The Q1 2024 earnings report from AI specialist, Nvidia and in particular the guidance for the second quarter, is already being described as one of the most exciting earnings reports of all time. In after hours trading, at one stage, the shares were up by almost a third, to take the market value to a whisker shy of $1 trillion.
This backs up my view that Nvidia may have the most exciting investment story in the world just now although if you read the rest of this report I have another name in the frame, something completely different, which also looks incredibly exciting.
Nvidia’s second quarter guidance was stunning. As I noted in an alert three days ago, before the latest results, there is a massive ‘something new’ going on at Nvidia and these shares could still have a long way to run.
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I am having problems with my chart source and may not be able to show a chart for Nvidia, but not to worry, it could not be stronger. The shares are massively overbought but that is often what happens early in a huge move. You could wait for a pull back to buy but I do not believe in that kind of fine tuning. Do you want to own the shares or don’t you; that is the question which I ask myself and no prizes for guessing what my answer is with Nvidia.
Imagine if you were a hot tech graduate, fresh out of Stanford or MIT. Where would you want to work just now – yeah, it has to be Nvidia, which is going to be able to cherry pick from the finest brains on the planet.
ChatGBT ushers in inflection point for AI
Nvidia’s Jensen Huang has been talking about the ChatGPT moment as ushering in an inflection point for AI and their incredible leap in revenue guidance for the second quarter reflects what is happening.
It’s been known for some time, and you’ve heard me talk about it, that accelerated computing is a full stack problem. But if you could successfully do it in a large number of application domain it’s sufficiently that almost the entire data centres’ major applications could be accelerated, you could reduce the amount of energy consumed and the amount of cost for our data centre by an order of magnitude. It costs a lot of money to do it because you have to do all the software, you have to build all the systems and so on and so forth. But we’ve been at it for 15 years.
And what happened is when generative AI I came along, it triggered a killer app for this computing platform that’s been in preparation for some time.
But over the last four years, call it $1 trillion worth of infrastructure has been installed, and it’s all based on CPUs and dumb NICs [network interface cards]. It’s basically unaccelerated. In the future, with generative AI becoming the primary workload of most of the world’s data centres and the fact that accelerated computing is so energy-efficient, that the budget of a data centre will shift very dramatically toward accelerated computing, and we’re going through that moment as we speak.
At the same time, we’re seeing incredible orders to retool the world’s data centres. You’re seeing the beginning of a 10-year transition to recycle the world’s data centres and build it out as accelerated computing. You’ll have a dramatic shift in the spend of a data centre from traditional computing to accelerated computing with SmartNICs, smart switches, GPUs and the workload is going to be predominantly generative AI.Q1 2024, 24 May 2023
R&D spend reaches $1.875bn a quarter and growing fast
There is huge competition in this field but also reason to believe that Nvidia has a massive first mover advantage, and that is first mover as in 15-30 years of development to get where they are now and they are not stopping here. In the latest quarter Nvidia spent $1.875bn on research and development. This is not only up 15.9pc on a year earlier but likely to grow dramatically in future in line with the growth in sales. Nvidia is an innovation machine and that is a huge competitive advantage.
NVIDIA’s value proposition at the core is we are the lowest cost solution. We’re the lowest TCO [total cost of ownership] solution. And the reason for that is because accelerated computing is two things that I talked about often, which is it’s a full stack problem.
You have to engineer all of the software and all the libraries and all the algorithms, integrate them into and optimize the frameworks and optimize it for the architecture of not just one chip but the architecture of an entire data centre all the way into the frameworks, all the way into the models. And the amount of engineering and distributed computing — fundamental computer science work is extraordinary. It is the hardest computing as we know. And so, number one, it’s a full stack challenge, and you have to optimize it across the whole thing and across just a mind-blowing number of stacks.
