• Meta’s decision not to partner with Google to create a Metaverse platform makes complete sense confirming my view that Meta Platforms is determined to ensure that its business is never again hostage to a foreign platform.
• The Information is reporting that Google approached Meta to jointly create a platform for the Metaverse and that Meta decided not to join Google.
• This makes complete sense and given that Meta is far ahead of Google in addressing the Metaverse, there was far more in this partnership for Google than there was for Meta.
• At a very high level, a partnership makes sense as Meta’s Metaverse is based on a customised spin of Android which is owned by Google and would give Meta better vertical access to all aspects of its platform.
• However, I think that Meta will not regret this decision as:
  • First, Control. Meta Platforms has suffered at the hands of Apple and Google as its key revenue-generating assets depend on iOS and Android to make money.
  • Every time a decision has been taken by Apple or Google that adversely impacts Meta, it has had to scramble to contain the damage.
  • The most prominent example of this was when Apple required apps to ask users if they wanted to be tracked hamstringing a major method by which Meta made money.
  • Meta has found a way around this, but it has brought home with crystal clarity just how dangerous this kind of dependence can be and Meta is determined that there will be no repeat of this.
  • This is why it is designing its version of the Metaverse from the ground up and why it has created foundation models and then let the open-source community use them.
  • Letting Google partner on the platform cedes an element of control to Google that Meta would obviously like to retain.
  • Second, Leading position. Meta Platforms is the leader in the Metaverse by a substantial margin and letting Google into the platform gives a competitor a leg up.
  • Google will have to compete in the Metaverse eventually should it begin to take off, and this would help the Google ecosystem compete against Meta’s ecosystem in the Metaverse.
  • Third, win-lose. I think that Google would be much better off with this partnership while Meta Platforms would be a net loser.
  • This is because Google does not have much to offer Meta.
  • Android is already in the open source and if things go sour, Meta can carry on developing on Android although it would have to take over all aspects of Android development not just the pieces that it currently customises.
  • Google has billions of users that Meta could access but I suspect that the vast majority of these and all of the valuable ones already have a relationship with at least one Meta property.
  • Hence, the benefit to Meta of getting access to Google’s users is likely to be worth very little meaning that there is not much here for Meta.
• Hence, I think that this was the right decision for Meta as Google is miles behind when it comes to the Metaverse and there is very little benefit to Meta by giving it a leg up.
• That being said if I had to choose between Google and Meta, I would take a position in Google.
• This is because Google is already cheaper than all of its peers and is a leader in AI no matter how many times it shoots itself in the foot.
• This tendency has been particularly strong when it comes to its AI products and the market is again panicking that it will lose market share in search to Open AI or one of the other upstarts.
• I see no sign of this as Google’s AI is just as good as anyone else’s but Google remains awful at public relations.
• This has ensured that it has received all the negative attention despite the fact that everyone else’s AI suffers from the same or similar biases that have caused the recent bad press.
• The cheaper it gets, the more I want to own it.

• Unity has realised that developers are the life’s blood of both its business and its long-term potential and has greatly watered down its plans to earn more money which will preserve its position but will do the share price no good whatsoever in the short term.
• Unity has written an open letter to the community where it offers a grovelling apology and waters down its new revenue proposal to such a degree that even the angriest developers are likely to give the company a second chance.
• The whole furore erupted when Unity decided to feather its nest by charging developers a per-install fee above certain thresholds in order to increase the revenue it was earning per developer.
• This is badly needed because the games market has declined since the end of the pandemic and the weakness in the smartphone market is putting a crimp on revenue growth.
• This is a particularly acute problem at Unity because even though the share price has declined by 80%, the company still trades on over 5x 2023 revenues and 48x 2023 PER.
• These are lofty numbers for a company that is struggling with growth and cannot monetise its customers further without stoking a rebellion.
• The new measures were designed to generate more revenues and reinstate growth but have been watered down to the point where revenues may now be less than they otherwise would have been had Unity done nothing.
• The Unity Personal plan will now have no per-install fees added, the threshold for any payment has been increased from $100,000 to $200,000 and there is now no requirement to use the Unity splash screen when the game boots up.
