Generative AI reaches its 'tipping point' as NVIDIA skyrockets

NVIDIA’s earnings update last week was the market’s most important event and, despite excessive expectations going into the release, the Artificial Intelligence (AI) chip behemoth delivered incredible results. We have never seen anything like this before in the equity market – 265 per cent year-on-year (YoY) revenue growth for a company expected to report around USD 100 billion in revenue over the next four quarters. It should almost not be possible.

Here are Saxo’s key takeaways from NVIDIA’s earnings update last week:

  • Solid beat in FY24 Q4 (the quarter ended 28 January 2024), with revenue growing 265 per cent YoY. FY25 Q1 revenue guidance, at USD 24 billion, is 10 per cent above the consensus estimate.
  • NVIDIA CEO Jensen Huang’s comment that generative AI has reached a “tipping point” is the NVIDIA’s most firm long-term prediction on demand since the generative AI era started. This is the key driver of model upgrades on NVIDIA, and what drives higher returns.
  • One customer represented 13 per cent of revenue in FY24 – that’s USD 7.9 billion worth of computer chips from a single customer in one year. Saxo’s best guess of this customer is Microsoft, based on its aggressive ramp-up of capital expenditures in previous quarters.
  • NVIDIA’s net profit margin was 55.6 per cent for the quarter – no other company in the technology sector with a market value above USD 100 billion has this kind of net profit margin. Incidentally, it seems that OpenAI co-founder Sam Altman has taken Amazon founder Jeff Bezos’ famous words “your margin is my opportunity” at face value, as he is planning to start a chip venture to compete with NVIDIA in AI chips.
  • Equity sentiment will thrive on this result for weeks to come, and we cannot rule out a melt-up scenario in AI-related stocks. The broader US technology sector will also likely extend its momentum.
  • This was the eighth straight earnings beat from NVIDIA. This will create a positive feedback loop in expectations, which will make it increasingly difficult for NVIDIA to keep beating estimates.

The past year has been all about the evolving AI theme and its capacity to power equity markets higher. Saxo has a “basket” of AI-themed equities on its platform, consisting of 20 stocks with a high degree of exposure to the AI boom – it is a group of companies which has enjoyed close to double-digit growth rates over the past year, paired with strong profit margins. Analysts also remain bullish overall on AI-related stocks, and the average five-year total return is significantly above the market.

However, AI sentiment seems to have reached proportions not seen since the 2021 tech bubble and the dot-com period – there really is a “fear of missing out” in this space. Therefore, as AI’s momentum persists, Saxo believes investors should begin thinking about reducing exposure to US technology more broadly. Investors that want to be fully invested in equities, but also take advantage of recent exceptional gains in US technology stocks, can easily reduce their portfolio risk by diversifying into non-correlated sectors such as energy, utilities or consumer staples. Saxo also believes investors should keep an eye on the way Nvidia’s momentum has rippled into FX markets, creating a “risk-on” mood for activity currencies such as AUD, NZD, SEK and GBP.

Disclaimer: Saxo Capital Markets (Australia) Limited (Saxo) provides this information as general information only, without taking into account the circumstances, needs or objectives of any of its clients. Clients should consider the appropriateness of any recommendation or forecast or other information for their individual situation.

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