In his weekly commentary , Jim Cramer talked about what makes this market so hard. It’s the divergent views between market strategists and equity analysts. Strategists are focused on macro-level data points such as inflationary readings, the yield curve in the bond market, and housing strength whereas equity analysts care about supply and demand dynamics to determine the ability to generate one thing that really matters to stock investors like us, and that is profits. We obviously fall much more into the equity analyst line of thinking. As members know, even when it comes to gauging the state of the economy, we think earnings calls provide far more insight than backward-looking economic data releases. Take Club stock Nvidia (NVDA) for example. If you’re completely focused on the strategist’s viewpoint, it’s hard to get bullish when the inverted yield curve, high Federal Reserve-controlled policy interest rates, and sticky home price inflation will tell you that a recession is imminent — and as a result, corporate spending is set to pullback. You can’t own Nvidia if that’s the data you’re using to generate your worldview of future demand, especially after the monstrous run shares have already had this year. It’s a view that tells you the strongest demand is in the rearview. That’s not our view. If you focus on the specific drivers of Nvidia’s demand — and not the downbeat story Taiwan Semiconductor Manufacturing already told for the chip industry more broadly in the near term— you’re going to come away a whole heck of a lot more bullish, to the point where you have to wonder if you have enough exposure in Nvidia despite the year-to-date surge we’ve already seen. That’s the quandary we’re in. On Monday, analysts at Bernstein who usually cover different industries within the technology sector teamed up to offer a view on the artificial intelligence demand environment. In a note to clients, they discussed what it means in terms of Nvidia’s strong forward guidance for the quarter it’s due to report in late August and the potential for momentum into 2024. It’s quite possibly one of the most bullish notes we’re seen on the name. And, we know bullish. Jim loves NVDA. It’s only the second stock that he designated as own-it and don’t-trade-it. Apple (AAPL), also a Club name, was the first. The big takeaway from the Bernstein analysts is this: Their bottoms-up analyses suggest that increased spending this quarter from just four so-called hyperscalers (or large cloud providers) — Tiktok-owner ByteDance and Club names Microsoft (MSFT), Meta Platforms (META) and Alphabet (GOOGL) — is already enough to “meet NVDA’s current quarter guidance.” You’ll note that Club holding Amazon (AMZN), the biggest cloud provider on the planet by revenue, isn’t even included in the list, nor is Apple, which we recently learned is also working on its own generative AI initiative. Then of course there’s everyone else looking to plant their flag and solidify a spot in the AI generation. Bernstein expects Amazon and Apple (both of which report this week) as well as Oracle and Tesla , among others, to “materially increase” graphics processing unit (GPU) server spending and capital expenditures (capex) year over year. That’s not even mentioning shipments to China, the analysts added. Before we get into the numbers, thinking higher level, if what the analysts are saying pans out, and the entirety of Nvidia’s current quarter’s forecast can be achieved by only selling into the four aforementioned hyperscalers, well, that’s an incredibly bullish as far as guidance for the next quarter goes. And, if that’s the case, then it stands to reason that the rally in shares of Nvidia still has room to run. NVDA has more than tripled in 2023, hitting a record last month despite atrocious 2022 performance. NVDA 5Y mountain Nvidia 5-year performance As for some numbers, the Bernstein analysts currently project industry data center revenue doubling this calendar year, growing by about $15 billion. The market thinks data center revenue could grow by another $20 billion in 2024 based on the current supply and demand imbalance. That said, by analyzing current production bottlenecks, production capacity additions, and pricing dynamics, the analysts are left with the view that even these bullish estimates may prove conservative in time. In fact, some of the investment community, according to the analysts, is modeling at least $30 billion of incremental data center revenue next calendar year, with additional capacity coming online to support even more if needed. In terms of how much room there is left to run for the current cycle, the Bernstein analysts said, “While gauging the magnitude and trajectory of capacity additions and AI demand may be foolish to predict, we suspect that we likely have another 12-18 months+ of unbridled AI infrastructure buildout, but things look murkier beyond that.” That’s not all that surprising. After all, those buying Nvidia’s chips will need to harvest profits on their investment at some point but 12 to 18 months is a lifetime in the stock market. Just think about where we were 12 to 18 months ago. Bottom line In the end, we can either take a high-level view, thinking about the economy and all those that operate in it like a market strategist, or we can think like an equity analyst and dig into the nuanced supply and demand environment for each individual investment. We’re generally in the latter camp. You can either look to things like the yield curve, interest rates, manufacturing rates and the housing market, and wonder how anyone could be so bullish heading into 2024, or you can consider commentary from Bernstein about those hyperscalers regarding capex and what that means for the only metric that really matters in the end, profits. In this case, looking at Nvidia’s profit potential you may be left wondering how anyone could doubt that the chip maker is set up to print a boatload of money for at least the next year. We suspect the outlook for Nvidia will become even more apparent after the bell Thursday. That’s when we get some insight into Amazon’s capex expectations going forward, and perhaps even hear some thoughts from Apple about how it’s thinking about the implementation of large language models and generative AI applications. (Jim Cramer’s Charitable Trust is long NVDA, MSFT, META, GOOGL, AMZN, AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Nvidia CEO Jensen Huang,speaks at the Supermicro keynote presentation during the Computex conference in Taipei on June 1, 2023.
In his weekly commentary, Jim Cramer talked about what makes this market so hard. It’s the divergent views between market strategists and equity analysts. Strategists are focused on macro-level data points such as inflationary readings, the yield curve in the bond market, and housing strength whereas equity analysts care about supply and demand dynamics to determine the ability to generate one thing that really matters to stock investors like us, and that is profits. We obviously fall much more into the equity analyst line of thinking. As members know, even when it comes to gauging the state of the economy, we think earnings calls provide far more insight than backward-looking economic data releases.
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