I just found an informative analysis of Nvidia and why the business is so successful and looks poised for further success.
Table of Contents
Nvidia is the Apple of artificial intelligence, one bull explained to me this past week. I don’t want to sound like the Microsoft of stating the obvious, but this seems like a good thing. It means Nvidia, whose split-adjusted stock has multiplied nearly 18 times in five years, and whose data-centre revenue is estimated to have tripled over the past year, might yet find ways to beat even euphoric expectations.
Let’s hope so. Just this year, Nvidia blew past Amazon.com and Alphabet to become the third-largest company in the S&P 500, behind Apple and current leader Microsoft. That gives it plenty of pull on index fund returns — Nvidia’s $1.8 trillion market value is more than 4pc of the S&P 500. Its rise is a key reason that the index has returned 22pc over the past year. If there are other companies in the market’s top 20 with the potential to gain 224pc in a year, like Nvidia just did, I’m not seeing them. Home Depot? That would be a lot of screws. JPMorgan Chase? Not even Jamie Dimon could believe that.
The same bull who compares Nvidia to Apple also tells me that Nvidia will have to “thread the needle” when it reports fourth-quarter financial results this coming Wednesday after the market closes. This is concerning. From what I vaguely remember about needle-threading, the best-case scenario involves twisting, a bit of saliva, and hopefully no blood.
Let me start with the Apple thing and then come to the needle business. The bull is Ben Reitzes, head of technology coverage at independent Melius Research. He keeps a framed copy of his report from January 2004, when he worked at UBS and upgraded Apple stock from Neutral to Buy, where he kept it for many years. The upgrade, at what Reitzes calculates was a split-adjusted 17 cents per share, was years before the iPhone, and based on factors like iPod momentum and retail profitability.
Reitzes’ first task after joining Melius 10 months ago was to launch coverage of Nvidia at Buy, but the initiation report took three months to prepare, with the stock rising the whole time. “Every day, just ta-tick, ta-tick, ta-tick,” he says. “But anyway, it still worked.” Today his price target of $920 implies 24pc upside from recent levels, with Nvidia entering what he calls its 30/30 season — marching toward more than $30 in earnings per share over the next few years, more than double its estimated take last year, and deserving a stock price of 30 times that figure.
The first key parallel with Apple is an end market that’s turning out to be bigger than previously expected. The iPhone replaced cameras, camcorders, answering machines, and personal digital assistants, and made smartphones ubiquitous. Nvidia makes chips that accelerate servers, which is a must-have for AI applications, which are steadily creeping into software and services, in part because one of the things AI can do is chomp through vast oceans of data to figure out new ways to make itself useful.
That raises the question of whether all servers, or nearly all of them, will need to be accelerated in the future. “An unaccelerated server will be the flip phone of a data centre within 10 years,” says Reitzes. In December, Nvidia rival Advanced Micro Devices raised its estimate of the total addressable market, or TAM, for AI accelerators, including memory, to $400bn by 2027 — up from $150bn six months prior. The new figure provides more than enough room for both companies to thrive.
A second parallel is CUDA. If you’re wondering why a chip company is taking over the S&P 500, even though internet pioneer Marc Andreessen told us in a 2011 essay that “software is eating the world,” it’s because Nvidia, like Apple, is a software company in disguise. CUDA is a software layer that optimizes Nvidia’s chips and allows customers to build applications. Its model libraries and network of experts aren’t easily replicated. I can’t tell you the processor speed or pixel count on my iPhone, but I can tell you that I get one every three years, and I’m not migrating 23,000 family photos and 4,300 videos to anything new. I’m sure I’m understating how data scientists feel about Nvidia’s impressive chip specs, but you get the idea.
CUDA, by the way, isn’t short for barracuda. That would be cooler than its actual origin story, which is that it’s an acronym for “compute unified device architecture.”
A third, related parallel is that Nvidia’s software allows it to bring in a rising stream of revenue from recurring services, much the way Apple cashes in on application sales and subscriptions. “This whole Apple analogy for Nvidia is sort of happening in two years versus what took 20 years for Apple,” says Reitzes.
Now for the needle-threading. Wall Street’s consensus has Nvidia reporting $20.3bn in fourth-quarter revenue, made up mostly of $16.8bn in data-centre business and $2.7bn from gaming. But Nvidia has topped sales estimates by double-digit percentages in each of its past three quarters, and firms are now raising estimates last-minute. UBS analyst Timothy Arcuri this past week went to $23bn from $20.8bn. Customer discussions, he wrote, led him to conclude that lead times on Nvidia chips have “come in substantially.”
Lead times, or delays in customers getting their stuff, are a tricky business. They can be caused by manufacturing delays, or by ravenous demand, or, in the case of Nvidia, both. There has been a dire shortage at Taiwan Semiconductor Manufacturing and other manufacturers of machines for a type of circuit packaging called chip-on-wafer-on-substrate, or CoWoS. I’d explain it in detail, but I have a photo library in dire need of curating.
The important thing is that new CoWoS capacity has come online, and lead times are believed to have collapsed. But Nvidia must be careful to explain to investors that this is the good kind of collapse, not the bad kind. Blowout revenue and a nod toward more of the same should help — UBS predicts guidance of $25bn to $26bn for the first quarter. For the sake of our index funds, here’s hoping Nvidia talks up its big TAM [total addressable market] and lucrative services, too.
Dow Jones Newswires, 17 February 2024 (Jack Hough, Barrons.com)
The chart looks strong but is very long-term. It doesn’t give us much of a clue as to what will happen in the short run. However, even if the shares do fall back or become very volatile after the Q4 2024 results I doubt if that will change the big picture that Nvidia is an amazing company with an exciting future – the most important computer company of the 21st century as a long-time director, Mark Stevens said in an interview recently.
