Nvidia Rolls On | The Motley Fool

In this podcast, Motley Fool analyst Asit Sharma joins host Ricky Mulvey to discuss the boom of Nvidia‘s data center business, future growth stories for the company, and some questions about its valuation.

Then, Motley Fool contributor Matt Frankel and host Mary Long continue their conversation about David and Goliath business match-ups.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 23, 2024.

Ricky Mulvey: NVIDIA once again knocks the cover off the ball. You’re listening to Motley Fool Money. I’m Ricky Mulvey joined today by Asit Sharma, Asit. Good, we’ve been talking for 20 minutes, but it’s still good to see you.

Asit Sharma: Good to see you, Ricky.

Ricky Mulvey: There’s one story on the platter for the A segment and that is NVIDIA. They reported yesterday, high expectations in the business. Asit is still crushing it. Revenue was 26 billion, which is a billion more than the analysts were expecting. They got to 10 for one stock split and they also announced the new chip platform. The Blackwell is in full production. Do you have any big takeaways before we get to the meat of the business?

Asit Sharma: Ricky, yeah I’ve got one takeaway. I think there must be some return on investment here for all the companies, the hyperscalers, the enterprise businesses, the internet businesses that are buying products from NVIDIA. This is one thing analysts have worried about for a while. What if we get to the end of the road and people find out that generative AI doesn’t really change much? Well, it’s changing a lot. We saw that in the fact that NVIDIA, which had such a blowout quarters you mentioned, is up 10% today because in the fourth quarter is when they think Blackwell will really start to sell its out-of-production. They only put their estimates for one quarter at a time. It’s leaving the whole investment community guessing how much more revenue can grow sequentially year-over-year, two quarters from now.

Ricky Mulvey: There’s a lot of exciting things going on with NVIDIA. This is a data center business though. It’s how NVIDIA makes most of its money in just an eye-popping figure, or I’m going to the decimal, I’m sorry, 427% year-over-year growth for the data center business. I want to know who are the customers buying, what are they buying. How do they grow that much?

Asit Sharma: That’s so fascinating, Ricky, this has made the other segments that NVIDIA reports just look like afterthoughts because they’re in a couple of billion in the hundreds of millions. The customers primarily are the big Cloud providers. I say primarily that’s not really the whole story but yesterday in the call management said that 40% of customers were coming from this data center Cloud business. You can think of the big Cloud titans, Microsoft, Amazon, Oracle, etc. This is the group that’s pushing the growth, but enterprise businesses are buying it. Academic institutions are buying NVIDIA products. As we saw, this is a theme now in the last three calls, sovereign governments, which are trying to develop their own strategy. Whole country-specific avenues of revenue are being opened up by NVIDIA. All this comes together, but the real meat and potatoes of their business right now are the big, familiar Cloud titans. They’re driving the acceleration.

Ricky Mulvey: Let’s talk about Sovereign AI for a minute because this is throughout the call. They’re trying to paint the picture of the next growth stories, the next growth waves for NVIDIA products. This is something that Jensen Wong has talked a lot about, which is sovereign AI or a nation’s basically capability to produce artificial intelligence using its own infrastructure, data, workforce, business networks. Basically, all of the data produced in a country, the government should be able to control that and then create intelligence out of it using NVIDIA products. Of course, Asit. Are you as bullish on this as Jensen Wong is or there’s the cynical take of if there’s a gold rush, you want to sell picks and shovels to everyone?

