4. NVIDIA Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 179
Dan Niles, Niles Investment Management founder and portfolio manager, said while talking to CNBC that the “poster child” of AI Nvidia’s declines represent a fundamental shift in tech stocks where investors expect ROI.
“During 2021, revenue growth for Nvidia was up 62% year over year.. 2022, revenues were up 6% and the stock went down from peak to trough 66%. If you look at CapEX spending over the last two years and you see Nvidia’s revenues, Nvidia’s revenues last year grew over a 100%, this year they are gonna grow over a 100%, I think what you are gonna see next year is a dramatic slowdown not only from the spending from hyperscalers but also in Nvidia’s revenues as those hyperscalers grow into all of this money that they have spent that’s not actually generating an increase in their revenue.”
What Niles is saying is not new. After Nvidia’s latest quarterly report, here is what InsiderMonkey’s Research Director Inan Dogan wrote in a report:
Nvidia’s market cap before today’s earnings report was $3.1 trillion. This means investors expect NVDA to earn around $140 billion per year once it becomes a more mature company like Alphabet Inc (GOOGL) which is currently trading at a forward P/E multiple of 21. NVIDIA Corporation’s quarterly revenue and profit were $30 billion and $16.6 billion respectively though. Is it reasonable to assume that NVDA’s quarterly profit can go from $16.6 billion today to $35 billion in a few years and then continue to grow at the same rate that GOOGL’s quarterly profit is growing?
Investors were surprised to see that NVDA projected only an 8% quarterly revenue growth rate for its next quarterly report (vs. 15% for the last quarter). The decline in quarterly revenue growth rate is really concerning and if the decline continues, it will be awfully clear to investors that NVDA will never get to the $140 billion annual profit figure that its current stock price is demanding.
Aoris International Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter:
“If Information Technology was the dominant sector for the quarter, NVIDIA Corporation (NASDAQ:NVDA), which is the largest supplier of microprocessors used for generative AI applications, was the dominant company. NVIDIA’s share price rose by a third in the quarter and has increased by 255% so far this year. Since the beginning of 2023, its market value has risen by 8.3x, or $4.3 trillion, making NVIDIA the third largest company in the world by this measure.
As a result of the unusually strong stock price performance from NVIDIA and a few other large companies, equity markets have become increasingly concentrated. You can see this in the chart below, which shows that on 30 June, 27% of the market value of the 500 largest US companies was attributable to just five companies, more than twice the average of the last 20 years.
The composition of the Aoris International Fund will always be very different to that of the broader equity market. There will be periods, such as the most recent quarter, where this contributes to our performance lagging that of our benchmark. When it comes to NVIDIA and other AI-centric companies, rapid growth is exciting, but it makes it difficult for us to judge what is normal. Our preference is to own established leading companies where we can make a more confident, evidence-based judgement about their growth and profitability.”
