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Australian Financial Review

May 23, 2024

Investors bet that Nvidia will leave Magnificent Seven rivals behind


Alex Gluyas

Market darling Nvidia has cemented its dominance among Wall Street’s elite after its latest earnings shattered analyst forecasts, suggesting the US chipmaker has broken away from its magnificent seven peers and entered into a league of its own.

It comes after the Silicon Valley company on Thursday morning unveiled another set of bullish forecasts, which reinforced the view that it remains the biggest beneficiary of artificial intelligence spending as tech giants Microsoft and Google continue to queue up for its so-called AI accelerators.

“The next industrial revolution has begun,” Nvidia’s CEO Jensen Huang said on Thursday. Bloomberg

The hotly anticipated first quarter result justified bullish investor positioning, which had already rocketed the stock 92 per cent this year.

And signs that Nvidia’s profits are still accelerating at a rapid pace pushed its shares 6 per cent higher in after-hours trading in New York as investors ramped up bets that the stock can sustain its meteoric rally.

“The stock is a hold it and don’t trade it, we’re very much of the view that Nvidia is the hardware and software company for AI, and will be the dominant supplier for years to come,” said Munro Partners’ chief investment officer Nick Griffin.

“I have never seen anything like this in terms of the dramatic earnings acceleration it’s displaying … it’s never happened before to a company of this size, and it’s unprecedented.”

Nvidia’s first-quarter revenue more than tripled to $US26 billion, while its profit, excluding certain items, came in at $US6.12 a share. Analysts had expected $US24.7 billion in sales and earnings of $US5.65 a share.

What’s more, its forecast second-quarter revenue of around $US28 billion versus the $US26.8 billion predicted by analysts.

If the after-hours rally extends into regular trading, Nvidia will add around $US140 billion to its valuation, which currently sits at $US2.3 trillion, inching it closer to taking out the title of the world’s largest company, which currently sits with Microsoft at $US3.2 trillion.

‘Breaking away’

Despite the meteoric rally in the share price – it’s up more than 600 per cent in 18 months – Mr Griffin said Nvidia was still good value, particularly compared to its mega-cap rivals. He first bought the shares in 2019, and it is the largest holding in Munro’s global growth fund.

“Nvidia is growing faster than all the mag-seven, yet trades at roughly the same multiple of around 30 times earnings,” he said.

“If Nvidia keeps growing at this rate, it’s going to become the biggest company in the world – we’ve been saying that for years but didn’t think it would happen this quickly.”

Nvidia’s journey to Wall Street royalty comes amid a divergence in the performance of the other magnificent seven stocks – Apple, Tesla, Microsoft, Alphabet, Meta Platform, and Amazon – which have largely fuelled the US sharemarket’s rally to record highs this year.

Indeed, the US first-quarter reporting season showed that the mega-cap stocks directly benefiting from the AI revolution, led by Nvidia, are starting to break away from the rest of the pack.

Meta, Google and Amazon reported sales growth of 27 per cent, 15 per cent and 13 per cent respectively, which all beat analyst forecasts. Each stock has seen its share price jump more than 20 per cent this year.

Meanwhile, Apple sales fell by 4 per cent and Tesla revenue declined by 9 per cent. Apple shares are broadly flat this year while Tesla has tumbled nearly 30 per cent.

The divergence prompted Goldman Sachs’ chief US equity strategist, David Kostin, to declare that “the sobriquet magnificent seven needs to be retired following [the] first quarter results”.

Other strategists also believe Nvidia is now officially in a league of its own.

“Nvidia has cemented its place as the poster child of the artificial intelligence boom among US tech names,” said senior investment strategist at Betashares, Cameron Gleeson.

“Nvidia continues to lead the way on turning expectation into reality – a leadership role that’s unlikely to be turned over any time soon.”

Investors had broadly reduced their exposure to the mega-cap names during the first quarter of this year as they anticipated that the sharemarket rally would broaden out to other AI beneficiaries and cyclical stocks.

Indeed, Goldman Sachs’ analysis of 707 hedge funds with $US2.7 trillion of gross positions showed that funds trimmed exposure to all the magnificent seven stocks, excluding Apple, at the start of this quarter.

Hedge funds instead rotated towards the utilities sector as an expression of a broadening AI trade, with funds entering this quarter with the largest tilt to the sector since 2008.

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