27 May 27th May 2024

Weekly Index Movement

S&P500	+0.0%
Nasdaq	+1.4%
Aussie All Ords	-1.1%

After four weeks of rallying, markets took a breather last week, despite stellar earnings from the artificial intelligence (AI) darling NVIDIA. For the full year, the S&P 500 is still up by about 10% so some kind of pause has got to be expected.

Overall, momentum in the markets continues to be led by large-cap technology, but we have seen some early broadening across cyclical sectors. Industrials and Financials have been especially strong.

I am convinced we are in the mid-cycle part of a long-term Bull Market. Of course we will have small corrections along the way, but as an investor your job is to decide if you want to be long term and ignore these small moves or short term and react to them.

This week, let’s focus on some ideas to profit from this long-term Bull Market.

NVidia (NVDA)

Nvidia announced quarterly profits last week and somehow managed to exceed even the analysts lofty expectations.

Results beat across the board with a 5% revenue beat (led by data centers), 8% adjusted EPS beat, and Q2 revenue guide 4% above estimates. The company is also splitting 10-for-1 and boosting the dividend from 4 cents/share current to 10 cents per share (pre-split). Despite the strong results, the stock only traded modestly higher post-market, indicating that much of the good news may have already been priced in.

Just look at this growth in data centre revenue

and profitability is just getting ridiculous

I have never seen anything like it. Truly amazing.

Greg has been doing a lot of research into Nvidia and their business model. This is what he tells me.

Nvidia basically has two revenue streams. GPUs and Data Centres. The GPU business is hardware and sells ridiculously priced latest GPUs. Not many companies can afford these, think Apple, Microsoft etc. They buy tens of thousands of these chips at a time and use them in their own way to build their AI models.

The Data Centre business is for everyone else who cannot afford the lastest chips but still wants to build AI. NVidia rents them access to chips and packages it with software to build your AI on. The chips you get here are the old ones, not the new ones, to maintain the value of the new ones.

Access to a Data Centre costs around $37,000 per month and Nvidia covers their cost of building the data centre for a client in around 3 months. After that you are looking at almost 100% profitability on that $37,000 per month.

Once you build your AI in the Data Centre using Nvidia software, Nvidia basically owns the intellectual property in the build because it was done using their software. This makes it very hard for a customer to leave.

As you can see above, the Data Centre growth is huge. I suspect it will continue to grow for some time.

Which brings me to the question of valuation. I thought it was expensive at $600 per share. It is now $1,000 per share. But with a greater understanding of the business model, it reminds me of Apple and locking down customers inside their environment.

Even at $1,000 there is a very good chance this hits $1,200. Except after the split it will really be $100 hitting $120 before the end of the year. You all know about how stocks tend to rally after a split.

Just buy it now. There is no other business as profitable out there.

Price Cuts?

Price cuts for the consumer? We haven’t heard that in awhile! Aside from NVDA earnings this week, maybe the most notable news was the announcement of price cuts from big-box retailers and fast-food restaurants. On the WMT conference call from 5/16, Walmart US CEO John Furner said “broadly across the store, we have almost 7,000 rollbacks (in price).”

On TGT’s conference call a week later, management acknowledged many of the struggles consumers are going though, including interest rate uncertainty, political division in an election year, and dependance on maxed-out credit cards as they look for ways to stretch their budgets amidst stubbornly high prices. To help its customers, TGT announced that it “made price cuts on 1,500 frequently shopped items in many markets, and we’re planning additional price cuts on thousands more items this summer. These cuts are focused on everyday items, in our food and essential categories, and are designed to help our guests make the most of their budgets.”

Along with the big-name retailers, fast-food chains are also announcing new low-price deals. Last week, McDonald’s (MCD) announced a new $5 value meal and Wendy’s (WEN) a $3 deal for breakfast. Burger King will have a $5 “Your Way Meal” deal that one-ups MCD. It looks like the “Price War” is on as retailers and fast-food chains compete to win over consumers that have been complaining about rising prices for years now. These price cuts will take time to make their way into official inflation stats, but these kind of headlines are music to the ears of Fed officials

Petrobras (PBR)

There is a bit happening at my favourite oil company and it is not good.

Petrobras is basically basically a state run oil company in Brazil. The president of Brazil gets to decide who the CEO is.

Prior to 2023 the president of Brazil was Bolsonaro. He liked to reward shareholders with big, extraordinary dividends so he lent on the CEO to do this. This is why I liked the company, dividends were truly immense.

