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Why Nvidia Stock Dropped Before Earnings Today

By Rich Smith – Aug 17, 2021 at 11:47AM

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The stock is up 63% this year, but earnings tomorrow could change that.

What happened

Shares of semiconductor manufacturer Nvidia (NVDA -1.51%) -- a supplier of chips for everything from playing video games to mining cryptocurrency, to performing artificial intelligence computations -- dropped in early trading on Tuesday, hitting a 2% decline as of 11:11 a.m. EDT.

So what

There's no obvious bad news dragging Nvidia down today, or at least no bad news yet. But there is a second-quarter earnings report due out Wednesday evening, and chances are that today's decline in stock price is tied directly to that impending news.  

Glowing red stock chart arrow trending down

Image source: Getty Images.

Now what

This is not to say that Nvidia's news tomorrow will be bad. To the contrary, last week no fewer than three separate stock analysts -- at Evercore ISI, UBS, and Wells Fargo -- chimed in with higher price targets on the stock, with one of them calling it the "most compelling long-term secular growth story," and predicting a strong beat and raise in tomorrow's earnings report, said TheFly.com.

That being said, the stock market is not always a rational beast, and even great earnings reports don't always result in higher stock prices if investors have been led to expect an even greater earnings report than what the company can deliver. With expectations for Nvidia built up to incredible highs already (sales expected to fly 64% higher year over year, and earnings expected to rise 89%), the stock has high hurdles to clear.

The stock price performance might not depend so much on whether Nvidia meets or even beats expectations, but by how much it beats them. Investors today seem to be hedging their bets accordingly.

Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.

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