The biggest criticism of 2023’s US equity market is also the simplest: The rally is narrow, market breadth is poor and although A.I. may well be the future, it’s premature to base a bull case on the new technology, particularly given macro crosscurrents, policy headwinds and geopolitical ambiguity.
Nvidia is the poster child for this year’s narrow US rally. Along with Microsoft, it’s the big-cap standard-bearer for the A.I. frenzy, it’s up triple-digits YTD and it’s singlehandedly responsible for 120bps of index performance, behind only Apple and — wait for it — Microsoft.
Some worried Nvidia’s shares ran too far out ahead of reality vis-à-vis the financial windfall the company is poised to enjoy from its pole position in A.I. On Wednesday evening, Nvidia served notice that the future is now, so to speak.
Revenue in Q2 will be around $11 billion, the company said, while reporting Q1 results that topped estimates. The top-line guide was more than 50% ahead of consensus.
“The computer industry is going through two simultaneous transitions — accelerated computing and generative A.I.,” CEO Jensen Huang said, on the way to painting a grandiose picture. “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative A.I. into every product, service and business process.”
Suffice to say there’s some upside here, and Huang is confident the world’s most valuable chipmaker is uniquely positioned to capture a very large portion of it. “We’re seeing incredible orders to retool the world’s data centers,” he told analysts on the call.
Sales fell 13% YoY in Q1, but nobody cared about that, nor was anyone in the mood to fret about the PC downturn which pushed revenue sharply lower in the company’s graphics business. It’s all about data center spend, and investors have adopted a “Shut up and take my money!” attitude there, consistent with Nvidia’s customers, apparently.
Analysts were impressed. Vital Knowledge called the Q2 guide a “blow-out” that “powerfully underscor[ed]” the notion of Nvidia as a “company at the heart of one of tech’s seminal transition points.”
There was some skepticism, although I certainly wouldn’t call it “pushback.” “We wonder if some of this upside might be a 1x ‘bump,'” Truist, which has a Buy rating on the shares, mused.
Huang would guess no. “The budget of a data center will shift very strongly to accelerated computing,” he said Wednesday evening, in the course of telling analysts we’re at the beginning of a decade-long cycle. The company is enjoying incredible orders for data centers, he went on.
Nvidia doesn’t sound like it’s having a difficult time sourcing the supplies it needs either. CFO Colette Kress said the company secured a large increase in data center chips and has visibility out several quarters.
The stock surged some 30% after hours, exceeding $390 at one point. Nvidia’s market cap was already north of $750 billion. Although a deep recession would obviously change the narrative, I wouldn’t be surprised if Nvidia made a run at becoming the most valuable company in the world in the event market participants get completely lost in the A.I. mania.
Before you scoff, remember: It was just a year ago when $350,000 counted as a bargain for a cartoon of a monkey wearing a sweater.
“The company clearly has the major first mover advantage of being the only picks & shovels provider in the A.I. gold rush [but] purchasing a piece does not come inexpensively,” JonesTrading’s Mike O’Rourke remarked, noting that “even if one were to annualize the strong Q2 forecast to $44 billion in revenues, it would still be trading in excess of 20x sales and more than 50x earnings.”
The S&P 500 and Nasdaq should pop nicely when NVDA reaches $400/share as analysts furiously upgrade the stock.
Any institutional investors underweight NVDA will underperform their benchmarks noticeably I imagine.
Therefore, they will have to pay top dollar to build their position. While there are no money losing positions for holders of this stock now that it is well above previous all-time highs, there are unlikely to be many sellers.
And how likely is it that NVDA will be added to DJIA ?? Shorting NVDA has become a widow maker.
I imagine some of the shorts will be getting expensive margin calls tomorrow.
Kress’s comments may be the most important nugget there. It sounds like they have reserved a lot of capacity at TSMC. That boxes competitors reliant on TSMC in that node out.
Not old enough to have traded during the dotcom bubble, but I do understand that in the short-term, the excitement for new technologies can push beneficiary stocks to unbelievable heights. Hence why I luckily closed my nvda short yesterday right before earnings.