Bolsonaro was toppled in 2023 by Lula Da Silva. Da Silva now has a different idea.

The Brazilian economy is slowing so he wants PBR to invest in infrastructure build, in particular in refining capacity and ship building. To get this done he has kicked the CEO out and put in Magda Chambriard, a former head of the Brazilian oil and gas regulator ANP. She has obviously agreed to do what he wants.

On the one hand, I don’t mind this approach. Instead of the government printing money to stimulate the economy and causing inflation, you get business to reinvest in projects to create jobs. No money printing means no inflation yet you still get the economic stimulus.

On the other hand, this means the days of massive dividends are past. PBR will go back to normal dividends. Which is why the stock has fallen 12% this week.

But, in the long run this infrastructure spend will generate additional cashflow, so it is a question of cash now or more cash later?

Mind you, PBR has seen 5 different CEOs in the last 3 years. So Chambriard might not be around very long anyway and things could well get back to extraordinary dividends before we know it.

I’m just going to hold mine for now, but if you can’t wait this long for a change, go and check out PUMP or SM

Ether ETFs

I’m not a crypto guy, but for those that are you will be pleased to know the SEC enacted a rule change to allow the creation of ETFs that buy and hold ether. The exchange-traded funds would be similar to bitcoin ETFs, which launched less than six months ago after a separate SEC ruling. Bitcoin ETFs have proven to be popular, with net inflows already surpassing $12 billion, according to FactSet. Many of the same companies that sponsor bitcoin ETFs, including BlackRock, Bitwise and Galaxy Digital, are also hoping to launch ETFs for ether, one of the world’s biggest cryptocurrencies.

New Hope Coal (NHC)

My favourite income play in Australia announced quarterly activities last week. Highlights were

• 2.4Mt of coal sales. An increase of 20.8% on the previous quarter
• The Bengalla mine achieved a cash cost of AU$73.4 per sales tonne – a 7.8% reduction in production costs.
• Average sale price was AU$179.78 per tonne, inline with last quarter.
• EBITDA of $218.8million for the quarter, up 21.6% compared to previous quarter
• Available cash is $381million after payment of the dividend of $144million and the investment in Malabar of $80million – there is enough cash for the next two dividend payments already.

Basically due to increased production and sales, profits were up 20% this quarter on last quarter

Coal cannot be replaced quickly so these investments have plenty of time to pay you back.

In other coal news, the NSW government will extend the life of the nation’s largest coal-fired power station for 2 more years until 2027 after signing an underwriting deal with the operator. They are finally realising it will take longer to transition than previously thought. What do you think will happen in 2026 when they realise we still haven’t got any reliable green energy?

Mind you, not a lot of this matters to NHC as the vast majority of sales are to Asia and New Hope expects Chinese demand to increase.

Coupang (CPNG)

Here is a company I came across last week that is interesting.

Coupang is trying to be the Amazon of Taiwan and Korea. It is in the early stages of carrying out both objectives. Sales growth has been very strong and it closed the acquisition of FarFetch this year which adds a luxury goods arm to the business.

The company recently posted sales growth of 23% to $7.1 billion. Gross profit increased 36% to $1.9 billion. It produced solid operating cash flow of $2.4 billion and free cash flow of $1.5 billion for the trailing twelve months. Like Amazon in its early days, it is plowing a lot of money back into the business to build out infrastructure and improve fulfillment and delivery.

The company flipped to profitability last year, posting $1.36 billion in net income, compared to losses in the prior two years. Operating cash flow has grown sharply over past three years to $2.65 billion last year. Recent quarter results showed net income evaporated, but that seems to be related to one off write offs linked to the Farfetch acquisition.

Management likes to point out that it has just a single digit share of a massive and highly fragmented $560 billion-commerce opportunity in Korea, and an even smaller share in Taiwan. They’re telling us they think they have plenty of room for growth.

The company is founder run, by Bom Kim. I like this quality in companies because it often means their stocks outperform. Founders tend to maintain their passion for developing a business even long after they get rich because their companies are a success (think Jeff Bezos).

As you can see from the chart above, this stock is now starting to move as the long term viability is becoming more clear.

There is an interesting play here. The company can just roll out the Amazon playbook for success and if it manages to replicate it closely enough, then it would become an obvious buyout for Bezos to expand into Asia.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.