Back in 2022, Munro Partners' Nick Griffin pitched NVIDIA (NASDAQ: NVDA) as his top stock for the year. As it would turn out, the stock would go on to fall around 50%, before rebounding from its lows in October 2022 by more than 330% today.
While he may have been a year early, Griffin believes the stock is far more attractive today than it was back then.
"The underlying earnings of the company have actually got significantly better," he says.
"We think this is just the beginning of the artificial intelligence (AI) runway... [It] should last three to five years at least. But is there an element of pull forward in that? Yeah, there could be... And I think that's what people are grappling with now."
That said, the stock is now trading on 25 times next year's earnings, versus 50 times earnings at the start of the year. But the real question of the company's long-term success lies in whether or not we end up really using AI products, he added.
Interestingly, Microsoft (NASDAQ: MSFT) has doubled down on its investment in AI, with CEO Satya Nadella likening the AI revolution to the widespread grasp of the mobile phone.
For more on this exciting opportunity, I sat down with Griffin for a look at how he is thinking about markets today ahead of his appearance at Livewire Live next week. He shares where he is seeing little (and a lot of) opportunity, as well as what the peak of the cash rate cycle could mean for growth investors like Munro Partners.
Note: This interview took place on 30 August 2023. You can watch the video or read an edited transcript below.
Chris Conway: Hello and welcome to Livewire Markets. My name is Chris Conway. Joining me today is Nick Griffin, Chief Investment Officer at Munro Partners. Nick will be presenting at Livewire Live later this month, but today he's joining me for a rapid-fire market insights segment.
Nick, it's great to see you again. Microsoft CEO Satya Nadella has taken a big bet on AI. I know that's a big position in your portfolio. Does the size of that bet worry you at all, Nick? Why or why not?
Nick Griffin: I've probably got some interesting perspectives here. I was actually in the Microsoft offices in June this year, and I actually asked them directly, "I mean, is this AI stuff real or are you just trying to distract us from the macro?" And the story they told us was, if you think about going back to November or December last year when ChatGPT first came out, Microsoft was an investor in OpenAI. They had a billion-dollar stake, and it was one of say, as they described it, 10 bets they had at the time. And then apparently Satya Nadella got the team in the room once he saw how ChatGPT worked and said, "Look, Microsoft as a company missed the mobile revolution. So we were made in the PC revolution and we missed the mobile revolution and we're not going to miss the AI revolution."
So he sat down all these big executives and said, "We're going all in on AI." They increased their investment in OpenAI from US$1 billion to US$10 billion. They launched their copilot products across every single product that Microsoft produces. So whether it's Dynamics or Office, PowerPoint, Excel, Outlook, etc., we'll have a copilot attached to them probably by the end of this calendar year. And he's essentially harnessed the entire company towards this one opportunity. And the reason why he's doing it is because he doesn't want to miss it like they missed the mobile bet.
And what we now see is Microsoft's CapEx budget has gone up by 50%. They're going all in and I think it's 100% the right thing to do. It's 100% the right thing to do because they've got themselves a good lead here and you're now seeing the entire tech industry try to follow them. And I suppose the big question is, are we going to use all these products when they come out when Microsoft launches them later this year
Chris Conway: Nick, you talked there a little bit about ChatGPT, and that seems to be one end of the conversation where ChatGPT is helping new students cheat on their assignments. The other end of course is killer robots. There's plenty in the middle. There's plenty that people aren't talking about. What practical AI applications have you excited?
Nick Griffin: The good thing about AI that's different to say the metaverse or cryptocurrencies is we're all using it. So we were using it for years before ChatGPT. It was like in your predictive shopping stream. It was selecting the shows you wanted to see on Netflix (NASDAQ: NFLX). It helps your Tesla (NASDAQ: TSLA) stay in the lane or this lane change technology, etc., that I'm sure people have used. So everyone's used AI already. ChatGPT is just the large language model version. So it's effectively gone from a small chatbot to 'We can answer any question you want'.