Asit Sharma: I’m medium bullish on it, Ricky, for one detail. That is that NVIDIA has been building their own data centers and playing around with these for a long time. They have the capability to configure data centers. They say almost instantaneously. What that means is that if you are a country like France, which is a customer of NVIDIA’s. If you are a Middle Eastern oil-rich company that wants to diversify your country’s GDP base, you want to be able to do that very quickly. If you’re going to take a chunk of that GDP in a year and put it in NVIDIA’s coffers and they’re able to deliver on that. Their systems are highly configurable. If you show NVIDIA, this is our data infrastructure. They’ve got products which are supercomputers which are backward compatible. They’ve got the Blackwell, for example, which can be air-cooled. It can also be liquid-cooled. This configurability, the idea that they can help you build data centers in a really rapid fashion, gives some legs to their predictions. I think they said that this is going to be a high single-digit billion-dollar business in the very near future. I don’t disbelieve them on that. Now, I’m not quite as bullish as Jensen Wong is on this. I think every proposition out in the business world has to be tested even if it’s coming from NVIDIA. We’ll see but medium bullish shore

Ricky Mulvey: I would say the other growth story that’s getting tested right now is autonomous driving. We have a new update from Tesla and their full self-driving cars, which NVIDIA discussed on the call but also when we were watching this morning, we were watching a full self-driving video of a Tesla with the latest update, but it seems, they’re not quite there yet. Essentially it was a car in Chicago where a car stops in front of it, the hazards turned on, but the Tesla is still maybe not able to pick up the fact that the hazards or on the car is stuck in traffic and it needs to go into the rate lane in order to get around the traffic.

Asit Sharma: I’m not going to give you my personal answer on this, Ricky. I’m going to give you the answer that I think NVIDIA’s management would give to investors. That is to say that in the past, Tesla has, yes, relied on NVIDIA hardware and software to train their supercomputer. They’ve also used a lot of data straight from vehicles. Everyone is aware of this. If you drive a Tesla that’s contributing to their machine-learning but there’s been a shift since, I would say the beginning of the generative AI explosion in that NVIDIA, which has really great core competencies and physics, the optics of physics is pushing this vision of autonomous driving being trained on video models. Instead of gathering data from cars, now, NVIDIA is working with Tesla and other manufacturers to have their artificial intelligence machines watch a ton of video because it’s Jensen Wong will tell you the best way for an AI to learn if you are looking at autonomous driving isn’t really to gather data from vehicles, but it’s to understand the physics of the world. The best way for the AI to do that is by sitting in front of a screen watching a bunch of videos like the one you and I were watching and laughing at this morning, and to that extent, they mentioned supporting Tesla’s expansion of its AI supercomputer via 35,100 GPUs. That’s quite a big number and a quite a huge capital investment but this is the way of the future now for autonomous driving, its inference, and its training being generated through video.

Ricky Mulvey: Well, in the other part of whatever growth story NVIDIA tells you is, you may not know what the next one is. This is a company that started building GPUs for gaming computers that have turned out to work well for cryptocurrency mining operations and then in artificial intelligence, NVIDIA is very much selling during the earnings call. One it was selling is how valuable the customer relationships are. The one they featured was with Meta, which is now using its LAMA 3 AI system with NVIDIA hardware. NVIDIA saying that Meta will get $7 in revenue for every $1 they spend in server cost. Let’s translate this into English. Does this just mean that Meta is making really good ads from the information they’re getting through this or what Asit?

Asit Sharma: Yeah, actually some of this gets pretty confusing. Here NVIDIA was really talking about the open-source large language model called LAMA 3 is the latest version they were referring to companies that will use LAMA 3. Think of a small AI start-up that has an LLM you want to use. They’re saying if fees, start-ups, and enlarged companies as well are going to charge for the tokens for that usage. When you talk to a large language model, they can drive a seven bucks of revenue for every dollar that they’re paying out on someone else’s server. Now, obviously, Meta itself is making money off of both LAMA and the computational power and you’re right, that they are making some money using this But really what they’re referring to there is they’re pitching to start-ups.

