(Bloomberg) — Shares of Nvidia Corp. (NVDA) shares have nearly tripled this year, and Wall Street analysts are overwhelmingly bullish on the chipmaker.
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But Terry Smith is not impressed.
The money manager, dubbed Britain’s Warren Buffett by the British press, is skeptical, saying the world’s biggest stocks lack a predictable profit stream and a strong track record of high returns on capital. Smith is avoiding the stock even as he acknowledges such a move would undermine his portfolio’s performance.
“I don’t feel confident that we know what the future of AI is because there are almost no applications that people are paying for,” Smith said in a Nov. 5 interview in Tokyo. “Will they be willing to pay on a sufficient scale and at a sufficient price to justify this? Because otherwise the suppliers of the chips will have a problem.”
Smith’s caution touches on one of the biggest concerns about the future of the artificial intelligence industry: Will the revenue generated by the technology ultimately justify the billions of dollars of investment companies have poured into it? The doubts contributed to a sell-off that wiped about $900 billion from Nvidia’s market value, from a peak in June to a low in August, although the shares have since recovered.
AI enthusiasts note that Nvidia’s largest customers, including Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG), have pledged to invest more in capital expenditures after investing a record $59 billion in data center equipment and other fixed assets in the third quarter. Strategists expect the company to post a 56% net profit margin in fiscal 2025 as tech companies continue to boost AI spending to keep up with the competition.
But Smith thinks such large margins may not last. “Even if AI is the next big thing and we start paying enough money to justify it, will there only be one manufacturer of these chips?” he said. “If you achieve fantastic returns, it attracts competition.”
“If you look at the people who are the big users of the microprocessors that Nvidia supplies, like Microsoft, Amazon and Oracle (ORCL), they have a history of developing their own microprocessors,” he added.
Smith’s Fundsmith Equity Fund has returned 9% in dollar terms this year, lagging the MSCI World Index of developing-world stocks, which is up almost 20%.
The underperformance is due to “concentration of performance in a handful of stocks,” Smith said, adding that the rising popularity of index funds is fueling the trend.
“The popularity of index funds is concerning,” he said. “Many people call them passive. But they are not passive. They are momentum strategies. And the momentum will continue until it doesn’t.”
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