Tech Resilience, Snowflake Slowdown, Nvidia And AI With Julian Lin

Summary:

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• 0:30 – Tech’s powerful recovery
• 2:34 – Nvidia and how AI may impact tech as a whole
• 5:30 – AI stocks’ rich valuations, but don’t short
• 9:00 – Snowflake’s slowdown not hard to understand
• 14:30 – Macro environment means companies having to rationalize costs.

Transcript

Rena Sherbill: Julian Lin runs Best Of Breed Growth Stocks, welcome to the afternoon edition of Wall Street Breakfast. We’re talking the tech sector as we like to do with you sometimes if we’re not talking cannabis. And we are also talking specifically NVIDIA (NASDAQ:NVDA) and Snowflake (NYSE:SNOW). But it’s great to have you on. Thanks for coming on.

Julian Lin: Thanks for having me on Rena.

RS: So, what are you looking at when you’re looking at the tech sector these days? How would you kind of synthesize your viewpoint of the tech sector?

JL: I think after two years of very difficult stock price action in the tech sector, we finally saw a significant recovery in 2023. In fact, the recovery has been quite powerful and has gone on for several months. So, I suspect some investors they might have grown complacent thinking that stocks can only go up again. And we’re seeing that the opposite could be true with Snowflake. Snowflake’s down 18% as of recording.

But at the same time, we also see a stock like NVIDIA, and I know that this is a stock which a lot of investors on Seeking Alpha or on Twitter were considering to be a bubble heading into the print. It is up 25% on a very, very strong report which saw the company materially beat their guidance. They initially guided for around $7 billion in revenue. They delivered $11 billion in revenue, which is a big beat. And they also delivered strong guidance for the upcoming quarter and the year which significantly paces consensus.

I note that their guidance for the upcoming quarter still implies some year-over-year declines. Yet analysts across the board are very, very bullish on AI and how NVIDIA will be a beneficiary from artificial intelligence. I’m just looking at a couple of price targets. A lot of them are doubling their price targets to $500, $600. I don’t recall if I saw a $700 price target. NVIDIA is currently at $300 — around $400 per share, which is just incredible. Now this is a $1 trillion company.

It’s joined the likes of Apple. (AAPL), Amazon (AMZN), Google (GOOG) (GOOGL), you know, as some of the rare trillion-dollar company — I forgot Microsoft (MSFT) of course. It’s one of the five trillion-dollar companies in the U.S. at the moment. Just truly incredible. But at the same time, in my opinion, it’s a very difficult, you know, it’s a very difficult stock to take a position and just because of how much forward growth is being priced in and how much reliance on this company to continue defying the estimates to sustain that valuation.

RS: What do you think of, when you’re looking at the tech sector and specifically NVIDIA, what do you think it’s — like, do you think that the company signifies things for the broader tech sector? Just what it represents alone?

JL: I think NVIDIA being a semiconductor manufacturer and for the tech sector, I think it’s that the strong results today definitely help to show how AI might impact tech as a whole and how AI could be a very game changing, either positive or negative for a lot of tech companies. I think not every tech company is going to benefit from AI the same — to the same extent that NVIDIA might as implied by the stock price today. But I think a lot of tech companies will and I — we are starting to see several other tech companies, with some associated with AI also rallied today after some big rallies in the past. Investors probably are already aware of, you know, some of those more typical names like Palantir (PLTR) or C3.ai (AI), not saying that these are the best AI plays, but these are the names that were associated with AI prior to all of this craze and are finally maybe getting some recognition for it this year.

But we in addition to the direct AI plays, we’re also seeing some of the cloud computing players like Microsoft, or Google, seeing some – or even Meta Platforms (META) seeing some positive action today because they’ve shown that AI could benefit their business, perhaps accelerate their cloud growth, or in Meta Platforms case help improve operational efficiencies. One stock that I’m surprised to not see going up today is Amazon because similar to Google and Microsoft, their Amazon Web Services should be a clear beneficiary of adding AI capabilities to their web services offerings.

RS: Why do you think that they didn’t go up with the rest of their cohorts?

JL: It’s interesting. It’s possible that maybe the rallies in Alphabet and Microsoft, it might be a little more short-lived, this is possible. It’s also possible that investors are a little more bearish on the retail platform for Amazon. Amazon is my largest position. So I clearly am very biased in this – in this horse. But I think that perhaps Wall Street is viewing some of the commentary that Amazon had regarding AWS on the conference call, comparing that with Microsoft. Whereas Microsoft implied that their cloud optimization headwinds might be ending quite soon. As soon as they mentioned things like they’re going to lap the annual anniversary of it, you know, next quarter, it’s going after that point, they believe it should ease. Amazon did not give similar commentary when discussing AWS. So it’s possible that Wall Street is of the view that Amazon’s cloud story is not as strong as seen at Microsoft Azure.

RS: Would you consider the AI kind of frenzy, would you consider that a bubble at this point? How do you think like investors should be kind of thinking about the valuations around these AI stocks?

