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The relationship between company earnings and share price;An empirical investigation of Nvidia and Intel Authors: Bleron Ala, Lukas Dursun, Erik Blbulyan, Mohammad Omar Examinator: Natalia Berg Course: 2FE190...

The relationship between company earnings and share price;An empirical investigation of Nvidia and Intel Authors: Bleron Ala, Lukas Dursun, Erik Blbulyan, Mohammad Omar Examinator: Natalia Berg Course: 2FE190 Term: HT24 Group: I2 Lukas Dursun, 031130-6054, [email protected] Bleron Ala, 030720-4719, [email protected] Erik Blbulyan, 010316-0271, [email protected] Mohammad Omar, 20001101-6318, [email protected] 1.Introduction Increasing a company’s profit and stock price share the same goal of creating value for investors. Profits often positively impact stock prices and also the stock price is influenced by external factors like market expectations, technological, product news and industry trends. According to Emellie Stark (2023) Investments in the stock market are often based on expectations of the future profits and growth.When a company reports strong financial results, such as high earnings, investors typically expect the share price to rise, as profits indicate the company's success in the stock market. Despite this, market dynamics are complex and the relationship between profits and stock price can also be influenced by many factors like economic condition, technology, global events and even customer behaviors. In this project we have chosen to investigate and compare two companies, NVIDIA and Intel. By analyzing their annual financial report we will find out the relationships between accounting profits and stock price fluctuations and also we want to see what factors contribute to one company performing better than the other, Kharina Beer (2023) About Nvidia and Intel Nvidia Nvidia was founded in 1993 by Jensen Huang, chris malachowsky and Curtis Priem The company became known for developing GPUs(graphics processing units) These GPU were originally added to desktop computers to improve graphics which was especially useful for gaming and graphic design. In the late 1990s and 200s, NVIDIA established itself as a learning company in the graphics card market. It was a major supplier for the game consoles like Microsoft's Xbox and Sony's playstation. And also during in 200s the company started making Chips for the car displays. To day NVidia is still a major player in the graphic cards but now earns most if its money from business that use their technology for AI and others Hight demand applications.Li openAl amazon etc, Eric Reed (2024) Intel Intel is an American international corporation and technology company which was founded in 1968 by Robert Noyce and Gordon Moore. It is mostly known for developing the x86 series of microprocessors which are the processors which are found in most personal computers today. Intel provides processors for computer manufacturers such as Apple, HP and Lenovo. The company also participates in development, research and manufacturing of integrated digital technology platforms, Samuel Chima (2023) 2.Theory Capital market research focuses on how capital markets respond to financial reporting. The theory investigates how information that is published about a firm affects the behavior of investors. Especially how investors make decisions based on that information. It focuses specifically on the connection between financial disclosures and stock price changes. The capital market research concept is based around the idea that capital markets work efficiently which is related to the efficient market hypothesis. This hypothesis holds that financial markets react to public information in a fair and efficient way. This also means that stock value adjusts quickly and correctly when new information emerges and becomes available. The justification for the efficiency of capital markets is by avoiding circumstances where imbalances allow investors to exploit unfair advantages that are based on undisclosed information (Deegan, 2023). 2.1 Question at issue How is the company's earnings affecting its share price? 3.Method In this qualitative study a three-step method was used to investigate the influence of financial information releases on business stock movements. The sources which were used were financial reports, Craig Deegan's "Financial Accounting Theory" course literature. Financial ratios obtained via multiple sources, for instance tradingview and marketscreener. The study begins by collecting predicted and reported profits per share and then analyzing them to determine gaps between the investor and the actual results.The stock changes that followed these reports were then studied. The last stage was to examine the financial statements to see if the reports of this information changed stock prices. Because of the wide range of possible impacts, this study will not attempt to forecast or list all of the variables that could influence stock prices. Instead it will look at specific potential variables that might cause stock prices to plummet or increase, rather than the connection between profits per share and stock price. 