Nvidia Shares May Still Be Cheap
Another interesting analysis of Nvidia points out that despite rising strongly the shares are relatively cheap.
I am bullish on NVIDIA as the backlog growth is very strong, giving healthy revenue stability and visibility beyond 2025. The company is in the early innings of a golden growth age as many other enterprises are yet to jump on the Enterprise AI bandwagon and new norm. Currently, the growth has been fueled mostly from large language model start-ups, consumer Internet companies and global cloud service providers. Financials, manufacturing companies, retail companies and the rest are yet to meaningfully begin investing in custom AI model infrastructure. I anticipate a favorable top-line mix shift to continue leading to favorable margin expansion in Q4 FY24 and beyond. Valuations are also in the buy-zone as the 1-yr fwd PE multiples are near the 5-yr trough levels.
Hunting Alpha, 17 February 2024
Above we can see a new buy signal for Nvidia on a long-term chart (12m candlesticks). These buy signals are rare and have been rewarding in the past.
Ad-Streaming a Big Something New for Netflix
There is a big ‘something new’ happening at Netflix which is ad-funded streaming. This was announced in November 2022, a month when the shares traded as low as $251 so they have already more than doubled since then.
One of the things that is so great about Netflix is the focus of its strategy and its ability to refresh the business.
Summary:
Greg Peters & Ted Sarandos, co-CEOs, Netflix, Q4 2023, 23 January 2024
● We’ve just ended our first year with Ted and Greg as co-CEOs and, under their leadership, Netflix achieved the key financial objectives we set at the start of 2023. We’ve:
○ Accelerated our growth, exiting the year with 12pc revenue growth, up from 6pc in 2022;
○ Grown our FY23 operating margin to 21pc from 18% in 2022, ahead of our 20pc target;
○ Increased our free cash flow to $6.9B for 2023.
● The year has shown the need for Netflix to balance consistency and continuous improvement with adaptability. In 2024, we see big opportunities to:
○ Increase our value to members by further improving the core (series and film), while broadening our offering (games, live and sports-adjacent programming);
○ Tap into a significant new long term revenue and profit pool by scaling our ads business;
○ Deepen our connection with fans through our marketing, consumer products and innovative new live experiences.
● We believe there is plenty of room for growth ahead as streaming expands, and our north star remains the same: to thrill members with our entertainment. If we can continue to improve Netflix faster than the competition, we’ll have an increasingly valuable business – for consumers, creators and shareholders.
Greg Peters was promoted as co-CEO in January 2023 with former co-CEO, Reed Hastings, becoming executive chairman.
Prospects look good, especially for 2025 and beyond as ad-related revenue starts to kick in more strongly.
We enter 2024 with good momentum. We expect healthy double digit revenue growth for the full year 2024 on a F/X neutral basis driven by continued membership growth as well as improvement in F/X neutral ARM [average revenue per member] as we adjust prices. We’ll also continue to invest in and build our ads business; we expect strong growth in 2024 but off a small base so it’s not yet a primary driver of our overall revenue growth. Our aim is to make ads a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond.
Greg Peters & Ted Sarandos, co-CEOs, Netflix, Q4 2023, 23 January 2024
Strategy – Stay Bullish of Nvidia
It is hard to stay in there when you have large paper profits and shares in even the most exciting companies can be volatile, witness Friday’s gyrations in the shares of Super Micro Computer, where the fundamental prospects remain as spectacular as ever.
Shares that are flying high do tend to crash occasionally but quickly rebuild and march onwards and upwards so that surprisingly soon that crash looks like a blip.
I just found this news item which could be interpreted as slightly concerning.
Don W Clegg, Senior Vice President, Worldwide Sales, on February 14, 2024, sold 28,727 shares in Super Micro Computer
MT Newswires, 16 February 2024SMCI for $25,123,838. Following the Form 4 filing with the SEC, Clegg has control over a total of 2,110 shares of the company, with 2,110 shares held directly.
Wild Gyrations but SMCI Shares Look as Exciting as Ever
It may make sense to wait for the dust to settle after this latest sell-off. Given the performance of the business, the shares are likely to be rising again ahead of the next quarterly results, due on 30 April. The big picture is that the outlook is sensational.
Before the sell-off, this is what Bank of America analyst, Ruplu Bhattacharya, had to say about SMCI while raising his price target to $1040.
The Super Micro Computer Analyst: BofA Securities analyst Ruplu Bhattacharya initiated coverage of Super Micro Computer with a Buy rating and a price target of $1,040.
The Super Micro Computer Thesis: The company is growing its backlog and expanding its capacity to support strong revenue growth, Bhattacharya said in the initiation note.
More than 50pc of Super Micro Computer’s revenues are now “tied to accelerators like GPUs,” the analyst wrote.
Bhattacharya stated that the market for AI servers is “much larger” than is reflected in Street models, and could grow at a 50pc CAGR [compound annual growth rate] over the next three years, versus the historical 5.5pc of the overall server market over the past 17 years. He added, that Super Micro Computer’s revenues could grow “even faster driving market share gain.”
Benzinga, 15 February (Ruplu Bhattacharya, Bank of America)
There is no reason to suppose that one day’s gyrations tell you anything about the future destiny of the share price. I remain bullish on SMCI and suspect that a policy of buying into weakness, which I don’t generally recommend, would work well with shares in this company.
Share Recommendations
Nvidia. NVDA. Buy @ $726
Netflix NFLX. Buy @ $584
Super Micro Computer. SMCI. Buy @ $803
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