Bingo! Nvidia surpassed the sales expectations once again and announced total sales of $22bn for the Q4 of last year – that’s a 22% growth compared to the quarter before and an eye popping 265% growth compared to the same period last year. Their data center unit revenue alone hit $18bn – that’s more than what they made during the entirety of the previous quarter. That number is up from $3.6bn generated for the data center unit during the same period last year. ‘Accelerated computing and generative AI have hit their tipping point’, said the company CEO, ‘demand is surging worldwide across companies, industries and nations’. Cherry on top: for the current quarter, Nvidia said that they will deliver $24bn sales. And given the track record of the past year, we must admit that there is a stronger case for the company to deliver on its promise than otherwise.
Nvidia jumped 10% in the afterhours trading as predicted by options positioning and will hit a fresh ATH at the open. This time, the idea that speculation is partly responsible for Nvidia’s shine will be on the back of investors’ mind, but investors must admit that a part of the rise is well funded and well deserved. So, there you go, ladies and gentlemen, a potential misstep from Nvidia that would hammer the AI rally has simply not come. What now? The rally will probably continue. Until when? Until a misstep.
Of course, Nvidia will see challenges on its way up. First the revenue growth will likely stabilize, and the euphoria regarding growth and growth perceptions will level out. Competition will come in, regulation will come in and China will be a drag regarding the stateside sales. China stood for 20% of the revenues last year, and their part of Nvidia’s sales will fall below 10%. But on the other hand, Nvidia is unlikely to be constrained by drying demand anytime soon. They will more likely be constrained by their own capacity to respond to the fast-surging demand, and that will make the future revenues finite. This being said, the company managed to decrease its lead times for GPU orders from 8-11 months to just 3-4 months, indicating room for further growth peak.
And it’s worth noting that, yes the AI rally is compared to the dot.com bubble – which ended in tears for many internet companies, but during the dot.com bubble that preceded a massive internet crash, valuations were getting ahead of earnings. What’s different with AI is, earnings are getting ahead of valuations. Some company valuations are extremely high, but overall, there is a huge amount of investment concretely flowing in. And that’s something beyond speculation.
As such, Nasdaq futures are up by 1.50% at the time of writing. It will be a good day.
Now in a rare occurrence, Nvidia stole the light from the Federal Reserve (Fed) minutes released yesterday. The news were not enchanting from the doves’ point of view. Minutes showed that most Fed members are concerned more about moving quickly to cut rates than concerned about keeping the rates high for long. Interestingly, activity on Fed funds futures gives more than 70% chance for a rate cut to happen in June, anyway, but any further evidence that inflation is picking up momentum could easily hammer that expectation, and make the Fed’s job harder for what they call the ‘last mile’.
On a side note, Biden announced that 150’000 student loan borrowers will have their debt forgiven, for a total amount of $1.2 trillion. And that’s just one area where government spends big to keep the US economy strong as it is, at least until November elections. Plus, oil prices are upbeat. Crude oil is trying to drill above the $78pb level, a major Fibonacci resistance that distinguishes between the actual negative trend and a medium-term bullish reversal, while US gasoline bulls are coughing back to life after more than 6-month silence. The rising gasoline prices should also show up in the next few inflation readings. Therefore, the Fed policy easing may not go according to the plan.
Consequently, I am NOT surprised that the Fed members won’t rush toward the exit, but I am surprised that the USD bulls are hard to bring on board. The US dollar index slipped below the 100-DMA, and below its ytd bullish channel base, the EURUSD cleared its 200-DMA and is now trading above the ytd descending channel. Cable looks upbeat above its 200-DMA, whereas the Japanese yen – which was supposed to be the rising star of the year, is pretty much the only major currency that doesn’t see demand. The USDJPY is above 150 despite a broad-based weakness in the US dollar.
Today, the Eurozone PMI numbers will give an idea on the fragile health of the euro area economies, while inflation is expected to have fallen 0.4% on a monthly basis, and core inflation is seen 0.9% lower on a monthly basis too for January. Softer-than-expected inflation and gloomy PMI numbers could stall the euro bull’s endeavor to beat the dollar bulls. Fundamentals back a softer euro against the greenback than the contrary.
