The power of AI = $200 billion

Nvidia reported earnings of $1.09 per share on revenue of $7.2 billion for the first quarter of fiscal 2023, beating analyst expectations of $0.92 per share on revenue of $6.5 billion. While the company’s gaming revenue was down 38% from a year ago, sales for its data center segment rose 14% thanks to demand for AI. What got the market excited, however, was the guidance; Nvidia guided to $11 billion in current-quarter revenue, significantly above the consensus of $7.2 billion. The stock was up almost 25% the following day, adding almost $200 billion of market value.

• Nvidia is a leading chip manufacturer poised to benefit from the impending boom in artificial intelligence
• The unexpected incremental $4bn of anticipated revenue speaks to the current demand
• While already rich, the valuation has reached nosebleed levels
• Some have drawn parallels to Cisco during the internet bubble of the late 1990s
• A beneficiary of the adoption of the internet, Cisco grew earnings at a similar rate and traded at a similar high valuation
• Cisco, of course, peaked in 2000 and only grew revenues at a fraction of its prior rate

Recession remains elusive

Experts have been predicting a recession since the beginning of 2022. This week we got several data points showing the economy is doing just fine. Services PMI, a reading of the health of the services sectors, representing ~80% of the economy, is comfortably in expansion. We also received encouraging housing data, indicating a potential bottom. Low jobless claims and strong consumer spending and income data finished the week. The stronger-than-anticipated data has caused GDP estimates to be revised higher, with Atlanta Fed’s estimate at 2.9% for the second quarter.

• While many continue to forecast a recession, this recent data simply does not show that one is imminent
• GDP estimates are being revised up, including Bloomberg consensus estimates
• While inflation is slowing, numbers remain higher than the Fed’s target
• This likely means that the Fed will be higher for longer
• The market's expectation of rate cuts later this year seems unlikely
• Employment remains the key; as long as employment holds up, the economy should also

Can higher rates be good for tech?

Historically tech stocks and interest rates have had an inverse relationship. In other words, as rates go up, tech stocks go down. This is because tech stocks are long duration, meaning investments are made now for cash flow in the distant future. The higher the rate, the less those cash flows are worth in the present. We have been pondering lately if, today, for established technology stocks, we may be witnessing the opposite. Uber is a good example. Despite generating losses, it was funded for over a decade during the low-interest rate environment. This allowed Uber to build out its network and it is now on its way to profitability. Since investors are not likely to fund a competitor in this higher rate environment, Uber can secure a near monopoly in the business.

• Historically rates and tech stocks moved in opposite directions
• For certain established tech companies, this relationship may have changed
• This will likely be a challenge to earlier-stage companies
• While allowing the big to get bigger
• We have seen this reflected in the stock market with large-cap growth and established tech performing strongly, while small-cap growth has struggled

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