May 2024

The April inflation data showed that the unwind of inflation is still happening, while earnings season showed that the AI spending/transformation is still strong. The consumer seems to be in OK shape, although there is a great deal of divergence under the surface. It’s an election year; there are wars and geopolitical worries; et al. Amid all this, it is useful to be reminded of the importance of staying focused on the secular story: technology and growth.

Along those lines, Nvidia reported earnings 461% higher than last year. Revenues surged 262% and net income was $14.9B versus $2.0B a year ago. All these numbers were well ahead of analyst estimates. The stock has moved commensurately, as have other members of the Mag 7, but amazingly enough, the best performers in this cohort do not appear extended. They trade at a 25% premium to the markets PE, which is in line with historical averages…..and much lower than 2000 and March 2020. The Mag 7, ex Tesla and Apple, have price to cash flow valuations that seem very sensible, i.e., they have not surged along with the stock prices. This metric has actually come down over the past six years.

A good example of the potential reach of all this is the utility sector, historically viewed as a mom and pop income generator; and sleepy bond surrogate. The AI revolution has put utilities on a different track altogether because of the need to power datacenters. The Duke Energy CEO said “this is a period of growth, and we are seeing it everywhere. AI and datacenters need power.” The load from datacenters is projected to double in 3-4 years, and then double again 2 years after that. She put it succinctly: “innovation and growth are meeting.”

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