The big story in investing this year has been optimism and worry about demand for the chips powering AI applications. While generative AI has demonstrated some impressive capabilities, there are fears regarding when there will be a profitable business model to support the tens of billions of dollars of capital expenditures currently being made in the space. Amid a terrible week for Nvidia $NVDA stock, the company is doing some smart things. Intel $INTC has had terrible reliability problems, but the second-generation Core Ultra line has amazing specs. Is it enough to rescue the company? The market is worried about the Chinese economy, but Macau visitation just exceeded 2019 pre-Covid levels. DKI started warning investors about the risk in Japanese government bonds and the carry trade in 2022. We welcome the recent agreement from the financial community on Twitter/X. In a new series on investor education, Learn Wall Street makes a great point on the risk of long-term declining revenues and management quality on stock valuation. With all of the contradictory news this week, maybe we should have called this “The on the Other Hand Issue”.
This week, we’ll address the following topics:
- Nvidia $NVDA benefits from vendor financing, but does so in a way that’s safer than Cisco $CSCO did during the dot-com boom.
- Intel $INTC announces the specs from the second-generation Core Ultra line. They’re impressive.
- The Chinese economy is showing signs of weakness, but Macau visitation is back to pre-Covid levels. What’s that mean for Las Vegas Sands $LVS?
- The finance community on Twitter/X discovers the risk in Japanese government bonds and the carry trade. DKI was talking about this two years ago. It’s a big issue now.
- Nike $NKE stock has performed poorly for years due to declining sales. Learn Wall Street cautions about buying a company based off of past glory when revenue growth turns negative.
As usual, we celebrate the fantastic work and analysis being done by DKI interns, Andrew Brown and Alex Petrou. Given the quality of their contributions to this piece, I’m going to have to find something more challenging for them to do. Great work, guys!
Ready for another week of contradictory headlines? Let’s dive in:
1) Nvidia’s Rise to Cisco 2.0: Boom or Bust?
Nvidia $NVDA has been a (the) powerhouse in AI and GPUs (graphics processing units), but there’s more to their strategy than just selling cutting-edge chips. They’ve been engaging in vendor financing—providing loans or financial backing to their customers so they can buy more Nvidia products. Sounds familiar? It’s a tactic employed by Cisco during the ‘90s dot-com boom, where vendor financing contributed to astronomical growth. But unlike Cisco, Nvidia seems to be playing its cards a little smarter. Here’s why: while half of NVIDIA’s revenue comes from just five major customers, they’re not taking all the risk. For example, CoreWeave, one of their largest customers, just secured a $2.3 billion debt facility to buy Nvidia’s GPUs—but the funding came from Blackstone and Magnetar, not Nvidia’s own pocket. In other words, Nvidia gets to keep its sales booming while outsourcing the repayment risk. That’s a pretty bullish move for investors.
About 50% of sales come from five customers. Want to guess who they are?
DKI Takeaway: With Nvidia $NVDA riding high on AI’s explosive demand and smart financing partnerships, the company looks set to avoid a Cisco 2.0 scenario. And while volatility in the stock price may rattle some nerves, Nvidia’s strategy of retaining customers without absorbing the full financial risk is a masterstroke. Our biggest concern is that any slowdown in orders from just a few customers would be enough to cause the growth rate to falter and the stock would respond negatively to that. Following that, there is competition coming. What do you think? Can $NVDA maintain their lead?
2) Intel’s Comeback: The Core Ultra Revival:
After a few tough years of trailing $AMD and losing market share, Intel $INTC is back in the race. The engine potentially powering their return; the Core Ultra processors. The 1st generation Core Ultra was a solid attempt, but the Core Ultra 200V is where Intel really steps on the gas. It boasts 20% better performance per watt compared to Qualcomm’s $QCOM Snapdragon, and uses 50% less power than its predecessor. This means laptops with Intel’s new chips will have cell phone-like battery life; offering up to 20 hours on office tasks—slightly edging out Qualcomm’s 18 hours. It’s still slightly behind in the video call department, lasting 10.7 hours versus Qualcomm’s 12.7 hours, the improved efficiency is a big win and a necessary change for Intel. For investors, this could signal a fresh lifeline for Intel in the highly competitive laptop space. Intel’s 200V chips also pack a future-ready feature: the Neural Processing Unit (NPU), which handles up to 48 trillion operations per second, positioning the chip for the AI revolution. It might not be a game-changer yet, but when AI workloads become more mainstream, Intel has product fast enough to handle on-board applications meaning you’ll have better privacy.
