INVESTMENT ADVISER | ISSUE 09 2024 23
The other threat will come if any of Nvidia ’ s four largest customers ( Microsoft , Amazon , Alphabet and Meta , which currently comprise around 40 % of its revenues ) succeed in their efforts to design a better priced alternative to the H100 or its next generation follow-up chips Blackwell ( 2025 ) and Rubin ( 2026 ). Economics undergraduate principles spring to mind : abnormal profits first attract abnormal speculation and then abnormal competition . Moreover , there ’ s an inherent cyclicality of demand for capital expenditure beneficiaries — whatever today ’ s trend might be — as shown by the history of massive 50 % -90 % drawdowns in Nvidia ’ s otherwise very successful history , in 2002 , 2008 , 2018 and 2022 . ⁴
For the avoidance of doubt , we are not making a bear case for Nvidia here ; there is plenty of potential upside . It is just that there is plenty of potential downside as well , and the market seems more focused on the former at present . It is this very wide range of outcomes that excludes us from owning Nvidia . Our strategies do embrace change and evolve significantly over time — our flagship global strategy ’ s consumer staples weight has gone from over 60 % to under 20 % over the past decade , and information technology is now over a quarter of the portfolio , even excluding the stocks that the Global Industry Classification Standard , known as GICS , moved into other sectors last year . However , we continue to look for the same characteristics since our strategy launched : strong intangible assets delivering high returns and pricing power , recurring revenues , and decent , resilient growth , all at a reasonable valuation . We have also reflected on some important lessons , most notably in consumer staples and health care . We shall aim to be less patient where larger holdings underdeliver on earnings while overdelivering on negative surprises , even if their valuations appear to be supportive . Also , we recognize we need to be more wary of transformational acquisitions , especially if they may be covering up existing problems in the core business .
Our portfolio composition has continued to evolve , from companies with powerful strongholds in dental care and painkillers to medtech for burgeoning women ’ s health services , innovative life sciences that support medical discovery , digital music , leading data companies set to benefit from AI and the enterprise staples of our era — cloud-based software as a service , data , payments and insurance broking . We believe these should deliver a portfolio offering resilient revenue growth and faster earnings growth at a reasonable valuation , with a free cash flow yield close to that of the market , with a history of double-digit compounding achieved over the last quarter of a century .
The current index composition and economic sailing conditions have made it challenging to deliver strong relative performance . We remain steadfast in following our quality process and our focus on valuation and fundamentals . The backdrop of high expectations generally in the market and high expectations specifically for direct GenAI plays ( and increasingly one exceptional company ) make us nervous about the prospects for the market . There are only two ways of losing money in equities : the earnings go away or the multiple goes away . Our “ double fussy ” philosophy — owning resilient earnings at reasonable valuations — should help mitigate both risks , while providing decent compounding .
¹ ² ⁴ Source FactSet , as at 30 June 2024 .
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Source : Forbes , 13 June 2024 , “ The World ’ s Largest Semiconductor Companies 2024 ”
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