Asit Sharma: Used technologists based on Nvidia. Let’s talk about the value of the company for a little bit, this is one where the bulls are out enforce Asit and one that I’m honestly kicking myself for not owning since I started looking at it, as I’m sure some listeners are as well. This is now a two and a half trillion dollar company at about, let’s say 38, 40 times forward earnings. At this point, what are your thoughts on Nvidia’s valuation? I think it’s a hard company to value. You have a company that has this incredible demand and they’re already telegraphing to the market that were a bit now supply constrained, we’re working with suppliers like TSMC and other partners in our ecosystem to get products as fast as we can to customers. On the other hand, they’re also saying that we’re innovating at this incredible pace and if you’ve heard our roadmap has up every year, which is superfast in this industry. It’s also just about the innovation in data centers, the fact that now they are providing so much of a data center from the switches to the networking, other networking equipment to the software. They’re working on their own InfiniBand technology, but now they play well with Ethernet. This is a company that’s innovating in so many directions that it’s not far-fetched to think that they could keep up from here. A pretty decent run rate going further, I don’t think we’re going to see again this 400% year over year growth but to be a two and a half trillion dollar company that could grow at a decent double digit rate, you would not really blinked that much to pay 38 times forward earnings for that. It’s a premium company with a lock on its marketplace right now, so some of that isn’t just about the expected earnings growth, it’s about the stability of the perceived cash flow, so I don’t think it’s that expensive at 38 times, Ricky, maybe you can buy just a little bit here because I know for me when I’ve watched companies run up and it’s painful if I didn’t buy them. I found it easy to reduce that pain, just take a little bit and watch that bit from their. Nvidia is a company that gives you cyclical opportunities to buy. However, I think this is not truly an exception at some point, the steam will evaporate a bit, so there’ll be more buying opportunities but right now for people who want to hold this company for a long term, it’s still not too expensive and I’m glad you pointed out that multiple. It’s not a crazy multiple and as you and I were chatting before the show, there’s a few companies that are also big tech that are much more expensive than.

Ricky Mulvey: It’s basically at the same if we’re using forward earnings, it’s basically where Amazon is right now and it’s below Tesla. Those are your sticks in the wind, Asit. Management would give you points for putting that PE ratio into context, they’re all about context and how that plays into inferencing and everything they’re doing with artificial intelligence.

Asit Sharma: Is Michael Mauboussin every listens to this show, which I will not assume he does, I’m sure he would want to kick me from afar.

Ricky Mulvey: I think he moves onto another podcast when both you and I are conversing in particular, let’s end it there.

Asit Sharma: Asit Sharma, as always, thank you for your time. Thank you for your insight. Thanks for breaking this down.

Ricky Mulvey: Thanks a lot, Ricky, it’s a lot of fun.

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Up next, Mary Long and Matt Frankel, look at two more David and Goliath matchups, you can hear the first two on yesterday’s episode, but this time it’s in food and insurance.

Mary Long: Next up, we’ll go to Cava and Chipotle. Last summer frequenting Cava, both IPO and the question heard around the investing world at the time was, is XX being Sweetgreen Kaba, the next Chipotle. As a consumer, I loved Chipotle and I feel like we glorify Chipotle stock a lot, but maybe for someone who’s less familiar with investing, or new to investing in, and less familiar with Chipotle stock. What is it that makes Chipotle stock so great?

Matt Frankel: It’s such a great restaurant business, so I’m saying this from someone who ran restaurants and that was my first career way back when I’m aging myself, but the very early 2000s, it’s a hard business to make money in. A good restaurant might make a 5% net margin if things are going well. People don’t realize how little money good restaurants actually make. Chipotle has a 13% net margin. They’re highly profitable business, they essentially invented that fast casual concept, fresh food fast. That was really a Chipotle thing and they really just a scale that beyond anybody’s dreams. It’s high quality food at fast food times and fast food prices and that’s what made the business great. A lot of companies like Cava have essentially tried to replicate the model, but none have been able to do it with the scale and profitability of Chipotle yet.

Mary Long: Yet is maybe the key keys there. Cava would sure like to think that the rest of that sentence ends in yet because as you said, Cava in many ways seems like a Mediterranean theme, Chipotle. It’s the same concept of fast casual. That said, it’s out of fart earlier growth stage, so theoretically, you could take that idea and say, oh, now’s my chance to get in on the new Chipotle. I’m using air-quotes early. What, if anything is stopping Cava from becoming the next Chipotle?

