TOL - 20th May, 2024
Why this stock picker only recently bought NVIDIA (and why he's never owned Tesla)
In this episode of The Pitch, concentration is the game and working out the winners among the leaders is the challenge.
There are market darlings, and then there is NVIDIA (NASDAQ: NVDA). The company, which designs chips for powering graphics and high-performance computing, is widely considered to be the company that will have the first and largest advantage in harnessing the artificial intelligence (AI) mega-trend. Its stock price is up over 70% year-to-date and in the past 12 months, it's up well over 190%.
If you've tried to bet against this stock either through deliberate shorting or just not owning it, it's been a very painful ride.
It's certainly been like that for Chris Smith and his team at Intermede Investment Partners. Intermede's portfolio, which has owned most of the Magnificent Seven for a long time, prides itself on finding high-quality global companies that can deliver consistent, double-digit earnings growth. But they never owned NVIDIA until two months ago.
So naturally, the question begs - Why?
"The more we thought about it, the more we felt comfortable with the fact that this is just more than a hardware company making a fast chip. There is a whole ecosystem around that and barriers to entry are quite high," Smith said before adding:
"We had been behind the curve on estimating the potential for this business and we decided to go with our upside case rather than our base case."
In this edition of The Pitch, Smith shares his thoughts on the Magnificent Seven and stock market concentration more generally. He also gives his views on some of the fund's portfolio holdings and recent earnings. Finally, he shares his thoughts on the two Mag7 companies they don't own - Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA).
EDITED TRANSCRIPT
Does all this concentration (and the hype around these stocks) worry you?
It is a different era, I would say. The Magnificent Seven are making up a larger and larger portion of the market. When we started 10 years ago, there wasn't a security in the market that was more than 2% of the benchmark. Now, we have several that are close to 5%. It has changed the way we manage the portfolio to some extent.
I think when you look at that Magnificent Seven group, most of them are delivering. It is justified by the moves that they've had in stock price. You have earnings growth growing mid-teens or better for most of them. Some are growing well into the 20's. You have revenue growth well into double digits for most of them.
You have multiples on some of these stocks that are below market average, less than 20 times on Meta (NASDAQ: META), and less than 20 times on Alphabet (NASDAQ: GOOGL). There's still pretty good value across the space. We do invest in quite a number of them.
Does this new paradigm you speak of change the way you perceive them as investment opportunities?
It does make it very critical that you have a view of all of these companies. Certainly missing out on one of them that's doing quite well can be very painful as a manager. There are a couple of examples that we might talk about. Nvidia (NASDAQ: NVDA) is one of them, that we didn't have last year. You do have to be very aware of these key names, and you have to have a view.
What has been the most interesting takeaway from earnings season so far?
I think the tech earnings have been interesting. You've seen revenue growth going quite well. You've seen it increasing contribution from AI. There's a lot of concern about all this capital going in. What kind of contribution are we getting? I think Microsoft (NASDAQ: MSFT) demonstrated that a lot of their Azure growth is coming from AI. They're seeing a good boost from that.
Amazon (NASDAQ: AMZN) as well as seeing some good uptick from AI. You saw an increase in AWS growth, the cloud part of the business, that they just reported very recently. That's partly driven by AI. I think it's pretty amazing. But you've seen CAPEX budgets that are already expected to be growing very significantly this year were pushed even higher for some of the big companies like Microsoft and Alphabet. More than 50% growth year over year, coming off already quite high levels. A lot of that is going to AI and that's the sort of thing we've been following.
Meta (NASDAQ: META) was the one that was viewed as a disappointment. They have been having this year of efficiency that's given them a lot of benefits. You saw a lot of margin expansion. Now, they're investing again, this time in AI. Hopefully, that turns out into something. It is a name that we have in the portfolio.
You only just bought NVIDIA in the last couple of months. Why did you buy it now?
It is a bit painful to buy a stock that's up that much, no question about that. But the more we thought about it, the more we felt comfortable with the fact that it's more than just a hardware company making a fast chip at the moment. There's a whole ecosystem around that. Barriers to entry in this space we think are quite high. The growth can be sustained given we've seen CAPEX budgets being increased on top of increases from a couple of months ago. That money is flowing to NVIDIA.
We had been behind the curve, I would say, on estimating the potential for this business. We decided to go with our upside case on the stock rather than our base case. On that basis, we had a 20% plus upside, which is what we look for to enter a name. We are still below benchmark weight, so we are being a little bit conservative on that. But it is one of our favourite names in the sector. We felt we couldn't keep betting against it, and effectively being short the stock.
Four of the Magnificent Seven are in your Top 10 positions. We just talked about NVIDIA. Do you own either Apple or Tesla? If not, why not?
We've owned Apple (NASDAQ: AAPL) for many of the years that we've been going. We have been out of it in the past couple of years, given the valuation. The services growth in that business wasn't being reflected in the price, we thought at one time. Now, it's being fully reflected. IPhone sales have been pretty soft. It's quite a penetrated market. People have delayed the upgrade cycle relative to what it was. You've seen declines in iPhone sales. That's the driver of the business at the end of the day.
I would say at this point, we do feel exposed by not having that in the portfolio. We're effectively short, 4% of Apple. There's a possibility with their next round of phone launches that they could talk more about the AI capabilities. I think that's what's been missing from the story.
Tesla (NASDAQ: TSLA) is one that we've never owned. We have many concerns about the long-term competitive position of that business. They were a first mover in EVs, but there are a lot of other car companies out there, and a lot of capital going to develop new models and new platforms. We feel that over time, they're not going to be able to make the kind of margins that they were making. We've seen that play out a little bit.
We've also seen the EV market slowing, maybe more than expected. They're not taking off quite as much, particularly in the US. But for us, it really comes down to this question - is one company really going to dominate a market with just a few models of vehicles? We don't think so.
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For more information on the Intermede Global Equities Fund, please visit here. If you are a financial adviser, please contact your MLC representative here. If you are a direct investor, please speak to your financial adviser or invest directly through the Product Disclosure Statement (PDS) here.
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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1 fund mentioned
Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
Expertise
Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
Expertise
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