Why Can't Nvidia's Strong Earnings Stop Its Stock Price Decline? Wall Street Commentators Reveal the Reasons

Renowned Financial Commentator Jim Cramer

Phoenix Technology News, February 27 — According to CNBC, NVIDIA’s strong earnings report clearly indicates that the company remains the leader in AI chips. So, why did its stock still decline during Thursday’s trading?

By the close on Thursday, NVIDIA’s stock fell 5.5%, closing at $184.89, with its stock price essentially flat for the year.

CNBC’s well-known financial commentator Jim Cramer said the reason is that investors are worried that NVIDIA’s biggest customers may not continue to spend so aggressively unless they start seeing significant profit growth from their AI efforts.

“One view is that what we really care about or should care about is how much Amazon has borrowed, how much Microsoft has borrowed, how much Meta has borrowed, and whether they will ultimately fail to make money,” Cramer said Thursday on the “Squawk on the Street” program.

Cramer pointed out, “This is skepticism about NVIDIA’s customers, not about NVIDIA itself.” Amazon, Microsoft, Meta, and Google’s parent company Alphabet are often called super-scale cloud service providers, and they recently announced capital expenditure outlooks that exceeded expectations. These companies are expected to spend about $700 billion this year.

NVIDIA Stock Drops Over 5%

However, such aggressive spending plans are putting pressure on their free cash flow. Free cash flow refers to the remaining funds after a company pays expenses and purchases equipment, which can be used to pay down debt, pay dividends, buy back shares, or invest in growth.

According to Wall Street estimates summarized by FactSet, Amazon’s free cash flow is expected to turn negative by 2026. Alphabet’s free cash flow is projected to decline 64% year-over-year to $26 billion. Meta’s free cash flow is expected to drop 86% to $6.1 billion. Microsoft, on the other hand, is an exception. According to FactSet, in the fiscal year ending June this year, analysts expect its free cash flow to be roughly the same as last year, at $71.3 billion.

During Wednesday night’s earnings call, NVIDIA CEO Jensen Huang was asked whether he was confident that customers could continue increasing capital expenditures. “I am confident in their cash flow growth,” he said. “The reason is simple. We are now seeing a turning point for intelligent AI and its application value across enterprises worldwide. Because of this, we see incredible computational demand. In this new AI world, compute power equals revenue. We are generating profitable tokens, which are effective for customers and profitable for cloud service providers.”

Cramer said that ultimately, Thursday’s stock price fluctuation can be attributed to: “Customers have no choice. They have to spend money. And you might say, but they might not have enough money. Well, there will come a stage where they have revenue but no profit. But none of them dare to stop spending.” (Author: Xiao Yu)