Business editor-at-large Liam Dann talks to Pie Funds CIO and founder Mike Taylor about Nvidia’s market results.
Video / Gettyimages
Nvidia, the smart computer chip company with the funny name, is currently growing at a pace that could see it become the world’s largest company in the next year.
It’s also one of a handful of stocks lifting sharemarkets and keeping our KiwiSaver funds looking good this year.
But that raises the risk that we might all be exposed if it heads into bubble territory - and if it pops.
“Nvidia’s results are breathtaking,” says Pie Funds chief investment officer Mike Taylor.
“It’s something that I haven’t seen very often in my investing career, particularly at that scale. We’ve got a company that was earning $5 billion in revenue per quarter now earning $22 billion per quarter.”
Most of that was coming from Nvidia chips that were being put into data centres to power AI language learning models, Taylor said.
“If you think about it in terms of a gold rush, they are the picks and shovels, you can’t mine your gold without a pick or a shovel, you can’t run your AI without a chip.”
At the moment, Nvidia’s market share of AI chips is estimated to be somewhere between 85 and 90 per cent, he said.
So far Nvidia’s earnings growth has matched the investor hype, Taylor said.
“If you think about where Nvidia was trading a year ago, or even the lows of the market at the end of 2022, it was on an earnings multiple about 30 times and today, despite the price going up considerably over this period, it’s still only trading about 30 times.”
Typically with a stock market bubble, you see earnings going up, but you also get the price people are paying for those earnings significantly expanding, he said.
“For example, the dot.com bubble, when things were really crazy, it was not unheard of to see companies trading at 100 times [price to earnings], or companies with no revenue at all, trading at huge valuations,” Taylor said.
“So this particular cycle still feels a little bit in its infancy.”
The risk for Nvidia was that it didn’t operate as a software service model, with ongoing licensing fees.
Chips were hardware and while they were expensive, once they were in place they were good for a decent period of time, he said.
“So at some point, these sales will hit a wall.”
Mike Taylor is founder and chief investment officer at Pie Funds.
Nvidia had already been through a number of cycles since being listed, including the gaming boom and the cryptocurrency boom, he said.
At some point, the AI cycle would peak, although right now the demand was still very strong.
Good news for the world
The good news for the world was that AI as a technology should be very deflationary, Taylor said.
“There’s all the signs that it will be for the world and for productivity,” he said.
“If that plays out over the next couple of years, then that should be a nice tailwind to bring inflation down and keep it down.
“And if that’s the case, then we can start to see these interest rates come down from, from levels that we, we know, are restrictive on the economy, particularly, places like New Zealand and Australia.”
That, of course, would be good news for markets.
- The Market Watch video show is produced in association with Pie Funds.