4.Empirical Data 4.1 Analyst forecasts The end of the financial year is a much-anticipated period when companies publish their annual financial reports. These reports are a key factor for investors when deciding whether to buy or sell shares. During this time, analysts also provide forecasts and set expectations. If a company fails to meet these expectations, the consequences can be severe. As a result, the company's ability to meet or exceed expectations is important, and this is often reflected in the movement of its stock price (Investopedia, 2023). 4.2 Nvidia 4.2.1 Annual report for year 2020 (Fiscal 2021) In 2020, analysts expected Nvidia to continue its strong growth, forecasting revenue of around $16.8 billion and non-GAAP EPS of $8.19, with gross margins projected to remain at around 64% (Nvidia, 2021). Nvidia beat these expectations, posting a revenue of $16.68 billion, reflecting a 53% year-over-year growth, driven by increased demand for gaming GPUs and AI-powered data centers. Nvidia’s gross margins also surpassed expectations, reaching 65.5%, up from 64.1% in 2019​. Nvidia’s EPS climbed to $10.00, much higher than the $6.63 reported in 2019. (Yahoo Finance) Nvidia’s stock price climbed from $130 to over $300 by year-end. (Tradingview, 2021) 4.2.2 Annual report for year 2021 (Fiscal 2022) In 2021, analysts expected Nvidia’s revenue to be about $25.5 billion, with EPS around $15.97, driven by strong demand in gaming, AI, and data centers. Gross margins were predicted to be around 66.5%. (Yahoo finance) Nvidia beat these estimates, reporting $26.91 billion in revenue, a 61% increase. Gross margins improved to 67%, thanks to high demand for AI and gaming GPUs. EPS rose to $16.97, higher than expected. (Nvidia, 2022) Following the earnings report, Nvidia's stock price reacted positively, which led to the stock price climbing 1.6% in after-hours trading, which is not a significant reaction. However, throughout the year, Nvidia´s stock price delivered 55.5% return. 4.2.3 Annual report for year 2022 (Fiscal 2023) In 2022, analysts expected Nvidia’s revenue to be around $26-28 billion, with EPS of about $17.50. They also forecast slightly less in gross margins to 65% due to higher costs and supply chain issues partly because of the Ukraine-Russia war, which led to higher inflation and uncertainties in the world. (Yahoo Finance, 2023) Nvidia met these expectations with $27.0 billion in revenue, but EPS dropped to $13.40, mainly because of lower demand for gaming GPUs and ongoing chip shortages. Gross margins fell to 64%, affected by higher production costs. (Nvidia, 2023) Following the earnings announcement, Nvidia's stock price went up by 14%. The stock price continued a bullish trend throughout the year. (Tradingview, 2023) 4.2.4 Annual report for year 2023 (Fiscal 2024) In 2023, analysts expected Nvidia to recover strongly, with projected revenue of around $30 billion, driven by increasing demand for AI and data center GPUs. Non-GAAP EPS was estimated to be about $16.00, with gross margins improving to 67%. (Yahoo Finance) Nvidia beat these expectations and reported $31.8 billion in revenue, which was a 17.8% increase from the previous year. This was mainly due to the high demand for its A100 and H100 GPUs used in AI and cloud computing. Gross margins increased to 68%,and their EPS reached $17.25, which was higher than expected and shows its success in AI and data centers. (Nvidia, 2024) Nvidia’s stock went up in the fiscal year of 2024, the stock price surged by 9.1% in after-hours trading. So far, Nvidia´s stock price is up approximately 60% this year after their 2024 fiscal report was released. (Tradingview, 2024) 4.3 Intel 4.3.1 Annual report, year 2020 In 2020, analysts expected Intel's earnings per share (EPS) to be about $4.90 (non-GAAP), and revenue to be around $75.3 billion. They thought Intel's gross margins would be a little over 56%, due to difficulties with their 10nm process. In reality, Intel did better than expected, with a non-GAAP EPS of $5.30 and annual revenue of $77.9 billion. However, their gross margins were 56%, a bit lower than expected because of higher costs related to the 10nm production. (Intel, 2020) In 2021, Intel’s stock started between $55 and $60, but delays in their 7nm chip process and competition from AMD and Nvidia made investors worried. Even though Intel reported record revenue of $79 billion, the stock was still unstable. Investors were cautious because of the lower margins and Intel’s strategic