..even the smallest suggestions that the explosive AI growth priced into global markets might be stalling will have ramifications for Nvidia stock, and thus for broader sharemarkets.
Read the above 3 times.
..I think now may be an appropriate time IMO to toe-dip into BBUS because a 'mini-crash' could be just a couple of weeks away plus/minus. Sept/Oct could also see developments that could impact the Presidential race. Why Nvidia’s stunning quarter still leaves room for doubt
The debate about the AI market darling isn’t whether it is fabulously profitable or growing like a rocket ship, but whether its growth can keep going.
Aug 29, 2024 – 8.43am
Nvidia doesn’t just polarise investors.
A party held at a New York bar called Storehouse on Wednesday night to listen to the chipmaker’s second quarter earnings call caused a minor blow up on Elon Musk’s X platform in recent days. The organiser, tech investor Lauren Balik, insisted the event was an ironic and humorous comment on the silly hype around Nvidia. Plenty of keyboard warriors failed to get the joke, and declared they’d found the ultimate bubble signal.
Both takes are probably right. The stunning rise in Nvidia’s share price (up 760 per cent since the start of last year) and its outsized importance to global markets (the stock accounts for a staggering 7 per cent of the S&P 500) creates a feverish level of expectation around the world. Its second quarter earnings on Wednesday night were labelled “the most important earnings report for the stock market this year and potentially in years” by excitable tech analyst Dan Ives.
Ives’ language was hyperbolic, but his thinking was sound. The debate about Nvidia isn’t whether it is fabulously profitable or growing like a rocket ship, but whether its growth can keep going as the artificial intelligence boom accelerates. Ives argued that with the right numbers and the right comments, Nvidia chief executive Jensen Huang could keep the party going.
But in the end, Huang fell short. He provided plenty for the AI believers. But the 6.4 per cent fall in Nvidia shares in after-hours trade on Wall Street says AI scepticism is far from dead.
Nvidia’s July quarter numbers were unquestionably impressive. Revenue for the three months came in at $US30.04 billion ($44.28 billion) versus expectations of $US28.7 billion. Net profit climbed to $US16.6 billion, up a staggering 166 per cent on the previous year.
A $US50 billion share buyback was the cherry on top for investors. There was always going to be a ‘but’
Guidance for the September quarter was largely in line with expectations too. Nvidia expected revenue of $US32.5 billion (plus or minus 2.5 per cent), which compared favourably to the average forecast from Wall Street analysts, which sat at $US31.9 billion before the result.
But – and there was always going to be a “but”, given the incredible level of expectations surrounding this company – there were some notes of caution.
The quarterly growth rates for revenue and profit (15 per cent and 12 per cent respectively) were marginally lower than in the April quarter (18 per cent and 21 per cent). Sequential growth in Nvidia’s key data centre segment dipped from 23 per cent in the April quarter to 16 per cent in the July quarter. Gross margin also dipped slightly, from 78.9 per cent in the first quarter to 75.7 per cent in July quarter.
Now, these are still strong growth rates, and on huge quarterly numbers. And it would be foolish for any serious investor to change their fundamental view of this stock based on any one quarter.
But even the smallest suggestions that the explosive AI growth priced into global markets might be stalling will have ramifications for Nvidia stock, and thus for broader sharemarkets. Two key areas of concern
Analyst questions to Huang zeroed in on two key areas of concern, one macro and one micro.
A key cloud hanging over the stock has been rumours of delays to production of its new Blackwell chip, which is the hottest piece of tech kit in the world. Nvidia admitted it had made changes to the Blackwell production process to improve manufacturing yield. But it confirmed it would start shipping these chips in the December quarter, with “several billion dollars” of Blackwell revenue expected in that period.
The lack of clarity around exactly what “several billion dollars” looks like might be a sticking point in the coming days, but the market seemed relatively pleased with this.
The key big-picture question for Huang concerned the market’s big worry about AI: tens of billions of dollars are being invested in AI technology by the likes of Microsoft, Alphabet, Amazon and Meta Platforms (four of Nvidia’s five biggest customers). But are these tech giants going to generate sufficient returns on their AI investments to justify continued spending?
Huang danced around the question, giving long and waffly answers that essentially repeated previous comments about the importance of AI and the shift to a world of accelerated computing.
His passion was clear, but points of evidence, or even an indication on the sort of markers Nvidia is watching to monitor whether they are getting an appropriate return on investment, just weren’t there. This much focus on one company is a sign of dangerous concentration.
— Nick Ferres
So, the great ROI debate is far from over. The believers will be relieved that there is no suggestion Huang sees the boom missing a beat. And the doubters, such as US hedge fund Elliott, which recently told investors that most generative AI applications are “never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy” won’t have heard anything in Huang’s very high-level answers to convince them to change their view.
It’s unclear what the partygoers at Storehouse made of Huang’s call, but perhaps there’s a lesson in the fact their gathering happened at all.
Nick Ferres, chief investment officer at macro fund Vantage Point, says positioning and consensus beliefs about Nvidia’s invincibility remain incredibly crowded, particularly among retail investors. And that’s a worry.
“This much focus on one company is a sign of dangerous concentration,” he says. “Everyone waiting on a key outcome, for good or bad earnings, is not healthy from a behavioural standpoint.”
He also argues the laws of capitalism say Nvidia’s massive margins will encourage competition over time, and the strongest is likely to come from Nvidia’s own customers. These massive tech companies are already talking about building their own chips.
Ferres says investors should also take note of the 19 per cent fall on Wednesday night in the share price of Super Micro Computer, Nvidia’s third-biggest customer. It was accused of accounting manipulations by a short seller on Tuesday night, and has now delayed the release of its annual report to allow management time to “complete its assessment of the design and operating effectiveness of its internal controls over financial reporting”.
Yikes. Earnings call watch parties – ironic or otherwise – might be one sign of bubble-like conditions. But history says allegations of accounting problems are an even better signal of trouble.
