Forward Note - 2024/02/25
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The market made it! We survived!
Despite the swirling uncertainties surrounding NVDA's earnings and the FOMC minutes, the SP500 still managed to tack on an additional 1.7% over the week, while the Nasdaq saw a gain of 1.4%. And the VIX? It dipped below 14, pushed down by a strong wave of selling orders on Friday, marking VVIX's first weekly close below 80 since March 2023.
The week didn't kick off on the most robust footing. U.S. markets took a breather on Monday in observance of President's Day, leading into a somewhat gloomy Tuesday. The looming anxiety over NVDA's impending earnings report prompted fund managers to dial back on their exposure as a precaution: the stock was down 7%, dragging all the major indices before it clawed back some of its losses. The selling pressure persisted on Wednesday, with the consensus being that NVDA's earnings report needed to be nothing short of spectacular as the stock was already priced for perfection.
And then, at 5.20 pm, the report came in: who was talking about perfection again?
Initial reactions precipitated a quick sell-off, which was rapidly reversed as the market celebrated yet another outstanding quarter for the company: a year-on-year revenue growth of 265%, culminating in $22.1 billion, with net income soaring to $12.28 billion.
Yet, the statistic that truly captured our focus was the 33% quarter-over-quarter growth in their data center segment, which amounted to $14.5 billion or 66% of their total revenue.
Why is this significant? This surge underscores the accelerating embrace of GPU technology by organizations eager to fuel the next wave of data innovation driven by AI.
We are obviously no data center experts, but it’s clear that they represent significant, long-term financial commitments. Similarly, when Fortune 500 companies make such extensive investments, they tend to steer their course steadily. And much like cargo ships, these decisions aren't reversed or altered lightly—only substantial challenges like storms or piracy threats could change their trajectory.
So why so much skepticism and disconnect with half the analysts on the Street refusing to see what is unfolding in front of our eyes? And the answer is, here, right there, in the word see.
Let’s start with their favorite argument: “In the era of software, how can a hardware company be worth so much money?”
The last hardware company that consistently exceeded expectations quarter after quarter yet received nothing but amazement was Apple in the 2010s. You might raise an eyebrow at the comparison, but it's true—Apple and Samsung are the world's largest tech hardware companies. Yet, with exceptional branding and hefty marketing investments, we forget about it. Instead, we remember that they led the smartphone revolution and the commoditization of internet-based services, from social media to food delivery.
That transformation was much more palpable, primarily because it was consumer-centric. Remember the days in 2010 when flaunting the latest iPhone version was an instant status symbol in public spaces?
On the contrary, the revolution led by the chip manufacturers is less visible to the general public: unless you're a data center professional or an avid gamer, the widespread adoption and affordability of GPUs over the past decade is an abstract concept to you.
This underpins why a portion of the financial community remains skeptical about NVDA. To them, it is nothing more than a mere hardware company lacking direct, with bubbling sales-to-valuation ratios, and they are missing the bigger picture: who’s been quietly designing their own chips for about 5 years now? Their favorite hardware company, Apple. A move underscoring once more the importance of semiconductor technology in the wide-scale adoption of AI and augmented reality in the years to come.
The growth in the data center segment is the only tangible way to observe the OpenAi, Tesla, and Amazon buying equipment at full scale to make sure they won’t miss the next gold rush of consumer innovation. It’s gonna take a little time, but one day, you will look in the subway and think - god damnit, it was only yesterday when all we had was smartphones, and we were doing completely fine.
No one is denying that the overall semiconductor sector is expensive, certainly not finance professionals. Here is a sum up of a conversation we’ve had with an old friend from our time on the trading floor, giving you a glimpse of how fund managers assess the situation:
I have the choice between airlines or the food industry, but both are under scrutiny by an ever health and ecology conscious society. I could buy software, but they are overpriced and at risk of severe disruption by the next wave of innovation coming from AI technology. So what do I do? I still buy a little bit of software, but I also buy a lot of hardware. Hardware is sexy again, because it is from hardware innovation that will come the next consummer disruption. It is expensive, yes. But again what is the alternative: Coca Cola.. or Starbucks?
This is not a call to buy the stock hands over first, but rather an invitation to reconsider your skeptical and bearish views on the sector. We are not saying a remake of 2002 cannot or will not happen, but …right now, VIX 14, remember?
In other news
Warren Buffet published his annual letter to shareholders this Saturday and admitted that the era of “eye-popping” gains for Berkshire was over. The reason? Way too much cash to deploy and not enough opportunities.
It is hard to say something wrong about Buffet's investing approach: when your pile of cash hits a record $168 billion, you must have done a couple of things right throughout your career. One can only salute the foresight of the Oracle of Omaha in investment decisions like Coca-Cola or Apple.
Yet, we can't help but ponder if Berkshire's cautious approach is causing it to miss out on significant returns from more dynamic companies: the principle of never risking a permanent loss of capital might be limiting its potential in today's rapidly evolving digital and competitive landscape: wasn’t NVDA trading at 20Bln market cap in 2017 and quickly announced … a dividend? Wasn’t Meta available for less than $100 just 18 months ago…? And didn’t they just announce … a dividend too?
Thank you for reading until the end, and as usual, here are a couple of fascinating reads from last week:
Do podcasts make us dumber? While the question may sound trivial
makes a brilliant demonstration of the diminishing returns you get from the medium.Some wars are hot, unfortunately, and some are cold but nonetheless ruthless: in this article from
read more on the escalation of the conflict between the US and China about … microchips. But hey, that must be a bubble, right?This week at Sharpe Two, we revisited why you should stay away from the tails - and settle some old score with a certain Nassim T. Don’t miss out!
That is it for us; thank you again for your support. Have a great week ahead and happy trading!
Ksander
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