"UK Buffett" avoids NVIDIA: Where are the AI applications that people are willing to pay for?

NVIDIA's stock price has nearly doubled this year, and Wall Street analysts are optimistic about the chip manufacturer.

But Terry Smith is not convinced.

The fund manager, known as the "UK Buffett," is skeptical about NVIDIA. In an interview with Bloomberg on the 11th, he stated that NVIDIA's stock lacks predictable cash flows and a track record of high capital returns over the long term. He chooses to avoid this stock, even though he admits this move weakens the performance of his portfolio.

“I’m not sure we know what the future of artificial intelligence is, because there are almost no applications that people are willing to pay enough for to prove it. If that’s not the case, then chip suppliers will run into problems.”

“UK Buffett” Throws Cold Water: Uncertain Prospects for AI Chip Giants

Smith's question strikes at one of the biggest concerns about the future of the artificial intelligence industry: Is the investment of billions of dollars really justified?

Amid ongoing market skepticism, NVIDIA's market value evaporated by about $900 billion in June, but the stock has since recovered and rebounded.

AI "believers" argue that NVIDIA's largest customers, including Microsoft and Alphabet, have committed to investing $59 billion in data center equipment and other fixed assets in the third quarter and continue to increase capital expenditures.

As tech companies continue to ramp up AI spending to keep pace with competitors, strategists expect NVIDIA's net profit margin to reach 56% in fiscal 2025.

However, Smith points out that NVIDIA's high profit margins may not be sustainable.

“Even if AI is the next big trend and we are paying enough for it, will there only be one manufacturer of these chips? If you achieve substantial returns, it will attract competition.

In fact, Microsoft, Amazon, and Oracle all have a history of developing their own microprocessors.”

Fundsmith Fund Underperforms

The Fundsmith equity fund managed by Smith has performed poorly this year. In dollar terms, the fund's return is 9%, significantly lower than the nearly 20% increase in the MSCI World Index for emerging market stocks.

He explains that the main reason for the fund's poor performance is the "concentration of performance in a few stocks." He also notes that the growing popularity of index funds is exacerbating this trend.

“The popularity of index funds is concerning. Many call them passive, but in reality, they are a momentum strategy. This momentum will continue until it disappears.”