Matt Frankel: Personally, this is just anecdotal, but I can tell you that three Cavas have opened up within a 10-mile radius of me within the past year. You’re right, they are in rapid growth mode and none of them were placed at Chipotle by the way, so Chipotle is still doing fine. You’re right, they are in an earlier stage of growth, they’re growing faster, they’re expecting to grow revenue by about 20% next year. Chipotles is about 15%, there’s consensus, so faster growth rate than Chipotle. Both businesses actually have identical gross margins, it was interesting to find when I was doing some research for this, they both have 33% gross margins. As you would expect, Cava is not nearly as profitable yet because they are in growth mode more so than Chipotle. Chipotle has, I’m not sure the exact number off the top of my head, but thousands of stores that are able to turn it into a compounding machine. Whereas Cava, they have fewer resources and faster growth, so they’re not making a ton of money right now. Do not look at the PE on this stock. That doesn’t tell you the story. They both trade from similar multiples of sales. It’s really interesting businesses and I don’t want to say the next Chipotle, that’s like saying the next Berkshire Hathaway but covers in that conversation.

Mary Long: We still try to make that comparison, the next a mini Berkshire Hathaway and that’s maybe a perfect segue into our final matchup where we’ve got to specialty insurers, which are duking it out. First, in one corner, founded in 1930 and today boasting a market cap of 21.7-ish billion-dollars, we’ve got Markel. A stock that’s up over 13,000.

Mary Long: Bulbs that underlying that. Since it’s 1980 IPO and is up 55 percent in the past five years. Other corner with a market cap just shy of $9 billion. We have Kinsale Capital Group that was founded in 1990, so it’s not exactly a newbie, but it went public in 2016 and is the younger of the two companies here. Since then, Kinsale stock is up over 2,000 percent. That’s since 2016, and in the past five years that stock is up 356 percent last I checked. I’m going to go ahead with all that information. I’m going to go ahead and say that Markel is our Goliath, but if that’s the case, why has Kinsale seen better returns in the past five years?

Matt Frankel: There’s so much to unpack there. I own both of these stocks and I know both companies really well. We’ll start with the insurance businesses. Both of these are insurance companies at their core at least, but they do things a little differently. They’re both specialty insurers. Markel actually it’s too big businesses. They’ve specialty insurance and they have reinsurance. Their reinsurance business. Think of it like insurance for insurance companies. If say, what’s a good homeowners insurance companies, State Farm wants to limit their losses or exposure to like hurricanes or something like that, they might purchase a reinsurance policy that limits their exposure and would pay off in the event that a bad natural disaster hit, so they’re not going out of business. That’s a much more inconsistent business in insurance than property casualty insurance, so Markel’s reinsurance business has actually been unprofitable in the past few years. Both of them are specialty insurers. Kinsale focuses on smaller accounts, so while it sounds like it is a smaller market share, Markel actually customer count wise they’re more similar than you might think. Markel is not just an insurance company though. We said the next Berkshire Hathaway that was the big segue into this. They take a Berkshire-like approach. All insurers invest their money. That’s how most insurers make most of their money from investing the money that they’ve taken in before they pay it out for claims. Markel invests in a big stock portfolio like Berkshire Hathaway does.

Berkshire is actually it’s largest investment and they also have Markel Ventures which is a venture capital division and unlike Berkshire, they can make small investments like that and have them move the needle if they do well. Kinsale they make their money on insurance. Markel is a standard profit margin when it comes to their insurance business. Their underwriting margin is in the 4-5 percent range which most insurers would be very happy with that and just to make more money off on their investment portfolio which Markel does. Kinsale on the other hand, and stop me if I rambled too much, but Kinsale on the other hand their investment portfolio is boring for lack of a better term. They invest in high-quality corporate bonds and treasury bonds and mostly fixed-income stuff. They have a small amount of common stocks, but nothing that is worth mentioning in the investment thesis. Their insurance business on the other hand is wildly profitable. I mentioned that Markel is underwriting margin is usually in the 4-5 percent range, meaning that after they pay all their claims and pay their business expenses they’ve a 4-5 percent margin of the premiums leftover. Kinsale is over 20 percent, about five times is profitable, so it’s that’s also why Kinsale is more highly valued on a price to sales basis. Highly profitable insurance business. If they ever get to the point where they’re actually building a stock portfolio and making real money on investments, watch out. That’s a lot of potential, but totally different insurance business dynamics and it’s focused on small companies, a very overlooked area of specialty insurance that allows Kinsale to be that profitable

