By Alex Gluyas
Some of Nvidia’s earliest backers in Australia are repositioning for a period of lower returns from the artificial intelligence darling amid scepticism over whether it can fulfil the lofty earnings growth baked into its $US3.1 trillion ($4.5 trillion) valuation.
Munro Partners, which long held Nvidia as the largest position in its global growth fund, slashed its stake by a third heading into the chipmaker’s second quarter earnings, expecting some “froth” to come out of the stock.
While Nvidia is now the fund’s third-largest position, Munro believes the company can find its groove again after the launch of its Blackwell chip in the fourth quarter, which should provide a fresh thrust to earnings.
“These AI stocks have obviously performed very well for a long period of time so it’s not surprising that people are taking some profits,” Munro’s chief investment officer, Nick Griffin, told The Australian Financial Review.
“Nvidia will look much more interesting as we get closer to the end of the year when Blackwell gets launched, and that’s when we should see another dramatic step up in earnings growth – that’s the ‘show me’ side of the story.”
Munro’s move was vindicated on Thursday as shares in Nvidia dived as much as 8 per cent in after-market trading on Wall Street after the company’s revenue forecast missed the highest analyst estimate, and it flagged production challenges with Blackwell.
Semiconductor stocks throughout Asia were also hit, with South Korean memory maker SK Hynix dropping as much as 6.8 per cent. Japanese tester maker Advantest fell 3.6 per cent and leading foundry Taiwan Semiconductor Manufacturing dipped 2.8 per cent.
The local sharemarket was not immune, with data centre operator NextDC, which released its results on Wednesday, shedding a further 2.1 per cent. The ASX’s other key AI exposure, Goodman Group, slipped 0.6 per cent.
Souring sentiment
Nvidia’s new Blackwell processor that was announced earlier this year has been more challenging to manufacture than anticipated, sparking fears of delays. But the company’s rock star chief executive, Jensen Huang, told Bloomberg on Thursday that Nvidia would have “lots and lots of supply, and we will be able to ramp”.
Some fund managers are not convinced.
Mr Griffin is among a growing list of former Nvidia bulls that have trimmed their position in the stock in recent months.
Alphinity portfolio manager Trent Masters had been reducing the firm’s exposure to Nvidia and the broader AI sector before the result, and Loftus Peak, which first bought Nvidia in 2016 when the shares traded for less than $US30 apiece, took it one step further by completely exiting the stock in the June quarter.
Loftus investment chief Alex Pollak is sceptical about the company’s valuation given its trajectory of slowing revenue growth, which peaked at 265 per cent in the fourth quarter of fiscal 2023. It has since slowed to 262 per cent in the first quarter of FY24 and 122 per cent in the second quarter.
“From here, Nvidia is expecting growth of 65 per cent in Q3 and 40 per cent in Q4 and that’s as much as we know,” Mr Pollak said. “That doesn’t mean there’s not a re-acceleration down the track … it just means the conclusion of this initial chapter of AI rollout and Nvidia’s vital part in it is understood, but the book is utterly silent on what the next chapter looks like.”
Wilson Asset Management’s global fund does not hold Nvidia, and portfolio manager Nick Healy believes the lack of clarity around the company’s future profits makes it a risky investment at current levels.
“Sentiment around Nvidia is extremely extended,” he said. “The challenge with the investment case of Nvidia at a $US3 trillion market cap is it implies a significant assumption around the future, and it’s very difficult to predict Nvidia’s forward earnings.”
The reaction by investors is likely to have repercussions for equity markets, which have rocketed to near record levels on the back of hype around AI.
Broker IG told clients on Thursday morning that it had taken a “tactically short bias” in the Nasdaq 100 following Nvidia’s result and ahead of the seasonally challenging month of September.
“At the very least, [Nvidia’s] post-earnings reaction does suggest it’s an excellent time to consider diversifying from Nvidia into other chipmakers,” said IG market analyst Tony Sycamore.
Licensed by Copyright Agency. You must not copy this work without permission.