• This puts Unity in a worse position than it was before and the free marketing that it had in customer apps has been lost.
• For Unity Pro and Unity Enterprise, the per-install fee will only apply to future versions of the platform which will be launched in 2024 and beyond and developers can choose between a 2.5% revenue share or the per-install fee.
• A self-reporting system already in place will calculate the two options and will default to charging developers the lower of the two calculations.
• The net result is that it looks to me that Unity is back where it started but it is not difficult to conclude that it is worse off than before.
• Its brand has certainly taken a knock with its clients, and it has been forced to give back more than it took in order to keep developers happy.
• This means that the outlook for a return to growth in revenues any time soon is now worse than before, which could lead to further downside.
• In the long term, I like Unity as it has the potential to solve the most pressing problem in The Metaverse (interoperability), but one is going to have to wait a very long time for that to become a reality.
• Hence, the short to medium-term outlook remains pretty difficult for Unity and I am far from convinced that we have seen the all-time lows on this stock.
• Although it has $1.6bn in the bank, I think that as time passes and there is no recovery, the probability of this company being acquired rises steadily.
• Independence is a key factor in Unity’s appeal for both the gaming segment and The Metaverse and so I suspect that someone like Nvidia, Qualcomm or Arm would be the best fit for an acquisition.
• This is still a distant possibility and so I have no inclination to own the shares for either The Metaverse or an acquisition at this time.

• Unity’s financial requirements have led it to alienate its customers which if left unresolved could cause its dominant position to erode and with it the substantial long-term potential it has as the platform for The Metaverse.
• Unity has updated its terms of business which will now require developers who meet either revenue or install thresholds to pay a per-install fee on top of the other fees they already pay.
• Needless to say, developers are hopping mad and a group of 12 have written an open letter stating that they have turned off all monetisation on Unity and IronSource (acquired in 2022) until the new fees are cancelled.
• The 12 are also encouraging other developers to do the same and one (Mega Crit (see here)) has gone so far as to say that it is dumping Unity and going elsewhere for its next game.
• This is a big deal because turning off the monetisation of games via advertising will hurt the individual developers far more than it will hurt Unity in the short term.
• Around 97% of all revenues from games on smartphones comes from advertising meaning that each of the 12 will lose almost all their revenue while Unity will still earn revenues from those studios who continue to monetise with Unity.
• Consequently, in this game of chicken, the studios are likely to blink first but one also has to consider the damage that this may do to Unity’s long-term position.
• I have long thought (see here) that the real opportunity for Unity is not as a game engine but as the unifying platform for the creation of The Metaverse.
• In order to succeed there can be only one Metaverse and at the moment all of the digital ecosystems are busily creating their own proprietary version of the Metaverse none of which will interoperate with each other.
• However, many of them are using Unity to render their 3D environment which provides Unity the opportunity to become the unifying element that allows The Metaverse to function as one rather than many.
• Assuming The Metaverse takes off, this is a far larger opportunity than the one that Unity currently addresses and offers the possibility to move away from advertising towards a subscription or revenue fee model.
• However, if developers now rebel and start seeking alternatives to Unity, then the market will fragment and others will have a greatly improved chance to be the platform of The Metaverse rather than Unity.
• Hence, Unity is running a big risk, but I understand why the company has been forced down this road.
• In this market, unless you are an AI company, growth, profits and cash flow are now required to support a high valuation and Unity’s ability to deliver these has diminished in the last 12 months.
• This is why the shares are down around 80% from their all-time high and have bounced around between $25 and $48 for the last 12 months.
• To break out of this, Unity needs to earn more money from a market that is not growing nearly as quickly as it was during the pandemic and the opportunity of The Metaverse remains many years away.
• By clipping the ticket on installs, Unity will make more money from every game but it will do so at the cost of its customers, many of whom are small developers who are struggling as it is.
• Unity’s thresholds are high enough such that only the biggest developers are likely to end up paying this fee, but these studios are making a lot of noise which will impact small studios who dream of becoming big studios (as they all do).
