216: How Long Will Nvidia’s Rally Last?

What’s behind Nvidia’s recent surge, and can it last? Join Josh and Austin in this episode as they dive into what Nvidia is, why its stock spiked, and the company’s outlook in the booming AI market. They also discuss Nvidia’s main competitors, macro-economic and geopolitical influences, and analyze the market price and valuation to question the sustainability of this rally.

Main Talking Points

[3:24] – What is Nvidia & Why’d It Spike?
[7:15] – AI Market & Nvidia Projections
[9:40] – Dad Joke of the Week
[10:15] – Nvidia’s Main Competitors
[13:09] – Macro-Economics & Geopolitical Factors
[14:12] – Market Price & Valuation of Nvidia
[16:25] – Is This Rally Sustainable?
 
 

Links & Resources

Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles to Investing

Full Transcript

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, hey, hey. Welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I’m Austin Wilson, Co-Portfolio Manager at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?

Austin Wilson:

Subscribe. If you’re not subscribed already, we’d really appreciate if you hit that plus or that follow, whatever button it is on your podcast player that gets new episodes to your player every single time it comes out. Do that, please. Also, if you could leave us a review on Apple Podcasts, or Spotify, or wherever you’re listening, that would be awesome. That would help us to be found by more people.

So today, Josh, we’re answering the big question.

Josh Robb:

Yes.

Austin Wilson:

Can this Nvidia rally be sustained? Because, it’s crazy. Nvidia is up 200 and some percent over the past year or so. Like 100% this year. It’s really captured the attention of everyone in not just the business world, but popular culture.

Josh Robb:

Yes.

Austin Wilson:

The theme of artificial intelligence is at the forefront of people’s minds, and Nvidia is at the forefront of that theme. So, it’s stock’s been on fire, so we want to evaluate what’s driving the stock price, kind of talk a little bit about how Nvidia works and why it’s doing so well, and then discuss our opinions on whether this can be sustained over the long term. All of this with the caveat being, nothing we talk about is a recommendation.

Josh Robb:

Right.

Austin Wilson:

So, do your investment research, talk to your advisor. That’d be really what we would prefer.

Josh Robb:

Yes.

Austin Wilson:

If you don’t have an advisor, give us a call. We’d be happy to talk to you, and maybe help you out on your Nvidia position or not. So yeah, that’s today. Nvidia. It’s all about Nvidia.

Josh Robb:

We’re talking about an individual company, like you said. This is not a recommendation whether you should buy or sell it.

Austin Wilson:

It’s not.

Josh Robb:

We’re going to look at-

Austin Wilson:

We will have opinions.

Josh Robb:

… the history of it and everything, but in the end, this is just our opinion on the company. You have to look to see what fits in your long-term investment.

Austin Wilson:

So, why Nvidia?

Josh Robb:

Yes.

Austin Wilson:

Why is it such a crazy, cool story right now? Let’s talk about a little bit about the company itself. So, Nvidia is really the pioneer in graphics card technology, and those are the things that essentially make your computer run and process things really, really quickly. GPUs, these are graphic processor units, so they are the leader in that space. They have different areas of the business where they make the GPUs for things like data centers, where there’s big buildings full of computers that companies use cloud technology to use all the power of these servers. That’s one aspect.

They also make the chips that go in crypto mining or gaming computers, and they are the best of the best. They really are. They’re the high-performance computing chips that are the backbone of artificial intelligence, and they’re used by tech companies all around the world. They’ve got some really famous particular products that are what everyone wants, and those are the RTX 40 Series and the A100 Series. Those are their GPUs, their numbers, those are model numbers, and they are the ones that companies are using and buying as much as they can of, as soon as they can, to get their computers to be able to process the most amount of data in the quickest time.

 

[3:24] – What is Nvidia & Why’d It Spike?

Austin Wilson:

So, what happened? Well, this year, and in fact, recently, so we’re recording this at the end of June, Nvidia most recently overtook Apple and Microsoft for a very brief period to become the world’s most valuable publicly traded company.

Josh Robb:

That’s crazy.

Austin Wilson:

Over $3 trillion in market cap. That’s insane, and it’s amazing. But that’s why we’re talking about this, is because of how fast this has happened, and this has happened… Really, some of the fastest on record in terms of growth, in terms of market cap. So, why Nvidia? That’s why. It’s one of the biggest companies in the world. It kind of fluctuates around Microsoft and Apple at this point, but $3 trillion in market cap.

