It’s been a busy week in markets, particularly in technology stocks, and we wanted to dig into this in a bit more detail. For all of the noise around the Nvidia CEO, we think underlying demand in technology looks pretty healthy, and that’s reflected in the corporate reports we saw this week.
We think the key questions for investors remain the same as they were a week ago – underlying demand, cash-flow generation and the return on investment from all the capital investments these tech businesses are making. In the end, we think those will matter most for future returns.
Nvidia: how much does the CEO matter?
The resignation of Nvidia CEO Jensen Huang has captured media attention and it’s worth asking how much we should care. On the surface, the resignation of a single CEO shouldn’t make much difference to investors in broad, globally diversified portfolios. But Nvidia occupies a particular position in the current environment.
It’s one of the largest companies in the world by market capitalisation, accounting for around 5.5% – 6% of the S&P 500 index. It is also at the epicenter of the Artificial Intelligence (AI) theme that has been dominating markets – both equities and fixed income – over the past couple of years. Nvidia hasn’t just been a provider of the chips that are driving the development of Large Language Models (LLMs), it has also been a significant investor in other AI businesses, providing financing for a number of its customers to buy its products. It is also due to report its latest earnings next week.
Then there’s the question of how much impact a single individual can have, even a CEO. There can be a tendency to lionise (or demonise) individual business leaders. Will the “machine” really run differently, and worse, under new leadership? There are decent arguments on both sides and it’s really hard for outsiders truly to understand the culture of the business. At the very least, we’d expect the machine to continue to run smoothly day to day. That said, Nvidia has been a founder-led business since its creation and the CEO reportedly had a relatively large number of people reporting to him directly, suggesting a high level of individual control.
It also seems that there wasn’t much of a succession plan at the company, at least for the CEO, and that’s a bit surprising for such a large business. It’s certainly not a given that the departure of a founder should damage the business. Apple, for instance, saw its founder depart, albeit with a well-defined succession plan, and the business continued to perform well.
There’s also a geopolitical angle here. The US has placed restrictions on the export of certain Nvidia chips to China. But there’s some question about how much of the demand for Nvidia products has come indirectly from Chinese customers. The CEOs departure could prompt greater scrutiny on this issue and potentially shift demand for Nvidia products. That said, if global demand for these chips is as strong as investors typically assume, then a shift in demand patterns shouldn’t have that much impact.
CoreWeave’s results: encouraging signs
Slightly lost in all the noise around Nvidia were quarterly results from the neocloud business CoreWeave. In a normal week, this would have been the focus of investor attention, as neoclouds are perceived to be one of the weakest links. As such, CoreWeave has been a source of concern in recent weeks, and the yield on its debt has risen significantly.
Investors were looking for indications around the health of the business. Overall, the results from the company came in ahead of expectations and the company raised its full year revenue guidance. While this “beat-and-raise” seemed to alleviate some investor concerns, the company also mentioned increased GPU rental yields, very healthy customer prepayments and improving margins – all suggesting that the weaker portions of the ecosystem are not just holding up but slightly improving.
Anthropic’s IPO: what to watch
Finally, we’ve got the Anthropic IPO process that should conclude in the next ten days. We’ll cover this in more detail next week. At Moneyfarm, we don’t invest in IPOs directly, but we do evaluate significant transactions to understand their impact on the broader market. We typically break them down into three parts – the actual business, the valuation and the book-building (the process of collecting orders from investors).
Typically the narrative matters a lot in the short-term, since the IPOing companies (any company) are selling future hopes and dreams. That’s particularly true for Anthropic, as the first “pure-play” LLM business to list. That means investors should consider the potential for higher volatility after a listing. From what we can tell, investor demand has been strong so far – perhaps anchored by announced commitments from industry players, including Nvidia – while the reported revenue growth in the business remains strong.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
