Synovus Trust Senior Portfolio Manager Daniel Morgan joins Yahoo Finance Live to discuss Nvdia's latest earnings report and breaks down how the AI-driven boom is driving the company's future prospects.
RACHELLE AKUFFO: Well, Nvidia shares are surging today after releasing its Q1 earnings report. It's clear investors are bullish on the chipmaker's AI business. Rosenblatt, JP Morgan, Jefferies, Goldman Sachs, and Citi just to name a few companies all raising their price target on the stock today.
For a deeper dive into the company's latest financial results, we're joined by Daniel Morgan. Synovus trust senior portfolio manager. Good to have you on the show here, Daniel.
DANIEL MORGAN: Hi, Rachelle.
RACHELLE AKUFFO: So first-- good to have you. So as we look at the stock price reaction, especially to that forward guidance there, that second quarter revenue expected to come in at $11 billion, but about 50% higher than the Street was expecting. How would you sum up what's been happening for Nvidia right now?
DANIEL MORGAN: You know, Rachelle, what's interesting is we had the Fang stocks report last month. And pretty much every conference call, AI was mentioned. I think you guys even did a poll like 45 times or something to try to get the stock price to go higher.
But we had really no material tangible evidence that I was actually impacting these companies in terms of profitability. But what's so critical about this Nvidia report is this is really the first technology company that has come out at least on this earnings cycle where we actually see tangible evidence of the impact of AI. If you look at their data center group, it came in at 4.38 billion. The Street was looking for about $3.9 billion. That was about a 18% quarter over quarter increase. And it's estimated that about 65% of the revenues that they generate in their data center group is through deep learning, about 90% for training, about 10% for inference.
So we're actually seeing, Rachelle, tangible evidence that's coming down. And showing in the profits of a company that AI is for real, where before it was always, like we talked about before with meta saying they're going to produce their own chip. Well, what does that mean in terms of profits? But we're actually seeing that with Nvidia. And that's why the stock is really doing very well today.
RACHELLE AKUFFO: Certainly that use case, that missing part there for meta at the moment. But looking at some of the valuations that we're seeing, putting Nvidia near the trillion market cap status, do you think that's well deserved?
DANIEL MORGAN: Well there's no doubt Rochelle that Nvidia is trading at a huge multiple right now. On a trailing basis, it's almost astronomical. If you look at it from a fiscal year 2024, earnings estimate, I know that number moved up after that new guidance on the second quarter of 24. It was trading about 70 times earnings. But it's probably North of that after the big run that we've had.
Is it a company that we can say is in that trillion club along with companies like Microsoft and Apple? I think we can. It's been trickling and hitting that point and bouncing back again. But we have to start looking at Nvidia, this is going to be a huge statement, but it may eventually outdo one of these Fang stocks and find itself in one of those big five tech companies that represent, let's say, 25% of the total market cap in the S&P.
RACHELLE AKUFFO: I mean, that could be game changing when you look at how Nvidia is moving, and you look at the sort of interest that we're seeing here. So we'll have to hold you to that. We'll keep an eye on that for you. I do want to ask, though, because when you think about the future, especially of generative AI, you can't talk about that without talking about Taiwan Semiconductor company, because essentially they hold-- they're the ones who can most reliably create the kind of chips that Nvidia needs for this next gen AI. So what is your take when you have that potential wild card when you consider what's happening with China in the US over this chip fight?
DANIEL MORGAN: You're right, Rachelle. And you know, I don't think there's any short interest or sell recommendations on Wall Street right now for Nvidia. And the question is, what can go wrong, right?
Well, what could go wrong would be some sort of increase in tension between China and Taiwan that would jeopardize Taiwan Semiconductors' ability to make chips for Nvidia. For your viewers out there, Nvidia is fabulous. They do not have their own plants, not-- Intel does. They're a company that are strictly an engineering and marketing company. So they rely 100%, as you said, Rochelle, on producing their chips in the Taiwan Semiconductor Manufacturing facilities.
If for some reason there was an increase in tension between China and Taiwan, that would jeopardize that ability to produce those chips. That would be devastating, as you said, for their AI initiatives going forward. Hopefully that won't happen. Obviously, there's a huge move now with Intel building foundries potentially in Ohio and potentially in Arizona that maybe Nvidia would eventually start to use them to produce chips here domestically. But at this point, they are very susceptible to any issues with TSM.
RACHELLE AKUFFO: And so to that point then, who are the biggest winners and losers then that come with Nvidia's strength in this space?
DANIEL MORGAN: We mean in terms of competition against other companies in AI, or?
RACHELLE AKUFFO: Yes, in terms of chip manufacturers. I mean, we're looking at Intel right now under a lot of pressure, down more than 7% right now.
DANIEL MORGAN: Yeah. So we know that Microsoft announced a couple of weeks ago that they are going to infuse additional capital into AMD to build AI chips. We know that AMD has come out with their MI300, which is a competitive chip in that space. Pretty much all the major chip producers, Rachelle, have a focus on AI, including Intel.
You look at Alphabet has their tensor unit. You've got the Apple is in that space. You have Xilinx. There's really a host of companies. But I will say this, Rachelle, and that is that a lot of the chip manufacturers have existing chips that have produced for many years that are being used for other sources. And they're being kind of recast as AI chips, whereas Nvidia has their hopper line, their H100 which is a very specific chip that's used in AI.
So I think if we look at the field right now in the chip space, you'd have to have AI in terms of Nvidia in the pole position, and then everyone else trying to play catch up with a lot of these companies still in the formulation, so to speak, of specific AI chips. So it's really wide open. But Nvidia is leading the pack right now.
RACHELLE AKUFFO: And what are the chances that people can keep up Nvidia? I mean, when you look at how cost prohibitive it is to create these, especially some of these fabrication places as well. And you think about Taiwan Semiconductor, really how much longer will it take before someone really can catch up with Nvidia?
DANIEL MORGAN: It's going to be really tough, Rachelle, because right now the players are TSM. You've got Samsung, GlobalFoundries. There's only about a handful of actual companies who produce chips. That's why it's going to take a very long time for Intel to make that transition over to becoming a major player in the space.
It requires a tremendous amount of capital. You have to go out, build the factories, you have to buy the equipment from the companies like KLAC, Applied Materials, Lam Research, ASM lithography. And you've got to get that capacity up. And then the domestic producers should come over and start producing chips here domestically.
But it's still something that's way off. So if there was an issue with TSM, Samsung is in that same region. It would be very challenging for Nvidia going forward.
RACHELLE AKUFFO: Really an incredible earnings report there. Daniel Morgan, Synovus trust senior portfolio manager, thank you so much for joining me today.
DANIEL MORGAN: Thank you, Rachelle.