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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Earnings preview: Nvidia and Snowflake
Peter Garnry
Chief Investment Strategist
Summary: Nvidia is expected to report 21% decline in revenue in Q1 as the company is still impacted from the demand slump caused by less crypto mining, lower growth in gaming and cooling technology spending due to cost cutting among technology companies. However, expectations for Nvidia's outlook are extremely also seen by its excessive equity valuation driven by the hype over AI. Snowflake is also reporting earnings and previous cloud infrastructure darling is under pressure to improve profitability while maintaining its high growth rate.
Key points in this equity note:
- This year’s AI hype has driven Nvidia’s equity valuation to excessive levels compared to other technology stocks.
- Nvidia’s Q1 earnings result tonight is expected to show a 21% revenue decline y/y, but then a strong growth rebound to 35% by Q3 driven by AI.
- Snowflake Q1 revenue growth is expected at 44% y/y coming down fast as technology spending is cooling.
Can Nvidia deliver on excessively high expectations for AI?
The most talked about equity theme this year has been AI due to the technical and commercial success of ChatGPT (OpenAI/Microsoft) and Bard (Google). Last week we wrote an equity note Google and Microsoft are battling for the lead in AI explaining how the AI landscape is developing on the application side. Earlier we also introduced our AI inspiration list so investors could get an overview of the different stocks that provide a various degree exposure to AI technology. But there is no doubt that the stock that has responded the most to the AI hype is Nvidia, which has become the second-most owned stock among Saxo clients highlighting Nvidia’s popularity.
There are also good reasons for why investors are betting on Nvidia. The company is designing and manufacturing the GPUs (graphical processing units, graphics cards) used in AI research and implementation, and thus Nvidia is selling the shovels used in AI race, which is our time’s gold rush. The AI hype has pushed Nvidia’s EV/Sales ratio to 24x which insanely high when compared to other technology stocks. Microsoft is currently valued at 10x EV/Sales and the equity valuation on Nvidia is definitely raising the stakes ahead of tonight’s FY24 Q1 (ending 30 April) earnings release. Nvidia delivered $27bn in revenue in FY23 (ending 31 Jan 2023) up from $4.3bn 10 years ago so long-term investors in Nvidia have been used to high growth rates. With machine learning applications, self-driving car research, gaming and crypto mining already driving future growth, the market expects AI to add another growth leg which is of course driving the high expectations.
Analysts expect FY24 Q1 (ending 30 April) revenue of $6.5bn down 21% y/y and EBITDA of $2.9bn down from $3.6bn a year ago as the impact from higher interest rates on crypto mining is still impacting revenue. The gaming industry is also not growing at the same levels and datacenter spending has also cooled because of higher interest rates. The key tonight is not the Q1 figures but rather the outlook for the current quarter (Q2) and the fiscal year outlook as analysts are expecting revenue growth to increase to 7% y/y in Q2 and then 35% and 42% respectively in Q3 and Q4 driven by pick up in all its businesses with AI research and deployment driven a lot of the growth. Expectations could not be higher and given the recent change in sentiment among economists on the US economic outlook the stakes are very high for Nvidia investors.
Growth for Nvidia and the overall semiconductor industry does not come without risks. As we highlighted in yesterday’s equity note Great opportunities and risks lie ahead for semiconductors the industry is facing key risks such as semiconductor export restrictions between the US and China, but recently Japan has implemented restrictions and the Netherlands might soon follow on lithography machines. On the geopolitical risks related to the semiconductor industry Nvidia’s CEO Jensen Huang said in an FT article today that he sees enormous risk to the US technology sector if more restrictions against China are put in place. In addition there is a growing concern in the industry over future bans of the chemical PFAS, because it causes cancer, which is important for microchip production and unfortunately no cheap alternative exists.
Snowflake and the muted corporate technology spending
Snowflake was one of the most hyped IPOs of 2020 riding the excessive speculative nature of equity markets back then driven by pandemic government checks and a new wave of retail investors pouring into the market. Snowflake shares provided investors with the first opportunity to get pure exposure to the cloud infrastructure theme as the cloud businesses of Google, Amazon, and Microsoft are just a part of the overall business. Shares in Snowflake became an immediate hit with investors rallying to over $400 per share before the big growth reset in the first half of 2021 taking the stock back down to around $200. The last gasp of technology euphoria took all technology stocks higher into late 2021 including Snowflake shares hitting $400 again. Ahead of tonight’s earnings release the stock is trading around $175.
Analysts are expecting FY24 Q1 (ending 30 April) revenue of $610mn up 44% y/y and EBITDA of $22mn up from $-177mn a year ago. Revenue growth is coming down fast for Snowflake, which was 102% y/y just a year ago, driven by a combination of a constantly higher revenue base but also a generally slowdown in technology spending. Some analysts are saying that a winter hibernation has arrived in technology spending, but that some companies including Snowflake might be more resilient because of their offering. Given the downward pressure on technology spending the market may have too high expectations for FY24 (ending 31 Jan 2024) revenue growth of 39% y/y and this the key risk going into Snowflake earnings tonight.
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