Blain’s Morning Porridge Feb 20th 2024: Nvidia – more than just a stock phenomenon, but a long-term Macro factor.
“Productivity is never an accident.“
Nvidia’s extraordinary rise comes from being the picks and shovels supplier to the AI revolution. It’s not just MegaTechs coat-tailing Nvidia that will win, but productivity gains from AI could counter the growing debt/gowth crisis in the West. AI is more complex than just a single stock.
I am wondering if I might have underestimated the importance of Nvidia at both the stock price and Macro level.
Following my comments in y’day’s porridge on how directional and significant Nvidia’s numbers might prove on Wednesday afternoon, a number of Porridge Readers reckon it’s going to be a market moving moment.
The options market (long/shorts in Nvidia) could be poised for a +/- 11% move up or down on whether the market hears an overshoot in the 4th Quarter numbers in ecstatic joy, or if they disappoint – then how steeply can it plummet. There is a $200 bln potential options driven day-move cooked into Nvidia’s value – which is larger than the market cap of all but 36 other stocks on the S&P 500.
The betting is Nvidia’s stellar gains will continue. As the monopoly supplier in the race to innovate AI it is expected to deliver on previous promises to boost sales and profits. Q4 sales are expected to have leapt to $20 bln from $6 bln in the final quarter last year. Past performance is no guide to the future, but a firm that overdelivers on promises will hold the market’s attention.
What the CEO, Jensen Huang, says about his growth expectations for 2024 will determine if the market keeps its wallet out, and laces up its buying-boots. If Nvidia is going to continue its meteoric stock price rise, and justify its extraordinary valuation – then investors will need convinced the AI everything rally is accelerating. It will be a big day for Huang.
Nvidia, but also much of the Big Tech market’s apparently insane valuations, have benefitted from the belief that AI will prove the biggest thing since before Sliced Bread. It is the theme dominating the market. And as always.. this time its different. Many buyers are convinced it will be bigger than computing, smart-phones, digitisation and the internet – combined. Which is why the fate of the stock market is linked to the stock.
If Nvidia isn’t delivering – then the AI premiums built into the Megastocks coat-tailing it; Meta, Alphabet (I got told to stop calling it Google… fair comment) Microsoft, pretenders like closely held ARM, and the rest will stumble. It won’t be the end of the AI rally – but it will reset and calm expectations. Personally, I’d be looking at how quickly Microsoft and Google can innovate their own AI chip tech and how the battlelines between Microsoft’s flawed AI products, OpenAI and opensource AI tools at Meta playout.
If Nvidia stumbles – it won’t be the end of AI. But it may slow down adoption and the belief in how exceptional an economic revolution AI has the capacity to become.
That’s the real potential downside. There is a much wider, Macro angle to Nvidia and AI.
AI is not just about Nvidia. Its not just open OpenAI. It’s not just about ChatGBT. It’s about productivity, debt, growth and the future of the Western economies.
The market is wedded to AI for the short-term stock upside – that’s clear. However, the long-term hope is that it offers a unique opportunity to reverse the damage done to the economic foundations of the Western Economy since 2008 through the consequences of the QE Era, ultra-low interest rates, and the debt quantums now stifling growth and recovery.
AI is seen by as a cure and the way to kick-start the desperately required productivity gains needed to unravel the debt-addled Western Economies. If growth can be accelerated, then the coss of preserving and growing the Democracies of the West can be kept in balance.
That is what is so disturbing about the AI everything bubble: the hopes invested in it. Hope is never a good investment strategy – especially when what might be at stake is the future of democracy! (Very grandiose for the Morning Porridge… but that’s what AI productivity may represent.)
A number of analysts, including my very good friend and colleague at Shard Capital, Ernst Knacke (head of research), have noted how AI productivity gains may be the only way for the West to balance out the constrictions of:
- Over indebtedness in Sovereign, corporate and consumer debt,
- The growing demographic issues of aging and under-provisioned pensioners,
- The failure to maintain decaying state infrastructure and services, and
- The collapse of confidence in politics itself..
Without a major boom to restore growth, and at its most basic, pay off debt, the West is doomed to stagnation and decay as state budgets fail to meet basic O&M spending requirements. (Operations and Maintenance – basically the UK’s failing infrastructure, services and welfare provision is already at this stage.)
At the macro level, that’s a reason the AI narrative has been so widely adopted. Any positive outlook for the Western Democracies over the next 10-50 years requires massive growth to stabilise economic decay. AI is seen as the most likely catalyst to the kind of productivity gains that will be required – not just improving services and execution across the service sectors, but speeding up and enabling new “hard” technologies in Bio-Med, Bio-Engineering, Agri-security, Renewables, Robotics and even in areas like Space.
To justify current valuations, AI needs to show it can generate these productivity gains. That is already happening as AI rolls out. Nvidia has become the poster-boy of the Generative AI everything revolution. Its graphic processing units (“GPUs”) are seen as the enablers of AI – without them, firms are out of the AI race. Access and control of GPU supply is critical. As the globe scrambles to build AI capacity, the need for AI enabled data centres (the largest part of Nvidia’s business) become even more important. GPU demand and Data Centre growth will be the actual metrics of Nvidia’s value in coming days.
On a really simplistic level a bet on Nvidia is a proxy for a bet on the Western Economy. Without it delivering, then the productivity revolution won’t happen. (A tad simplistic – but I’m sure you get the drift.)
Nvidia illuminates a fundamental truth of any Gold Rush: don’t dig for gold. It’s much better and more profitable to sell miners the picks and shovels to do the heavy work. Nvidia – lest we forget – doesn’t actually make the GPUs it designs, but outsources that to its partner chip foundries.
AI chip sets – the gubbins required for AI – are going to represent a $400 bln market within 3 years, according to central processing unit (“CPU”) chip designer AMD. If Nvidia comes in at $11 bln profit per quarter – then it’s clear there is still plenty of upside to play for. Competition and consolidation will be inevitable. Nvidia dominates GPUs, which has been the primary reason for its 400+% market rally over a year.
There are host of reasons to be nervous about Nvidia’s value:
- Estimates that AI might represent a $400 bln market could be vastly exaggerated – but not under the productivity/growth argument.
- The big firms, the “hyperscalers” – including Meta, Google and Amazon are commissioning their own chips. They could literally eat Nvidia’s current market as they are the bulk of current demand. Microsoft is already doing it – despite its long-term partnership with Nvidia in OpenAI.
- Smaller firms are being priced out the market to secure the chips they need – leaving Nvidia floundering if MegaTech do their own thing.
- Nvidia’s earnings are reliant on its supply chain – which are it’s external foundry partners – heavily dependent on Taiwan.
- GPUs for AI is on the proscribed list of tech that cant be sold to China – a significant market for chips.
Conflict is just economics played with different rules. If the West really is betting the ship on AI productivity gains, then don’t underestimate the Chinese figuring the optimal way of destroying the West’s economic confidence – while boosting its long-term struggle to recover with its own domestic tech – could well be removing the Taiwan Chip Foundries from the equation.
Worth thinking about a moment. Where are the other weak links…?
There are 54 recognised market analysts following the stock (according to market watch – 42 say buy, 8 say overweight and 4 say hold. Not one of them says Sell. I suspect they would be daft to even think it.
Let’s see what comes out Wednesday…
Bill Blain
Market Strategist – Author of the Morning Porridge
CEO – Wind Shift Capital