JL: So, I think it’s very difficult, right? As mentioned earlier, a lot of the investors, perhaps including myself to some extent already viewed NVIDIA stock to be of very rich valuation. Some calling in the outright bubble, I did not get quite to that level. But after today’s results, it’s clear that, you know, Wall Street consensus is of the opposite view. I think that if you were to look at some of these stocks, let’s just focus on NVIDIA because that’s the name of the day. If you were to focus on maybe current financials or past financials, even like their peak year in 20 — was it 2021, it — the stock looks quite expensive. It could be hard to imagine the growth justifying the current valuation.

But at the same time, as was very – as it was made clear when ChatGPT came out, AI could be a big game changer. It could be similar to how the smartphone was a big game changer, but it’s very difficult to predict how much of an impact it has or how much growth, how much improvement in margin and pricing power NVIDIA might be able to show. I think it’s reasonable to assume that valuations are pretty rich, but at the same time, I would caution calling it a bubble because some investors might find the courage to try to short a bubble. And I do not — I’m not of the view that shorting NVIDIA or any of these AI stocks is a good decision at this point.

RS: We were talking on the podcast yesterday and the news came out yesterday morning about this National AI strategy, the Biden administration really released this plan? What are your — do you have thoughts on that? Like, as an investor, do you feel like that that is something worth watching? And how should kind of investors be looking at that news aside from the obvious fact that AI is here to come to play with our lunch and maybe take our lunch and give us a new lunch and do a whole bunch of things that we’re not aware of. But certainly a lot of things that we are somewhat aware of at this point.

JL: Yeah, I think AI with all of the technical advancements, it could bring, it definitely is uncharted waters and there’s a lot of risk that could come with it. I think that regulation is needed. I’m not sure that our politicians will be able to move fast enough to enact adequate regulations. I mean, for example, just look at social media, I think Facebook, Google, they’ve been asking for fair regulations for — God knows how long, maybe 10 years already.

And there hasn’t really been much framework there yet. I mean, there’s been plenty of fines but there hasn’t been clear framework, clear guidelines for the government for what should be done. Something similar might happen to AI. It’s possible that AI will prove more disruptive than what we saw in online advertising and I mean it’s more disruptive to the economy and to daily life and that might force our politicians to enact stricter regulations.

RS: I think something else that we’re seeing in the tech sector that has been evidenced by recent earnings and different analysts take on those recent earnings is a company like Snowflake who I think has been at the short-end of some recessionary kind of factors that are going into play with how their numbers are doing and what’s happening to their consumer base and what that means for the type of company that it wants to be in its business model. How are you looking at how — like I’m happy for you to get into Snowflake, but I’m also curious how you’re thinking about the macro pressures specifically affecting tech.

JL: Yeah, so this is a tough macro environment. No doubt, interest rates rising, economy seems to be teetering on a recession. But what we’ve seen for the most part across the tech sector, especially across enterprise tech has been that growth has been very resilient. Even a lot of these companies are still showing 15%, 20%, 25% growth. I mean, even higher in Snowflake’s case, in spite of a tough macro environment that those are numbers that outside of the tech sector these companies even in a zero-interest rate environment, they were not able to show.

So in general tech has in large part escaped rather unscathed ironically from this tough macro environment. Yes, the stock price has crashed, but that was not necessarily due to fundamentals in terms of their financials. It was more due to the other part of the fundamentals in terms of valuation where a lot of these names were trading at far too rich valuations.

Now in Snowflake’s case, the stock again is down almost 20% today. That might surprise some investors because Snowflake is a data lakehouse helping companies to manage, analyze their data. You would think that with the growth of artificial intelligence, data will just become more important. You’re going to have more and more data. These companies are going to need more data to fund their — to power their LLMs, but Snowflake’s results did not quite indicate the same level of acceleration in demand that you saw on NVIDIA.

Sure, I mean, Snowflake was able to beat their revenue guidance pretty easily, but at the same time, they saw a steep deceleration in remaining performance obligations, which is typically an indicator for future revenue growth. I think this was the first quarter where our RPOs declined sequentially. And then their guidance, their guidance was really the kicker where they lowered their forward guidance, which was already lowered. They lowered it from 40% to around 30%.

And that’s a really big — that’s a really big step down implying that probably in the 3rd, 4th quarter, you might even see growth slow down to the 20% level and that’s not quite going to cut it for this business which was valued at 20 times — over 20 times sales heading into the print…

RS: And it was its second – sorry, but it was its second guidance cut also, which I think, you know, plays into that.

JL: Yeah. And I think even beyond these past two quarters, this management team has been sort of walking back some of their aggressive guidance. So, I mean investors, they’ve I think they’re starting to throw in the towel and some investors they might have been still having hoped that at least maybe this growth in AI would help accelerate the business, after the management already started issuing conservative guidance.

I mean, just for reference. What I’m referring is that while this is maybe just like the second time they lowered guidance, I think for several quarters, heading into two quarters ago, many investors were hoping that Snowflake would increase their fiscal, I think fiscal ‘29 guidance of $10 billion in revenue.

