WILLIAM MEYER: Beyond the glow of the Nvidia rocket

AI is the new rave investment trend, and at the forefront of this sector stands Nvidia Corp.

Nvidia is a US technology company and a colonising pioneer in the design and production of specialised computer chips — more specifically, graphics processing units for high-performance computing as well as chip units for mobile computing and the automotive market.

The company is the dominant supplier of AI hardware and software.

And now, not surprisingly, Nvidia has overtaken Google and Amazon to become the third most valuable company on the planet. Only Microsoft and Apple are worth more at about $3-trillion. Nvidia is at $2-trillion.

Nvidia announced blockbuster results on February 21, propelling the shares to a stratospheric rise of 16% in one day. This was an increase in shareholder wealth of $280bn, a stock market record.

Analysts, for once, were at a loss for words.

Quarterly revenue came in at $22.1bn, up 22% from quarter three and up 265% from a year ago. Data centre revenue was a record $18.4bn, up 27% from the third quarter and 409% from a year ago. Full-year revenue was $60.9bn, up 126%.

If you think this is good, the forward-looking statements are even more encouraging. “The computer industry is going through two simultaneous transitions: accelerated computing and generative AI,” says Nvidia founder and CEO Jensen Huang.

“A trillion dollars of installed global data centre infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.

“Our entire data centre family of products is in production. We are significantly increasing our supply to meet surging demand for them,” he says.

While Nvidia is the dominant supplier of AI hardware and software, Microsoft — the dominant developer of software, services, devices and solutions worldwide — is seen as having a clear lead in monetising AI and rolling it out to its clients.

The productivity and business processes segment offers a host of software packages and Microsoft 365 Copilot. It also has LinkedIn and cloud-based applications.

The intelligent cloud segment provides server products and cloud services such as Azure, while the more personal computing segment offers Windows and all the related software, all the gaming businesses, Xbox hardware and content, search and news advertising, Bing and Microsoft News and Edge. In the interests of brevity, this is a condensed list of all the services and software; the offering is incredible.

Microsoft has the absolute best management team around, delivering coup after coup and executing incredibly well. The biggest segment is now the intelligent cloud. Azure is the driving force behind the cloud platform and revenue from this division grew 29% in the past quarter.

By comparison, Amazon Web Services grew only 12% and Google Cloud, which is much smaller, grew 22%.

Microsoft expects the segment to continue growing at this pace. Driving its performance is growth in the Azure Arc platform, which allows customers to run apps on-premise or in hybrid cloud environments. This platform achieved a 140% increase in customers year over year last quarter.

And if that is not thrilling enough, Microsoft is the clear leader in AI. Azure is the preferred platform for some of the best large language model developers, which are using it to create generative AI applications. Microsoft also has OpenAI models and Meta Platforms’ Llama 2, as well as other open-source models.

Microsoft continues to generate vast amounts of cash, with free cash flow over the past 12 months exceeding $63bn. With a balance sheet of $144bn in cash and just $72bn debt, it’s no wonder that Microsoft shares hit a record high in March and are set to go much higher.

It is hard to find shares more compelling than Microsoft on a growth and risk-adjusted basis.

Now investors also have a new opportunity to consider. At Arm Holdings’ IPO on the Nasdaq on September 14, shares were priced at $51. On the first day of trading, they closed at $63.59 for a huge 25% rally. Some of the largest companies such as AMD, Apple, Google and Nvidia participated in the listing, adding to the excitement.

Arm is one of the most important semiconductor stocks in the world and designs the architecture used in about 99% of all smartphones and other devices. Both turnover and profitability have declined over the past 12 months, which makes pricing or valuing the company so much harder. However, value is not about the past but about the future — and the future for Arm is bright.

Recently there was an announcement that Arm had extended the agreement to supply Apple with the architecture it uses extensively in its iPhones, iPads and Macs.

Another joint venture is creating further excitement. Arm is working with Nvidia to deploy technology to run AI and machine learning workloads in billions of devices. 

Don’t forget that the dark horse in the AI race is Apple. It certainly wasn’t the original inventor of the PC, nor the earliest to market a cellphone or the initial producer to sell an electronic watch, but here we are.

Apple is most often not the first to market but after everyone has been playing marbles in the playground, it appears out of nowhere with a soccer ball.

The thoroughbreds have started the race, but in future the biggest winners will be smaller companies providing services to the AI industry.

* Meyer is the owner of Fenestra Asset Management