May 2024

Insights

The Good: Nvidia – Taking Home All the Chips

Exceeding high expectations, Nvidia, the frontrunner in the AI revolution, delivered another impressive set of results, quelling any doubts about their continued momentum and solidifying its position as the key enabler of AI adoption. These results underscore the robust demand for AI hardware across diverse sectors, including cloud service providers, automakers, and governments.

For the quarter the company surpassed expectations on both revenue and profit. Revenue skyrocketed by 262% to $26.0 billion, driven by the demand for their AI-focused data center platforms. The company’s efficiency is evident in the significant rise in gross margins and a staggering 690% increase in operating profit. Additionally, Nvidia boasts a healthy free cash flow of $14.9 billion which on revenue of $26 billion equates to a free cashflow margin of 57%. This strong cash position allowed the company to update their cash return strategy by rewarding shareholders with a 150% dividend increase and $7.7bn in stock buybacks. Additionally, they unveiled plans for a ten-for-one stock split in June, which could enhance the stock’s tradability.

Prior to the earnings report, concerns swirled about a potential slowdown in chip orders as Nvidia transitions between product generations. Specifically, analysts feared demand for the current Hopper chip might wane before the launch of the next-generation Blackwell chip. These anxieties were further fuelled by reports of major clients, like Amazon, planning to delay orders in order to switch to the updated Blackwell. However, Nvidia’s CEO, Jensen Huang, confidently addressed these concerns. He assured investors that demand for Hopper would rise in the coming quarter and continue exceeding supply for some time.

 

Source: Visual Capitalist

Google parent Alphabet put out an equally strong set of numbers, driving the share price higher by 11% on the day. Total company revenue increased by 15%, its fastest rate of growth since early 2022. Cloud computing was a particular highlight, with revenue growing 28% and operating income more than quadrupling thanks to improved efficiencies. Ad sales were also significantly higher than in 2023 as a reacceleration in the digital ad market boosted their core business. Strong growth here also helped alleviate some investor concerns that AI chatbots were impacting Google’s dominance in Search. Looking ahead, Google is also planning to invest heavily in their cloud infrastructure, with capital expenditure increasing by 50% or more this year. Despite this elevated spending, Alphabet remains in an extremely positive financial position. A cash balance of $108bn has allowed management to distribute some profits back to shareholders, with a $70bn share buyback programme as well as through the company’s first ever dividend.

Given these huge capital spending programmes, we are also eagerly awaiting Nvidia’s results in the coming weeks. Nvidia has been one of the biggest beneficiaries of elevated capex spend, since their world-leading chips are first choice for powering advanced AI tools. Across our funds and products, High Street continues to prioritise strong operating fundamentals above all. Regardless of the narratives and noises moving markets in the short-term, exposure to these kinds of business is likely to reward investors in the long term.

The Bad: Penny Pinching

The S&P 500 Consumer Discretionary index outperformed the S&P 500 by around 18% in 2023. Initial fears of a weakening US consumer were quashed by strong performances from companies such as Lululemon and Amazon, which retuned 59.6% and 80.9% respectively. This, alongside strong macroeconomic data being reported throughout 2024, has shifted the narrative to that of a stronger US consumer. Despite this strength, recent earnings reports from consumer-facing companies indicate a potentially gloomy near-term future.

The Consumer Discretionary sector index has underperformed the S&P 500 by almost 11% year-to-date and companies within this sector that have reported quarterly earnings thus far have cautioned that there could be a challenging economic environment ahead in the near future. Lululemon, a multinational athleisure apparel retailer, fell short on their guidance and stated that it had been a slow start to the year, mentioning softness coming from their US customers. Similarly, McDonald’s CEO stated that the “consumer is certainly being very discriminating in how they spend their dollar … I think it’s important to recognise that all income cohorts are seeking value.”

 

 

 

Source: Kevin Dietsch via Getty Images

Within our holdings, Starbucks has suffered along with the sector. In the prior quarter, their US operations recorded a surprise 3% year-over-year decline in comparable store sales. Of concern, this figure would have been significantly weaker had it not been for a 4% increase in order values. Management also noted that consumers are more conscious of how they spend their money, which has been negative for the company. Furthermore, their most dedicated customers have stayed loyal, but the coffee-drinkers who visit occasionally have declined.

US home improvement company Lowe’s is another consumer-facing company which has indicated that their customers are feeling the pinch. They have reported negative revenue growth for five quarters in a row, and cited shoppers visiting their website and stores less in recent times, in addition to buying fewer pricey items and delaying big ticket purchases.

Our investment strategy remains dynamic, and we prioritise diligent analysis and adaptation in response to market conditions. We do not let short term fluctuations in share price dictate our decision making. As part of our ongoing evaluation process, we carefully assess the long-term performance and prospects of each company in our portfolio. This involves scrutinising key financial metrics, industry dynamics, competitive positioning, and potential catalysts for growth or decline. Should we determine that the long-term investment thesis for any company has weakened or that superior opportunities exist elsewhere, we are prepared to reallocate capital accordingly.

 

& A Walk Along the High Street – Part Three: Reimagining South African Retirement: A New Approach

As High Street continues to grow, the next milestone on the horizon is the ‘Meet the Mangers 2024’ event (Meet the Managers registration). To build on the growing momentum we have experienced in the institutional market, Ross Beckley High Street’s Chief Investment Officer, will be delivering a comprehensive session on “Maximising Offshore Exposure under Regulation 28”. In anticipation of the event, High Street is launching a five-part series that will be published in Citywire. These articles aim to share our insights on various aspects, including the success of the High Street Balanced Prescient Fund, comparisons between local and offshore market performance, the current landscape of retirement savings options in South Africa, and how High Street distinguishes itself within the asset management industry.

Source: ASISA & High Street Asset Management via Bloomberg, 31/03/2024

In this month’s edition, we take a look at the high correlation between retirement funds in South Africa and how High Street offers a highly differentiated Regulation 28 compliant product, the High Street Balanced Prescient Fund. With a 90%+ Rand-hedge exposure, the Fund aims to protect and grow investors’ wealth on a global scale, thereby mitigating risks associated with the South African market. If you are interested, please click the link below:

A Walk Along the High Street: Part 3

 

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