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Nvidia has been a headline grabber of note in global markets, with eyewatering returns that have left even the other semiconductor stocks for dead. Mohammed Nalla focused on not just the latest results from Nvidia, but the performance of other stocks in the sector.

The Finance Ghost tackled Intuit, covering the growth in revenue across the product range and the importance of integration strategies within the ecosystem. Although this is a powerful SaaS business, the risk of a double top in the share price chart cannot be ignored.

Episode 177 of Magic Markets is brought to you by Future Forex. Listen to Episode 170 for a detailed discussion with co-founder and CEO Harry Scherzer on why South Africans shouldn’t allow their annual offshore investment allowances to go to waste, with crypto arbitrage offering an interesting boost to returns. In Episode 173, you can learn about how Future Forex is disrupting the mainstream banks by making international money transfers simpler and more affordable for forex clients.

 Future Forex SA (Pty) Ltd is a registered financial services provider, FSP number 51884.


Full transcript:

The Finance Ghost: Welcome to episode 177 of Magic Markets. We’re recording this the day before elections in South Africa. It’ll come out just afterwards. So, busy day this side of the pond, Moe, in your old home. Thanks for joining as always all the way from Canada. And I look forward to covering a couple of pretty interesting companies today, including the ultimate headline grabber, which is the one that you’ve taken.

Mohammed Nalla: Indeed, Ghost, I think it’s a welcome break away from election news flow, just looking at global stocks, because there’s a big world out there and there’s a lot that’s actually going on other than elections in South Africa. But not to take away from the importance of the elections. Again, wishing everyone the best of luck and let’s see if we can actually craft a better outcome for South Africa. That’s the bull in me coming through and certainly just hoping for the best. You’re right – this week I’m covering – I’m bullish because I’m covering Nvidia, right, as you indicated, that’s the headline grabber. Ghost, what stock are you covering? I’m keen to hear what you’re talking about.

The Finance Ghost: Yes, I’m doing Intuit, which we’ve covered before in Magic Markets Premium. So you might not know the name Intuit, but you’ll certainly have heard of QuickBooks, Mailchimp, you might have heard of TurboTax in the US. So Intuit owns all of these things. Pretty interesting software-as-a-service play, and I think it’s going to be good to dig in.

Mohammed Nalla: Indeed. But I’m not going to let you go first because I’m the headline grabber this week. Right, Nvidia. So I’m going to get into it with Nvidia and Ghost, I’ve taken a slightly different tack on this. You know, it’s interesting, just because Nvidia has been grabbing the headlines, a lot of people know what Nvidia does. You know, they’re out there. They’re manufacturing semiconductors and chips, and they’re there for the AI boom. There’s a lot going on there. So I said, let’s dial this back a little bit. Let’s look at some of the lesser known facts. And these are somewhat quirky, maybe not entirely contributing to the investment thesis, but I certainly found them interesting.

And let’s maybe first start out with the founder of Nvidia, and that is someone called Jensen Huang. Now, interestingly enough, we know about the importance of Taiwan as a global center for semiconductor manufacture. But what a lot of people probably don’t know is Jensen Huang was actually born in Taipei, Taiwan, back in 1963, and then he moved across to the United States when he was young and arguably has probably been one of Taiwan’s best, or maybe worst, depending on how you want to look at it, exports. Because he then came across to the US, was educated as an engineer, and then started out his career before founding Nvidia, obviously started his career, interestingly enough, at a company called LSI Logic and then, wait for it, AMD, Advanced Micro Devices. And what’s interesting is we also this week are covering Intel, and we’ll get into some of that a little bit later on in terms of why all chip companies are not equal and why you should maybe be looking at some of the other players in this industry. But then what was interesting for me is that Huang eventually was, let’s call it, you know, not content with his corporate career and with a couple of other people in the industry, was then sitting, wait for it, at a Denny’s restaurant back in 1993. Nvidia was founded in a Denny’s restaurant as Jensen Huang, Chris Malachowsky and Curtis Priem, those were, the founders, had a brainstorming session, and they were really looking at creating a company. They had vision of using graphics chips for more than just gaming, and that’s what effectively seeded the idea behind Nvidia. Nvidia subsequently was lucky in that their technology was really ideally suited for a lot of the trends that we’re seeing come through now, and they’ve become a leader in AI and computing technology.

