☕ Nvidia: the single most important thing that nobody is talking about

Howdy! 👋 

It's about 1am and I'm so excited I can't sleep after Nvidia's earnings. (Read) 

To be fair, some of that is probably due to the fact that my body is back in the US but that my mind is probably somewhere over the Pacific after a few days in Japan. 

I'll take it. 

My mind is racing and that's something I've learned to respect over the years because being too excited to sleep has helped me – more often than not – identify some truly remarkable profit potential. 

For example, I felt this way when Apple launched the iPhone in 2007 and services in 2014… when I saw Nvidia make the initial pivot into AI and accelerated computing away from gaming in 2016... and when I saw Tesla first begin speaking about autonomous driving, charging and the Supercharger network in 2013. More recently when Palantir came on the scene and Wall Streeters said “Pala-what” whenever I brought up “ontology.” 

You get the idea. 

Anyway, back to Team Jensen. 

Nvidia knocked the leather off the ball as I thought would be the case on Monday when the venerable Stuart Varney asked me about what I expected heading into the call. And, right on cue, the algos have taken over to knock prices a skosh lower in the after hours. (Watch) 

I have a hunch that the real fireworks won't start until the open bell or just prior to it but that's a story for another time. Perhaps by the time you read this. 

Here's my take so far. 

I have said three things would happen repeatedly: 

1. Another blowout quarter with growth topping 80% and the numbers obliterating analyst expectations. Check. 
2. Chip demand would continue to accelerate as would data center growth. Check. 
3. The company would be the shovel maker's shovel maker – meaning that it would power virtually every AI model from every single one of the so-called hyperscalers including Anthropic, OpenAI, SpaceXAI, Meta and Google's Gemini. Check. 

So now what? 

Two things, imho. 

• Physical AI is the next big jump, particularly via CUDA and Vera CPUs 
• Nvidia is still undervalued and my only fear is not owning enough shares 

Of course, the "yeah but" crowd is already out in full-force judging by what I see in papers around the world this morning – and I get why they feel that way. 

I urge you to take what they have to say with a really big grain of salt. 

Revenue came in at a record $81.6 billion — up 85% year over year — obliterating Wall Street's consensus of roughly $78.8 billion. Data center revenue alone hit $75.2 billion, up 92% from a year ago… more than most S&P 500 companies earn in an entire year. Jensen described it as simply as I've ever heard him put it: "Demand has gone parabolic.” 

It’s the same for the "emerging competition" angle which has been conveniently trotted out every earnings season for as long as I can recall and, yet, Nvidia has returned over ~20,492% over the past decade anyway. You’d think these folks would recognize how silly that looks but, hey, it’s a free country and even blind squirrels find a nut once in a while. 

Nor am I concerned that Nvidia will fail to find a way to procure foundry capacity and input materials — something that the company itself noted. Jensen will find a way; he's simply got to note the risks to keep the regulators happy because they don't like forward looking statements that are, well, actually forward looking even if they do come from the CEO himself. 

Oh, lest I forget the spreadsheet valuation gang… they're also at it again in the wee hours. We've been over this many times – it's value investing's blindspot (something I wrote about to the OBA Family in great detail in the December 2024 issue so that they'd have an understandable edge. 

Sharp 5 with Fitzers – hopefully including you as you're reading along – will also recall that I've spoken about this on television quite a few times including this appearance on CNBC with the super-sharp Kelly Evans. (Watch) 

And then again, a year later in this clip. (Watch) 

Modern accounting rules do not reflect digital investment properly, so companies like Nvidia will have high PE ratios then grow into 'em over time. For example, in early 2022 the trailing PE was around 65x — and briefly spiked above 175x when earnings dipped mid-year — yet today, after all that growth, it sits around 27x forward. In other words, earnings caught up to the story, just like they tend to do with the right companies making “must have” products and services. 

My focus at the moment is China. 

Specifically. 

Nvidia CEO Jensen Huang said the company has "largely conceded" China's advanced AI chip market to Huawei.  

My eyebrows shot up. 

Jensen made this point explicitly during a conversation with Sara Eisen: "Conceding an entire market the size of China probably does not make a lot of strategic sense. I think that has already largely backfired."  

Here’s where you want to be as clear as I am. 

Jensen’s concern is not about the hardware revenue Nvidia lost. It is about the software ecosystem China is gaining. That’s because Chinese developers building on Ascend instead of CUDA can potentially create a globally exportable alternative stack. 

I am not surprised and you shouldn't be either. 

I have repeatedly suggested point blank that well intentioned – and I would argue needed – policies to control chip-related technology would likely backfire spectacularly. 

Now, that's happened. 

Nvidia's Chinese market did account for about 1/5th of the company's data center revenue but now it's down to what is probably a mid-single digit percentage — effectively near zero for the advanced AI chips that matter most. 

I think Nvidia will go back to China ultimately – and Unka J. says he would be delighted to – but I'm struck by the fact that he's said point blank for all of their analysts and investors to "invest nothing" and "to expect nothing" from that market going forward.   

Which brings me to one last point. 

Jensen has also made it very clear where he sees the company going, observing that, "As we're growing hundreds of billions of dollars at a time, we have to support our supply chain so that they are able to support our growth." 

That smells like fresh opportunity to me. 

I've got a few ideas ranging from corporate bonds to investing in competitors to investing in partners and even sector-based ETFs. And while I'd love to snap up a few shares of Huawei, that's not possible. 

Time to put on a pot of coffee. ☕️ 🧐 

Bottom Line 

There is always a path forward in today's financial markets. 

The question is what YOU make of it. 

Speaking of which and as always, let's MAKE it a great day. 

You got this – I promise. 

Keith 😀