Nvidia’s Command in GPUs and AI: Strategic Investing Opportunity

Unlock the secrets behind NVIDIA's breathtaking ascent as we explore the company's grip on AI and GPU markets . With his deep insights, we navigate the powerhouse's role in gaming, crypto mining, and how its software, specifically CUDA, is at the forefront of AI development. Join us for a compelling dialogue on the driving forces behind NVIDIA's stock rally, and why this tech titan's narrative is one you can't afford to miss.

This episode isn't just about NVIDIA's skyrocketing success; it's about positioning yourself within the tempestuous world of AI investing. Steve and Clem dissect NVIDIA's financial health, scrutinizing the sustainability of its growth. We discuss maintaining a diversified portfolio in an AI-hyped market and offer a perspective on NVIDIA's influence on your asset allocation within the tech sector. Whether you're an investor, a tech enthusiast, or simply curious about the future of AI, tune in for an episode packed with critical analysis and strategic insights.

Straight Talk for All - Nonsense for None


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Transcript

Clem Miller: 0:26

Welcome everyone to Skeptics Guide to Investing. I'm Clem Miller and today we are going to talk about NVIDIA's magnificent 7-stock, which is on a great run. Steve Davenport and I will dig into the reasons for its meteoric rise. Steve.

Steve Davenport: 0:43

There's a lot to capture here, clem, but first we probably need to define some terms. Ai, you'll hear, is talking about artificial intelligence and that's AI at many different levels from many different industries. So we'll use the general term. But obviously AI and finance is going to be different than AI and manufacturing GPU graphical processing units. That is the ability of where NVIDIA has shown that they are the leader. They were the best people.

Steve Davenport: 1:17

When my son wanted a good gaming computer, he made sure he had an NVIDIA graphical processor. I think it's something that you wouldn't think would lead to their current efforts, but it really has become their differentiator. And then there's gaming and crypto mining. Gaming and crypto both use a lot of computing power to do what they do, and I've thought about the. Gaming is not a real thing for the businesses, but the processing and gaming is a lot like the processing that goes on in AI, in that you have different paths and different outcomes and you have different parallel events. Then there's a term called CUDA. Cuda is the software that engineers use at various companies to develop AI. Their software has become almost as strong as their chips, so when you take the two together, a person could develop a better chip or a person could develop software, but they have an A lead in both, and I'll talk about some competition from AMD and other titans like Apple, google and Taiwan Center.

Clem Miller: 2:34

So, steve, did all of this hype around AI and generative AI and NVIDIA happen just in 2023?

Steve Davenport: 2:44

No, NVIDIA has been a leader for years. The pie is getting a lot bigger because now people are saying we're in this space with computing, we have to be thinking about AI and computing, and when you do that, you're asking people to use much more complicated algorithms and ideas. And they have made it the standard of managing GPU design and implementation.

Clem Miller: 3:12

So okay, steve. How do we invest then in NVIDIA in 2024?

Steve Davenport: 3:20

Here are the basics and these are my thoughts. This is not advice, but it's really some education in this space. Where are you in your life cycle, risk spectrum and understanding of technology? How does this fit in the asset allocation of your technology sector? You probably own it now as part of ETFs and index ETFs because it's one of the largest companies in the world. The MAG7 is starting to become the MAG4 and eventually it might become the MAG1, with NVIDIA being the best company of all the MAG companies. So I try to tell clients that greater than 20% of equity or 10% of your assets, then you need to sell or hedge. I think that's a guideline and people will vary it. But if you're owning all the MAG7 and nothing else, then perhaps you need to think about the other parts of the economy and what happens when these multiples for this excitement with AI starts to abate. Competition is fierce and these companies are all chasing to apply artificial intelligence.

Clem Miller: 4:35

Steve, I totally agree with all the points you've made, except maybe the one about MAG4 becoming MAG1. I think there'll always be some room for other companies in the technology space in the future.

Steve Davenport: 4:58

Right now there's a 30,000 for these big companies and I think that NVIDIA might just have that sweet spot for a little bit longer. Here are some numbers to think about. Nvidia and VID has a PE of about 83 times Its market cap is right now 1.8 trillion, and that's trillion with a T. Price to sales is about 50 times. The gross margin over the last 10 years is about 55%. Now it's about 70%. That's a 30% increase at a level that was extraordinary at 55%. Is that 30% borne out in what they're doing? It may be, but my question is how many years or how the law of large numbers tells you that, at 1.8 trillion, going up 30% more from there is going to be more difficult. The ROE is about 10.2 in 23 and the ROE is about 18 in 2023. Leverage is 1.8 times versus about 1.2 over the last 10 years. Do you like to use price to book or price to sales or price to cash flow when you're looking at these companies?

Clem Miller: 6:28

I think price to book is an old fashioned ratio. I don't think price to book is relevant, especially for a company that is essentially involved in services. Nvidia is a software design company. All the chips are made in Taiwan, semi, I think. For a services company, price to book is irrelevant. Price to sales is more relevant. But you've got to be very careful about price to sales, especially for some of these startups, because price to sales ignores profitability. I give that a little bit less weight. Price to earnings I use and price to cash flow I use as well. The only thing about those is that you really need to look at some of these on a forward basis. Granted forward relies on analyst expectations of earnings and sometimes they can be a little optimistic. But still, when you look at some of the numbers, like the trailing PE of 83 times, that number becomes a lot less over time as NVIDIA grows. So 83 times trailing is a lot less on a forward basis, especially if you're talking about two and three years forward.

Steve Davenport: 8:06

You and I are typical investors based on our experience, but how do you think individuals should think about NVIDIA?

