A Skeptical View of Nvidia’s Soaring Stock
Nvidia Corp.’s stock has experienced a meteoric rise this year, leaving Wall Street analysts scrambling to keep up. However, not everyone is convinced that the chipmaker’s success will last.
A Warning from a Seasoned Investor
Terry Smith, a renowned money manager often referred to as Britain’s Warren Buffett, is cautioning against Nvidia’s stock despite its impressive performance. Smith believes that the company lacks a reliable earnings stream and a strong track record of high returns on capital.
The AI Conundrum
Smith’s concerns center around the artificial intelligence industry, which has yet to prove its revenue-generating potential. “I’m not confident that we know what the future of AI is because there are almost no applications people are paying for,” Smith said in a recent interview. He questions whether customers will be willing to pay a sufficient price to justify the billions of dollars invested in AI technology.
A Billion-Dollar Question
Smith’s doubts strike at the heart of the AI industry’s biggest concern: will the revenue generated by the technology ultimately justify the massive investments made by firms like Nvidia? This uncertainty contributed to a significant selloff in Nvidia’s market value earlier this year, although the shares have since rebounded.
The Optimists’ View
On the other hand, AI enthusiasts point to Nvidia’s biggest customers, including Microsoft Corp. and Alphabet Inc., which have pledged to increase capital spending on data center gear and other fixed assets. Strategists expect Nvidia to record a net profit margin of 56% in the 2025 fiscal year as tech firms continue to boost AI spending.
Competition and Sustainability
However, Smith remains skeptical about the sustainability of Nvidia’s profit margins. He notes that if AI is indeed the next big thing, it will likely attract competition, which could erode Nvidia’s market share. Furthermore, Smith points out that major users of Nvidia’s microprocessors, such as Microsoft and Oracle, have a history of developing their own chips.
A Wider Concern
Smith’s Fundsmith Equity Fund has underperformed this year, due in part to the concentration of performance among a handful of stocks. He attributes this trend to the rising popularity of index funds, which he believes are not truly passive but rather momentum-driven strategies.
A Cautionary Note
As the tech industry continues to evolve, investors would do well to heed Smith’s warning. While Nvidia’s stock may be soaring, it’s essential to consider the underlying fundamentals and potential risks before jumping on the bandwagon.
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