Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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NVIDIA’s bleeding ends with crypto rally
Peter Garnry
Chief Investment Strategist
Summary: Equity markets are slightly in risk-on mode today with Kudlow's comments that the US-China first-phase trade deal is now in its final stage. But the action is muted so in today's equity update we instead focus on earnings from NVIDIA overnight and earnings from A.P. Moller-Maersk in Europe today.
With a thin macro calendar and the weekend approaching traders are quietly waiting for any new headlines on the US-China trade deal to hit the market. Overnight the US Director of the National Economic Council, Larry Kudlow, did provide some additional fuel for the bulls saying that a first-phase trade deal was now entering the final stage. On top of this the PBoC, China’s central bank, conducted a CNY 200bn medium-term lending facility to the market as financial conditions have recently tightened in China. With little action happening on the macro frontline today’s equity update will instead focus on individual stocks.
NVIDIA had been one of the best performing semiconductor companies since 2008 as its GPUs and related software architecture have sit in the middle of the cloud infrastructure and machine learning revolution pushing revenue up from $4.1bn in 2008 to $10bn in the last 12 months. A parallel demand driver for NVIDIA’s GPUs has been the expanding crypto market where mining acquires extensive computing power. However, NVIDIA has always downplayed the crypto market although the numbers clearly align well with the ups and downs of crypto currencies. The point is most likely that NVIDIA do not known all the purposes of GPUs and thus GPUs used in crypto mining are booked in the Gaming segment. With Bitcoin up 185% since early 2019 so has NVIDIA’s gaming segment improved from $954mn in the fiscal quarter ending in January 2019 to $1.66bn in the fiscal quarter that ended in October 2019. All other segments for NVIDIA seem to be cooling down on growth with most notable cooling observed in the Datacenter and Automotive segments. The share price was unchanged in after-market trading as traders focused on a dampened outlook for revenue although the reported revenue and EPS for the quarter beat expectations. Valuation on NVIDIA remains at an aggressive 3.5x premium to global equities on the EV/EBITDA multiple. The valuation hinges a lot on further machine learning adoption and in the short term on the health of the crypto market. But revenue growth y/y for the quarter at -5% compared to -31% y/y two quarters ago the bleeding as definitely ended.
The world’s largest shipping company, A.P. Moller-Maersk, reported earnings in European pre-mkt session and chilled investors with a bleak outlook lowering its expected FY container volume from 1-3% to 1-2% as the US-China trade war is negatively impacting global trade. Despite its less rosy outlook shares are higher in today’s session as profitability improved significantly from last year. EBITDA in Q3 was $1.67bn up from $1.15bn a year ago. Another positive news for Maersk is the free cash flow generation that ended at $4.2bn for the last 12 months which is the strongest performance since FY2010. The cash flow improvement has mostly been driven by lower investments as the company has exited its oil & gas business and in general hold back on new shipbuilding. CAPEX was $2.3bn in the last 12 months compared to $8.6bn in FY2014 when oil prices were high and believed to remain high.
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