They’ve also done a lot to really form some strategic partnerships around different areas of the tech space. Those could be from automotive companies, to cloud companies, to other artificial intelligence companies that need their chips and their products to do all of the things that they want to do involving AI, and this is actually being trickled down into products you and I use. So first of all, all the ChatGPT’s searches we use. OpenAI, they’re using NVIDIA chips to process all the requests that you’re sending in. But if you buy laptops, or you buy desktops, or whatever, a lot of those are coming with Nvidia chips, and they’re going to be more and more so that you’ll have AI on board, so it’s trickling down to just user stuff as well.

So, let’s talk a little bit about the company fundamentals. The most recent fiscal year ended, fiscal 2023. Nvidia had a revenue of $26.91 billion. That revenue was up 61% year-over-year. That’s a big jump, and that pales in comparison to their profit, or their net income, which was 9.75 billion and up 125% year-over-year.

Josh Robb:

That is a one-year change-

Austin Wilson:

That’s a one-year change.

Josh Robb:

… going more than double.

Austin Wilson:

Oh, yeah.

Josh Robb:

A double and then another fourth.

Austin Wilson:

Yep, exactly.

Josh Robb:

That’s just crazy.

Austin Wilson:

For a large company at that. It’s not like it’s… A small company…

Josh Robb:

Yeah, you could do that. Yeah, you could do that.

Austin Wilson:

But this is a large company. This growth really caused the stock, the last handful of earnings reports, to jump 10, 20% just on a whim. It’s incredible. That’s why it’s on the front page of The Wall Street Journal and all business news all the time. So, we talked a little bit about their products, but a little bit of deeper look into those two main products I talked about. The RTX 40 Series. That is incredibly efficient in the way that it performs their AI capabilities compared to the prior generation that it was built off of. It’s actually built on Taiwan’s semiconductors five nanometer process, which is really, really, really small little chips.

Josh Robb:

Five nanometers.

Austin Wilson:

Yeah, really small. Think about semiconductors. A lot of them are like the size of dust particles.

Josh Robb:

Just my brain, I don’t know.

Austin Wilson:

Isn’t that incredibly small?

Josh Robb:

It is, yeah.

Austin Wilson:

And the smaller and more efficient they get, the better processing power per chip you can actually have, and it’s just amazing. So, this particular product is really strong among gamers, content creators, and this helps their gaming center revenue here. Then the A 100 GPUs, this is more about data analytics, artificial intelligence, high-performance computing, and this particular product is 20 times higher performance to the previous generations in AI training.

Now, this is exponential growth that we’re having in terms of AI, so think about Moore’s law, right? Moore’s law is an exponential growth curve. Well, we’re certainly experiencing that right now, and this is definitely that. So, this is what the tech companies are buying, these particular products, to be able to train their products on AI. Research institutions are doing that. This is driving the data center revenue, because these data centers are really buying the most of them.

 

[7:15] – AI Market & Nvidia Projections

Austin Wilson:

So, let’s talk a little bit about the market. The AI market is projected to grow to $191 billion by 2025, over the next year. Data center market revenue is expected to be $110.4 billion this year, and Nvidia’s data center revenue, just in the first quarter, was 4.28 billion, which was a 71% increase year-over-year, so they’re growing, just their sleeve, which still has a lot of room to grow, potentially, at a 71% clip year- over-year.

Josh Robb:

Wow.

Austin Wilson:

That’s pretty fast growth. The gaming side of things, which is that graphic processor unit, very intense processing power, it’s forecasted to reach 268.8 billion by next year, and their revenue was 2.24 billion in that segment, which was a huge portion of their business and continues to be a good profit generator for the company there.

I will also note that Nvidia’s grown so well that they’ve had to consider actually how they get their products, sourcing their products effectively and efficiently so that they always have products on hand, and they can sell as many as they can get their hands on, so they’ve diversified their suppliers, they have long-term contracts. They’ve invested in that infrastructure and that supply chain behind that, whether that be through logistics and warehousing. They’ve also collaborated with the upstream side of things from foundries so that they can work together to be able to plan ahead for the demand of these products, and then their stockpiling strategic products as they get deals and as they find good opportunities in the upstream supply chain side of things.

Josh Robb:

I mean, how much do you need when it only takes one nanometer, right?

Austin Wilson:

Right, so you can have, what, a million in your hand at one time?

Josh Robb:

They’re stockpiling it in their pocket right now.

Austin Wilson:

And the crazy thing is they’re doing this with years ahead of… They already are planning out years ahead of what’s coming.

Josh Robb:

Yeah, that’s crazy.

Austin Wilson:

So, we’re having trouble getting our hands on exactly what they want now, but they’re already planning five years down the road, which are even more incredible products.

