Stocks: One to Love and One to Leave

NVIDIA Corp (Ticker: NVDA) took center stage this week and by most accounts it did not disappoint on earnings. As I’ve been chirping about on various shows, I think that AI will remain the most important theme for investors over the next few years. And NVDA is the dominant player, the chief picks and shovels seller in the space.  

Picks and shovels refers to the mid-1800s California gold rush where the real and consistent winner was the seller of important items to those dreaming of gold. The pans, the overalls, the blankets and tents…..

Did all those people find gold? Not even remotely. But the store selling them supplies sure did well. NVDA is that store. And this rush is not letting up for years.

$26.14 Billion in free cash flow – music to my ears. Q2 revenue guidance was slightly below consensus due to China export constraints but strong nonetheless.   New UAE and Saudi GPU demand is what investors love to hear. Gross margins, which everyone was worried about, are still healthy.   Margins may come down a little, but folks are missing the point.  The pie is getting massive and NVDA will be feasting on it for years.

I believe that AI is in the midst of a significant pivot into inference and what I would think is much greater AI monetization across the economy.   The good news for NVDA is that it is the poster child for both training and inference (having AI actually generate insight, leading to productivity gains and efficiency).  

The market didn’t soar today for three reasons.  1) it has had a good run and stocks aren't cheap. 2)despite NVDA numbers being good, a 50% rally off the lows may need some digestion. 3)a court block and unblock of Trump’s tariffs poses a problem... as follows:

The Big Beautiful Bill – the spending that republicans are trying to push through, needs money from somewhere.  Tariffs were it.  The silver lining is that yields did not rise on this news.  Bond stability bodes well for equities.

My Top Pick: MSFT

My income pick is MSFT Corp (Ticker: MSFT).  This is a company that is well positioned to take advantage of all things AI.  Its customers are captive to its incredibly sticky ecosystem.  Who is giving up Office?  No one. Co-Pilot will be injected into all corners of this incredible suite of products.  Unlike Google, which faces a horrible dilemma of having to pivot away from its largest and most profitable source of revenue (ads), Microsoft is firing on all cylinders.  It might even figure out a way to make Bing less annoying.  It’s worth watching just for that.

My Least Favorite Pick: IWM

I think the Russell 2000 continues to struggle for a few more months – higher rates are no bueno for highly indebted and non-profitable companies.  It has way too many of those.  

Until next time,

Hans