challenges. After Intel released its 2021 annual report, the stock fell to around $50 as concerns about competition and higher costs from the IDM 2.0 strategy overshadowed their good financial results. (Cutress, 2022) 4.3.2 Annual report, year 2021 In 2021, analysts expected Intel to make about $74.7 billion in revenue (non-GAAP) with an earnings per share (EPS) of $4.60. Gross margins were predicted to be around 57.7%, which was a bit lower than in 2020 due to rising research and manufacturing costs. (MarketScreener, 2022) Intel did better than these predictions, reporting a non-GAAP EPS of $5.47 and full-year revenue of $79.0 billion, which was a 1% increase from the year before. However, their gross margins were lower at 55.4%, affected by their ongoing investments in manufacturing and the global chip shortage.(Intel, 2021) Intel's stock faced major problems in 2022, falling by about 20% due to lower revenue and profit margins. Starting the year around $50, the stock struggled after Intel reported a 14% revenue drop to $63.1 billion and a sharp 60% decrease in net income. Concerns over Intel’s ability to compete and continued delays in production hurt investor confidence. Even with new strategies like IDM 2.0, Intel’s stock remained around $30–$40 after the release of its 2022 annual report in early 2023, showing ongoing market uncertainty. (Cutress, 2023) 4.3.3 Annual report, year 2022 In 2022, analysts expected Intel's revenue to be between $65–68 billion and earnings per share (EPS) around $2.30. They also predicted a gross margin of about 52%. However, the actual results were lower than expected. (HPCwire, 2023) Intel reported revenue of $63.1 billion for 2022, a 20% drop from 2021. Its gross margin was 42.6%, much lower than the forecast, due to higher costs and less demand in different areas. The actual EPS was around $1.94, missing the forecast as well. Intel's Client Computing Group (CCG) and Data Center segments saw large declines, with revenues down 23% and 15% respectively. (Intel, 2022) Intel's stock continued to struggle in 2023 as the company faced a 14% drop in revenue and a steep 79% decrease in net income. The stock started the year between $30 and $40, affected by competition from AMD and Nvidia, as well as delays in Intel’s product roadmap. Even though Intel beat expectations in the fourth quarter with higher revenue and EPS, the company’s challenges in the data center and AI markets limited growth. By the end of 2023, investor confidence remained low, keeping the stock around $30. (Nasdaq, 2024) 4.3.4 Annual report, year 2023 In 2023, Intel’s performance declined significantly compared to the previous year. Analysts expected revenue to be around $54 billion and earnings per share (EPS) around $1.05. The actual revenue for the year was $54.2 billion, a 14% drop from 2022. Intel’s net income fell by 79% to $1.69 billion, and EPS was $0.40, much lower than the $1.94 reported in 2022. (Simply Wall St, 2024) However, in the fourth quarter, Intel did better than expected, reporting revenue of $15.41 billion, beating the estimate of $15.2 billion. The EPS for Q4 was $0.54, higher than the forecast of $0.45. Gross margins for the year also improved slightly, reaching 48.8% by the end of the fourth quarter, up from 43.8% earlier in the year. (Intel, 2023) Intel's stock faced significant volatility in 2024, reflecting ongoing challenges in its business strategy. By mid-September, Intel's stock price hovered around $20, marking a steep decline from its highs in previous years (LongForecast, 2024). Despite efforts to catch up in the semiconductor race and a series of restructuring efforts, the stock remained pressured due to intense competition from Nvidia and AMD, alongside delays in Intel’s advanced manufacturing processes. Investor confidence was also shaken by the company's struggles in the AI and data center markets, contributing to a low trading range of $18 to $22 for much of the year​(Tom's Hardware, 2023). 5.Analysis This analysis which is based on capital market research will look at how financial results affect the stock prices of both companies. Capital market research focuses on investor reactions to financial reporting which in turn affects the stock prices of these companies. Nvidia has done well in areas such as AI and data centers, which affected their stock price and financial reporting positively. This is in line with the efficient market hypothesis, which suggests that stock prices reflect all available information (Deegan, 2023, p.608-609). Nvidia seems to be better than people expect each year. For example in 2020 with the pandemic causing problems Nvidia still hit its targets for sales and profits. This led to a higher stock price, as expected by capital market research that explains that financial disclosures can influence stock price