The Tip of the Spear

Briton Ryle

Written By Briton Ryle

Posted March 21, 2024

The financial media is very good at ramping up bullish hysteria with its breathless “buy now” hype. It’s a very predictable cycle… 

Wall Street investment banks and hedge funds start whispering in the ears of their favorite financial media anchors and Wall Street Journal reporters. White papers get written, analyst “buy” ratings get issued, price targets get raised…next thing you know there’s a stock-buying frenzy.

Remember when EVs were going to replace regular cars by 2027? Investors ramped EV stocks to insane levels. Tesla was worth more than every car maker on the planet combined. How’s that working out? 

Or maybe you remember when 3D printing was going to change the world. Need a kidney or a new aorta? Don’t worry, we’ll be 3D printing them soon…

Internet-of-Things, the 5G rollout – if you’ve been around for a while, you’ve seen this hype cycle play out time and time again. And it never ends well for most individual investors. The financial hype machine keeps churning out bullish forecasts long after the stocks have hit their highs and retreated…

So if you’re shaking your head a little every time you hear about the AI Revolution, well, I’m not surprised. Because the financial hype machine has absolutely kicked into overdrive about AI. 

I’ve been investing, trading, and recommending stocks to individual investors for nearly 30 years. I started in this biz in 1998 – right before the mother of all stock market bubbles started for internet stocks. And I can tell you the one thing that every bubble has in common. Revenue and, more importantly, profits. 

Bubbles come with a lot of promise about future revenue growth and windfall profits. But when it becomes clear that windfall isn’t coming, that’s when the bubble pops.

And that’s one thing that separates the best AI stocks from the bubble stocks of the past. Revenue and profits are surging for the top AI companies. 

Biggest Dollar Gains in History

Let’s turn the clock back a year, to May 24, 2023… 

It was a Wednesday and Nvidia (NASDAQ: NVDA) finished the day with a market valuation of $755 billion. People were already saying that the stock was a bubble. Then after the closing bell, Nvidia reported its second quarter earnings…

Analysts were looking for $6.5 billion in revenue. Nvidia came in with $7.2 billion. 

Earnings per share of $0.88 beat the $0.81 estimate by nearly 10%…

By the end of the next day, Thursday, May 25, 2023, Nvidia was worth $940 billion.

That $184 billion addition to its market valuation is the biggest dollar amount gain for any company, ever. In all of stock market history.

But it wasn’t the extra $700 million ($7.2 billion vs $6.5 billion) the company took in during the quarter that launched the stock higher. It was the forecast for the current quarter – analysts were already optimistic, thinking Nvidia would take in $7.2 billion or so. Nvidia said, w-e-e-e-ll, it’s gonna be more like $11 billion…

39 analysts cover Nvidia. It is their job to keep tabs on how Nvidia’s business is going. Manufacturing, orders, deliveries – all that. And they missed Nvidia’s sales by 50% – in the current quarter. The orders are in, deliveries are being made, and the analysts still missed by a wide margin…

I don’t mean to indict the analysts. Of course, revenue and earnings estimates always get low-balled so the companies can then beat the number and get a little pop for the stock – that’s just how the game is played. But when you have 39 analysts covering a stock, you’d think one or two would at least get close…

The fact that they didn’t explains why Nvidia added $184 billion to its value in one fell swoop. Nvidia’s business is booming because companies are investing in Artificial Intelligence (AI) as fast as they can. 

A few weeks ago, on February 21, Nvidia released its latest quarterly earnings report. $22.1 billion in revenue and $4.93 per share in earnings. 

In less than one year, Nvidia grew revenue from $7.2 billion to $22.1 billion. Earnings jumped from $0.88 a share to $4.93. 

Again, this kind of growth has never happened before…

The Tip of the Spear

Now, I want to be clear that all this is not meant to be a recommendation for Nvidia stock. Most of the money that investors will make on Nvidia has already been made. 

My point is to show you that Nvidia is the tip of the spear for AI.

A year ago, the most powerful data centers in the world, like Microsoft Azure and Amazon Web Services, weren’t capable of running AI applications. Nvidia is the only company in the world that can make chips powerful and versatile to run AI. 

That’s why there’s such a mad dash to buy these chips. By the end of this year, Meta’s (NASDAQ: META) Mark Zuckerberg says he will own 350,000 of Nvidia’s best chip, the H100 at $30,000 each. I expect the numbers to be similar for Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN). 

There will come a time when Nvidia’s revenue growth slows down. Once the mad scramble to upgrade data centers is done, then the infrastructure phase of AI adoption will mostly be done…

But, then what? How will AI applications change the way companies do business? What companies will benefit most? 

There’s no firm answer for that just yet. We’re still very early in the AI adoption cycle. But I have some ideas. And robots are at the top of my list. 

We’ll be talking more about this in the future, there’s still a lot of money made from AI.



Briton Ryle

Chief Investment Strategist

Outsider Club