76report

5cc7cf44eb

August 29, 2024

*|MC:SUBJECT|*

View this email in your browser

76report

August 29, 2024

NVIDIA Shares Slip, but the AI Revolution Advances

Shares of NVIDIA (NVDA) are down following the company’s release of its most recent quarterly earnings results on Wednesday evening (8/28/2024). As we write on Thursday morning, NVDA shares are trading around $120, now off approximately 5% from Wednesday’s closing levels. NVDA shares were even somewhat weaker in after-market trading yesterday evening.

The share price reaction should be seen in the context of an arguably full valuation for the stock, with NVDA having recovered sharply from a late-July/early-August tumble that briefly took the share price below $100. For perspective, NVDA’s all-time high closing price was $136 on June 18 of this year.

NVDA share price year-to-date

Although NVDA generally surpassed consensus forecasts across a range of key metrics, more extreme outperformance seems to have been required to push the stock to new heights or even sustain its current levels.

The negative stock price reaction should not distract investors from the most important story here. NVDA is not just delivering extraordinary growth but is truly leading a technological revolution that is transforming the economy.

Whether or not one is invested in NVDA shares, NVDA is a critical company to understand and monitor because its products are uniquely important to the proliferation of Artificial Intelligence (AI) across essentially every industry. Of course, if you are an investor in the S&P 500, NVDA should interest you since the stock now represents an approximately 6.5% weighting in the index.

NVDA generated revenue for the quarter of approximately $30 billion, which represents more than 120% growth from the same quarter a year ago. This growth is being fueled by its data center segment, which has become, by a wide margin, the most important business line for the company (despite its dominance in video gaming.)

Data center revenue was $26.3 billion this quarter, versus $10.3 billion in the second quarter of last fiscal year. Remarkably, data center revenue was less than $4 billion in the same quarter two years ago. On a run-rate basis, sales of Graphic Processing Units (GPUs), the technological equipment that drives all of the generative AI computing now taking place in the world, are up nearly seven times versus just two years ago.

We have been cautious on NVDA shares from a valuation standpoint, which among other risk factors is why the stock has not made its way into our Model Portfolios. Nonetheless, we view the earnings results and related discussion during the conference call last night as very much reinforcing our conviction in the AI growth theme.

A key takeaway from the call was simply the breadth of corporate adoption of generative AI technology, with NVDA reporting that most of the Fortune 100 is now working with the company on AI initiatives. NVDA also described significant progress selling into key segments like national governments, automotive (self-driving vehicles) and healthcare.

Healthcare is also on its way to being a multibillion dollar business as AI revolutionizes medical imaging, surgical robots, patient care, electronic health record processing, and drug discovery. - Colette Cress, NVDA CFO (Q2 earnings call, 8/28/2024)

As we discussed in some depth a few weeks ago, the market is wrestling with this question of whether or not we are in the midst of a late-1990s dotcom-style tech bubble, given the massive investment in data center buildouts for AI computing. Perhaps the most interesting element of last night’s call was NVDA Founder and CEO Jensen Huang addressing this question directly.

One of the main risks investors are concerned about is that the hyperscaler customers of NVDA (largely the Magnificent 7 internet platform companies) are investing hundreds of billions of dollar in AI capacity—but may not be seeing an adequate return on investment to justify it.

According to Jensen, the “people who are investing in NVIDIA infrastructure are getting returns on it right away, and it’s the best ROI infrastructure, computing infrastructure investment you can make today.”

He believes NVDA customers are effectively replacing a CPU-based computing infrastructure (processing power distributed across a lot of individual computers and local servers) with a GPU-based computing infrastructure (located in data centers). This investment allows them to increase performance while also saving money.

Jensen also pointed out that customers who have invested in NVDA’s data center products are immediately able to rent that capacity out “because so many companies are being founded to create generative AI, and so your capacity is rented right away and the return on investment of that is really good.”

The world of general purpose computing is shifting to accelerated computing. The world of human engineered software is moving to generative AI software. If you were to build infrastructure to modernize your cloud and your data centers, build it with accelerated computing NVIDIA, that’s the best way to do it. - NVDA CEO Jensen Huang (8/28/2024)

The question of whether or not NVDA’s current valuation overestimates or underestimates its future business prospects is largely unrelated to the main thing investors should understand about NVDA—that it is driving a technological wave that will empower businesses in ways that remain unforeseen.

The AI revolution is a major area of interest for 76research, and we encourage readers interested in learning more to explore some of our recent video discussions on the topic.