Now, what’s important is that, yes, we know about AI, we know about the advancements there, but there’s also the, let’s call it more tangential benefits here, in that Nvidia’s chips and technology are also used extensively in the entertainment business. We’ve covered stocks like Netflix, like Disney.

We know about this rush for content. And increasingly, a lot of big blockbuster movies have all been using Nvidia’s graphics processing units to generate their special effects. So you’re actually picking up, let’s call it clips on the deal ticket, not just from AI, but you’re getting it from the content megatrend that’s come through.

And then, wait for it. The last point I’m going to end off on, on this particular introductory point is Nvidia’s role in autonomous vehicles. We’ve discussed EVs, maybe a little bit less of a focus on autonomous or self drive vehicles, but that’s actually been a very large trend. You’ve seen it not just at the likes of Tesla, but you’re also seeing it at some of the larger manufacturers, like Mercedes-Benz, like Audi. And these firms are actually using Nvidia’s technology to help power their autonomous driver assistance programs and systems. And so this is very interesting and important to note just the various parts of the value chain where Nvidia seems to have a competitive edge and helps to explain why they’ve actually gained so much ground and have become a market leader in this space, Ghost.

The Finance Ghost: Yeah, Nvidia is the ultimate headline grabber, of course, and Intuit, not really. You know, a lot of people listening to this podcast might not have heard of it before, so I’ll start with some numbers because that’s really the important thing, of course. And third quarter revenue is up 12%. So, you know, this is a pretty mature tech business. They are definitely still growing, but you’re not seeing like crazy, crazy numbers here. Their small business and self-employed group revenue is up 18%. That does not surprise me at all. I use QuickBooks, I use Mailchimp. So there are two Intuit products in my ecosystem already. Frankly, I think if they just went out there and acquired Canva, then they would actually pretty much own the ecosystem that I think all startups and small businesses are out there using. And their consumer businesses are doing well as well, with the consumer group revenue up 9% and Credit Karma up 8%. So a little bit faster on the small business stuff, but still decent growth rates across the board.

Now, it might sound like these businesses are not actually related, but they do feed off one another. The integration, for example, across Credit Karma and TurboTax, is working, with the number of customers that filed using TurboTax in the US from the embedded Credit Karma experience up 76%. So on these platforms, it’s all about integrations and just seamless experiences. Now, TurboTax is very important in the US because it helps people actually file their taxes, as the name would suggest to you. And filing your taxes in the US is not the most straightforward thing on the planet. So that is actually quite an important product that does rather well. Our TurboTax Live revenue is up 17%, and that represents 30% of total consumer group revenue, with the average revenue they make per return up 10%. So what’s happening here is they are basically tweaking their focus area. They are focusing less on the lower value customers in TurboTax, and they are actually focusing more on customers who need to do more with their taxes and hence can pay more. So they’re actually giving up around 80 basis points of market share and allowing their total units to drop 1%. But they are creating a higher quality business over time that is less reliant on free offerings and is more reliant on higher quality customers, where, of course, they can try and cross sell the different platforms within the group. So quite a shift from the strategy that we saw during the pandemic at most platforms, which was very much a landgrab, get-every-client-you-can. Things are now a lot more focused in US tech.

Mohammed Nalla: I love that description around an ecosystem and how the various parts of the business plug into different parts of the value chain. It’s probably a great place for me to jump into, as you call it, the serious stuff. Let’s look at some numbers on Nvidia, because as you indicated with Intuit, you’re not getting the crazy numbers. The crazy numbers this week come into my playbook and let’s look at Nvidia because there are certainly some crazy numbers out there. We’ll start off with revenue. So they actually achieved record quarterly revenue. Quarterly $26 billion. That’s a monster of a number. And that was actually up, wait for it, 18% from the previous quarter. Remarkably, over the last year, wait for it, 262% year-on-year increase. So this just showing you that even though the stock price has gone absolutely bananas, and we will get into that in my last talking point, the underlying growth in the business has certainly delivered.

