By David Rogers
It’s full steam ahead for the AI boom but a sharp fall in Nvidia after its latest quarterly report suggests it might be time to have a closer look at other ways to play the latest tech theme.
It’s full steam ahead for the AI boom but a sharp fall in Nvidia after its latest quarterly report suggests it might be time to have a closer look at other ways to play the AI theme.
With US rate cuts imminent and a soft economic landing anticipated, some of the money flowing out of the $US3.08 trillion ($4.5tn) tech behemoth could also find its way into smaller companies.
Not only does the AI leader have to beat expectations these days, it has to shoot the lights out.
Second-quarter revenue and profit more than doubled to $US16.6bn and $US32.5bn, beating consensus estimates by about 10 per cent and 4.5 per cent respectively.
A third quarter revenue forecast of $US32.5bn was almost 2 per cent above consensus, but the market was spoiled by revenue projections 20 per cent above consensus in the past five quarters.
After bouncing 45 per cent in three weeks to be up 150 per cent this year, Nvidia’s share price fell as much as 8.5 per cent in after hours trading.
It was headed for a 7 per cent fall when regular trading resumed on Thursday.
A 7 per cent fall in Nvidia would be worth about $US227bn. To put that loss of value in an Australian context, it would be bigger than the entire market capitalisation of Australia’s largest company, CBA.
WAM Global’s Nick Healy says it was a “very strong result” but “sentiment was “far too elevated”.
The revenue growth projected by Nvidia simply didn’t beat expectations by as much as usual.
But a 7 per cent dip in Nvidia is hardly a death knell for the stock – after all the options market had projected that its stock price was going to swing about 10 per cent either way after reporting.
Moreover, its results were certainly strong enough to show that the AI wave is “real”.
However, the share price reaction suggests the market was too far over its skis.
WAM’s Healy says Nvidia’s market cap is a “very full figure, which embeds pretty high expectations”.
At around 38 times, Nvidia’s 12-month forward price-to-earnings multiple isn’t unusual for a tech stock, particularly one that has had such stellar revenue growth in the past two years.
The concern is more the elevated nature of earnings estimates and uncertainty over the outlook.
“This is a very difficult to predict forward earnings path, because we know for a fact that certain buyers of their (Nvidia’s) products are buying uneconomically,” Healy said.
“The cloud service providers have said they’re going to overspend if they have to.
“They have very strong cloud platforms (but) if computing shifts from the old Intel-based infrastructure to the more parallel-processing Nvidia infrastructure, they don’t want to be in a position where their customers want that parallel computing and they can’t give it to them.”
Their aim is to ensure that whatever the customer wants, they’re in a position to provide it.
Of course the so-called “hyperscalers” – Google, Microsoft, Amazon, Meta – are super-profitable businesses with so much cash that they can afford to stockpile AI chips they may not need.
The question is whether they may be going beyond the potential demand for the new chips.
“They have indicated that they will keep this going at least into 2025, but anytime when you get demand overstated, you run into the potential for ‘bull-whip’ phenomena,” Healy cautions.
“So looking at Nvidia’s market capitalisation, we think there’s better opportunities elsewhere – it’s not so much about the market valuation, it’s just that ability to predict forward earnings.
“I think for some tech stocks, certainly the PE (valuation) is egregious and doesn’t fit our approach to investing, but what I’m saying with Nvidia is that where it is trading today isn’t in that realm where you would say, ‘okay, that’s a showstopper’, that’s the obstacle.”
Nvidia has the highest market cap of any company apart from Apple, which is worth $US3.44 trillion. But together with Google Cloud, Azure and AWS, its results show demand for generative AI.
WAM Global doesn’t own Nvidia shares, but Healy sees other ways to win from AI.
Stocks he likes include Quanta Services, which provides infrastructure services for electric power, pipeline, industrial and communications industries; Booz Allen Hamilton, a preferred provider of consulting services to the US government; Intuit, the US leader of small business accounting software; and TansUnion, a credit reporting company that could use Gen AI to lower costs.
IG market analyst Tony Sycamore said Nvidia has in some ways become a “victim of its success”.
Its share price had soared as much as 180 per cent this year and after beating earnings expectations for 14 of the past 15 quarters.
“Whether today’s results signal the end of investor’s strong affinity for the chip maker remains to be seen,” Sycamore said.
“However, at the very least, the post earnings reaction does suggest it’s an excellent time to consider diversifying from Nvidia into other chip makers.”
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