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2/28/2024 11:00:00 PM
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Market Watch: The AI company boosting your KiwiSaver – what could this mean?

Which AI company is making waves in the market and what could this mean for your KiwiSaver?

 

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Nvidia, the smart computer chip company with the funny name, is currently growing at a pace that could see it become the world’s largest company in the next year.

It’s also one of a handful of stocks lifting sharemarkets and keeping our KiwiSaver funds looking good this year.

But that raises the risk that we might all be exposed if it heads into bubble territory - and if it pops.

“Nvidia’s results are breathtaking,” says Pie Funds Chief Investment Officer Mike Taylor.

“It’s something that I haven’t seen very often in my investing career, particularly at that scale. We’ve got a company that was earning $5 billion in revenue per quarter now earning $22 billion per quarter.”

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Most of that was coming from Nvidia chips that were being put into data centres to power AI language learning models, Taylor said.

“If you think about it in terms of a gold rush, they are the picks and shovels, you can’t mine your gold without a pick or a shovel, you can’t run your AI without a chip.”

At the moment, Nvidia’s market share of AI chips is estimated to be somewhere between 85 and 90 per cent, he said.

“So they control the market.”

So will it all crash and burn?

So far Nvidia’s earnings growth has matched the investor hype, Taylor said.

“If you think about where Nvidia was trading a year ago, or even the lows of the market at the end of 2022, it was on an earnings multiple about 30 times and today, despite the price going up considerably over this period, it’s still only trading about 30 times.”

Typically with a stock market bubble, you see earnings going up, but you also get the price people are paying for those earnings significantly expanding, he said.

“For example, the dot.com bubble, when things were really crazy, it was not unheard of to see companies trading at 100 times [price to earnings], or companies with no revenue at all, trading at huge valuations,” Taylor said.

“So this particular cycle still feels a little bit in its infancy.”

The risk for Nvidia was that it didn’t operate as a software service model, with ongoing licensing fees.

Chips were hardware and while they were expensive, once they were in place they were good for a decent period of time, he said.

“So at some point, these sales will hit a wall.”

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Mike Taylor is founder and chief investment officer at Pie Funds.

Nvidia had already been through a number of cycles since being listed, including the gaming boom and the cryptocurrency boom, he said.

At some point, the AI cycle would peak, although right now the demand is still very strong.

Good news for the world

The good news for the world was that AI as a technology should be very deflationary, Taylor said.

“There’s all the signs that it will be for the world and for productivity,” he said.

“If that plays out over the next couple of years, then that should be a nice tailwind to bring inflation down and keep it down.

“And if that’s the case, then we can start to see these interest rates come down from, levels that, we know, are restrictive on the economy, particularly, places like New Zealand and Australia.”

That, of course, would be good news for markets.


The Market Watch video is produced in association with NZ Herald and Pie Funds. Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.

Information is current as at 29 February 2024. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme and Pie KiwiSaver Scheme (the Schemes). Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary.

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