Hi Everyone 👋,

The tug of war in equity markets was on full display again last week with two critical data points.

Nvidia has been the poster child of the YTD Tech rally and the hype around AI. Nvidia reported this week - and they delivered.

Powell also took to the stage at Jackson Hole. Investors dissected his comments to find clues on where the economy is heading next.

These two events stand in stark contrast when looking at equity markets. Despite a torrid rise in both Fed fund rates and the 10yr, Tech stocks continue their rapid ascent.

While Nvidia looks like a freight train plowing through quarterly earnings, the Fed is trying to conjure quicksand to slow everything down.

To quote Heath Ledger’s Joker from The Dark Knight:

• Nvidia👉 Stand and Deliver

• Jackson Hole 👉 Powell Kept His Fireworks at Home

Let’s get started!

1. Nvidia👉 Stand and Deliver

Heading into the print, Nvidia was coming off one of the most impressive quarterly beats ever. Back in May, Nvidia posted Q1/24 revenue of $7.2B, ahead of estimates of $6.5B. The most remarkable thing about last quarter though was the guide.

They put out a forecast for Q2/24 of $11B, which was 55% higher than previous consensus estimates. This was all due to a spike in Data Centre orders for AI infrastructure buildout. So… did they meet this lofty guidance bump?

No… they smashed it. Revenue for the quarter was $13.5B, representing a 101.5% YoY and 88% QoQ increase. Better yet, Nvidia’s gross margins improved to 70.1% from 43.5% the year before. Those are software margins… Nvidia is slinging mostly silicon.

CEO Jensen Huang has always been a fan of dramatics, so they also put out next quarter top-line guide of $16B. Sell side analysts everywhere breathed a sigh of relief as they won’t be made fools with how off their revenue projections are.

$16B will represent a 170% YoY revenue growth rate. THAT growth rate at THAT scale is unheard of. I bet you can’t find a bigger organic YoY revenue growth number (no cheating…no acquisitions…).

This is all a result of major players racing ahead to get their hands on Nvidia’s chips to be able to handle the coming compute wave that was precluded by cloud technology and is now being accelerated by AI. Here’s a nifty chart for ya…

BOOM!

Quote of the call was:

“During the quarter, major cloud service providers announced massive NVIDIA H100 AI infrastructures. Leading enterprise IT system and software providers announced partnerships to bring NVIDIA AI to every industry. The race is on to adopt generative AI.” - Jensen Huang

The main question being asked is “where do we go from here?” Now that Nvidia has met their lofty guidance numbers, there’s no way they blow the next huge guide out of the water too right? We’ll see.

While I couldn’t be more hyped up on the fundamentals that were shown over this quarter, fundamentals only make up one component of stock prices. The other, sentiment, plays a critical role. With Nvidia now joining the $1T club, you have to start looking at the longevity of its lofty blended forward multiples of 37x P/E, 33x EV/EBITDA, and 19x EV/Revenue.

While investors are no doubt paying up for a secular grower, the questions that I’ll need answers to will be:

1. How much of this growth is pulled forward at the expense of future growth? i.e. Is this an initial CAPEX cycle buildout that will plateau? The law of large numbers and history tells us YES, but Jensen tells us NO. Remember - last Q he said that we can expect "significant sequential growth" beyond the next Q guide.

2. At what point does competition take a Bezos approach - “your margin is my opportunity”?

3. This seems too good to be true - what else can go wrong? (trade wars escalate further?)

It’s very hard to pick holes in the fundamental components of this company, and while I’ll entertain the bear concerns around valuation, I’d rather be on board with at least a half-position size than watch this train rip through without me on it. That is not a FOMO call - that is a secular growth trend call.

Recap By the Numbers¹:

• Revenue of $13.5 B, up 101% YoY

• Gross Margins of 70.1%, up from 43.5% YoY, and 64.6% QoQ

• Adj. EPS of $2.50, up from $0.26 YoY and $0.87 QoQ

• Data center revenue of $10.3 B

• $25 B stock buyback (!!!)

• Q3 guidance for revenue of $16B, 28% above expectations

2. Jackson Hole 👉 Powell Kept His Fireworks at Home

Now that we got through the exciting part of the week, onto the boring, more important part… Jackson Hole. Heading into the meeting, inboxes everywhere were getting flooded from economists and fixed income analysts talking about the concept of R*.

R* is the neutral rate of interest, which is the theoretical level at which rates neither stimulate nor restrict the economy. With the 10yr treasury yield now at the highest point since 2007, economists were wondering whether Powell would use the Jackson Hole speech to signal the Fed would change course and increase the estimates of where R* is.

The other theme into the presser is the word “pivot”. Last year, Powell shot down any hopes of a reversal of tightening monetary policy, and the hawkish surprise sent all major indices down 3-4%.

This year, Powell again struck a hawkish tone, but the impact was somewhat subdued. The market was able to hold on to its daily gains.

Powell came out swinging with an emphasis on maintaining his target on squashing inflation:

“Good morning. At last year’s Jackson Hole symposium, I delivered a brief, direct message. My remarks this year will be a bit longer, but the message is the same: It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so….”

He described policy as tight and suggested the base case is that the tightness will be sufficient to deliver the below-trend growth required to deliver fully on the inflation objective.

However, he also acknowledged the stubborn growth we’re seeing YTD:

“…But we are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

This year, Powell took a much more measured and careful approach at Jackson Hole and towed the line, leaving enough room for ambiguity, while nailing down the trademark line of remaining “data dependent”.

Wrapping Up…

These two events occurring in the same week are a microcosm of what’s going on in the equity markets. We’re starting to see some Tech companies turn the corner on earnings at the same time that rates are expected to lower.

However, we’re not quite there yet. The 10yr has rallied to recent highs and some are even calling for a higher for longer rate environment. But nothing happens in a vacuum. There are pushes and pulls all the time the market. One thing’s for sure though, higher rates may not always result in lower Tech stocks.

Somethings gotta give right?

Until next time. Always Yours. Incessantly Chasing ROI.

Sources:

1 Nvidia Investor Relations (August 2023): https://investor.nvidia.com/home/default.aspx

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