Clem Miller: 8:16

So I think, individual investors. I think NVIDIA is a great stock for individual investors. A great stock. A lot of people may say well, I don't understand what NVIDIA does. We did another podcast about banks. I think it's much more difficult to understand banks in terms of what their lending is, credit quality is and so on, than it is to understand NVIDIA. I mean NVIDIA, as you pointed out, designs chips that are used for some discrete applications AI, gaming and other applications that you might have out there for graphical processing units. I just think it's actually easier to understand than some other sectors might be.

Steve Davenport: 9:12

I hear people all day as strategists and analysts talk about how worthy NVIDIA is of these multiples, but I also learned that you need to understand their position and where they're coming from. People talking their own book, quote unquote to get others invested so that their holdings will do better.

Clem Miller: 9:37

So I think that these are really complex companies to understand and I don't think people are really talking their book so much. Well, let me take that back. Some people, some investment firms, might be saying well, look at my performance, because I've been heavily involved in the Mag7 over the last year, I would discount those to a certain degree because that kind of performance from the Mag7 might not continue into 2024 and 2025. So, yeah, I think it's important to keep diversified and not necessarily be swayed by those who think that only investing in Mag7 and maybe a few others is a good idea no-transcript.

Steve Davenport: 10:43

I think that the interesting thing about this chip company is that we don't know what the future holds. Self-driving cars, artificial intelligence on x-rays, computer-generated investment advice, general automation when do you think AI is? On the four classes of investing? Where I'd say frontier is the most risky? Emerging, developing and developed tech scale.

Clem Miller: 11:17

Yeah, so just in terms of types of products and so on, I would say that AI is. I don't think generative AI is still on the frontier. I don't think the types of AI that are used in a Tesla car are frontier. Those things are actually out in circulation now. I think AI is somewhere between emerging and developing in terms of a technology.

Steve Davenport: 11:47

Yeah, I think it depends on the application.

Clem Miller: 11:49

Right, it depends on the application. One thing I read recently well, some months ago which really struck a chord with me was that as various AI applications develop, you don't really think of them as AI anymore. I mean they just become a part of normal life. So, for example, automated calling when you call into a call center and basically you've got a robot directing your call. We don't think twice about that anymore. And yet that's a major application of AI and I think, as we go along, some of these applications that sound really cool and cutting edge right now are just going to become normal for us.

Steve Davenport: 12:43

Yeah, when I think about this, I think about my little electric circuit and most things are used to computer processing where it's sequential you process something, you get an output, you process the next thing, and what AI and what video is doing is really getting into the whole parallel processing, doing multiple things at the same time. When your screen starts to change, they're not doing pixel one, pixel two, pixel three. They're using 80 or 90 or 100 parallel processing so that each of parts of the screen come up much faster. And I think that that concept of parallel processing is really, when you take it to the extreme that they can now deal with design of these chips and you've got so many processors and you can run them in parallel it really does extreme things for the speed. The nano meters is another example of when we're getting thinner, when we're doing a processing better in terms of the algorithms. These are all advantages that when I started, there was talk about something called irrational exuberance, and I don't think I can really put that term out here for Nvidia, because I think some of what they're doing and their leadership is really very rational and I think some of this is good governance, you know, has some great future in front of it.

Steve Davenport: 14:21

So I don't know if this is the best analogy, but the Supreme Court was looking at a question of pornography one time, and then they said the way you define it is you know it when you see it, nobody cares about your assets as much as you do. So I think this is a great technology, I think it's a great idea and I think they have a great vision. But you just have to be careful. Out there, right, the excitement may be able to continue, but competition usually helps the consumer in the marketplace by having others who will go after those high margins, and they're the areas where there's huge profitability and growth in the future.

Steve Davenport: 15:05

So I would just try to keep your head up. Look at this, put it in a proper perspective. In the mailbag, I guess we have a question about do we own it? So my answer is yes, we own it in a growth strategy. We own it in a core strategy. We own it in a faith-based strategy. It's not in the value and it's not in a dividend strategy, but we believe it's one of the leaders and you should own it. How about you Clim?

Clem Miller: 15:42

Yes, I definitely own NVIDIA. I do not have a concentrated position in NVIDIA. I don't have as large a position as I do in some of the other MAG7 stocks. Because of this, I do have some concern that NVIDIA might be getting ahead of itself in terms of or NVIDIA, not NVIDIA as a company, but NVIDIA share prices might be getting out ahead of themselves. So it's not my number one position and I have some significant exposure, but I'm not putting a lot of my eggs in that particular basket.

Steve Davenport: 16:29

We equal weight, so we're talking about one of 40 names. Two and a half percent. It's grown significantly since we put it in, but we also trim when it gets above three and a half. In summary, I'd say that growth matters for your financial wellness, but you've got to keep it in perspective. Understand how much equity is right for you. Understand then, once you're in the equity space, how much tech is right for you, and then figure out other great names which you should own. And, as we did in our other podcast, microsoft is a great name Google, amazon, et cetera. I think that there's a lot of smart people in this business, and they're not all at Taiwan, semi, they're not all at Microsoft, they're not all at NVIDIA. So my point is I want to have all these smart people working for me. Understand the tax impact of selling Long term business long term in an IRA versus in a taxable account. Enact in a disciplined way. Clem, is there anything else you think I should add?

Clem Miller: 17:39

No, I think that that about covers it. I would just echo your point about being careful. I think this is an exciting new technology. I think an awful lot of us, an awful lot of investors, are excited about it, and when you have that, valuations go up, so just be very mindful as we go along about valuations. Things could turn and you need to be prepared for that possibility.

Steve Davenport: 18:13

Sure, maybe even think about hedging. Thanks, for that's pushing another one of our podcasts, so I'm self promoting here. Please like and share and tell your friends about us and we look forward to helping you with your financial wellness. Thanks, and have a good day.