And I think that's as Jensen Huang, the President of NVIDIA, would put it, that's your iPhone moment for AI. What's essentially happened here is you now have applications that are effectively infinite. And the reason why he calls it an "iPhone moment" is if you think about it, when the iPhone came along, it was great. The internet was on your phone, but it was really the Apple ecosystem that made the iPhone work. It could track your health, it could create a map, it could play a podcast. So you should think about large language models or AI as the same thing. You can effectively apply them to anything.
So I talk about Microsoft with the co-pilot products, which is essentially listening to your team's meeting and summarising it for you or turning a Word document into a PowerPoint presentation. But Adobe (NASDAQ: ADBE) has a thing called Firefly, in which you type words and it creates a picture for you for graphic design. You can think about it for pharmaceutical companies trying to work on drug discovery. You can think about it for banks trying to work out credit, Xero (ASX: XRO) for instance, helping you do your accounts.
So from our point of view, you should think about AI as a copilot or an assistant. It's not going to do your job for you, it's just going to make your job easier. And it's applicable across pretty much every industry in the world. So every company's going to have a go at using these models to create more productive tools. I suppose the big question we don't know is how successful they're going to be and how much we're all going to use them, but the early signs are really good.
Chris Conway: I think you talked a little bit about a healthy China being healthy for Australia and the world more broadly. Do you have a couple of positions in the portfolio that are plugged into the middle class in China and that burgeoning middle class? How worried, if at all, are you about the property situation in China? What's going on there with respect to how those positions might play out?
Nick Griffin: So we exited the Chinese equity market in 2021. We basically didn't feel comfortable that we could predict what the earnings of the companies were going to do, mainly because the regulatory environment was getting very difficult. Companies had to direct money to health and prosperity funds, etc. So from that point of view, we have no China investments in the fund today. But you make a good point. We do own shares and things like Lululemon (NYSE: LULU) or Louis Vuitton (EPA: MC) that rely on a healthy Chinese consumer. And without a doubt, the Chinese consumer has definitely not bounced back in the way that everyone thought.
However, it is important to distinguish between the high-end consumer and the low-end consumer. The high-end consumer is fairly unique in China. There's potentially even a dynamic where the high-end consumer is trying to get their money out of China - if that makes sense. So they're using high-end products to do that. And you see that in property markets as well in places like Melbourne and Sydney. So from our point of view, the jury's still out as to whether the high-end consumer in China is going to be affected by what's going on in the economy. But the economy's not doing well, and that's obviously not great for global growth and it is a concern that we have to monitor over the medium term.
Chris Conway: Nick, lots of debate at the moment about the interest rate cycle being done potentially here and in the US. Being a growth investor, how excited are you about that being a reality and what would it mean for the way you're looking at markets?
Nick Griffin: From our point of view, very excited. It's obviously well-documented that growth equities had a pretty tough time last year. Why? Because interest rates went from zero to 5%. So we invest in long-duration assets or generally longer duration assets than everyone else. If the discount rate goes from zero to 5%, it hurts. It lowers the multiple that you should pay for companies, it lowers the valuation. Now that that's stopped, we've peaked at 5%, you're actually seeing these companies go back to following their earnings, whether it's Microsoft in AI, as we talked about, or even some of these consumer stocks. So the multiples have stopped falling. So from our point of view, that's really exciting.
The second thing to say is you don't actually need rates to fall from here. You just need them to stay the same, which is the way we think about the world. The whole Dot-Com bubble was inflated at 6% interest rates. It wasn't inflated at 0% interest rates. So this concept that you need 0% interest rates for growth equities to work is wrong. So we don't actually need rates to be cut, we just love them to stay the same. So from that point of view, that pressure has come off, the stocks we look at, and their earnings are starting to grow again and the stocks are starting to follow with earnings. So that's exciting.
