‘MAG-7’: Semiconductor giant Nvidia (NVDA) is the poster child for this year’s AI-led tech rally and is the best performing of the ‘magnificent seven’ big-tech stocks. This makes its Wednesday quarterly results, and $8 billion of estimated data center revenue, crucial for the broader market and the last hurrah of this trough earnings season. The stock has rallied 200% this year (see Chart), taking its market cap to $1.1 trillion. This is now the 4th largest in the S&P 500 index and larger than all crypto assets, for example. The whole tech sector would get a needed boost from confirmation of stronger-for-longer chips and AI growth and validation of the big valuation surge.
LEAD: Nvidia has been the classic ‘picks and shovels’ leader of the AI boom. With twin drivers of strong demand and pricing power, for now. Its first-mover technological advantage is driving strong demand. Whilst an up to 9-month supply bottleneck for its key H100 chip gives it pricing power. These benefits may also be felt back down the tech supply chain, from SK Hynix to TSMC (TSM). Nvidia is also looking to stretch this lead with its new GH200 ‘superchip’ that will broaden demand. But capacity constraints may open the door to late comer competitors AMD (AMD) and Intel (INTC), and force some, like Tesla (TSLA), to try boosting their self-sufficiency.
CONTEXT: Nvidia’s graphic processing units (GPU’s) are used from graphics to crypto and now AI and machine learning. Bulls see a multi-year demand life cycle of machine learning ‘training’ and then ‘inference’. Whilst a combo of strong growth and profitability (70% gross margin) puts its PEG ratio valuation well under 1x. Bears compare it to 1999 tech-bubble networking leader Cisco (CSCO) that is still off those highs. 60% of Nvidia sales come from data centres with a c. 50% growth rate, 30% from gaming with a 10% growth rate, and rest professional visualisation.
All data, figures & charts are valid as of 17/08/2023.