🔒 Boardroom Talk – AI-play Nvidia: an exponential success story or case of feeding the quacking ducks

By Alec Hogg

There’s been plenty of good news in the past month for the BizNews model share portfolios, boosted by the surge for Nvidia, which has been the portfolio’s star performer since being added in January following all that Artificial Intelligence hype encountered in Davos. The stock’s cheerleaders include ARK Invest’s Cathy Wood. Among the sceptics are Sean Peche of Ranmore.

On the basis that divergence is what makes a market, here’s what each of them had to say after the share price jumped 24% in the wake of quarterly results released on Thursday…

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Ms Wood pushed the bull point…. “Although revenue growth declined 13% on a year-over-year basis, it increased sequentially and was higher than expected thanks to record Data Center revenue. The showstopper in the report was guidance for second-quarter revenue of $11 billion, leaps ahead of the $7.11 billion consensus expectation, pointing to year-over-year growth of 63%. In our view, as a provider of accelerated computing hardware used in training and inferencing large language models, Nvidia is likely to be a direct beneficiary of the explosion in interest in generative artificial intelligence (AI) that OpenAI’s ChatGPT ignited. The company should benefit further from sequential growth in its Gaming segment now that an inventory build-up in the channel has eased. Looking ahead, we expect the explosion in AI hardware demand to cause accelerated revenue growth for software companies well-positioned to leverage their proprietary data/distribution advantages and deploy AI use cases across their product lines.”

Sean Peche, a value investor from the old school, offered a very different perspective in his LinkedIn posting yesterday.

It reads: “ Well, well, did you see that Nvidia filed to sell $10bn worth of securities after hours on Friday.

No, I didn’t! Is that on their investor relations page?

Nope, you need to look on 
SEC.GOV

But why file it on a Friday night?

I guess, no time to waste if you want to sell $10bn.. but I’m sure they weren’t hoping it got buried in the weekend news …

So filed alongside their Q & a few director sales…

48hrs after their results

Good point, did they mention any capital raising in their results or the call?

No, quite the opposite – the CFO reminded investors that, “We have $7 billion available in recurrent authorization for repurchases. We did not repurchase anything in this last quarter, but we do repurchase opportunistically. And we’ll consider that as we go forward as well.”

So now we all know – they also “sell opportunistically” …

Do they need the cash?

Nope, they have $15bn in cash and marketable securities

And they said capex is only expected to be $300m – $350m this quarter

And if demand is as strong as they say it is, that cash balance should grow with all these AI profits people are now “baking” in

So what’s going on?

I think management watched their share price rise by the market cap of Fedex + Heineken + Colgate Palmolive + Yum Brands in a few hours and thought,

“When the ducks quack, feed them”

I can’t fault them, it’s entirely rational

They warned everyone on the call, “Regarding competition, we have competition from every direction. Start-ups really-really well-funded and innovative startups, countless of them all over the world. We have competition from existing semiconductor companies. We have competition from CSPs with internal projects…And so, — we get competition all the time.”

Do you remember Elon “fed the ducks” $5bn in December 2020 and another $5bn in January 2021

And here we are, over two years later and the Tesla share price is down around 30%

Those “ducks” can’t be happy..

Anyway, it makes financial sense because they’re issuing these shares on a PE of 127 or earnings yield of 0.77%

So if you “borrow” at 0.77% and open an Apple Pay account and earn 4%, guess what?

You earn $400m of interest income and grow EPS

that they’ll need that if all that competition kicks in..

or raise guidance if they don’t – possibly excite more “ducks”

But remember it increases the supply of shares and maybe halts the demand so spare a thought for those who spent $66bn buying shares the past 2 days – this won’t go down well!

And if the company is issuing shares, you can bet management wants to exercise every vested share option they can…

So what’s your point?

Look, the guys who run the business, who understand the AI potential better than any of us – i.e the “smart money”, is selling

So maybe, it’s time we all calmed down about AI because when the smart money goes from “opportunistic repurchasing” to “opportunistic selling
“, within 48 hours.

You don’t want to be a “stupid duck”  “

Sterkte

Alec

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