The last thing I'd just say that I think a lot of people underestimate is central banks actually got rates to 5% or circa 5% without collapsing the financial system or without any major breakage. A lot of people thought this could never happen. A lot of people thought we would never get out of the post-GFC world and we have. And it's important to think about the long-term sustainability of the cycle from here because you now have central banks that have downside buffers that they could use. They've managed to get them in place without too much damage occurring. So I think that gets us much more excited about being able to take much longer-term views without the cycle getting in the way from here.
Chris Conway: Nick, let's talk NVIDIA. Another major position in the portfolio has absolutely smashed it this year. So first of all, well done. I want to ask though, has this one become overhyped? They did have a big revenue forecast that they put out recently, but has the share price departed from reality and how are you looking at it?
Nick Griffin: We've liked NVIDIA for a long time and obviously it's been good this year, but it's a point to flag that I think I'd be able as my number one pick in 2022 on Livewire and it proceeded to fall 50% in 2022 and then rally a couple 100% this year. So look, this is a tough stock to own. In our view, you pick a size and try not to trade it. I would just point out the stocks, even though it's done very well this year, it's still less than 20% above where I predicted it to be the best company in 2022. And the underlying earnings of the company have actually got significantly better. So I think it's important for viewers to understand how dramatic this shift has been. So when we were talking to NVIDIA in November last year, they thought 2023 was not looking like a good year.
They said, 'We've still got inventory in the supply chain. Things are looking difficult.' And then by January, ChatGPT had come out, their phone's ringing off the hook and they're like, '2023 is going to be amazing.' And we're like, "Really?" And then they released the results in May and it was really amazing. And then they released their results in June and it was really amazing again.
So just to put this in context, you've got a top 10 company on the planet that's covered by 28 analysts who've all got their earnings estimates for 2023 wrong by about 150%, and next year by more than 200%. So this has been a dramatic pickup in demand for NVIDIA's GPU products. We think it is just the beginning of the AI runway because the AI runway should last three to five years or at least. But is there an element of pull forward in that? Yeah, there could be. There could easily be an element of pull forward in that.
And I think that's what people are grappling with now. The stocks actually now cheaper than it was at the start of the year. So it's on 25 times next year's earnings. At the start of the year was on 50 times because of the huge earnings upgrade. And is that reflecting this pull forward or is this real? And I think the real question you've got to ask yourself on NVIDIA, which has come through on a number of the questions we've had here today, is how much are we actually going to use these products?
If we end up using them a lot, and people would know this because they're already using them a little bit, they're probably using Bard or ChatGPT - how much are you going to use this product over the next three or five years? And if you think it's a lot, then it doesn't really matter from here for NVIDIA because NVIDIA is the winner. GPUs, they virtually have no competitors. They should be the big winners of this next computer shift, and we think you should just own it and not trade it for a long period of time from here.
Chris Conway: Nick, let's change direction a little bit. Any podcasts, books, or TV shows that you've been consuming recently? Anything you've been binge-watching?
Nick Griffin: I mean obviously Netflix. Funny that, binge-watching Netflix as always. Should get better now that there's a strike in the US and Netflix has all the content. Podcast-wise, Business Breakdowns, is a good little podcast that goes through a business. If you're looking at a company, have a look if they've got it, there's usually a nice little 45-minute video there from that point of view. The Knowledge Project is a good one I listened to about leadership, how different companies have been successful and the people that help drive those situations. So those are a couple of things that I look at.
Chris Conway: Some good tips there. Last one for today. How are you feeling about Livewire live in a couple of weeks?
Nick Griffin: Yeah, we're pretty pumped. It's going to be exciting. We did this a long time ago now - three or four years ago - and it was exciting that time and it's good to be back.
Chris Conway: Fantastic. Well, look forward to seeing you there. Thanks, Nick. If you enjoyed that conversation with Nick as much as I did, make sure to give it a like, and don't forget to follow our YouTube channel because we're adding lots of great content every single week.
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