Why is Terry Smith not investing in Nvidia?

Stock

One would have expected one of the top fund managers in the world to be impressed by Nvidia stock that has almost tripled in 2024.

 

But this hasn’t been the case.

 

Terry Smith, UK's answer to Warren Buffett is not as positive on Nvidia Corp.’s stock as Wall street analysts are . Hes not interested.

 

What does Nvidia sell and why the surge in the value of its stock?

 

Nvidia sells computer chips, graphics processing units (GPUs) that processed data in AI software.

 

The rise of AI has led to increase in the demand for Nvidia's processors, known to be the most advanced among those available in the market.

 

Would the demand for Nvidia's processors continue to increase? Most likely?

 

So Why is Terry Smith not interested?

 

Maybe investing in Nvidia stock doesn’t align with his investment philosophy.

 

What is his investment philosophy?

 

Terry Smith has an investment philosophy that’s rooted in spotting companies with enduring business models.

 

The fund manger believes that such business model is the only way to build long term wealth.

 

Terry Smith gives two reasons why he’s not excited about Nvidia's stock.

 

His first reason in his words.

 

 

“It’s a company which has made – what people are calling in modern parts – a pivot twice in its business model, very successfully. You might say, what’s the problem? Well, because people who have to pivot in their business model sometimes get the pivot wrong.

“So, it moved from gaming chips to basically chips for digital currencies, very successfully. And then it moved from chips for digital currencies to GPUs for large language models and AI - very successfully.

 

“Jensen Huang – the founder, and the man who runs it – is clearly very clever – and they’ve done that very successfully, and all credit to them for doing that.

“However, bear in mind the following. On those two changes in the direction of what they were doing in the past, the stock went down 80% on both occasions. You’ve got to have a pretty strong stomach for that kind of stuff. And it does worry us that it’s not got the predictability that we seek in companies. One of the most important things we’re looking for is something that’s relatively predictable, and that doesn’t sound like it’s particularly predictable. Presumably at one time they may do that and it may go down 80% and it might not succeed. So that’s one thing.”

His second reason in his words.

 

“There’s only one thing more dangerous than being close to the consumer in a downturn and that’s not being close to the consumer.

“Because if you think it’s bad running a consumer products company in a downturn, when you might see a 5% to 10% downturn in demand, you can only begin to imagine what happens to people who are supplying to those consumer companies, particularly if they’re supplying capital equipment, which just goes on hold.

“They don’t have 5% to 10% downturns. They get properly strapped into the roller coaster at that point. That tends to be what happens to them. And there’s no doubt whatsoever that what Nvidia is doing is selling into a massive capital cycle. They’re building things which are going into people to put into data centres, to build models. They’re not selling direct to consumer. They’re two or three stages back from the consumer basically here.

“So, at some point, if the end demand for this falls, or even just doesn’t go up as fast as it has been going up, there’s going to be an interesting outcome.”