Now, remember, a lot of the megatrends we discussed as my first point, have been driving this performance, a strong performance from the data center segment, which posted a chunk of revenue at $22.6 billion, which was actually responsible for a 427% year-on-year growth number. So you can certainly see where a lot of that activity has come from. Data centers, AI-powered data centers specifically, have been a big driver. And again, just keep an eye out in case there are any megatrends that are changing there. There is some talk around bringing AI chips into local machines rather than in the cloud. That could represent a little bit of a risk for Nvidia, certainly in terms of one of its core growth engines. Now, if we actually dial this down from revenue to the earnings number and Ghost, I know you like GAAP earnings, so if we look at GAAP earnings, those actually increased 33% over the last quarter and 765% on a year-on-year basis. Now, if we map that against revenue, obviously it shows you how Nvidia has actually gotten a lot more efficient in terms of managing this business.

There have been some significant improvements underlying in the business, and if we break that down, and let’s look at some of the segments. They’ve got several core segments here. Gaming, that’s actually a very large and important business. Remember, a lot of Nvidia’s core business started out with graphic processing units, and that effectively was then perfectly suited for parallel processing that is ideal for AI. So the gaming segment, that reported fourth quarter revenue of 2.9 billion, it was flat on a quarter-on-quarter basis, but up 56% year-on-year, made up around full year revenue of ten and a half billion dollars. Then we’ve got the other two smaller segments, and this would be professional visualization, that only had revenue of around 463 million. It was up 11% quarter-on-quarter, but still 100% year-on-year. So showing you that even the smaller segments of the business, yes, growing off a low base, but still delivering fairly strong, fairly robust growth. And then, as I indicated, automotive. Nvidia plays in that space. It’s still what I would call a fledgling business. Revenue only reached 281 million for the quarter, but it increased 8% quarter-on-quarter, but concerningly a 4% decrease year-on-year. So it’s showing you it’s not all smooth sailing. Nvidia trying to actually tackle a couple of places of the value chain, they’re going to try and do that as efficiently as they can. And again, in my last point, I’m going to maybe unpack just what’s been happening with the share price, what’s happened with the dividend. There’s a stock split coming and we’ll look at how Nvidia stacked up against some of its competitors as well, Ghost.

The Finance Ghost: Yeah, so for my next point on Intuit, I’m going to focus on QuickBooks, because obviously TurboTax was the talking point up front there, really. And QuickBooks actually grew its revenue by 19% for the quarter. So that’s really strong. Just a very good example of how they are focusing on actually getting a higher share of wallet from consumers because the mid-market customers that have greater need for the services are more lucrative and are more interested in the broader Intuit ecosystem as well. So, you know, guess what? That’s where they are focusing in QuickBooks as well. Now, oddly enough, they still have a number of customers on desktop ecosystems, if you can believe it. Some people just will not shift to cloud unless you literally force them. More weirdly, revenue was actually up 14% in that part of the business. At the end of this fiscal year, they will complete a three year transition period for desktop customers to be moved to a recurring subscription model. Interestingly though, desktop enterprise not so easy. QuickBooks will still need to continue to support that model. For whatever reason, there are larger customers who just will not move from an on-prem solution. Smaller desktop customers, however, will need to migrate to either desktop enterprise and pay a whole lot more for on-prem, or to recurring subscriptions.

Now, if we look at Mailchimp, where growth actually decelerated this quarter due to a very strong base effect with pricing increases, these businesses together will drive that small business and self-employed group, which is where Intuit has actually raised its revenue growth guidance to 18%. They reckon the long-term growth algorithm in this part of the business is between 15% and 20%. So Intuit really does have a very, very strong software-as-a-service business targeting specifically small and larger businesses. And as a user of both those products, I can confirm how sticky they actually are.

You’re not going to move your QuickBooks unless you have an incredibly good reason, because all your financial data is sitting on there and any of the other products are really much of a muchness. So very nice sticky client base in their specifically business software.

Mohammed Nalla: I’m smiling and I’m laughing because I’m one of those small customers who’s refused to migrate onto the cloud and now they’re going to stop supporting me, which means I either go and buy a new product from Intuit or, or I would argue, could also be a risk to the business. Because if I’m gonna be forced to migrate, they really have to make that quite seamless. Otherwise, I’m gonna go out there and maybe consider some of the alternatives. Where I do not consider an alternative is TurboTax, because as you indicate, they do have quite a nice niche in that space. It’s a reasonably good product. Let me move on from this. I know you’re chuckling at my expense you’re thinking, Boomer Moe, let me move on from that.

