The NVDA “Hype-Cycle”

Powell’s Jackson Hole speech and NVDA’s earnings release were the key market events last week.? Neither seemed to have much impact on markets. ?Globally, in China there are questions around President Xi’s appetite for new stimulus to counter recent economic weakness.? As the second largest global economy, China’s economic output has the potential to create a ripple effect for others. Rising US interest rates and a cloudy economic picture are creating more questions than answers as summer begins to wind down.

The NVDA “Hype-Cycle”

NVDA reported a blow-out quarter, beating earnings and revenues by 20-30% and raising expectations.? After an initial rally, NVDA shares ended the day little changed.? According to Bloomberg, 93% of analysts that cover the company have a buy rating with an average expected return of 37.8% over the next 12 months.? With so much excitement around NVDA, it’s hard to find someone making a case for not owning NVDA shares.? Ultimately if share share prices stagnate or begin to move lower the talking heads will start looking for storylines to justify the change.?

Below are a few considerations.

• No more marginal buyers of NVDA – everyone already has as much as they want.
• Earnings are long on hype and short on substance.
• Management may be oversupplying the market – similar to the crypto market in 2018.
• Customer capex budgets may come under pressure in a higher for longer rate environment.
• Supply Constraints restrict growth – management could provide much detail on future supply.
• Valuation – According to Bloomberg, shares are trading at 22x Forward Sales, 45x Forward Earnings and 44x Forward Cash Flow – Prices that may prove expensive without aggressive growth multiple years into the future.
• Higher interest rates weigh on high valuations that rely on aggressive growth estimates.

It can be fun to watch speculative bubbles inflate and then deflate based on extreme sentiment changes.? As benchmark agnostic, dividend investors we have no insights into where we are in the “hype-cycle.”? Instead of speculating on if another investor will buy a stock from us at a higher price later, we prefer to invest in companies that stand to benefit from growth in dividends and free cash flows, with less potential downside from valuation contraction.

“Navigating by the Stars under Cloudy Skies”

In Powell’s Jackson Hole speech, he stated the Fed is “navigating by the stars under cloudy skies” indicating the Fed remains data dependent, but the choppiness of the data increases the level of difficulty.? Keep this in mind the next time you see an economist on TV telling you where the economy is going.? They may be speaking as if they have 100% certainty on the future of the economy, but the only thing that is certain is that they will be wrong.? The economy is big and complex with millions of variables that can impact future outcomes making it impossible to consistently predict future outcomes with any amount of accuracy.?

Instead of listening to opinions of those who will be wrong it probably makes sense to listen to the Fed.? After all, the Fed has the ability to set short-term rates.? The Fed is telling us that rates will remain higher for longer as they remain committed to their 2% inflation target.? Speculators have been predicting a reversal of Fed positioning for nearly a year.? Given the amount of uncertainty in the economic data it probably makes sense to take your cues from the Fed who has the ability to impact the outcome rather than listening to speculators who are certain to get it wrong.

Dividend Payers

As dividend investors we prefer to focus on facts and data over speculation and the “hype-cycle.”? We’re comfortable watching others participate in the market craze.? Over the last few years we’ve seen some doozies including SPACs, meme stocks and Crypto.? While there are certainly some valuable use-cases for AI, we question whether recent price movements are justified by underlying fundamentals.? Likewise, we aren’t interested in waiting for the Federal Reserve to bail us out via lower rates.? Instead, we remain focused on growing our capital with the prospects of the underlying businesses that we own.? To do this we own high-quality dividend payers that have the ability to grow through the business cycle.? We continue to focus on owning these companies at reasonable prices, because in a world of higher rates for longer, the price you pay has a greater impact on future return potential.

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Dividend Payers in the News:

#ADI announced disappointing earnings and guided down, however shares remained flat.? Management communicated inventory concerns may soon be in the rear-view mirror.? Exposure to secular growth markets is expected to contribute to margin stability through the cycle.

#LOW announced inline earnings and guidance and shares traded up.? Guidance indicates a decline in year-over-year sales, but a sequential improvement in the back half of 2023.? Focus on productivity improvements should contribute to operating margin expansion through the cycle.

#MDT shares rose on an earnings beat and guidance raise.? The company has a robust pipeline of new products and easy comps, setting the stock up for positive performance in the quarters ahead.

Dividend Payers to Watch this Week:

A few earnings reports remain.? This week’s reports include the following:

#AVGO

#BF/B

#CPB

#DG

#SJM

Investors should continue to focus on margins, free cash flow and management commentary on the outlook for growth.

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Please feel free to reach out if you have any questions or would like to discuss.