We have 400 acceleration libraries. As you know, the amount of libraries and frameworks that we accelerate is pretty mind-blowing. The second part is that generative AI is a large-scale problem and it’s a data centre scale problem. It’s another way of thinking that the computer is the data center or the data center is the computer.
It’s not the chip, it’s the data centre. And it’s never happened like this before. And in this particular environment, your networking operating system, your distributed computing engines, your understanding of the architecture of the networking gear, the switches, and the computing systems, the computing fabric, that entire system is your computer. And that’s what you’re trying to operate.Q1 2024, 24 May 2023
Jensen Huang talks a lot about full stack problems. Here is a clue as to what he means.
Full stack development is the process of designing, creating, testing, and deploying a complete web application from start to finish. It involves working with various technologies and tools, including front-end web development, back-end web development, and database development.Simplilearn
Strategy – buy shares in Nvidia
Reading about Nvidia’s endless innovations gives me a headache because I might as well be reading in a foreign language. I don’t understand all this stuff but I don’t think I need to in order to know that Nvidia is an exciting investment.
The launch of ChatGBT has been like a Black Swan event. Nothing will ever be the same again as computers go from being useful aids, number crunchers, data processors, all the stuff they were before to something else, something almost human and maybe ultimately superhuman.
As Jensen Huang says, the world is at an inflection point in its use of technology and the implications are seismic. As far as I can tell, as a layman, the best way to invest in this incredible new development is Nvidia. The shares are expensive in terms of valuation but there is something almost priceless about Nvidia. They are literally the most important company making this revolution happen.
And America needs companies like Nvidia. AI is going to infiltrate and transform everything we do and the Americans cannot afford to slip behind, to let the Chinese, say, steal a march on them.
Jensen Huang tried to sum it all up in a way we might be able to understand.
The simple way to think about it in the end is that the world has a $1 trillion of data centre installed, and it used to be 100pc CPUs. In the future, we know — we’ve heard it in enough places, and I think this year’s ISC [Internet Systems Consortium] keynote was actually about the end of Moore’s Law. We’ve seen it in a lot of places now that you can’t reasonably scale out data centres with general purpose computing and that accelerated computing is the path forward. And now, it’s got a killer app.
It’s called generative AI. And so, the easiest way to think about that is your $1 trillion infrastructure. Every quarter’s capex budget would lean heavily into generative AI, into accelerated computing infrastructure, everywhere from the number of GPUs [graphical processing units – Nvidia’s speciality] that would be used in the capex budget to the accelerated switches and accelerated networking chips that connect them all. The easiest way to think about that is, over the next four, five, 10 years, most of that $1 trillion and then compensating, adjusting for all the growth in data center still, it will be largely generative AI.Q1 2024, 24 May 2023
I could go on but I think you get the idea. One analyst doing the sums reckoned that even at $388 or wherever it is going to open when dealings begin the 2023 PER could be around 50, which is not such a lot for the world’s most exciting company.
E.L.F. Beauty has blow out quarter
Again I am unable to show you the chart but I can assure you it is strong and compatible with a much higher share price in future years.
The fundamentals on this share could not be more explosive.
In fiscal ‘23, we grew net sales by 48pc and adjusted EBITDA by 56pc, well above our original expectations and hitting major milestones by reaching over $500m in net sales and over $100m in adjusted EBITDA for the first time. Q4 marked our 17th consecutive quarter of net sales growth.
In Q4, we grew net sales by 78pc, increased gross margin by approximately 470 basis points and delivered $21m in adjusted EBITDA, up 66pc. We are encouraged by the continued strength we are seeing across the color cosmetics category. In Q4, the category grew 18pc versus a year ago. e.l.f. continue to significantly outperform the category, growing 64pc in tracked channels. We grew our market share by 270 basis points, increasing our rank from number five a year ago to the number three brand for the first time. We continue to be the fastest growing top five brand by a wide margin.Q4 2023, 24 May 20
They are gaining impressive recognition for their extraordinary achievements.