movements. When it comes to Intel it is a bit different. Intel is mostly known for microprocessors but has been through difficult times that has hurt their stock price. Problems such as delays in making new chips have made investors uncertain. Even though Intel sometimes does beat its sales and earnings targets, its stock didn’t do very well. For example, in 2020, even though Intel made as much money as expected, its stock price fell because of those ongoing issues. This demonstrates that markets quickly adjust to reflect both positive and negative information (Deegan, 2023, p. 596-599). When comparing Nvidia and Intel, we can see the alignment of performance with investor expectations. As predicted by capital market theory, it plays a negative role in stock price movements. As we have seen Nvidia often outperform these expectations which causes stock prices to increase. This can be explained by the post-earnings-announcement, which means that the stock price continues to rise or decline depending on the earnings report. In Nvidias case it continued to rise throughout the year (Deegan, 2023, p.632-633). Intel on the other hand has had failures and delays in exploring hot sectors such as AI which caused investors to be cautious and caused stock prices to fall. Nvidia's early investment in AI and high-performance computing positioned it as a leader in the tech industry. As demand for AI and machine learning grew, Nvidia’s GPUs became important for tasks like data analysis, AI training, and gaming. Their strategic focus on AI allowed them to dominate sectors like data centers. Nvidia’s early R&D in AI technology and a combination of strong partnerships and ecosystem development, ensured its success in an increasingly data-driven world. Intel, on the other hand, has been slower to move into these types of areas, which has hurt their position and appeal to investors. This analysis shows that a company’s financial health, its strategy and outside economic factors all are things that influence the stock price. For Nvidia and Intel these factors have led to very different results in the stock market. The efficient market hypothesis provides a useful lens for understanding these differences and showing how markets quickly react to public information (Deegan, 2023, p.608-609). All this makes us wonder what these companies might do in the future and how they can keep or change their positions in the market. 6.Conclusion In conclusion, this analysis highlights how financial performance, strategic decisions, and market conditions affect stock prices, with a focus on Nvidia and Intel. Capital market theory and the efficient market hypothesis explains that stock prices reflect all available information. Nvidia's strong performance in AI and data centers, consistently beating investor expectations, has driven its stock price to rise, which shows the market's reaction to these positive financial results. In contrast, Intel's challenges, including production delays and increased competition, have caused uncertainty among investors. This has led to that their stock price has been impacted negatively even if they are meeting reporting expectations. This comparison shows the importance of aligning with investor expectations and adapting to industry shifts, as Nvidia's strategy has secured its market position, while Intel’s slower adaptation has led to declines and their stock price to fall. Future success for both companies will depend on their ability to navigate these ongoing challenges and opportunities. 7. Contribution In this assignment, the group collaboration has been highly effective, with each member contributing distinct sections to ensure a thorough analysis of the topic. Mohammad has written the introduction part of the assignment as well as our theory and method, and with the help of Erik they have together written about Nvidia and Intel. Erik has also put together our theory and method. Bleron has researched Nvidia's annual reports and written about their empirical data while Lukas has done the same for Intel. We have together developed the analysis and to conclude our assignment Erik structured the conclusion. Source list Deegan, C., 2023. Financial Accounting Theory. 5th ed. Sydney: McGraw-Hill AnnualReports, 2024. Intel Corporation annual reports. [online] Available at: https://www.annualreports.com/Company/intel-corporation [Accessed 15 September 2024]. Cutress, I., 2022. Intel reports Q4 2021 and FY 2021 earnings: Ending 2021 on a high note. [online] AnandTech. Available at: https://www.anandtech.com/show/17230/intel-reports-q4-2021-and-fy-2021-earnings-ending- 2021-on-a-high-note [Accessed 16 September 2024]. Cutress, I., 2023. Intel reports Q4 2022 and FY 2022 earnings: 2022 goes out on a low note. [online] AnandTech. 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