Equity Perspective: Artificial Intelligence – Same old song and dance

Special Commentary

February 22, 2024

What Happened 

Being reflective is not something many people have time for given the global nature of the capital markets. But after NVIDIA reported yet another stellar earnings report, we ask ourselves, why were there doubts? While the phrase “Same Old Song and Dance” was famously penned by two writers from Boston a few decades ago, it is a good description of what NVDA has done the past year. Never have we seen a company as large as NVIDIA grow as fast as it has the past year, as the company continues to change the way technology is built and used. What was the earnings report heard around the world last May, has now become the norm, which itself is impressive.

Investing is an endless search for what’s next as what happened becomes consensus. But, as we reflect on the past year, we remain steadfast in our belief there is a long runway for Artificial Intelligence (AI) and patience is needed as the market finds the winners and losers. 

Our Take

Artificial Intelligence is here today, without question. While AI traces its roots back to the 1950s, it really arrived last year. NVIDIA’s chips have changed the narrative. One year ago, consensus expectations were NVDA would earn $4.42 per share in fiscal 2024. The company ended up earning $12.96, which was up 288% from fiscal 2023. Fiscal 2025 is expected to produce a mere 88% growth.

It is natural to look for what’s next as ultimately companies buying all these chips look to earn a return on their investment. But the sheer scale of AI should continue to favor large, well-capitalized technology companies for the immediate future. Based on NVIDIA’s filings, its largest customer alone spent over $6 billion on the company’s chips during the fiscal year. The capital required for AI gives an advantage to the companies that produce the most cash, the ones that can spend the most.

The topic of who else benefits from AI is a frequent one. We have spoken of some and have invested in others. Companies are beginning to roll out tools that utilize AI to give new customers the opportunity to leverage the power of this technology. We have also seen an increase in focus on security spend as these networks contain information critically important to companies. But the reality is this change in how the world uses technology is also causing disruption in business models. We experienced this dynamic this week as a large-cap software company that provides network security saw its shares drop a record 28% in one day. The company has seen a clear benefit from the spend in AI as it is a provider of advanced network security tools. However, future security spending is changing, so it has adjusted its selling practices. But software investors do not like cuts to bookings guidance, no matter the reason.

The point is, as it relates to investing in AI, large-cap technology companies are like the trunk of a tree and where we see the better risk/reward. They have the stability and the resources to build out this powerful technology. Investors should remain patient as they look to expand their AI basket, much like when moving farther out onto the limbs of a tree. There will be more winners, but the proverbial tree is still growing.

Bottom line

Investors are conditioned to see change in technology happen at an extremely fast pace. However, the important transformational changes take time. Artificial Intelligence will continue to be as important a technological advance as was the commercialization of the internet and the iPhone. AI will also take time separating the beneficiaries from those hurt by this technology. We remain positive on the technology sector overall and will continue to look for what’s next, but in this case, it does not have to be at the expense of today’s winners. 

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