• Hence, I suspect that Unity will affect some sort of a climb down by increasing the thresholds or getting rid of the new fees completely because competitors are already jumping at the chance to lure Unity customers to their own engines.
• This will not help the financial performance, but Unity is now free cash flow positive and has $1.6bn in the bank, so it has the means to play chicken with the developers.
• The real winner here is the competition which has a window of opportunity to erode Unity’s market share which could break the market for mobile game engines wide open.
• In this scenario, I can’t see Unity lasting very long as an independent company, but it would not be a digital ecosystem or game developer that would acquire it due to the loss of independence that would result.
• Instead, a company like Nvidia, Qualcomm or Arm would make much more sense as an acquirer.
• I still struggle with the value of Unity but if the shares weaken materially should the boycott spread, then a speculative position on the basis of an acquisition might be worth looking at.

• Disappointing results from Tencent combined with the worsening economic outlook and disappearing data make China a deeply contrarian trade and there is no immediate catalyst to pull it out of its nose-dive.
• Tencent reported Q2 2023 revenues / EPS of RMB149.2bn / RMB2.70 short of revenue forecasts of RMB151.7bn as gaming revenue did not recover as had been hoped.
• Net income (after removing the RMB2.99bn fine) also fell short at RMB29.2bn compared to consensus of RMB32.3bn as a result of the lacklustre recovery seen in Chinese consumer expenditure.
• Online advertising was one bright spot growing 34% YoY but this was mostly due to an easy compare against 2022 when China was still mired in Covid Zero.
• Tencent is doing everything that it can to return to growth and its margins expanded pretty nicely during the quarter but while the economic situation in China continues to unravel, there is little more that management can do other than wait.
• On the economic front, there is nothing but bad news with demographics, debt, youth unemployment, real estate and confidence in the government’s ability to turn the economy around all rapidly eroding.
• To make matters worse, China’s National Bureau of Statistics will now stop reporting youth unemployment which will only lead investors to conclude that things will continue to worsen.
• There is nowhere to hide in the public market.
• This is evidenced by sales of Chinese securities by foreign investors who have now reversed everything that was invested since the government promised in July to support the economy and public markets.
• Pessimism about China is everywhere and is showing up as red flags in surveys of investors.
• For example, a Bank of America fund manager survey showed that 84% of respondents thought that Chinese stocks are in a period of structural derating implying that no one wants to buy China and in fact many are still in the process of selling.
• This is a very far cry from the optimism that I had going into 2023 and has largely been caused by the state’s slowness to take concerted action to turn the economy around.
• Alavan Independent has concluded that loyalty and subservience to the party is seen as more important than economic prosperity meaning that the outlook for a real change is pretty bleak in the short-term.
• Hence it may be a while before President XI changes his mind.
• The sudden reversal of Covid Zero demonstrates that this is possible at any time, but it may take further social unrest to push Mr Xi to switch his priorities.
• Until then, the technology sector is likely to remain in a value trap where managements are powerless to do anything about it.
• I still own Alibaba and, in this environment, it is not impossible that its price-earnings ratio slips into single-figure territory meaning that there is a long wait ahead.
• China is now almost universally despised across the investment landscape, but it is worth remembering that the time to buy is always when things look to be at their worst.
• The problem here is that there is a geopolitical angle to this and politics make investment decisions extremely difficult due to their dependence on personalities rather than logic and hard numbers.
• This is why I am nervous about increasing my weighting towards China.
• However, at some point, the people of China are likely to express their discontent which will force Mr. Xi to properly address the real issues that China is facing.
• I am lucky that I can just sit it out and get paid dividends while I wait.

• Tencent reported a return to YoY growth in Q1 in a sign that some consumer activity is coming back in China, but the shares did not budge as investors remain unwilling to invest in China given the less-than-spectacular economy and geopolitical events.
• Q1 2023 revenues / EPS were RMB150bn (up 11% YoY) / RMB2.63 (up 9% YoY) broadly in line with estimates but the market remains uninterested in very little that comes from China at the moment.
• Games revenues improved by 25% YoY while advertising was up 17% YoY which was offset by weaker revenue growth at social networks (6% YoY) and other revenue which more than halved although it is very small relative to the other businesses.
