The Nvidia Chips Are Down

 

Market Scorecard


Global markets are going through a period of heightened uncertainty. The nasty drop of almost all markets in October 2018 knocked the confidence of many, so more investors are sitting on the sidelines. Volatility has increased, meaning bigger swings during each trading session. It is not often that you see a market oscillate between gains and losses in a single day, but that was the case for most of last week. Until there is a significant market catalyst, we might see this pattern continue.

On Friday the JSE All-share closed down 0.10%, the S&P 500 closed up 0.22%, and the Nasdaq closed down 0.15%.

Company Corner


 

One thing, from Paul

One of the things that I like the most about financial markets is that they provide a great way to monitor arguments about the valuation of companies. If ABC’s stock is trading at $100 or R100, and I think that’s a bargain price for a world-beating operation like ABC, while someone else thinks that ABC is a dog with fleas and the right price is much lower (or even zero), then I can buy it and that other person can avoid it, or even sell it short. Then we can sit back and see what happens. There is usually a clear answer in time, but the valuation is constantly changing and sometimes those swings can be very significant.

One of our recommended stocks in New York, chip maker Nvidia, had a tremendous run over the past three years, growing in value by ten times, but has been walloped in the last six weeks.

What’s going on? Nvidia reported quarterly (to October) sales of $3,2 billion and profits of $1.84 per share, which was below consensus expectations. The stock, which had already fallen sharply after reaching a high of about $290 on 1 October, fell further to close at $164.43 on Friday evening.

Remember that Nvidia makes specialised computer chips for high-end applications. The current mainstay of the business is gaming and professional visualisation, where its graphics processing units deliver market-leading performance. That part of the business did fine. It’s blossoming data centre business is very exciting, because the new Tesla T4 chips are selling well. The laggard was sales to cryptocurrency miners. This makes sense and frankly, who cares? That craze has really come and gone.

Guidance for the year ahead was a little muted, and it will take time for expectations to be reset. It would appear that Nvidia was left with about a quarter’s worth of excess inventory in its gaming business, which it now needs to clear ahead of the release of new mid-range Turing Gaming GPUs in 2019. Sales of that product should be good, especially in China.

The new bundled supercomputer Nvidia DGX2 unit (which is pictured below and costs about $350,000 each) is in great demand for artificial intelligence and deep learning applications. Units like these are plugged into big arrays and operate side-by-side. A key customer is Google, which has been ramping up orders in recent weeks.

All in all, this is a soft patch for a great company with a very significant technological advantage over its competitors. I bought some more Nvidia shares on Friday after the slump, and I advise you to do that too.


 

Michael’s Musings

On Thursday morning Mediclinic released less than impressive numbers. As a group, their revenue dropped 1%, and earnings per share declined 9%. In the recent past, their issues were related to the Middle East division, this time it is their Swiss division which disappointed.

Their Swiss division, Hirslanden, was negatively impacted by changes in government regulation of heath care pay outs by private insurers. The new coverage rules have caused patients who would previously have stayed a night in hospital (inpatients) to shift to checking out sooner (outpatients). Having fewer patients spend the night, means the hospital makes less money.

Out of all their operating regions, I was surprised that Switzerland was the one to fall foul of stricter regulations. Most government policies have good intentions but can have unintended consequences. These new regulations have been in place for less than a year and have resulted in Mediclinic spending 7% less on expansion and 31% less on maintenance. I wonder what the long-term impact will be on the medical industry in general.

Due to Hirslanden being their biggest division, those woes outweighed the improvements from both South Africa and the Middle East. In their local currencies, both divisions reported a growth in revenues and more importantly a growth in margins. Good to see.

Mediclinic’s final operating region is the UK, where they have a 30% stake in Spire Healthcare Group. Spire is a listed company, which resutls in Mediclinic updating the holding value of their investment as the share price changes. Over the last 2-years, the share price has gone from GBP 4.00 a share, to GBP 1.25. It is astonishing how many South African companies have burned their fingers with investments in the UK.

It will be another 18-months until we see comparable results out of Switzerland which reflect the trend under these new insurance rules. The value of the UK investment will probably stay subdued until we have some certainty around Brexit. After some tough periods, the South African and Middle East regions looked poised for solid growth. All in all, two out of the four regions are struggling, so we don’t expect fireworks from the share price in the near term.

Our 10c Worth


 

Bright’s Banter

I was listening to the podcast called PIVOT which is hosted by co-founder of Recode Kara Swisher and Professor Scott Galloway. This episode is called “Facebook’s Dirty Tricks”. A great title for clickbait!

In this episode, they spend 19 minutes sharing their opinion on the New York Times articles titled “Delay, Deny and Deflect: How Facebook’s Leaders Fought Through Crisis”. I think it’s better to read the article first to understand the context.

Facebook has had to endure a great deal of criticism due to the use of the platform by shadowy parties with Russian connections in the previous 2016 US presidential election. This topic resurfaced recently because of the US midterm elections. Luckily this time the company went on the front foot, shutting down accounts that demonstrated suspicious behaviour.

Personally, I think that all this drama will motivate the Facebook management team to run an even tighter ship. Facebook is hiring over 4 000 people to wage war on the fake news problem. Advertisers still like the fact that they the Facebook group websites give them access to over 2.2 billion people.

If you don’t have the time to listen to the whole thing, the notes below show the flow of topics in the actual podcast, so you can fast forward as you see fit.

Kara and Scott talk about (01:04) Facebook and the explosive report on its deception over the past three years. They get into what some of the fallout might look like for politicians, like Senator Chuck Schumer (14:47). Some stories they think went underreported include Apple selling iPhones on Amazon (21:22) and more on Jamal Khashoggi’s murder (25:20). Also in this episode: a preview of Kara’s interview with Salesforce’s Marc Benioff [Spoiler Alert: David Blaine, the magician, showed up to the interview] (34:18).

Linkfest, Lap it up


I (Michael) don’t understand how a painting can cost $90 million. If you are going to spend that amount on art, do you buy it because you want to hang it on your wall or because you think it is an investment? (David Hockney’s $90 million Pool Painting, Record for a Piece of Art for a Living Artist)

This is why Facebook and Google keep printing cash – Social Media Ad Boom Continues.

Infographic: Social Media Ad Boom Continues | Statista You will find more infographics at Statista

Vestact Out and About


Signing off


Data releases in the week ahead include an October inflation read for South Africa, followed by an interest rate decision from the SARB. With the price of oil dropping, and the Rand holding steady, they shouldn’t be raising rates. At the last meeting we only avoided a rate hike by one vote, so this MPC meeting is what you would call ‘live’. This is a short week for US markets with a holiday on Thursday for Thanksgiving, and only a half-day of trading on Friday.

Sent to you by Team Vestact.

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