Nvidia wins again — plus two more takeaways from this week's mega-cap earnings

Original Article:

Source: Link

Earnings reports from Alphabet (GOOGL) and Microsoft (MSFT) on Tuesday revealed that both tech giants are doubling down on their investments in artificial intelligence — a strategy that benefits another one of our favorite holdings: Nvidia (NVDA). The guidance further reinforced our view that Nvidia is an "own it, don't trade it" stock, and was in-line with the company's own bullish forward guidance for this past quarter delivered back in May . It bodes well for the chipmaker's earnings, set to release Aug. 23, but perhaps more importantly management's ability to keep forward guidance the same, or even raise it. It was also one of several conclusions we made combing through the results and listening to the conference calls with investors. On Wall Street, it's called a "read-through" — a quick analysis using financial information and guidance from one company to make predictions about an upcoming release from a competitor, a strategy we regularly use at the Club. We are basically looking for results or management commentary that speaks to peer companies or the industry as a whole. Here then are 3 read-throughs from Tuesday's big earnings reports: 1. Nvidia stays on top. This was easily the most obvious takeaway. Microsoft and Alphabet are separately working to weave artificial reality into core products — such as Office 365 and internet search — while developing enterprise-level tools in the cloud to help customers across industries. Not only have both spend tens of billions already to get to where they are now with generative AI, both are also gearing up to spend a boatload more as the AI arms race shows no signs of stopping. Let's start with Google parent Alphabet, which reported second-quarter capital expenditures below expectations, but said the largest spend was for servers, including a "meaningful increase in our investments in AI compute." The team expects elevated levels of investment in its technical infrastructure increasing through the back half of 2023 and growing more in 2024. The primary driver is to support opportunities in AI across Alphabet, including investments in GPUs and proprietary TPUs as well as data center capacity." CEO Sundar Pichai even mentioned the Nvidia's H100 as the chip powering the company's new "A3 AI supercomputers." Meanwhile, Microsoft reported capex that was above what the Street's estimates and up 30% versus the year-ago period. On the call, management said it was "to support cloud demand, including investments in AI infrastructure." Microsoft, too, said it expects to spend more through the year to ramp up purchases of data center GPUs, and though they didn't state it as plainly as Pichai, we can assume the H100 is going to comprise a good deal of that spending as it's the most powerful AI-oriented chip on the market today. This is all welcome news for Nvidia. First, the results show the company's aggressive guidance provided for the second quarter is achievable. Second, it increases the likelihood management can provide a forward outlook at least on par with current third-quarter estimates. With shares now up nearly 50% just since the last report, the guide is going to prove even more important than the results in terms of the stock's ability to continue its upward trajectory. 2. AMD should win, too — just not right away. Though this commentary is also a positive for AMD since you can't build a data center without CPUs, the chipmaker's specialty. But we don't see AMD benefiting in the near term on the GPU front, which is where the bulk of the spending is likely to be targeted. That could change in coming quarters when MI300 production starts to ramp up. Nvidia's H100 chip really is the Generative AI gold standard at the moment and as a result stands to soak up much of the money going into AI-oriented GPUs. Of course, as Microsoft highlighted, data center buildouts do require CPUs and as we know AMD continues to take share from Intel on the data center CPU front, so they do stand to benefit, even if not quite to the extent Nvidia will. We also think that Microsoft's disappointing guide for the current quarter points to a bottoming out in the PC market, another pain point for AMD that may soon ease. It's not bullish for AMD near-term, the more personal computing guide does point to a sequential decline in sales, however, if we really are looking at a bottom this quarter then it could mean that we're now in the last bad quarter for AMD's Client segment (which was down 65% annually in the first quarter) before things start to improve. That would indicate a possible buying opportunity once earnings are released and guidance is quantified. 3. We're more worried about spending at Amazon and Meta Platforms. While the reports were clearly positive, they're a bit more mixed in terms of what we can expect from Amazon's AWS unity and Meta Platforms, which reports after the bell Wednesday. Amazon (AMZN) reports next week. The same commentary that gives us confidence in Nvidia's revenue momentum also makes us concerned about what Amazon and Meta Platforms will have to say about their own capital expenditure expectations. While Alphabet's report clearly bodes well for Meta's own advertising revenues, and Microsoft's Azure results give us reason to believe that the AWS results can at least match Street expectations (even with customer optimization efforts still underway), it's clear that the AI spending is only getting started. And if Alphabet and Microsoft are about to ramp up spending, it stands to reason that Amazon and Meta Platforms could be looking to do the same. Wall Street still wants to see cost rationalization, which is why we were so happy to finally see Alphabet's expense growth come in below revenue growth. That means that if Amazon and Meta Platforms are going to guide for capital expenditure to increase in coming quarters, they need to explain to investors how those investments are going to pay off. What is increased AI spending going to do for Meta's engagement and Reels monetization efforts? Can we get assurance that an intense focus on efficiency remains even should additional AI-oriented investments be required? What will it do for Amazon shopping recommendations and the value AWS can offer users? These are topics will be listening out for when the company's report. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. Nvidia chief Jensen Huang (centre L) poses for photographs before attending a press conference at Computex 2023 in Taipei on May 30, 2023. Sam Yeh | Afp | Getty Images