Nvidia’s epic rise from 150 in Jan-2023 to 726 now is historic in Silicon Valley. Yet it is no exaggeration to state that the entire fate of the Mag-7, the chip sector or even Nas-100 now depends on what Jensen Huang reports and guides on Wednesday. Nvidia (NVDA) shares are just not positioned for any hint of a disappointment in revenue or EPS growth. While revenues are expected to triple to $20 billion, it would be a miracle if the exponential growth in GPU training and inference chips used to power large language AI models do not decelerate going into summer 2024, if they have not already begun to do so in the past three months.
The firm’s 95%+ market share in GPU chips is just not sustainable as competition from Intel, AMD and a spectrum of New Age private chip companies begins to rev-up. Even though Nvidia boasts an almost unassailable software moat as enterprise adoption of AI chips accelerates. SoftBank’s planned $100 billion AI chip design venture seems a pipe dream if Masa-san plans to raise $70 billion from Gulf investors, given that he stung them badly with the Vision Fund’s spectacular fall from grace. In any case, I have done my best to dissuade my friends from taking new positions in Nvidia here. If Huang indicates that the AI chip cycle could cool down in 2024, all bets are off and a steep fall in NVDA to 640 to 650 is possible.
The S&P 500 now trades at a nosebleed valuation of 20.6X forward earning while the macro-omens are turning darker. The CPI/PPI data last week clearly showed that the one-year-old trend in declining inflation could well reverse as services inflation is indeed “sticky” to use the platitude du jour and thus the consensus for a March or even May FOMC rate was simply insane. In fact, the increase in Uncle Sam’s debt to $34 trillion, a hyper-polarized political scene and thus fiscal gridlock to even deal with the budget deficit, the shock waves of the unfolding horror in the Middle East and the prospect of colossal supply have now led to a significant rise on the US Treasury note yield to 4.28% and the dollar index has risen to 104.
There is no way the stock market reflects the monetary, fiscal, inflation and geopolitical risk with the volatility index at 14.72, the “irrational exuberance” on Wall Street since November was ignited by a conviction that a dramatic Fed pivot was imminent and thus Mr. Market is bound to throw a temper tantrum if the 10 year Treasury note yield rises to 4.5% or the PCE moves higher to 2.8% at a time when fund flows are disproportionately tilted to equities, with the highest allocation to this asset class since 2021. The put/call ratio has hit new lows and sentiment indicators are dangerously bullish. The market breadth is broadening but vast swaths of the S&P 500 are technically overbought. So a 10-12% technical correction would not be a surprise as even the Atlanta Fed’s Raphael Bostic confessed that the path to 2% inflation will be bumpy.
Also published on Medium.
