All the hype in the markets this past year has focused on Nvidia, culminating with Wednesday’s latest earnings announcement. This was being billed as the most important and anticipated earnings report ever. The CEO was even obliging requests to autograph women’s bosoms. They are a big deal. They provide over 90% of the microchips being purchased today – a clear leader in AI chip design and software. Their earnings have skyrocketed of late, grossing over $30 billion dollars in the last quarter. For perspective, a year and a half ago they were bringing in $5 billion a quarter. On top of that, their profit margins are around 70%, just unheard of for a manufacturer. This is real money, not dot-com hope and expectations. And they are returning that cash to investors in the form of dividends and stock buybacks.
Amazingly, over the last year-plus as the stock has tripled, they have actually gotten cheaper. From a fundamental value perspective, a buyer of Nvidia today is paying less for cash flow and earnings than they would have paid in the past. It trades at about 50 times earnings today, whereas that number was about 150x several quarters ago. It’s impossible to know when the music stops for Nvidia and the earnings multiple comes down, but at least we can count on the earnings to keep increasing on an absolute basis for the next several quarters. The five largest tech companies (Microsoft, Meta, Tesla, Google, and Amazon) plan to spend $200 billion on infrastructure and GPU chips this year and over $250 billion next year. A staggering 40% of all money spent by Microsoft and Meta goes directly to Nvidia. Google pushes 14% of their spending to Nvidia and the CEO recently stated that the risk of underinvesting in AI and processing is greater than overinvesting. So, look for Google to bump up their capital expenditure soon.
Few people predicted that Nvidia would dominate the chip industry in this way. The semiconductor industry is relatively mature with some large and storied competitive players like Intel, Taiwan Semiconductor, Texas Instruments, Qualcomm, Broadcom, and AMD to name a few. Betting on just one company a decade or two ago statistically would not have gone as well as owning all of them. However, skewing towards those that do well by their shareholders is generally a safer bet. Companies have two obligations with their cash, invest in future growth or return it to the shareholders. Nvidia has been doing that for years - even before their meteoric growth. Which takes us to another company that has done this better than anyone for decades.
While all the hype and cameras were on Nvidia and artificial intelligence processors, little old Warren Buffett and his Berkshire Hathaway crossed the trillion-dollar valuation mark with almost no fanfare at all. With Buffett at the helm of Berkshire they have not once issued a dividend. They reinvest all capital. Ostensibly, Berkshire Hathaway is an insurance company. They insure the insurers and collect a healthy premium to do so. With those premiums Buffett first looks to invest in his core businesses to create growth organically or via acquisition, and secondly looks to buy stock in other businesses in the public and private markets that he deems are undervalued (including his own stock). When he can’t find anything that looks fairly priced to him, he will invest in treasury bonds and the S&P 500 index like the rest of us.
There is no one way to make money in the stock market, but there are plenty of ways to lose it. At HWM we know that sticking with companies and funds that take care of the hard-earned cash raised from investors are worthy of investing in and sticking with. We can’t know exactly which direction a stock will go on any given day or quarter but staying away from the ones saddled with debt or poor track records of generating returns on investment, and staying with those growing or returning cash via dividends and stock buybacks has a healthy track record of success.