Overview:

With the end of summer here and the markets closed next Monday, we’re expecting a slow news week with many market participants taking off mid-week for an extended holiday. As a result, we may choose to skip the 5 Things this week and pick that up the following week. Instead, I’ll provide you with the pre-analysis for the big upcoming events as well as offer updates on a couple of DKI’s stock positions.

 

Nvidia ($NVDA) Results on Wednesday:

The one stock that has been most responsible for the rise in the equity indexes over the past two years reports earnings on Wednesday. Revenue is expected to rise by almost 100% in the quarter and by 95% for the full fiscal year. Earnings are expected to more than double for both the quarter and the year. Nvidia is a fantastic company and is the clear market and performance leader in the high-growth AI market segment. With a market cap exceeding $3 trillion dollars, investors are expecting continued incredible performance.

 

Over the past couple of years, $NVDA has done nothing but outperform. I like their products and have Nvidia graphics cards in both my laptop and desktop. Both have excess capacity even when I’m doing high-definition video calls. However, the company is facing two threats to growth.

 

The first is that Nvidia gets much of its revenue from a few mega-cap tech companies like Google and Microsoft. A handful of companies are spending tens of billions of dollars to try to be the leader in AI. The problem with that is as of now, AI presents high expectations for a transformational future, but is light on actual business plans to make money. Some of these tech firms saw their stocks fall after they reported 2Q earnings due to investor concerns regarding spending so much on capital expenditures without a business model to earn a return on that investment. If 3-4 of these companies were to cut AI-related spending by just 10%, Nvidia would still have positive growth, but the stock is going to fall if the company’s beat and raise guidance pattern is broken. At this point, 50% growth would cause the stock to fall.

 

The second problem is some of Nvidia’s customers have been complaining in public about the company’s high-pressure sales tactics. With the highest-end GPU chips on allocation, some of Nvidia’s customers feel like they have to over-order and to buy unwanted and unrelated product from $NVDA in order to get their preferred allocation of GPUs. I’ve read that the current AI models are optimized to run on Nvidia’s instruction set which gives them an advantage. However, it’s clear that at least some of their customers are openly looking for other alternatives.

 

If Nvidia beats and raises guidance again, we could see the S&P 500 and the NASDAQ 100 indexes up big the next day and much of the tech sector up with them. Anything close to a miss would bring the opposite result. Worth noting, some DKI positions like Coursera ($COUR) and authID ($AUID) are likely to be sensitive to such short-term trading movements. Nothing $NVDA reports on Wednesday will affect the long-term fundamentals for those stocks, but we’re likely to see some short-term volatility surrounding Wednesday’s earnings announcement.

 

PCE Reported This Week:

DKI has been closely following and writing about macro inflation indicators since the fourth quarter of 2021 when we warned that inflation would be large and non-transitory. We further recommended buying gold, Bitcoin, and energy. While inflation has been a disaster for most Americans, we’ve found ways to profit from it.

 

While the CPI gets most of the attention, the PCE is the Federal Reserve’s preferred measure of inflation. While I will definitely take a look at the release, I suspect there won’t be much to write on the topic. That’s because absent some result that’s significantly outside of expectations, it’s unlikely that this week’s PCE report will cause a change in our expectations for the Federal Reserve. We continue to believe that a 25 bp (.25%) rate cut is coming in September. I think that’s unwise and the wrong move, but the Fed doesn’t take my preferences into account when making decisions.

 

Your TL/DR version: The PCE report will get a lot of attention, but is highly unlikely to change next month’s outcome at the Federal Reserve.

 

A Margin Call Led to the Recent Decline in $AUID Stock:

A couple of weekends ago, I got a notice from my brokerage that the margin requirement for authID ($AUID) has risen from 30% to 100%. Shortly afterwards, the stock started declining. Here’s what happened:  The higher margin requirement meant that some authID shareholders who were using margin (leverage) in their accounts got margin calls. That meant these shareholders had to either add more cash to their accounts, or sell stock. This led to forced sales as some shareholders had no choice but to reduce their positions to satisfy the margin calls of their brokers. (Absent this action, the broker has the right to sell client positions so one way or another, exposure was going to be reduced.)

 

As a very thinly traded micro-cap stock, it’s almost impossible to buy or sell a large amount of $AUID without moving the stock price. That’s what we’ve seen recently. Non-discretionary time-sensitive selling pushed the stock down temporarily. I’m not aware of any fundamental problem or change at the company. DKI’s 2Q update outlining the company’s progress is still valid, and I’ve had no change in opinion or information since then.

 

The Macau Corruption Crackdown isn’t a Big Problem for $LVS:

I’ve followed Las Vegas Sands for over a decade and as a result, I’m familiar with events in Macau, the world’s gaming capital. On occasion, the Chinese government engages in a corruption crackdown that scares or inconveniences gamblers enough that Macau’s GGR (gross gaming revenue) suffers. There is one happening right now focused on criminalizing illegal money transfers.

 

If you’re wondering why illegal activity needs to be criminalized, that’s a great question. China has capital controls which make it difficult for people to take large amounts of money out of the country. Macau is classified as a SAR (special administrative region) and some of those limits can apply to Chinese gamblers. Over the years, local businesses found all kinds of creative ways to help the ultra-wealthy get access to more of their cash while in Macau and the current crackdown is discouraging that activity.

 

There is an understandable fear that this crackdown will lead to reduced gaming and lower profits for the Macau concessionaires who run the casinos. That’s true (sort of). While the increased attention from the Chinese authorities will reduce overall GGR, the effect will be concentrated in the low-margin VIP business. Las Vegas Sands caters to the high-margin mass and premium mass markets. The crackdown is a problem for the casinos who focus on the VIP customer, but I don’t expect it to materially affect the outlook at $LVS.

 

Conclusion:

It’s likely to be a slow news week and as a result, please expect limited posting volume for a short while. We’ll stay on top of events and report anything significant or portfolio company-related to premium subscribers. Wishing everyone a good week and a safe and happy holiday.

 

GB@DeepKnowledgeInvesting.com if you have any questions.

 

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