• Engagement and user numbers grew slightly, but the main story of these results is that Chinese users are out and about once again and have resumed some of the spending that was hammered by Covid Zero.
• The big question on everyone’s lips at the moment is whether there will be a Covid-related economic bounce in the Chinese economy this year.
• President Xi badly needs a recovery to regain some standing with the Chinese population after the problematic Covid policies, but he has, so far, declined to cut interest rates or make similar interventions.
• This is surprising as the economic data released in 2023 has not been particularly encouraging, especially as the official numbers often overstate how well the economy is functioning.
• Furthermore, none of the suppliers into China have seen any sign of an increase in demand meaning that there is a possibility that, in reality, China may not see any meaningful recovery this year.
• Tencent’s results are concrete evidence of a recovery in consumer spending, but it is clearly far from universal meaning that it is premature to assume that a rising tide at Tencent will float all boats.
• Alibaba reports its calendar Q1 (fiscal Q4) later today where I expect the numbers will echo what is being seen at Tencent and fall short of signalling a strong recovery.
• A tepid resumption of consumption is also not enough to get international investors off the fence and to reinvest in China.
• The increasing geopolitical tension and the regulatory scouring of the technology sector have made investors very nervous and it will take more than a sputtering recovery to overcome their fears.
• That being said, the risk of investing in Chinese Technology is probably now lower than it has been for a while as the regulatory crackdown is over, the VIE structure now has official recognition and the valuations remain extremely cheap.
• Despite its obvious attractions, Chinese technology remains a highly contrarian trade meaning that those who are in it (like me) may have to wait for a while before ownership of these stocks begins to normalise.
• China is committed to its technological independence in order not to repeat the problems it has in semiconductors and win a position as a global world power.
• However, in order to achieve this, it needs a thriving technology sector but what it has at the moment is a group of brow-beaten companies which are struggling to recover.
• This is why, if they do not recover on their own, I would expect some form of intervention such as lower regulation and oversight to bring them back to some semblance of their former glory.
• This is when we might see the market get off the fence and reinvest in the sector once again, but we might be waiting for a while.
• With valuations this low, one can be patient.

• With perfect timing, Nvidia has launched some new products and services that would have barely caused a ripple a year ago but in this environment, Nvidia is likely to end up with more demand than it can handle but for how long?
• Nvidia focused almost exclusively on AI at its 1^st GTC of 2023 and launched new products that aim to make it easy for anyone to develop their own ChatGPT-like chatbot for which I am sure it will experience huge demand for now.
• Three new cloud services were launched which are Nvidia Nemo for large language models (ChatGPT), Nvidia Picasso for image and video-related applications (Midjourney, DALLE) and BioNeMo which is for scientific and medical applications like drug discovery.
• This sounds great but it is going to be brutally expensive as DGX Server boxes which have 8 H100 or A100 GPUs and 640GB of memory will cost $37,000 each per month to rent.
• This includes storage, software as well as technical support from Nvidia to help get the generative AI model up and behaving the way intended.
• Based on Tom’s Hardware’s testing (see here), one of these is probably enough to run a very large LLM like ChatGPT but whether it is enough to train the model or deal with millions of queries is another matter entirely.
• Consequently, it is not hard to see how generative AI quickly becomes incredibly expensive but as always during a craze, no one cares.
• This is because the crowd thinks that the revenues generated will be so huge and so profitable, that the cost to deliver this technology is almost irrelevant.
• This is true until companies have to answer to their shareholders as to why the service is not as good as promised, meaning revenue delays and emergency capital raises.
• It is at this point that the bubble will burst and reality will return with a vengeance causing many start-ups to go bankrupt as well as many forced consolidations and fire sales.
• This has already happened with autonomous driving and crypto, and given that generative AI does not solve any of the pressing problems of AI today, I think that this outcome is very likely.
• Nvidia makes a very convincing case for its accelerated computing model over regular CPUs in many use cases but it does not address the cost of generative AI more broadly.
• For example, it does not answer the question of whether migrating search to a generative AI-based system from the systems in use today would be cheaper.
