PAUL MCBETH: No hiding from the Nvidia juggernaut

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years. His KiwiSaver has been with Milford Asset Management since 2014 and he’s owned units of the Smart S&P/NZX 50 ETF since January 2024.

It was hard for anyone in New Zealand with a passing interest in markets to avoid Nvidia last week.

The chipmaker’s quarterly earnings had been prepped as a line-in-the-sand moment that would either validate this artificial intelligence thing as the latest version of the industrial revolution or show the emperor had a penchant for walking down main street starkers.

It turns out, two things can happen at once.

Nvidia knocked it out of the park.

Its October quarter sales of US$57 billion – no typo – were up 62% from a year earlier and its net income of US$31.9 billion – still no typo – was up by almost two thirds.

Sure, expectations had been juiced by the billions of dollars being spent by the other insanely large tech companies we’ve taken to calling the Magnificent 7, but even those clear-eyed analysts were wowed by Nvidia’s numbers.

A day of tiny triumphs

What’s more, chief executive Jensen Huang declared we’ve entered the virtuous cycle of AI where it’s going to be everything, everywhere all at once.

Helpfully, he provided a longer sales pipeline than usual, giving everyone a general sense that he’s at least got enough buyers to keep everyone in clover until the end of next year.

Which shouldn’t really have been surprising given the other titans such as Microsoft, Meta Platforms, Google-parent Alphabet, Amazon and Tesla can afford to pay these eye-watering sums of money to invest in AI infrastructure from their existing cashflows.

They might not all pan out, but there’s real money backing the big BIG end of town, not just other people’s and the promise of a glorious tomorrow.

So everything’s hunky-dory, right?

Not quite.

Because even with Nvidia settling some of those fragile petals out there, the growing scepticism about AI has plenty of valid concerns.

A week spent in despair

Regular listeners of the Prof G Markets podcast might want to count how many times Scott Galloway’s earnest sidekick Ed Elson reflects on OpenAI chief Sam Altman’s recent defensiveness in pushing back against the perceived mismatch between revenue growth and the ChatGPT behemoth’s plans to spend US$1.4 trillion on computing infrastructure.

Because ultimately those fears are turning into questions about where the money’s coming from.

Take Larry Ellison’s software giant Oracle. It should be fine, given how much time his family’s spending dabbling with becoming media moguls.

But the stock has taken a pummelling this month, falling from a peak faster than it’s even done before.

A big concern was the recent sale of US$18 billion of bonds to help pay for the infrastructure it needs to service OpenAI and pocket the hundreds of billions of revenue coming its way.

Watch you grow tall

Oracle’s now the most heavily indebted big tech company with an investment grade rating, owing US$100 billion, or roughly $178 billion in local terms. To put that in perspective, it’s about $40 billion more than New Zealand businesses – all of them – have borrowed from banks and other non-bank lenders.

Why does that matter?

Because when strains start creeping into the system, debt amplifies things to the nth degree. When things are going well, that debt is a beautiful thing, but watch out when things sour.

And even if New Zealand seems so far removed from the Silicon Valley tech bros, our appetite to invest in them is not.

Take the NZ Super Fund for example. At the end of June, it had some $9.96 billion of its $28.21 billion in US stocks was in the BAATMMAN stocks – Broadcom, Alphabet, Amazon, Meta Platforms, Microsoft, Applen and Nvidia – or roughly 11% of the entire portfolio.

That’s a chunky exposure.

Or just check what your KiwiSaver fund’s top holdings are. Topping my Milford active growth fund is New Zealand government bonds, followed by Microsoft and Amazon.

Dream up your fate

Once upon a time we might’ve thought those international exposures were limited to our own little big end of town.

But check out the favourites list for the Sharesies brigade and Nvidia, Apple and Tesla make up three of the top five companies held by their 880,000 users, while NZX’s Smart US 500 exchange traded fund and the Vanguard 500 index fund ETF are the top two funds.

It’s a similar story for Hatch users, as those familiar tech titans top the list of its most traded stocks and ETFs too.

The opening up of international markets by those kinds of platforms to allcomers has been a revolution for local retail investors, who’ve been far happier plopping their money overseas than backing homegrown talent.

I’m so sorry, I was miles away

And that’s one of the hidden shames we’re yet to realise as our broadening horizons whet our investment appetites to all kinds of international flavours.

Because despite the reputation New Zealand’s benchmark S&P/NZX 50 has as a home for reliable dividend payers, like the power companies, Spark and the commercial landlords, that’s a disservice to some of the more interesting local firms with global aspirations, such as Infratil, Mainfreight Fisher & Paykel Healthcare and a2 Milk Co.

And even if the more subdued gains for the NZX’s top 50 haven’t necessarily won over the local retail investor audience, we’ve also done an awful job of pointing out just how well some of those smaller players – who are more closely tied to the slowly building momentum in our domestic economy – have been performing.

In fact, the S&P/NZX mid-cap index, which tracks the bottom 40 companies on the NZX50, has notched up a 19% gain so far this year, while the NZX small-cap index – that really gets into the weeds of our local market – is up 28% and heading for its best year since 2012.

That’s really been an opportunity gone begging – and not just from those supposedly unsophisticated retail investors, given a surprisingly small number of actively-managed funds outperformed their benchmark tracking passive peers in the first half of the year.

It seems we might all need a reminder that we can find some juicy returns at home as well as overseas.

Image from Daniel Lloyd Blunk-Fernández on Unsplash.