Chief Investment Strategist
Summary: Nvidia reports earnings results on Tuesday after the US market close and will be the defining for sentiment not only on AI-related stocks but also the entire US technology sector. While analysts and investors are still bullish on the outlook the news yesterday from Microsoft and Tencent is potentially a warning of lower demand in the medium term. Microsoft is pushing ahead with its own purpose built AI chips expected for delivering already next year and Tencent announced that it had acquired significant inventory of AI chips from Nvidia suggesting that maybe a lot of demand has been frontloaded.
Updated (17 November 2023): Read our option strategist's take on Nvidia Investing with options: Nvidia - 3 long term scenarios
Nvidia has been this year’s hottest stock as generative AI has fuelled fever like sentiment not at least because of Nvidia’s phenomenal revenue guidance to the market in the previous two earnings releases. Nvidia reports FY24 Q3 results on Tuesday after the US market close with analysts expecting revenue of $16bn up 171% y/y and EBITDA of $10bn up from $1.07bn a year ago. It does not take much imagination to understand why investors are so excited about Nvidia and why there is so high anticipation of Nvidia’s earnings release. Never has there been a more important earnings releases defining an entire industry and setting the overall sentiment direction for a whole sector (US technology). Listen to yesterday’s Saxo Market Call podcast for more context about Nvidia earnings.
Everything is not rosy though. Yesterday, Microsoft confirmed that it is building its own bespoke AI chips specifically designed for generative AI model training. These new chips will be deployed in Azure data centres already next year which underpin the R&D and deployment of OpenAI’s ChatGPT and Microsoft’s Copilot. With Nvidia’s operating profit hitting an expected 57.1% in FY24 (ending 31 Jan 2024) it seems there is a lot to be saved for Microsoft if it can produce its own chips. The move feels a bit like the move Apple did against Intel on its iPhone and it is potential a key warning to Nvidia shareholders that naïve extrapolation cannot be done. Regardless of what happens it seems like semiconductor foundry businesses such as TSMC are the winners of the AI push.
Another worry for Nvidia shareholders should be the comment yesterday from Chinese internet giant Tencent saying that they have bought enough Nvidia chips to last ‘a couple of generations’ which means that Tencent now has the largest inventory of AI chips in China. In other words, there is a risk that a lot of the demand has been front-loaded which means that there will be a glut and maybe lower demand on the other side. It is interesting to note that Nvidia does not dare to put out an outlook more than 1-2 quarters out while sell-side analysts are willing to extrapolate current demand aggressively higher into FY27 (see chart below). What shareholders should consider is whether the generative AI industry really means 4x in Nvidia revenue in FY27 compared to FY23 or front-loading of demand is blurring the true normal demand?
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