Josh Robb:

More silicone and more of the… What is that metal that they use in there? There’s some rare earth metals that they have to put in those things, so yeah. It’s not like you go to Walmart or Radio Shack to get your supplies.

Austin Wilson:

No, no, no. So yeah, they’re continuing to innovate, they’re continuing to think ahead, and they’re continuing to plan for growth in this space going forward, and obviously that’s coming through. So, when you think about investing in artificial intelligence, there’s a lot of uncertainty as to what that looks like going forward, and a lot of companies that talk about AI don’t necessarily have the fundamentals to back it up. Nvidia does, and that’s why its stock is up over 200% over the last year or so.

Let’s take a break, Josh. Dad joke of the week?

 

[9:40] – Dad Joke of the Week

Josh Robb:

All right, so I got one. It’s just more of a comment, but a funny one.

Austin Wilson:

I like it.

Josh Robb:

All right. The other day a man tried to sell me a coffin. I told him, “That’s the last thing I’ll need.”

Austin Wilson:

That’s the last thing you’ll need. That’s good.

Josh Robb:

So, that’s the dad comment of the week.

Austin Wilson:

The funeral business. That’s one that never goes out of style.

Josh Robb:

No, it is always in demand.

Austin Wilson:

Always in demand.

Josh Robb:

Just tell you what.

Austin Wilson:

It’s like babies and funerals.

Josh Robb:

That’s right.

Austin Wilson:

Both ends of the spectrum.

Josh Robb:

They say, what, the only things guaranteed are death and taxes?

 

[10:15] – Nvidia’s Main Competitors

Austin Wilson:

There’s death for you. So, let’s talk just briefly about competition for Nvidia. A couple companies to note. AMD, which is Advanced Micro Devices. They are growing their GPU segment very rapidly as well and continuing launch new products. Intel’s another company. More of an established longer-term company that, they’re just now getting into the GPU market with their ARC series, and that’s something that’s still going.

Josh Robb:

They were more processors.

Austin Wilson:

Correct, so now they’re getting into the graphics side of things as well. It’s kind of early for them, but… Well, in Ohio here, we’re experiencing some Intel growth ourselves. They’re putting billions of dollars into plants in Columbus area right now, with an effort to grow in the AI space as well. That’s interesting, but really, Nvidia has a technological edge compared to a lot of their peers. They’ve been doing this for the longest, and they are the performance benchmark of the world for the graphic processing units so that gives them a leg up, which is why market share is so favorable for them.

As I mentioned earlier, continuing to advance technology in the artificial intelligence space. Their GPUs, again, they’re the backbone for AI and machine learning applications, and they have partnerships with the biggest tech companies and research institutions around the world that allow them to continue to pull ahead at this point in that space, and they’re continuing to seek new opportunities. So, one area that they’re looking to grow into is the autonomous vehicle area, so they have a drive platform which uses their GPU products to learn using artificial intelligence for autonomous vehicles. That’s pretty cool.

Josh Robb:

That is neat.

Austin Wilson:

If I’m using an autonomous vehicle, I want the fastest processing possible.

Josh Robb:

I don’t want you to thinking too long about-

Austin Wilson:

I don’t want to lag.

Josh Robb:

… “Should I stop at this light?”

Austin Wilson:

Yeah, I don’t want a lag on whether you’re coming up to the back of a car or not. So, that’s pretty cool, and they’re working on continuing to grow that as well.

Josh Robb:

You know what is going to be the hardest thing?

Austin Wilson:

What.

Josh Robb:

A side note, AI are just the learning of drivers. When you add the variable of animals, so deer. Here in Ohio, there’s always deer… They do not act… There’s no pattern.

Austin Wilson:

They’re not rational.

Josh Robb:

There’s no pattern to this. It’s not predictable. Yeah.

Austin Wilson:

How do you train something on that’s not predictable?

Josh Robb:

Interesting.

Austin Wilson:

Yeah.

Josh Robb:

Yeah, I would be curious to ride in a fully autonomous Tesla or whatever. Like, hat does it do? Because I see a deer when I’m driving before I would imagine a camera will see.

Austin Wilson:

Right.

Josh Robb:

Yeah, because it’s got that range.

Austin Wilson:

Yeah, so is the camera able to see it in the field next to me?

Josh Robb:

Yeah, hopping along?

Austin Wilson:

I don’t know, but that’s the part that gives me a little bit of pause, or like how small of an animal are they able to see, and are they going to slam on the brakes for a squirrel?

Josh Robb:

Yeah.

Austin Wilson:

Please don’t. That’s a bad idea. Remember what you were trained. Don’t slam on the brakes for anything smaller than a deer. Can’t do it.