The Finance Ghost: Well, I guess. I mean, I guess the desktop stuff was cheaper, right? It was cheaper to be on desktop than it was to be on cloud. I mean, that was the whole point.

Mohammed Nalla: Well, the idea was that you bought the desktop software, you owned it, you ran it for a number of years, and you didn’t have to have this recurring payment. The fact of the matter is that over the longer term, cloud, or a subscription-based model, certainly in the software space, might actually end up being more expensive for casual users such as myself. If you’re a user that uses this, you know, quite intensively. Yes. Arguably the move to the cloud and the subscription model makes sense. Let’s see how that comes through in the wash.

Ghost, I’m going to jump into my last point on Nvidia, and we’re going to talk a little bit about numbers or the share price and then look at the competitors. And first and foremost, it was so interesting for me, right, Nvidia is considering a ten-to-one stock split. Now, the stocks just gone over $1,000, so this makes sense. A ten-to-one stock split in June will effectively move that pricing point back down to around $100. And the intent here is really to make it a lot more accessible to a wider range of investors. And specifically, I would say, retail investors, whether that’s good or bad, again, you can make your own mind up. Linked to that, they’ve also increased their quarterly cash dividend. Now, don’t laugh. It’s one cent per share, right? This is post-split, but it’s one cent per hundred dollars. That’s the post-split share price. One cent per quarter, per hundred dollar share. You’re not buying Nvidia for the dividend, you’re buying it for the growth story. So let’s look at what that growth story actually looks like. And as I indicated upfront, let’s firstly look at who the competitors are.

We’ve discussed AMD in my introductory comments there, because that’s where Jensen Huang actually came from. And they’re a major player in the GPU, or graphical processing unit space, and they also have a significant presence in the CPU market. That’s where a player like AMD came up against Intel. Intel was dominant back in the day. AMD then came and ate their lunch. And so if you look at AMD, they’ve been a direct competitor to Nvidia in both the gaming and data segments. And again, you know, they’re a company of some significance, but not at the same scale of Nvidia. Then if we have a look at Intel, that’s a company we’re covering in Magic Markets Premium, as we indicated, traditionally dominant in the CPU marketspace and not really a strong presence in the GPU market. They have been trying to make some forays into that space. And then you’ve got other competitors, the likes of Qualcomm, for example. They compete in the AI and automotive segments. They’ve got this very interesting Snapdragon platform, something we covered in a Premium show some time ago. Now, Ghost, let’s look at share price performance, because I love to do this, right. Over five years, just take a flyer. We know Nvidia shot the lights out. We know it’s beaten everyone. So this week, I’m going to turn this on its head. I’m not going to ask you who’s number two, who’s number three. Just give me a number. What is the percentage performance been in Nvidia over the course of the last five years?

The Finance Ghost: Isn’t it a couple of thousand percent?

Mohammed Nalla: So you’re on the money. It’s just shy of 2700%. And it’s why it’s so ridiculous if you’re actually charting Nvidia against pretty much anything else in the market, because the next competitor is actually AMD and they come down still with significant growth. I mean, in ordinary times, you would not, you know, turn an eye away from this, but AMD growing by 530% over the last five years. Guess what – if you told someone you’re going to grow 500% over five years and you’re not good enough, no one would have believed you five years ago. But AMD coming through as a distant, but I would say still respectable second place. And then followed by other players in the industry. As I indicated, they all kind of cluster around the 400s, but Ghost, I’m going to actually move from this five year ridiculous thousands of percent returns to just the last year.

