Earlier this month we asserted that investors were attuned to certain “secret words.” Yesterday afternoon we searched for two of them: “Disinflation” in the FOMC minutes, and “AI” in Nvidia’s (NVDA) earnings release. Only the latter obliged.
One of my big regrets was not including “AI” among my secret words. Quite frankly, I have a publication deadline and I ran out of time that day. Investor enthusiasm over Microsoft’s (MSFT) investment in ChatGPT was in full force. Even though some of that specific infatuation has waned, artificial intelligence, or “AI”, has remained an important topic in the investment zeitgeist.
Seemingly echoing its role when “crypto” was at the forefront, NVDA is perceived as a key beneficiary of the potential for widespread adoption of AI. There is a definite logic to this perception. For starters, AI is likely to require significant computing resources and those computers would all require high-performance chips -the kind NVDA makes. Also, many investors take a “gold rush” approach. During the California and Klondike gold rushes, selling supplies to prospectors was a safer and smarter to make money than the actual prospecting. It is quite reasonable to think of NVDA as selling picks and shovels, first to the cryptocurrency gold rush, now to the AI gold rush.
It is quite clear that NVDA management is leaning heavily into the AI theme. By my count, management mentioned “AI” 70 times. They mentioned it 37 times even before the first question was asked! Investors were already enthusiastic about the company’s earnings beat — $0.88 versus a $0.81 consensus estimate – and rosy revenue guidance of $6.5bn, which is above the $6.35 estimate. Yet the emphasis on AI supercharged an already positive response. The stock initially rose about 7% on the numbers, but is now 13% higher this morning.
The market’s love of AI certainly helps distract investors from an important factor. This is a growth company that is not actually growing. Last quarter’s revenues are 17% lower than a year ago and EBITDA is about a third of last year’s, yet the stock price is essentially unchanged from a year ago. As of now, AI’s promise has not translated into the type of sales and profits that NVDA experienced during the crypto craze. But perhaps it could. That is the bet that investors are making when they pay nearly 100x trailing earnings or 50x estimated EPS.
Now let’s move onto the Federal Reserve. Recall how stocks and bonds responded on February 1st during Chair Powell’s post-FOMC press conference. Both were selling off until the Chair used the word “disinflation”. The first mentions were in response to a question about last quarter’s deceleration in wage and price growth, when he stated:
So I would say it is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market. But I would also say that that disinflationary process that you now see under way is really at an early stage.
Markets perked up almost immediately, with stock and bond prices taking another leg higher with each of his subsequent 13 mentions of that word. The rallies continued apace on the next day, accompanied by record options volume (abetted heavily by so-called “zero-dated” or “0DTE” contracts) before ending with a thud with the following day’s Payrolls report.
Considering how much of an impact the word “disinflation” had on asset prices, it was tempting to search for it in the minutes of the last FOMC meeting. We count 91 mentions of “inflation.” Not a single one contained the prefix “dis”. Zero, zilch, nada.
At the time, we noted that the market’s reaction to “disinflation” was similar to its reaction to the term “neutral” in July. In both cases, those were the words that spurred significant rallies. At least the word “neutral” showed up twice in the July minutes.
After last week’s higher than expected CPI and PPI reports, along with this morning’s release of 4th quarter Core PCE at 4.3% (above the 3.9% estimate), I will assert that disinflation has so far been transitory (to borrow a previous buzzword). Investor’s love of AI may prove a bit more lasting. Hype, oops I mean “hope”, springs eternal.
Disclosure: Interactive Brokers
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