Actual intelligence

Stocks had a mixed close yesterday spending most of the session under siege… until the final minutes of trading when traders caved in fear that NVIDIA would do it again after the close… it did. The Fed is worried about stagflation, which is why it is not going to lower rates so fast, according to the last FOMC minutes.

A blinding glimpse of the obvious. I first read the line “blinding glimpse of the obvious” in the famous Wall Street required reading list’s Barbarians at the Gate (Burrough B, Helyar J. Barbarians at the Gate : The Fall of RJR Nabisco. 1st ed. Harper & Row; 1990). The quote became an instant hit with me and my brother-in-law as we both used it for just about everything the year we both read it. Truth is, it is still, until this day, likely to grace one of our conversations. The line describes F. Ross Johnson’s inner thought to the notion proposed by Clemmie Dixon “Dickie” Spangler’s “prattling” on about how RJR Nabisco was a great but undervalued company. Ok, that all took place in the 1980s… ahhhh, the ‘80s. What does that have to do with today’s topic?

Well, I suppose when describing Artificial Intelligence companies, the first description that comes to mind is certainly not… undervalued. Have you heard about NVIDIA? Of course, you have. I am sure that you have noticed that there is a hint of the word “video” in its very name. That is because the company started out developing video controller cards for PCs. Not the kind you would need to get your email or snoop on old classmates on Facebook, but for graphic intensive applications. Really… games. As games became more advanced and graphics more lifelike and animated, intense processing was required, and this is where NVIDIA first differentiated themselves. You see graphics require a different type of processing that would not be found in a typical CPU made from Intel or AMD (at the time), and NVIDIA focused solely on that. That was great, but not enough to be elevated into the ranks of semiconductor royalty.

What first really put NVIDIA on the investor map was Bitcoin. Bitcoin mining involves solving intense equations that require massive amounts of parallel processing, which incidentally, is similar to the requirements of graphics-intensive games. Bitcoin and cryptocurrency are still very much a thing, but as you have probably noticed, mining coins in one’s basement, or in some former Soviet satellite state is not so much en vogue anymore these days. That is intentional to give the coins some sort of rareness value… they get harder and harder to produce. That may be good for investors but not good for the cottage industry of miners. NVIDIA enjoyed the rush into Bitcoin mining and remained quite relevant in graphics processing.

Several years back the company began to diversify into mobile computing. Not mobile as in your phone, but rather automobiles when it announced a partnership with Mercedes-Benz, and while it only represents about 2% of the company’s revenue today it caught the attention of investors, who praised the move to diversify. Turn the clock forward… just a bit… and we get to generative AI and machine learning.

In order for Artificial Intelligence to be… er, intelligent, it needs to study and process massive amounts of data all the time. That type of activity requires a very unique type of hardware processing found in, you may have guessed by now, the parallel processing chips which NVIDIA is expert at. GPUs, or Graphics Processing Units are really good at performing complex mathematical calculations required for 3D graphics… and now we know, AI. In case you haven’t noticed, AI is here, and it is very real. Just about every company is scrambling to build AI into its processes and products, which is why demand for NVIDIA’s chips are through the roof. This massive demand to gain productivity is akin to companies’ adopting word processors and spreadsheets back in the 1980s. AND speaking of the 1980s.

Today, you will open your morning newspaper and likely find someone make a bold statement like NVIDIA is a good but overvalued company. While it is certainly not cheap, given the massive adoption of AI and NVIDIA’s competent and nimble management along with best-in-class products, one wonders, how can NVIDIA’s exact value be determined? Stating that the company is expensive seems like a blinding glimpse of the obvious. But as we have all learned many times, just because something is expensive doesn’t mean that it won’t become more expensive. Credit must be given to NVIDIA’s leadership for not only keeping the company relevant, but for making it, according to Goldman Sachs, the “most important stock on the planet.” I will end with another quote from Barbarians. “Recognize that ultimate success comes from opportunistic, bold moves which, by definition, cannot be planned.”

A GLIMPSE AT THIS MORNING’S MARKETS

NVIDIA Corp (NVDA) shares are higher by +13.06% in the premarket after it announced that it beat EPS and Revenues by +12.09% and +8.28% respectively. We all know about NVIDIA’s success with AI, but management was keen to note that the company’s other business lines, namely financial services, auto, and healthcare are at multibillion-dollar levels. Read more about it above ☝️. Dividend yield: 0.02%. Potential average analyst target upside: +21.3%.

Moderna Inc (MRNA) shares are higher by +6.34% after the company announced a revenue beat for last quarter. Though the company’s value has declined along with demand for its famous COVID jab, the company has managed to gain market share over its rival Pfizer. Potential average analyst target upside: +53.4%.

YESTERDAY’S MARKETS

NEXT UP

• Initial Jobless Claims (Feb 10) is expected to come in at 216k, up slightly from last week’s 212k claims.
• S&P Global Manufacturing flash PMI (Feb) is expected to be unchanged at 50.7.
• S&P Global Services flash PMI (Feb) may have slipped to 52.3 from 52.5.
• Existing Home Sales (Jan) is expected to have gained +4.9% after falling by -1.0% in December.
• Earnings after the closing bell: VICI Properties, Block Inc, Carvana, EOG Resources, Intuit, and Guardant Health.