Josh Robb:

Or a cute dog.

Austin Wilson:

Can’t do it.

Josh Robb:

Cute dog.

Austin Wilson:

I’ll run it over.

Josh Robb:

Cute dog.

Austin Wilson:

Nope.

Josh Robb:

Yeah.

Austin Wilson:

And I have a dog.

Josh Robb:

Yeah.

Austin Wilson:

Smaller than a deer.

Josh Robb:

My dog’s about the size of a deer, so I guess I’ll be all right.

 

[13:09] – Macro-Economics & Geopolitical Factors

Austin Wilson:

That’s your justification there.

Macroeconomics obviously play a huge factor in Nvidia, and interest rates and inflation obviously have pressured tech stocks over the last couple of years. Nvidia got slaughtered. Their stock got just absolutely demolished, but then it rallied way stronger than it has been before. Global economic growth projections affect Nvidia’s growth potential as well, but those are pretty strong right now, especially in the U.S, so that’s doing okay. A couple other things to consider, geopolitical factors. US and China trade relations not always the greatest. We have a lot of friction there right now, and Nvidia wants to have access to China. China’s a growing economy, their tech sector’s growing rapidly. There’s a lot of AI demand over there. Nvidia wants access to that.

If there’s pressure from the US or China on either side of that, that really could slow their growth potential, so they’re working out strategies constantly to mitigate those geopolitical risks. Some of those are offering different products in China than you get here. Some of those kind of skirt around those rules, but it’s kind of a risk either way.

 

[14:12] – Market Price & Valuation of Nvidia

Austin Wilson:

As we mentioned, let’s talk about stock performance and valuation of the company. Again, stock’s up about 200 and some percent over the last year. It’s incredible. AMD, by comparison, is only up about 50.

Josh Robb:

No, only 50.

Austin Wilson:

So, great. It’s been a great year, but only about 50%, and Intel is about flat in that same time.

Josh Robb:

That’s crazy.

Austin Wilson:

So, it’s pulling ahead from a stock price comparison, but when you look at valuations, the company is trading currently at about 62.5 times trailing price to earnings ratio. So, that’d be using the last 12 months earnings, price divided by that. That’s kind of a way to look at how much bang for your buck you’re getting in terms of the price you’re paying, right? So, the market as a metric is about 20 to 25 times, depending on what you’re looking at, so it’s trading at a significant premium-

Josh Robb:

Three times.

Austin Wilson:

… on a trailing basis.

Now, if you look at a forward price to earnings ratios, so they’ll be looking at the next 12 months of estimated earnings. That’s around 45, depending on where you’re looking at that, and that is higher than the market again, but a little bit lower than the trailing, so that’s anticipating that earnings are going to go faster at this point in the next year. So not cheap, but a lot of high expectations are really built into those earnings estimates right now, and I think that’s one of the things that I view as most risky. It’s done so well and grown so fast, and beat expectations by so much, that they keep jacking up estimates so that eventually it will miss, and it will probably have a little bit of pressure is my estimate.

Again, not a recommendation. If you look at something called the PEG ratio, so that’s price to earnings growth. If you look at something, you want to see that around one to be fairly valued. That’s trading at about 1.5, which would mean it’s trading at a premium, even based on the growth that’s expected in earnings. I’m not going to get into the details of how that’s calculated. If you want, you can ChatGPT that with an Nvidia chip to be able to-

Josh Robb:

Oh, there you go.

Austin Wilson:

… see that, but that’s interesting there. Again, over 3 trillion in market cap. It’s one of the most valuable tech companies in the world. Again, in the top three with Microsoft and Apple at any given point. It’s amazing, the run. So, the question that we need to answer, Josh, is, is the rally sustainable? I know my answer. What’s my answer?

 

[16:25] – Is This Rally Sustainable?

Josh Robb:

Your answer? Well, I know my answer.

Austin Wilson:

Yours is, “It depends.”

Josh Robb:

Yes.

Austin Wilson:

Mine is, “Maybe.”

Josh Robb:

Maybe? That sounds like, what, it depends.

Austin Wilson:

It kind of is, because think about this. Like I just said, expectations are very high because analysts have just jacked them up every single quarter. They’ve been beat, beat, beat, beat. Beat and raised, beat and raised, and just, the stock’s been going off the charts. To the moment that you get a whiff of something coming in slightly weaker than expected, you’re going to get a bit of a sell off, right? That’s a real risk because of how well it’s done recently. I also think that there’s still a lot of uncertainty as to the actual demand for AI.