Source: ChatGPT
DKI Takeaway: Throw in Intel’s gaming performance that Qualcomm $QCOM struggles to match, and it’s clear Intel $INTC isn’t waving the white flag anytime soon. Despite stock slumps and layoffs, Intel’s aggressive push with the Core Ultra could be its key to reclaiming a solid foothold in the tech landscape. If next year’s new i7 and i9 processors solve prior version’s burnout problems, this could be Intel’s big comeback moment.
3) Macau Summer Tourism Rebounds:
If you’re new to following DKI, we closely track tourism data from Macau, the gaming capital of the world and a market much larger than Las Vegas. Las Vegas Sands $LVS, a DKI position, owns five integrated resorts and casinos in Macau and controls the largest market share in the largest gaming market. According to Inside Asian Gaming, Macau saw 6,685,000 visitors this summer, averaging 108,000 per day. This marks a strong recovery, approaching pre-COVID summer figures of 7,153,000 visitors. August visitation was above 2019 levels.
A big recovery from the Covid lows.
DKI Takeaway: With the recent growth in Macau’s tourism during the summer and strong bookings for the upcoming Golden Week holiday, visitation is steadily recovering. Last quarter, $LVS returned $550MM to shareholders through stock buybacks and dividends and returned more than $600MM the prior quarter. The stock has traded down on fears of a weak Chinese economy, but the increase in Macau visitation and the upcoming reopening of rooms temporarily closed for renovation suggest significant upside potential. For more details on our outlook for $LVS, check out our latest earnings update (paywalled for subscribers).
4) DKI Called Japan’s Disaster in 2022, FinTwit Now Agrees:
The Bank of Japan’s (BOJ) governor, Kazuo Ueda, announced this week that the BOJ would raise interest rates if inflation continued to climb. Following Ueda’s comments, the yen strengthened against the US dollar, rising from ¥147 to ¥143 per dollar amid expectations of further rate hikes. His remarks also rippled through the S&P 500 and Bitcoin communities, both of which saw mid-week declines. If you thought the first wave of the carry trade unwind was rough, brace yourself for an even ruder awakening.
DKI was early on Japan’s problems and the risk of the carry trade in this 2022 thread.
DKI Takeaway: DKI has been watching Japan’s economic disaster unfold since 2022. In an interview with Micheal Gayed @leadlagreport in 2022, we discussed the looming disaster in Japan. Thanks as well to the NY Alternative Investment Roundtable @NYHedgeFunds for hosting Mark Rossano @markfny and me in October, 2022 to discuss this issue in depth. Now, with the BOJ raising rates, interest expenses will rise, especially with a debt-to-GDP ratio of 260%. To cover these costs, the BOJ will likely print more fiat yen, causing higher inflation and more rate hikes. If BOJ hikes from 0.25% to 0.50%, we could see massive disruptions across the world’s equity and bond markets. Subscribe to DKI to learn how to hedge your portfolio against the risks of another round of carry trade turmoil.
5) Nike ($NKE) Stock Tanks, Don’t Let the Valuation Fool You:
Nike’s $NKE stock is down 24% year to date and has had a rough three years as well. Some of the top hedge funds managers, including Bill Ackman, are seeing signs of a potential discount to the valuation, and have taken positions. However, Nike’s signs of potentially being undervalued might be deceiving. The announcement of falling revenue projections is never a great catalyst.
Credit to our friends over at Learn Wall Street for the image.
DKI Takeaway: Raij Khabbaz from Learn Wall Street got it right. $NKE stock might appear to be a bargain, but has had considerable underlying issues. Nike still has a great brand; however, the stock is no longer a growth play. Declining revenue projections do not support a company’s valuation. Another factor to consider, is the company’s management team. Recently Starbucks $SBUX hired Chipotle’s $CMG CEO, Brain Niccol. During his tenure at Chipotle, he more than doubled revenue and grew the stock price more than 770%. Niccol resolved the company’s underlying food safety issues and made the company more profitable. At DKI, we took a position in authID $AUID because of the turnaround led by their current management team. When choosing your next stock, pay close attention to the management team and their track record for delivering revenue growth.
Here’s the video version: https://www.youtube.com/watch?v=r4wnOIgnBoY
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