The Nvidia Effect

Dear Reader,

Nvidia is reporting earnings today. In fact, by the time you read this letter, chances are that Nvidia’s results will already be out.

Tomorrow, I’ll cover the results in the next issue of The Bleeding Edge.

I don’t usually cover a single stock’s earnings release. But this one is different. Nvidia is… well… Nvidia.

The stock is the barometer for the entire AI market. And the company is the bottleneck in the middle of the AI supply chain.

Big tech companies like Meta, Alphabet, and Microsoft can’t train their models without Nvidia’s chips. And suppliers like SK Hynix, Samsung, and Micron are dependent on Nvidia’s orders to ramp up their production.

Competitors are working on building alternatives. But for now, Nvidia is the only option for serious AI contenders.

In all, there are dozens of publicly traded companies that are hinging on Nvidia’s results today.

That will create opportunities for us depending on what Nvidia’s results are… and how Wall Street interprets them.

Let me explain.

Still the King

Today, Nvidia is known as the undisputed king of artificial intelligence hardware. On June 16, Nvidia (NVDA) joined the exclusive “Trillion Dollar Club” when its market capitalization surpassed the $1 trillion mark. Nvidia remains one of the greatest success stories in high technology and investing.

But here’s what might surprise you… I do not recommend buying Nvidia today. At a $1 trillion valuation, Nvidia’s best days of growth are behind it. At the right price, investors may be able to see respectable double-digit returns with Nvidia over the long term. But the days of rapid, triple-digit returns have come and gone.

But just because we’re not investing in Nvidia does not mean we can’t profit from its success. It all comes down to something I call “The Nvidia Effect.”

When a company becomes as large as Nvidia, every move it makes impacts the smaller companies that support its operations. And we can see for ourselves the benefits of this strategy.

A Rising Tide

On January 26, 2021, Tesla set a new all-time high of $294.

It marked a 1,390% gain over the previous two years. That’s enough to turn every $10,000 into $149,000. It was also enough to make Elon Musk the world’s richest man with an estimated net worth of $195 billion.

Tesla was a stock market sensation. It was the stock that embodied the electric vehicle (EV) revolution. And 2021 was the year it had its biggest leap in production, from 500,000 cars to nearly 1 million per year. Early investors were rewarded for their foresight.

But investors that were late to recognize the EV trend were left with a tough decision: Purchase shares of Tesla at a high valuation or sit on the sidelines. Today, Tesla trades at around $235. That means investors were right to be cautious about buying in at such a high price.

But there was a third option. It was an option that would give investors a second chance at Tesla-like gains.

On July 16, 2021 – six months after Tesla’s new peak – a tiny semiconductor testing company called Aehr announced on its earnings call that it had landed a “major Fortune 500” customer. The CEO went on to mention Tesla 11 times on the call.

Shares of this penny stock jumped 22% from $2.81 to $3.43 on the news. But that was only the beginning.

Aehr makes specialized testing equipment for Silicon Carbide (SiC) semiconductor chips. These were the same chips that Tesla was starting to use in its vehicles to boost range and reduce charging times. There weren’t many companies that could test these chips. And Tesla chose Aehr as its main partner.

Securing a partner like Tesla also elevated Aehr’s visibility… attracting more clients and institutional investors. Aehr’s revenue tripled from $16 million in 2021 to $50 million in 2022.

In July 2021, just 21% of Aehr’s shares were held by institutional investors. Today, institutions hold 78% of Aehr’s stock. Its market cap grew from $60 million to $1.3 billion during that time.

If you’d invested within a month after the partnership was announced, you’d have between a 650% and 1,211% gain. That’s enough to turn a $10,000 investment into $75,000 or $131,100. If you’d bought Tesla shares during that same time, you’d be about flat.

That’s the kind of opportunity we can expect by looking upstream to the suppliers and testing companies that support Nvidia’s AI GPUs.

You didn’t have to be early to the AI trend to find companies like this. New partnerships are forged to keep up with demand. But you do have to act quickly once they’re announced.

Just Getting Started

I expect Nvidia to announce about $11.5 billion in revenue this quarter. That would mark a 59% increase in revenue over the last quarter.

At roughly $20,000 per H100 GPU, that’s theoretically an additional 225,000 chips for AI training.

And my research indicates that demand for Nvidia’s chips is only going to continue to grow.

That means the AI story is just starting to be told.

My team has been researching the best suppliers to Nvidia and not a single one has indicated demand is slowing.

In fact, just the opposite.

The fear for most suppliers is that they can’t keep up with the demand and Nvidia will find a better alternative.

So while today’s earnings for Nvidia are an important barometer for the AI industry, it’s just the start for suppliers.

Readers of my Exponential Tech Investor letter received my latest supplier recommendation on Monday.

It won’t be the last either. We’re finalizing research on more that are likely to become recommendations.

While Nvidia has made its big run, these stocks are just starting to move higher. They still offer triple-digit return potential ahead.

Regards,

Colin Tedards
Editor, The Bleeding Edge