There has been a stellar performance from Nvidia over the past many quarters and this time as well – a 122% revenue growth. What is the bad news here?
Arnab Das: I think what is going on here is that the market had been somewhat hyped up, and maybe had gotten ahead of itself in the throes of this Fourth Industrial Revolution, and this particular AI aspect of it, had been growing by leaps and bounds and it continued to grow by like by leaps and bounds as you say but slower leaps and smaller bounds than before.
So, perhaps what is going on here is a bellwether, a kind of normalisation in the AI process. All of these technological transformations seem to be accompanied by very strong market performance, maybe even bubble-like valuations, and then normalisation as reality sets in. It takes time for the transformation to come through in the technology itself and then to be embedded in productive processes in the behaviour and the work of the society and people and eventually shows up in productivity increases.
A lot of this is in the future of AI within the Fourth Industrial Revolution and it was being heavily priced in, and overpriced even. That is why, after a little bit of correction in the sector, we have a bit of a relatively high valuation compared to the rest of the market. The bigger question here is stepping back. Does the shine come off AI? The prospect for AI to make a difference is still very strong.
Where does Nvidia go from here in the near term and long term? Are there enough grounds for investors and analysts to have those sky-high expectations of Nvidia?
Arnab Das: Without wanting to focus specifically on Nvidia or any other stock too much, the bigger picture is that the market has gotten ahead of itself. We have seen this before with technology stocks. It is very different from the dot-com bubble. These are real companies with a lot of cash flow, very profitable, a lot of free cash flow and so I think it is a very different situation than took place in that era. This is part of the Magnificient Seven, companies that are already transforming the US and indeed the global economy.
What had gotten ahead of itself was the valuation of some stocks in particular. We see that from time to time. It is being called into question a little bit, but I do not think it is calling into question whether AI is going to make a difference or not. What is being called into question is how fast that difference is going to come about.The macro factors have to play in here as well. The Fed is around the corner from a rate cut and possibly this is going to be an important rate-cutting cycle. But if you look at how the curve for the Fed is priced, it is a lot of cuts right the way through 2025, but eventually it is a bit of an increase in rates. So, we are not going back to those kinds of zero rates in all probability that we had before. So, the upside for extremely long payoff stocks, like technology stocks, like growth stocks, may be less than in the last cutting cycle, so that is also important.You were just hinting that several rate cuts might come this year. Nvidia has been a key cog as far as the AI and chips ecosystem is concerned. Where does this leave the broader AI ecosystem in the near term and long term? What do you foresee?
Arnab Das: Like I said before, this is, a technological transformation, an industrial revolution that is taking place within which AI has a very important role, That is going to continue. There is possibly a significant amount of hype, and maybe some over-hyping around it. Nevertheless, it is an important change. It is, in my opinion, eventually going to increase productivity and make firms and households and society as a whole more efficient than they already are and that has captured the imagination of the market.
Like many of these things, it has probably gotten a bit ahead of itself, but the nature of the change is still there and we are still waiting for it to happen. The prospect will continue to be bright, even if there are corrections along the way.
What should investors bear in mind so far as these new-age chip stocks are concerned?
Arnab Das: There are different segments within this chip story and in the chip market. There are more commoditised chips at the lower end and then go all the way up to the top end where Nvidia and other companies, TSMC, and associated companies like ASML in the ecosystem are involved. It is a lot of high technology, very capital intensive, very skill intensive, and very resource intensive.
Many countries, be it the US, India, China or others, are trying to buy in or create capacity so that it is not all concentrated in Taiwan or South Korea or indeed China itself. That process is probably still going to continue. Many countries are going to want to have security of supply in their supply chains overall for technology, including chips, and that is going to affect different parts of the value chain here and different parts of the segmentation of the chip market.
What stands out is that the leading edge, very small chips and very sophisticated chips with extreme computing processing power and speed for AI, is where a lot of value creation is going to be and where a lot of the AI for businesses and governments for national security, are going to come into play. That is another reason why this information technology revolution is going to continue. It is going to have a push from the private sector. It is going to continue to have a push from the public sector and it is going to continue, like I said before, to capture the imagination of the market. You do not want it to get too far ahead, so to speak.