We know it’s growing, we know it’s high, but how long can it continue to grow at this rapid rate? That remains to be seen right now, so I view Nvidia as a wonderful company with a great secular trend growth story that is not going anywhere, but I do view it as a risky play to put all your eggs in that basket. Again, like we would usually say, not a recommendation, but if I were to give a recommendation, right size your position size. That would mean, don’t get over your skis. Typically, keeping a single sock position under 5% is usually a good way to diversify yourself. Also, taking into consideration the other areas in that AI technology space, that exposure that you have. But also, if you’re holding a broad index fund or whatever, like an S&P 500 index fund in your retirement account, you’re probably holding something like 7% in Nvidia alone right now, which means that if Nvidia has a significant pullback, it’s going to bring down the index quite a bit.

So, can the rally continue? I actually think it can, but I do think it is very prudent to keep risk in check, and risk is pretty high right now.

Josh Robb:

Okay.

Austin Wilson:

What about you?

Josh Robb:

The rally sustainable? Well, rally? 200%. I don’t know if a rally is sustainable in that I anticipate another 200%.

Austin Wilson:

That’s a good way to look at it, yeah.

Josh Robb:

So, is the rally sustainable? I’m going to say probably not. It doesn’t mean the stock price is going to fall. I don’t think that either necessarily. I just think that what you saw was the early pricing of a new technology, new area of the market, the AI, and this is one of the key components to that. I don’t think it’s sustainable in that, this movement is not the percentage movement you’re going to see going forward.

Austin Wilson:

Correct.

Josh Robb:

So, that’s my stance. I still think it’s a good company. It’s making the key things for, again, a new area of the market that is very popular, so I agree with what you said. Just be aware that it’s volatile, and the more extended it gets, the more volatile it will be.

Austin Wilson:

Absolutely.

Josh Robb:

From an advisor standpoint, it’s always looking at this, or any other stock who’s had a good run, to say, “Yeah, it could continue,” but the risk of it coming down I think grows over time versus the risk of missing out of future growth, and so you got to weigh those two risks and say, “Where should my weighting be?” You’re right in that. Don’t look at just individual holding it. What other things do I have that may have that same holding? So, if I have mutual funds or ETFs that are diversified into that space, how much is my total weighting of this stock? Not just what I own individually, but my exposure overall? So, just keep that aware. Like you said, 7% of a S&P 500 fund potentially because of it’s weighting and how they do market cap. If you own five, you’re already up to, what, 13, 12%? That’s a lot.

So, those are the things to think about overall. But like any individual stock, there’s risk in owning one. That’s what diversification is there to mitigate, and so just be careful that you don’t get too excited on just one holding because nothing goes up forever. I do know that.

Austin Wilson:

Another thing to think about is that, it’s mostly just Nvidia, but a couple other companies that are similar, that have really driven market returns in general. This year, and to some extent even last year. We’ve actually seen the rest of the market not do that much, but because these companies are so large on a market cap basis-

Josh Robb:

Pulling it up.

Austin Wilson:

Yeah, looking at a market cap with an index, they’ve made the index look like it’s doing okay, but the participation in that rally, which hasn’t been that great, right? So, there’s two ways that this can kind of heal itself. This is kind of a discrepancy of what we want to see. We want to see broad market participation, and right now we haven’t really seen that. It’s been led by only a few companies. Nvidia being the biggest leader, and there’s two ways that can correct itself. Number one is Nvidia can kind of come back to the rest of the market, which no one would prefer that, right? It’s a big company and most people hold it, or it kind of just takes a chill, takes a nap. It doesn’t do much for the next six months, or a year, or whatever, after it indigests the rally that we’ve had, and the rest of the market can kind of slowly chug away higher to catch up. Two ways that can work. I think we would all prefer the second.

Josh Robb:

Yeah. It’d be less painful.

Austin Wilson:

It’d be less painful and more healthy, I think, for the markets overall. So, that’s kind of what I’m hoping for in the second half of the year, and we’ll kind of have to see about that. But yeah, that’s the story of Nvidia. It depends. It could be sustainable, it could continue. It’s too early to tell, but there is a lot of risk for getting over your skis on a company like this after a huge run, right?

Josh Robb:

Yep.

Austin Wilson:

All right. Well, thank you for listening. Maybe you had someone asking about Nvidia. Send them this episode that, hopefully, will answer some of their questions. Always remember, you can email us at hello@theinvesteddads.com with any ideas that you may have for new episodes, and yeah. Until the next episode, have a good one.

Josh Robb:

Talk to you later.

Austin Wilson:

Bye.

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.

Josh Robb and Austin Wilson Work for Hixon Zuercher Capital Management. All opinions expressed by Josh Austin, or any podcast guest, are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment.

Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.