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Why Nvidia Stock Dropped Ahead of Earnings

By Rich Smith – Nov 17, 2021 at 2:06PM

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Earnings are due out tonight, and expectations are sky-high.

What happened

Shares of semiconductor specialist Nvidia (NVDA 2.84%) are trading 2.6% lower as of 1:40 p.m. EST Wednesday. With earnings due out in just a couple of hours, it seems investors are having a bit of an attack of the nerves.

They're wondering if Nvidia can live up to the hype.

A person bites their fingernails while looking at a laptop.

Image source: Getty Images.

So what

As well they might be! Nvidia stock is up 125% over the past year, rising four times faster than the S&P 500 as a whole, as investors bet big on Nvidia's potential to dominate the metaverse. So far this week, no fewer than four separate megabanks have raised their price targets for the stock ahead of earnings.

Yet, the bigger the expectations get, the greater the chance for Nvidia to fall short of analyst targets.

Now what

Tonight, investors will be looking for Nvidia to meet or beat some impressive stats. Analysts have forecast Nvidia will earn $1.11 per share for the third quarter on $6.83 billion in sales. To reach those numbers, Nvidia will need to grow its sales 44% year over year, grow its earnings 52%, and its grow profit margin as well.  

Yet Nvidia's trailing gross and operating profit margins are both already sitting at all-time highs. In order to merely meet expectations, Nvidia must tonight not merely grow quickly. It must report literally the best numbers investors have ever seen the company produce.  

Anything less than that will be a disappointment.

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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