• Given Google’s gross margins, I suspect it would end up being far more expensive, giving another reason why I think that generative AI will not take over the search business anytime soon.
• At the moment, this is immaterial as generative AI start-up valuations remain ludicrously high and these companies are having money thrown at them.
• This means that there is plenty of money available to spend on Nvidia services and GPUs regardless of how much Nvidia is charging for them.
• Furthermore, everyone now wants to make a chatbot of their own for the second time (remember the Alexa craze of 2015 and 2016?) and this is a perfect product for anyone who doesn’t know how to get started.
• Hence, for as long as the craze lasts, Nvidia is going to have more demand than it can handle which bodes well for financial results and guidance over the next 12 months.
• Nvidia also announced that Microsoft is moving to support Omniverse which is a tacit admission that it is giving up on the Metaverse.
• Microsoft Azure will now host the Omniverse and Nvidia showcased automakers who are using Omniverse to model their factories as well as design and test their new vehicles.
• Microsoft will also integrate Omniverse with Office 365 apps to enable all aspects of collaboration for the enterprise metaverse to occur in one place.
• Completely absent was any mention of the consumer metaverse which further supports RFM’s view that the metaverse will take off in the enterprise long before it takes off for the consumer segment.
• Nvidia has given the market exactly what it wants to hear and while no one is giving a second thought to the cost of generative AI, Nvidia is likely to see a strong pick-up in demand for its products.
• This is why I continue to think that Nvidia still has further to run despite the fact that I think the valuation looks stretched whichever way you look at it.
• Make hay while the sun shines but be ready to get out when pesky reality turns up as it always does in the end.

• The current AI craze is already bearing fruit for lead supplier Nvidia as it appears to have turned the taps back on at TSMC as every man and his dog rushes to create a chatbot based on some large language model (LLM) or other.
• Monica Chen of Digitimes (see here) who is based just around the corner from TSMC’s HQ has picked up news that Nvidia has significantly increased orders for its A100, H100 and A800 series chipsets, all of which are used for training deep learning neural networks.
• In this climate, everyone is scrambling to build LLM-based chatbots of their own thinking that they are a must-have to stay competitive, but no one is really thinking about how much these things cost.
• This is excellent news for Nvidia because it has almost 100% market share in this space and comfortably makes 65% gross margins on the chips that it sells.
• Furthermore, the weakness in consumer graphics and crypto will have opened up the possibility for capacity to be switched to the A100, H100 and A800 without too much delay.
• Hence, Nvidia should be in reasonable shape to meet the unexpected jump in demand triggered by ChatGPT going viral.
• While the headlines are full of how LLMs put humanity on the brink of human-like artificial intelligence, reality is going to have no say in the proceedings.
• Hence, I think that the frenzy is going to continue for a while meaning that there is plenty of hay to be made for Nvidia.
• While I continue to be uncomfortable with Nvidia’s valuation, sentiment is once again behind the shares meaning that its current rally looks like it will continue for a while.

Microsoft: finally, a move on gaming.

• Microsoft’s move to create a mobile games app store does two things.
• First, it strengthens its position in its attempt to acquire Activision and second, it marks a return to a true-cross platform gaming strategy.
• The EU is forcing the digital ecosystems to allow rival app stores on their platforms from March 2024 which creates a new opportunity, especially on iOS.
• This is because rival app stores are already available on Google Android and so these new rules won’t make an enormous amount of difference to the Android ecosystem.
• This is a segment worth addressing as gaming has no dominant player (unlike all of the others) and it is of a reasonable size in terms of the amount of time people spend playing games.
• The problem with it is monetization as 97% of all smartphone gamers never pay anything for games but instead consume advertising.
• This has moved the centre of gravity in mobile gaming to Android which does not place limitations in terms of the data that games can collect in order to generate revenue.
• Microsoft lobbied for a long-time for cross-platform multiplayer gaming where it has had some success and a mobile app store takes this a step further.
• I have long argued that Xbox is a languishing asset inside Microsoft as it has been unwilling or unable to address the biggest gaming platform of all, smartphones.
• If it sees renewed traction for its gaming platform with the mobile app store, then this would help the appeal of the Xbox platform overall and greatly increase its value.