So over the last year, again, conceivable Nvidia, the outperform at 252%. I’m not going to ask you to guess. If we actually have a look at competitors here. We’ve actually got AVGO, we’ve got Qualcomm. They come through at north of 100%. Fairly strong performances there. But what was interesting for me here is the worst performer over the last year was not Intel. And that might surprise you, right? I mean, Intel down at only, let’s call it 6% growth over the last year. I mean, that, that just makes you cry. 250% from Nvidia, 6% from Intel. But the worst performer actually goes to Global Foundries. And this is a firm that’s backed by US and Arab capital. They’re based in the US as well as in the UAE, but they’ve just failed to gather some significant momentum in that space. I just found that as an interesting point. And then on a year-to-date basis, you’ve still already doubled your money in Nvidia, around 50% for the rest of the industry. And as we’ve indicated, you’ve had fairly poor performances from the likes of Global Foundries and Intel. Interestingly enough, twelve months, Intel wasn’t the worst performer, but year-to-date, Intel was the worst performer. And if you want to know why, go and have a look at our Premium show this week.

The Finance Ghost: Yeah, absolutely. So let’s bring it home now and Intuit. And I must say, it is quite good to see a CEO who is really close to the details. So on the earnings call, when he was asked about the Credit Karma and TurboTax opportunity and that tech integration which is so important to Intuit’s strategy, he immediately spoke to two issues they’ve had. The first one is logins and how it just hasn’t been a seamless process. And the second is that the Credit Karma app has been quite slow on the integration in terms of loading time. That’s a very operational point and they’ve seen a lot of friction there. Obviously, this stuff is very important for an online business. You know, large players with extensive dev teams can fix this kind of thing and of course they are focused on doing that. He calls it being constructively dissatisfied with what they are doing, which is a term that I quite enjoyed. We don’t like what’s going on, but we have a way to fix it.

Now, the integration of the ecosystem at this business really is core to the strategy and you can be sure that they’re going to use every opportunity to point to examples of where it is working well, like for example in payments volumes. So that’s something that they fairly recently brought into the business is this payments layer. So for example, you can get your tax refund and put it in a Credit Karma money account. Now all of this is lovely and exciting, but the share price is at a risky, risky point. It has come all the way back up to over $600. And I’m no technical expert Moe, like you are, but I do know what the mother of all double tops can look like, and this looks like it could be one of them. When it reached the last top, it was trading at a crazy 18 times revenue multiple. This time it’s at a 10.8 times revenue multiple. And it’s gotten back to the same point on the share price chart, but that is still substantial. It’s running at a free cash flow margin of roughly 30%. So based on what we’ve observed in the US market, you can kind of treat ten times revenue, therefore 3% free cash flow yield, as being fully valued. But I wouldn’t race into shorting this because if it starts to roll over, then sure it will be a great short. But if the multiple stays where it is on sales, you do have a kind of mid-teens growth rate in revenue, which the share price would then presumably grow at. So I think that double top is interesting, but it would be good to kind of see it actually really roll over. And then if you’re going to short this, then try and catch a portion of the ride down without being too greedy, because the underlying business is doing very, very well, as we’ve seen.

For those looking to go long, I think personally, Moe, I would wait for some clarity around this double top. I don’t really feel like buying a chart that looks like that. And at the end of the day, if the revenue multiple can also just come down a bit, then you get back into that realm of, okay, not only will you get sales growth, but you might get some multiple expansion. I can’t really see multiple expansion coming from a level of 10.8 times sales in this environment. But on the whole, Intuit, it still looks pretty strong. The ecosystem remains powerful and they are beautifully at that level of sort of software-as-a-service, which the market just loves. Good business. And going from strength to strength, it seems.

Mohammed Nalla: Yeah, Ghost, I mean, that double top is interesting. Remember, on a double top, it’s not just the double top you’re looking for. You’re actually looking for a break below the neckline. And we’re kind of testing that level right now. So I think, you know, a cautious approach, if you’re looking at a short on the stock, would be to wait for that break, maybe even to test the break from below to actually check if it’s confirmed. And that might give you a play towards, let’s call it more sustainable longer term price targets. The 200 week moving average, that’s one that we generally tend to look at. But again, Intuit, certainly an interesting business. We hope you’ve enjoyed that because that’s where we’re going to leave it this week. Let us know. Hit us up on social media. It’s @magicmarketspod, one word, @financeghost and @mohammednalla all on X or go and find us on LinkedIn. Pop us a note on there. We hope you’ve enjoyed this and if you’re not a subscriber to Magic Markets Premium at only R99 a month, we think it’s phenomenal value, an extensive library that you will get full access to. Go and check that out until next week, same time, same place. Thanks and cheers.

The Finance Ghost: Cheers.

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