable there.

The biggest issue for investors is not even liquidity, it's access. Like, it will be harder to do. We, in several services in The Motley Fool, have exposure to foreign companies that trade on foreign exchanges, and it's not the best experience, but it's not something that you should panic about either. The thing that people might wonder is -- and there is no way that what would end up happening is that your shares would somehow be forfeit, you own those shares, and the way international commerce works and the way the markets work is, those shares are yours and they won't somehow be evaporated, they may be liquidated, so we'll have to see. I definitely want to make sure that people don't panic about this, because I think it's an unlikely outcome to start with, but even if it does come to pass that way, it will be done in a really organized way. Nobody wants $1.2 trillion worth of stuff to disappear.

Hill: So, assuming you're correct, and whether it's a year from now or a little bit further down the line, this is what comes to pass. Do you think it is just a done deal that, from that point on, any Chinese company will list in the United States or will there still be companies that just say, no, we're not interested in that?

Mann: Well, again, it's not really up to the companies, it's up to the government, right? And, yeah ...

Hill: Right. Yeah, sorry, I should have been more explicit. [laughs] Do you think the Chinese government is going to say, OK, now that we've made this deal, everybody is in on the U.S. exchanges?

Mann: Maybe. Maybe. You know, the reason that they come to the United States, and the reason that foreign companies come to the United States, is not a convenience for you or me, right, like, they aren't saying, hey, we would really love to have American shareholders. They come to the U.S. because we have the largest pool of money from which they can do secondaries and raise capital. That's a problem for companies that aren't in the United States, that aren't trading here. I mean, there are ones that already aren't here. Tencent, maybe the largest company by market cap in China, does not have a sponsored U.S. listing. So, it exists, right?

So, the biggest issue is that it will actually be fairly harmful for Chinese companies that are looking to raise capital.

Hill: What do you think the next step is, is it this --

Mann: That election will get certified, that will be the next step. [laughs]

Hill: I guess where I'm going with this is, and I guess I should apologize, because I'm basically asking you a series of crystal ball questions.

Mann: No, I love those. Although, I can be wrong on crystal ball questions.

Hill: [laughs] In terms of the public comment, what is your expectation there? Again, The Journal reported this story, let's, you know, put whatever is happening with a transition by the administration aside, if this becomes available for public comment in December, what should we expect in terms of comment, like, do you expect anyone to come out and be very opposed to this, or is it more going to be, sort of, a muted -- you know, if you're the New York Stock Exchange, you want this, because that's business for you. [laughs]

Mann: Yes. And I don't know that people really understand that when stock exchanges go out, and they compete with each other for listings, right? And New York Stock Exchange and the Nasdaq have almost an unbeatable hand because of the pool of money of the U.S., you know, the American investment public behind it. But they have very willingly lowered their standards. The laws on the books exist today, that these companies need to be audited, you know, by American accounting firms. The laws exist. They're just not really being enforced and they're not necessarily enforceable. So, this will just simply put some teeth to that. So, obviously, the exchanges will be concerned.

You know, Senator Marco Rubio has already put out a bill called the Equitable Act that would do this same thing, so I think you're going to see a very little, muted -- you know, very little, like, aggressive stance against this. This will be a pretty popular bipartisan bill or an effort.

Hill: Two quick things before we wrap up, first, for those who have been wondering -- and I understand, for anyone who turns on a radio and hears holiday music, there are now 200 radio stations across America that have flipped their format to all holiday, but for those wondering, here on MarketFoolery, it starts December 1st, like we do every year.

Mann: [laughs] Is that a Dan Boyd thing?

Hill: Producer Dan Boyd, yeah, he's adamant, and I back him 100% on that. We start on December 1st. [laughs]

Mann: I love that. I will say that 2020 has been such a weird year, I see a lot of people who've already put their Christmas decorations out. I'm here in New Orleans, there are plenty of houses that have gone straight to Christmas decorations. For this year, I'm completely for a little bit of joy, a little bit early. On ordinary years, I'm right there with you, but to me, it makes me happy to think of the holiday starting today, and specifically this crazy year in our rearview mirror. So, as soon as I can get to the point where that seems possible, it's a little bit of joy.

Hill: I agree completely with that. We're still starting on December 1st. And the second thing, because Barker and I talked about this the other day, will you publicly commit we're going to get an apropos of nothing episode in the can before Christmas?

Mann: Absolutely. I'll start drinking now. [laughs]

Hill: Well, that's all the time we have, so I'll let you get on to whatever is next in your day, I appreciate it, it's good to see you.

Mann: Thank you so much for the invite, Chris, it's been too long.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you on Monday.