• Strengthening its position with regulators fearful of unfair competition would be the icing on the cake.

• If Microsoft had delayed its bid for Activision, it probably would have been able to get it for half of the price it has committed to pay, meaning that an FTC blocking lawsuit may well do Satya & Co. a big favour.
• However, at the same time, there are some simple remedies that would satisfy the concerns of the deal’s critics (Sony) meaning that there is 30% for anyone who takes the bet that the deal will close.
• At the time, Microsoft said that it was buying Microsoft to accelerate its entry into the Metaverse (see here) and it is very interesting to see how this line has completely vanished from its commentary now that the public Metaverse companies have been hammered.
• Hence, I suspect that the reality is that Microsoft wanted to buy Activision for other reasons and just said that because it was in vogue at the time.
• Furthermore, I also think that deep down, Microsoft will be quite happy to have the deal blocked given that Activision’s peer group has fallen in value by 50% or more since the announcement meaning that there is little doubt that Microsoft is now paying way too much for this asset.
• This is exacerbated by the fact that Microsoft is paying in cash meaning that the decline in its share price has not had any effect n the real price being paid.
• The main problem with the deal is Sony to whom Activision’s Call of Duty game is of paramount importance.
• It is one of the biggest console games available today with over 400m players and has been a stable franchise for 20 years.
• Hence, if Microsoft was to make Call of Duty an Xbox exclusive, the appeal of the PlayStation would take a substantial hit.
• Microsoft has promised not to do this and for once, this old cynic is inclined to believe it.
• This is because Microsoft has fought with Sony for years to open up its platform so that Xbox and PlayStation players can play together, and I think that it wants Call of Duty and the other Activision games to be freely available everywhere.
• Microsoft also has form in this area since its acquisition of Minecraft (via Mojang), the title has gone from strength to strength on all platforms.
• This brings us to the question of why Microsoft wants to buy Activision and there I draw a blank.
• None of the arguments on its website make very much sense (see here) as all of the benefits could be delivered with decent management in charge of Activision and not necessarily being owned by Microsoft.
• Hence, I think Microsoft won’t be too upset if the deal gets cancelled given that the Metaverse has taken a nose dive, its own Metaverse offering is very uncertain and Microsoft is increasingly all about the enterprise and leaves consumer to others.
• Furthermore, given the deterioration in Activision’s performance, the deal now looks much more expensive than it did in January 2022.
• At $95 per share, Activision is trading on an EV / 12-month trailing revenue of 8.7x and a PER of 44.6x and it looks like earnings are declining and will continue to do so during this downturn.
• This looks extremely expensive to me and if I was Microsoft, I would be having an acute case of buyer’s remorse.
• However, there is a relatively easy solution to this as all the fuss seems to be about the availability of Call of Duty on non-Microsoft platforms which is a relatively easy fix.
• Hence, I think the deal could be cleared by regulators but only if Microsoft still has the will to fight for the transaction.
• There is an easy 30% to be made if you think it does but the deal is now so expensive, one has to wonder whether Microsoft would not prefer to quietly let this one go.

• Nvidia and Cisco managed to reassure the market with reasonable results pointing to steady enterprise spending but Micron, Amazon, and Meta Platforms all point to inflation-linked softness in consumer expenditure.
• Nvidia reported reasonable results where once again, excellent execution in the enterprise helped offset the triple whammy (consumer, crypto & inventory) that has hit the gaming segment.
• Nvidia Q3 2023 revenue declined 17% YoY to $5.93bn but critically, this was above consensus of $5.79bn while Q4 2023 revenue guidance was broadly in line at $6.0bn +/- 2% compared to consensus at $6.1bn.
• Data centre continued to perform well growing by over 30% helping to mitigate the collapse in gaming where revenues fell by 51%.
• These results are a story of weak consumer offset by steady enterprise which we can see being replicated right across the technology industry.
• Nvidia is also making the most of its leading products as evidenced by the deal it has announced with Microsoft to power an AI service that will be offered by Azure where it squeezed out Graphcore who has been working on this for over 3 years.
