To my clients:
A quick heads up to clients that I will be taking the week of July 1st through July 5th off. As usual, I will be connected while away and monitoring developments. Brenda will be available to accommodate urgent inquiries.
It was a mixed week for North American stock markets with the Canadian TSX finishing down 0.4%; the U.S. Dow Jones Index up 1.5%; and the U.S.S&P 500 up 0.6%.
This week I’m going to comment briefly on Nvidia and its impact upon the markets…
For those who don’t know, Nvidia is the company whose much sought after chips (largely graphical processing units) are at the forefront of demand for the AI (artificial intelligence) revolution. Historically, these units were powering advancements in video gaming, but the capabilities of these chips have proven integral to the needs of AI advancement. The acceleration in demand for Nvidia’s chips has been, in a word, staggering. As this demand has grown, revenue and profits have grown at an equally staggering pace. The overall pace of these growth metrics has been so rapid that investors, just this week, bid up the share price of Nvidia such that the company momentarily passed Microsoft as the world’s most valuable. Undoubtedly, this is an exceptional company.
More to the point, Nvidia’s 160% rise in share price so far this year has accounted for a full 33% of the 14.5% rise in the S&P 500. In other words, the S&P 500 would be up ~ 9.5% without Nvidia’s contribution. Discretionary clients do not own Nvidia. Ex-Nvidia, U.S. client portfolios are actually modestly outperforming the S&P 500.
Now, I’ll conclude by suggesting that I’d like to own Nvidia for clients…. BUT, I can’t justify the price. About 2 months ago, the stock dipped as low as ~ $75 per share (on a split adjusted basis), and I nearly pulled the trigger for a starter position for client portfolios. Woulda, coulda, shoulda. I didn’t, and now the stock trades at ~ $126 per share. Keep in mind that Nvidia doesn’t have the diversified business lines that its valuation peers like Microsoft or Apple have. For all intents and purposes, Nvidia is a one product-line company. And while that single product-line is currently enjoying unprecedented demand, there will undoubtedly come a point where purchases from its blue chip customer base will begin slowing if, for no other reason, that many of these customers have been ordering chips that they don’t currently need so as not to be left at the back of the line when they ultimately do need to have the chips. This sort of demand curves is unsustainable, and I’m confident there will be a meaningful correction at some point. If/when that correction occurs, I’ll evaluate whether a starter position might be warranted at that point. I’ll lastly note that a “starter” position would probably begin at about 1/3 the size of a normal position in client portfolios.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
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