"UK Buffett": Beware of NVIDIA! Artificial intelligence may be exaggerated
British fund manager Terry Smith expressed skepticism about NVIDIA's optimistic outlook, believing it lacks predictable earnings streams and strong capital returns. He pointed out that the future of artificial intelligence remains uncertain and questioned whether the massive investments by companies in this field would yield reasonable returns. Despite NVIDIA's market value experiencing significant fluctuations, Smith still chose to avoid the stock, believing that competition will impact its profit margins
NVIDIA's stock has nearly tripled this year, and Wall Street analysts generally hold an optimistic view of the chip manufacturer.
Terry Smith, a fund manager dubbed the "UK's Warren Buffett" by British media, is skeptical about this, stating that the world's largest stock lacks predictable earnings streams and a strong history of high capital returns. Smith is avoiding NVIDIA stock, even though he admits that doing so will hurt the performance of his portfolio.
“I’m not sure we understand the future of artificial intelligence because there are hardly any applications that people are willing to pay for,” Smith said in an interview on November 5. “Are people willing to pay at a sufficient scale and price to prove this? Because if not, chip suppliers will run into trouble.”
Smith's cautious stance points to one of the biggest concerns about the future of the AI industry: Will the revenue generated by AI technology ultimately justify the billions of dollars invested by companies? These concerns led to NVIDIA's market value evaporating by about $900 billion from its peak in June to its low in August, although the company's stock has since rebounded.
AI enthusiasts point out that NVIDIA's largest customers, including Microsoft and Alphabet, have committed to investing more in capital expenditures after pouring a record $59 billion into data center equipment and other fixed assets in the third quarter. Strategists expect that as tech companies continue to ramp up spending on AI to stay competitive, NVIDIA will achieve a 56% net profit margin in fiscal year 2025.
However, Smith believes that such a lucrative profit margin may not be sustainable. “Even if AI is the next big thing, are we going to pay enough for it? Is there only one chip manufacturer?” he said. “If you’re getting amazing returns, it will attract competition. In fact, if you look at the major users of the microprocessors supplied by NVIDIA, such as Microsoft, Amazon, and Oracle, they all have a history of developing their own products.”
Smith's Fundsmith Equity Fund has returned 9% in dollar terms this year, lagging behind the MSCI World Index, which has returned nearly 20%.
Smith stated that the underperformance is due to “a few stocks concentrating the gains,” adding that the growing popularity of index funds is driving this trend.
“The popularity of index funds is concerning,” he said. “Many people call them passive funds, but they are not passive funds. They are momentum strategies. Momentum will continue until it disappears.”