• Although the cloud has slowed somewhat it still growing at more than 30% YoY which has also been echoed by Cisco which beat estimates for the quarter just gone and raised estimates slightly for the fiscal year.
• Cisco is a very good measure of demand as it operates mostly on a turns business with very little in terms of long-term contracts which can muddy the picture.
• Consequently, the demand from enterprise for technology looks like it is going to remain steady for at least the next few quarters even when factoring in the impact of restrictions on China and its poor economic outlook.
• However, consumer is a completely different picture as Amazon and Meta are cutting jobs and Micron called out demand being even weaker than it had previously anticipated.
• This is a result of the inflation-linked cost of living crisis which is the route that has been selected for the world to pay for the huge cost of the pandemic.
• Hence, I think that for the next 18 months or so, consumer discretionary spending is going to remain under real pressure creating weakness in smartphones, tablets, TVs, PCs and so on.
• This will create opportunity as the valuations of some of the players in this space are going to get hit much too hard.
• Qualcomm and MediaTek are two of these but also the likes of TSMC if one can get comfortable with owning fabs through what looks like it could be quite a sharp downturn.

• Nvidia has announced its 3^rd generation RTX architecture as well as a series of solid but not revolutionary updates to the platforms that it offers on top of its silicon but largely ignored the problems that it is facing in China as well as the impact of the crypto winter.
• The new architecture (Ada Lovelace) is based on a custom 4nm manufacturing process from TSMC and boasts a substantial gain in performance with surprisingly low power consumption.
• The first new product announced on Lovelace was the RTX 4090 graphics card aimed at gaming enthusiasts and boasts roughly 2-4x the performance of its predecessor the RTX 3080 Ti.
• Nvidia also announced a new system-on-chip for the vehicle that aims to be able to run the entire vehicle in one place.
• Currently, there are multiple siloed computers in vehicles that run one domain each, but the direction of travel is to integrate all of these together in one place.
• The problem is that all of these computers have different safety and redundancy requirements which means that merging them together is a complex and difficult process.
• I expect that this will be achieved by virtualisation and Thor has been designed with this in mind and can support the full range of safety and reliability requirements that exist in the vehicle for different functions in the vehicle.
• Elsewhere, Nvidia announced upgrades and extensions of Omniverse that expand the number of systems that can plug into Omniverse as well as more large corporates who are using it.
• The number of use cases for digital twins where reality is simulated in the Metaverse which is then used to plan, design or manage assets in the real world is rapidly growing and Nvidia has a big lead here.
• This is because it has designed its offering from the beginning as a vertical offering whereas many of its competitors have always been focused on horizontal models where they supply the silicon and a few drivers and not much more.
• Nvidia’s competitors are running hard to catch up but Nvidia’s 6-month cadence of updates and new releases will take some matching.
• For example, most companies, including Apple only need to make updates once a year whereas Nvidia manages to do it without repeating itself too much twice per year.
• While I like where Nvidia is going in the long term and the lead that it has built, I think that the short-term headwinds combined with the rising interest rates are going to cause some trouble.
• Nvidia has been banned from selling its leading-edge AI products to China and there is every sign that these restrictions are going to firstly, get more strict and secondly, spread into other technologies (see here).
• Furthermore, I suspect that the crypto winter is going to hit pricing and demand for Nvidia’s older products (3090 and below) meaning that Gaming has a couple of tough quarters to come (see here).
• Hence, I think that Nvidia may be forced to bring down expectations for FQ4 2023 when it speaks to the market in November.
• This is not a great look for a company trading on an FY 2023 EV / Sales of 11.2x especially when some of its peers do not have these headwinds and are trading on a fraction of the multiple.
• Nvidia’s superlative profitability certainly warrants a premium but in this market, and with this outlook, I think this will prove to be too high.
• Consequently, either the stock goes sideways and the valuation comes down as Nvidia returns to growth or it will continue to decline which is most likely should the Fed continue to tighten interest rates.
• I like Nvidia as a company and at some point, I will want to own it, but the valuation remains too high to really pique my interest.
• I continue to prefer Qualcomm, MediaTek or TSMC which are growing but offer a much cheaper valuation.