Mary Long: Yes, so when we talk about Kinsale’s profitability, is it just able to out charge its competitors and with its insurance offerings? When I think about insurance and maybe stop me if this veers off into a different type of insurance and doesn’t maybe apply to the specialty insurance area, but when I think about home insurance and natural does, I feel like there have been so many new stories of late about insurance companies that are stopping ensuring certain car manufacturers that are stopping to ensure houses in certain states, is the insurance business is getting harder and if so, does that impact positively or negatively Kinsale and with that Markel’s ability to price?

Matt Frankel: Great question, and I thought that too. I actually talked to with Kinsale CEO Mikey Hub a couple of weeks ago and he pointed this out to me because I had a misconception about this. It’s not that their underwriting is that as profitable as we make it out to be. It said their costs are much better. There’s two components to underwriting margin. There’s the money that you’re paying up for claims. That’s called your loss ratio and there’s the money that you’re paying for the rest of your business, how to pay your employees, to pay your offices and things like that. That’s your expense ratio. Can put them together, it’s called your combined ratio, so Kinsale has a very low combined ratio, but it’s more because of that expense ratio side of it than it is the underwriting side of it, so their underwriting is roughly 10 percent points more probably not that their expenses are roughly 10 percent points lower than their peer group and that’s what’s their very price competitive is really the point that their CEO wanted to make to me is that their price competitive. It’s not that no one else is underwriting these policies for small companies. They can undercut everyone else because they have a low-cost structure. They automate most of their underwriting process. They have a proprietary technology platform that they view as their core competency and it allows them to be more profitable efficient on an expense basis than their peers.

Mary Long: You mentioned early on that the market share in the specialty insurance business doesn’t quite tell the whole story here, so I’ll throw out some numbers just in case they were missed, but last I checked Kinsale has about one-and-a-half percent of the excess and surplus market which is what we’re talking about often when we say specialty insurance? That basically means think of a weird or obscure business and act throwing business of marijuana dispensary that thing and that fits into the excess and surplus category, so Kinsale has one-and-a-half percent of that market. Markel has closer to 5.6 percent. That sounds like a small number, but that makes it I think the third largest insurer in the industry, so that in mind, how do we think about these two competitors, is it a growth story? If we’re trying to pick the better company here, is it only one that we should be betting on or is it more about growth story, how do you think about this yet?

Matt Frankel: Yes, so it’s a very fragmented business. As you mentioned the number three has like a 5 percent market share and I think that number is one and two are Lloyd’s and AIG that are especially insurance and you’re right. It is the same insurance that you would buy for your home or for your car, but in situations where most insurers wouldn’t want to touch it like the ASTORA business or if you’re a Hollywood stuck man like life insurance that normal MetLife might say no, we don’t really want to touch that, but that’s where a specialty insurer comes in, so when it comes to smaller accounts, there’s less competition. It’s not really an apples-to-apples thing, but at the same time, another thing there Kinsale CEO Mikey Hub pointed out to me, there’s a lot more small accounts than you would think. It was something like 80 percent of the E&S market, so I do think of them as competitors, but at the same time I think there’s enough room for everybody for more than one big winner here to disrupt what I call the traditional players or the Lloyd’s to AIG. Berkshire has a big specialty insurance business. Those are what I think of as their traditional players and there’s room for both Kinsale and Markel to disrupt them.

Ricky Mulvey: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don’t buy or sell anything based solely on what you hear. I’m Ricky Bobby. Thanks for listening. We’ll be back tomorrow.