In Q4, Fast Company named us to their annual Top 50 World’s Most Innovative Companies. We are the only beauty company on the list, putting e.l.f. with well-recognized game changers such as NASA, Microsoft and OpenAI.Q4 2023, 24 May 20
Marketing spend has been growing rapidly and is delivering dramatic results.
Our latest Nielsen marketing mix analysis shows that our marketing investment continues to deliver, driving ROI multiples above the industry benchmarks. During Q4, we invested further in marketing, given our better-than-expected top line trends. As a result, we ended the full year with marketing and digital investment at 22pc of net sales, above the high end of our 17pc to 19pc outlook.Q4 2023, 24 May 20
This rapid increase in spending is exciting because there is no point in doing it unless you are getting excellent results.
The group is also strong online.
Our second strategic imperative is to power digital. Founded is a digitally native brand, e.l.f. remains the only top 5 mass cosmetics brand with a direct-to-consumer site. In fiscal ‘23, our digital consumption was up over 75pc. Digital channels drove 17pc of our total consumption as compared to 14pc a year ago. We see opportunity to increase our digital penetration, particularly as we further enhance our Beauty Squad Loyalty Program.
Beauty Squad now has nearly 3.7m members, with enrollment growing over 25pc year-over-year. Our loyalty members drive almost 80pc of our sales on elfcosmetics.com, have higher average order values, purchased more frequently, have stronger retention rates and are a rich source of first-party data.Q4 2023, 24 May 20
The third key strength is innovation.
Our third strategic imperative is to lead innovation. We have a unique ability to deliver holy grails, taking inspiration from our community and the best products in Prestige and bringing them to the market at extraordinary value. Our innovation has built category leadership over time. e.l.f. now has the number one or number two position across 16 segments of the color cosmetics category. Collectively, these segments make up over 75pc of e.l.f. Cosmetics sales. We delivered the strongest sales growth and share gains in each of these segments in fiscal ‘23.
Our innovation approach is to build growing and sustaining product franchises instead of one-and-done launches. Our 4 largest franchises, Camo, Putty, Halo Glow and Power Grip, have all grown year-after-year. As we launch new innovation within each franchise, the entire franchise grows. We believe this is a source of competitive advantage as we are not dependent on proliferating SKUs to anniversary prior year launches.Q4 2023, 24 May 20
They give an example of how this works with Halo Glow.
Let me provide an example with our Halo Glow franchise. In 2020, we launched Halo Glow setting powder. In 2022, we launched Halo Glow liquid filter, which quickly became a viral sensation in one of our best-selling products. In April of this year, we built on that success with the launch of 3 Halo Glow Beauty Ones, a contour, blush and highlight trio, with each price at an incredible value of $9, compared to the Prestige item at $42, Halo Glow Beauty Wands have been one of our best launches ever.Q4 2023, 24 May 20
Fourth is the growth in productivity.
Our fourth strategic imperative is to drive productivity with our retail partners. In fiscal ‘23, e.l.f. increased its best-in-class productivity on a sales per linear foot basis with both Target and Walmart, our 2 largest customers. Ulta Beauty is another great example of our focus on productivity. We grew our Ulta business by over 70pc in fiscal ‘23 without incremental space gains. This productivity is helping us to earn additional space with our retail partners. As a reminder, as part of our spring resets earlier this year, we expanded space in Target, Walmart, CVS and Shoppers Drug Mart.Q4 2023, 24 May 20
Still in the early innings
Last but not least, their fifth strategic imperative, is to drive profitable growth.
They are justifiably excited about their prospects.
The progress on our five strategic imperatives has been terrific, and we believe we are still in the early innings with each.Q4 2023, 24 May 20
This is a fabulous company and still small, tiny even, against the global opportunity.
Q1 2024, 24 May 2023
Nvidia NVDA. Buy @ $383
E.L.F. Beauty. ELF. Buy @ $101.50