by Hubert Marleau, Market Economist, Palos Management
February 24, 2024
The Wednesday release of the January FOMC minutes was not on the top of my mind because I was pretty sure that the policymakers were not about to offer bond traders new clues as to where they stood on a rate-cut timeline. They confirmed that they may not begin cutting rates as soon or as much as previously believed, contemplating the risk of easing too early. Yet there were no signs that they may raise interest rates. On the contrary, many officials believe that the time has come to have a discussion about relaxing the stance of quantitative tightening.
The main occurrence of the week was Nvidia’s quarterly results. It’s not only part of the earnings calendar, but truly a macroeconomic event. Indeed, all eyes turned on Nvidia, for it has the earmarks of a buying climax due to an AI frenzy.
Stock operators were focussed on whether earnings were going to be supportive of Nvidia’s valuation and justify its blistering performance of the past, because it has become the favourite holding of the hedge fund industry, the most traded stock by value and the main reason for the rise in the broad benchmark. Indeed, its performance has been so spectacular that it has overtaken the market capitalization of Amazon and Alphabet to become the 3rd most valuable company on Wall Street and fourth in the world, just behind Aramco. The stock market believed that if Nvidia somehow managed to clear a very high bar, the release would likely propel the S&P to a new pinnacle. It did on Thursday, when the S&P 500 closed at 5087 - a new all-time high.
On this question, opinions were divided as option traders piled into both put and call options, suggesting that the price for NVDA could swing as much as 10% in either direction. After the bell Wednesday, the stock price popped 12% in the after-market because the company, once again, had surpassed expectations by a handsome margin. It not only showed no signs of letting up, giving guidance ahead of consensus, clearing what could have been an event risk and, in turn, forcing traders who were short to cover and those who were long to ride the wave longer. The party may not be over, either. Some optimistic options traders are betting on the stock reaching $1300, which would be almost double its current price. Ben Reitzes, an analyst with Melissa Research, is projecting Nvidia’s revenue to grow 77% in the fiscal year ending January 2025 to $108 billion, raising his target price to $1000.
While I was exalted with the earning results, as an economist, I was more focussed on total sales, because they are the clearest near-term and long-term leading indicator of whether the ongoing plans by companies to enhance productivity and efficiencies have legs. Nvidia has around a 80% market share in graphics processing units or GPUs used for AI - chips that accelerate servers - which are a must-have for AI applications. These are steadily creeping into software and services because one of the many things AI can do is chomp through vast oceans of data to figure out new ways to raise productivity. All servers will need to be accelerated to streamline decision making, boost efficiency and stay ahead of the curve to remain competitive. This is already happening in healthcare, robotics and applications, transforming the way people interact with computers and do their job. A whole new industry is being formed because this new application space is becoming ubiquitous. The total addressable market for AI accelerators, including memory, will reach $400 billion by 2027 - up from $140 billion in 2024.
In this connection, Nvidia's total revenue totaled $22.1 billion in the January 2024 quarter, up 22% from the previous one and 266% from a year ago. Meanwhile, the CFO predicted another massive sales gain in the forthcoming April quarter, thanks to insatiable demand for its artificial intelligence accelerators. Big tech companies are pouring cash into AI at a breakneck pace, kicking off a new wave of investment worth trillions of dollars, which Jasen Huanf, CEO of Nvidia, believes will double the amount of data centres in the next 5 years. He added: “Accelerated computing and generative AI have hit a tipping point: demand is surging across companies, industries and nations.”
This can only mean that recent productivity trends will continue in a sustainable fashion. We’ve been on this kick for two years now and are not about to change our mind on this one issue - not with these kinds of results. It's all about productivity and we are getting it right - right now.
P.S. I’m on a cruise ship until March 22. There will be fewer letters (unedited plus short and sweet.)
Copyright © Palos Management
