AI want(s) to break free

Nvidia's latest results have been a moment of realization for many investors: Artificial Intelligence is not some distant hype. One should be ready for the consequences. We are.

Bottom line

Nvidia's latest results are a blatant demonstration that Artificial Intelligence (AI) is not just hype, but can already be a massive business opportunity. Together with the series of positive developments across the industry since the launch of ChatGPT, they validate our longstanding investment case. But more importantly, they justify the essence of our Artificial Intelligence & Robotics strategy, launched in 2015 precisely to leverage this very moment. Some players may be surfing an AI-fueled hype, but our fundamental conviction has not changed: the market potential is huge, and is finally obvious for everyone to see. 

What happened

On May 24th, NVIDIA Corp delivered quarterly financial results which sent the stock up by ~24% the following day. The company's revenues beat estimates by 10% (~$700mn), while the revenue guidance for the following quarter came in 53% above expectations (~$3.8bn), both driven by the explosion in demand for GPUs to power Artificial intelligence (AI) workloads. 

These results benefited the broader AI sector, with players surging after results that would have otherwise not commanded such a spike (e.g., Marvell ), and others "just" being the targets of investors raising their expectations (e.g., C3.ai Inc). 

Impact on our Investment Case

No more doubts

Nvidia's results were much anticipated, if not even feared. The stock had witnessed an impressive recovery already (+109% YTD on the eve of the results) thanks to the ChatGPT effect: the service, launched in November 2022, is so groundbreaking that it ignited a large rally for AI-related stocks, based on all the potential applications powered by its technology. As analysts had yet to adjust their estimates, which is not an easy thing for disruptive technologies, valuation had risen to a point where these results had become a make-or-break moment. A quite understandable situation, given how some hyped stocks appear only loosely related to AI technologies, leading to some unflattering comparisons with the recent blockchain mania. 

Except that the test was passed with flying colors. It is quite rare to witness such a beat-and-raise, especially for a company of this size: Nvidia added ~$230bn to its market cap on that day, i.e., almost twice as much as Intel's entire market cap! Quite a symbolic moment, indeed. Most importantly, these results confirm our view that AI already generates substantial business opportunities, translating into solid cash generation: it is not yet another interesting technology full of distant promises. 

What it means for the sector

We agree that Nvidia's competitive positioning is unique, as it benefits from both a leading position in terms of hardware performance and great barriers to entry originating from its CUDA programming interface being the undisputed leader in the Machine Learning ecosystem. But the AI supply chain is not only made of GPUs. Other chips are required, with the gold old CPUs not being dead yet (benefiting AMD), and a large set of additional AI calculators, networking chips and memory systems being necessary to accelerate AI workloads. Beyond this, advanced AI needs training, which itself requires a huge amount of data and a performance cloud infrastructure to manage it (e.g., Datadog Inc). 

Although we do agree that some players positioning further downstream do not have Nvidia's competitive moat, it does not mean that capturing opportunities is impossible for them: there has been no better time, as every company is rushing to integrate AI, now that its major competitive differentiating role has become obvious to everyone. Nvidia is simply the (massive) tip of the iceberg, and the first solid proof of the financial attractiveness of the technology. There will be many more in the future; one just needs to consider all the infrastructure required to run ChatGPT smoothly. 

Impact on our strategy

We are no strangers to AI. The Artificial Intelligence & Robotics strategy was launched in 2015, precisely in anticipation of this moment, as we were convinced of the technology's potential impact on modern economies. Nvidia was already a major constituent of the portfolio. More recently, we repeatedly highlighted our belief that generative AI was, in our view, transformational. This conviction is only reinforced by the recent news, and despite the recent rally surrounding AI-related stock, our portfolio's valuation remains quite attractive, with an expected PEG of 1.0x. Additionally, we believe that, unsurprisingly, many analysts are likely still underestimating the impact of AI on the companies they cover, meaning that the "true" PEG is even lower. In other words, the sector's potential is only beginning to unfold, and it is not too late to hop on the departing train.  

Our Takeaway

Nvidia's results represent a watershed moment for the AI sector: they indeed show that the financial impact is not years away, but all too real. This realization is driving a fast paced market rally, but for quality businesses, this is just the beginning of a multi-year opportunity. As we have done since the launch of the certificate in 2015, we will keep focusing on such companies to capture the most of this opportunity. 

Companies mentioned in this article

AMD (AMD); C3.ai Inc (AI); Datadog Inc (DDOG); Intel (INTC); Marvell (MRVL); NVIDIA Corp (NVDA)

Explore:



Disclaimer

This report has been produced by the organizational unit responsible for investment research (Research unit) of atonra Partners and sent to you by the company sales representatives.

As an internationally active company, atonra Partners SA may be subject to a number of provisions in drawing up and distributing its investment research documents. These regulations include the Directives on the Independence of Financial Research issued by the Swiss Bankers Association. Although atonra Partners SA believes that the information provided in this document is based on reliable sources, it cannot assume responsibility for the quality, correctness, timeliness or completeness of the information contained in this report.

The information contained in these publications is exclusively intended for a client base consisting of professionals or qualified investors. It is sent to you by way of information and cannot be divulged to a third party without the prior consent of atonra Partners. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such.

Past performance is not indicative or a guarantee of future results. Investment losses may occur, and investors could lose some or all of their investment. Any indices cited herein are provided only as examples of general market performance and no index is directly comparable to the past or future performance of the Certificate.

It should not be assumed that the Certificate will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between the Certificate’s returns and any index returns.

Any material provided to you is intended only for discussion purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any security and should not be relied upon by you in evaluating the merits of investing inany securities.


Contact