But Snowflake management ended up not increasing that. They were kind of hinting on the conference call for many quarters that, oh they’re — this guy hints they’re going to be able to beat it. And then once they had their investor analyst day, they maintained it. So there’s already been at this point, many quarters of disappointments and this slowdown by the company it’s not entirely hard to understand because in the tough macroenvironment, this consumption based business is going to see demand grow lower.

Snowflake mentions many of its customers are starting to delete some of their data instead of just growing their data and analysts may be growing concerned that this might be the start of a new trend. Maybe Snowflake will not see the big growth that it and all of Wall Street thought it would see, I mean, sure management, they did reiterate their guidance for $10 billion of product revenues by fiscal year 2029.

But at the same time to hit that target it might be very tough considering that they just lowered their guidance to around 30% this year. I think the company will have to sustain over 30% all the way through 2029 to hit that guidance. So clearly, what we’re seeing here is a breakdown in what was supposed to be one of the safer stories in the market.

And when your stock trades so high, that expectations are also going to be very high. And we’re seeing the stock get punished. I mean, of course, and it’s funny to mention this because at the same time, we’re seeing NVIDIA trade up so hyperbolically as well, in spite of high expectations. This is just a reminder that even though tech stocks continue to trade very strongly over the past several months, the fundamentals do eventually matter. And just because the stock has been trading strongly for several months or several quarters, it does not mean that it cannot drop so quickly in a matter of, you know, a matter of hours.

RS: I wanted to ask you a question because along with the guidance cut and the macro headwinds and the factors that are affecting customer retention, Michael Wiggins De Oliveira, I hope I’m pronouncing that part right, who runs Deep Value Returns on Seeking Alpha. Curious your thoughts, maybe you’ve seen it. But he was comparing their business model to Netflix that if Netflix (NFLX) were to charge customers per video watched that it wouldn’t be as valuable as an experience. And he’s comparing that to how Snowflake’s business model is. What would you say to that or how are you thinking about that?

JL: I think definitely in a macroenvironment like today, such a metaphor is — it makes a lot of sense because all these customers not just in the tech sector that are all — all these companies that are thinking about how to rationalize costs. And then when you have this pricing model where it’s based on conception, the more you use it, the more you pay, Sure, Yes, when you’re growing at any cost, it’s very attractive to Snowflake’s business and investors love it.

But at the same time, it makes it a big target, it makes it an obvious kind of a low hanging fruit for a lot of companies. Just it’s very easy way for them to rationalize costs. So I think such a metaphor really makes sense, especially in the current macroenvironment.

RS: So, how would you advise investors to kind of go forward as these recessionary headwinds, we’re not completely sure how they’re going to play out and what the economy is going to look like, but it certainly looks like challenges still remain and are ever present. How are you kind of looking at the next s6 to 12 months in the tech sector? How are you thinking about it?

JL: So, I would say that the most important thing will continue to be focusing on the fundamentals. It’s very tempted – well, actually, I would say I’m rather surprised to see some of the sentiments among retail investors shift so quickly. After a very brutal valuation reset, you would expect a greater focus on valuation. But I’m starting to see a lot of investors start to return to their momentum ways and kind of forgetting about valuation.

I think that given that this is a very uncertain macro environment and a lot of stocks in the tech sectors have bounced very strongly off the lows it’s important to not focus just on the quality of the business or even just investment narratives, you know, especially with AI. It’s important to also look at valuation to look at what is the opportunity cost because it’s not necessary to own the most attractive investment narrative if the valuation just does not make sense.

What I’ve been saying for subscribers is that I continue have to apologize for the higher amount of trading and transactions. But I think this is a byproduct of the fact that things are moving very quickly with the higher interest rate environment. This definitely changes a lot of investment narratives, changes a lot of how one should view certain things. For example, I also recently wrote a piece about REITs, about the real estate sector in terms of what’s been interest rates rising so much.

It makes a lot of high yield stocks look very attractive, but the high interest rate environment is making it, so a lot of these REITs are not able to show growth.

So it’s very important to look at the current investment landscapes in terms of how the high interest rate environment will impact their growth rates. And then again, focusing on valuation because a lot of these businesses perhaps they could have survived when interest rates are much lower and thrived even. But with interest rates higher, it could negatively impact their growth rates. It could — not only that really impact the long term viability of their business models. So it’s important to not hinge on maybe what you might have believed in, in the past, but be very important to be willing to change how you view things today.

RS: Because I know that you’re living in San Francisco and we had an episode yesterday where Kim and Kevin were talking about this retail theft and I know San Francisco is really in the headlines a lot about suffering from that. What’s the feeling like as somebody living there? And what’s your experience of this retail theft and how much it’s affecting retail?

JL: So I think that in the United States, politics have unfortunately began to shape narratives and what is true in reality. I think that perhaps if you’re living here things you may not view it as negatively as perhaps some politicians might try to make California, especially the Bay Area seem to be. But definitely, I think that it’s kind of interesting, similar with AI and how that might bring some unexpected consequences or benefits.

You know what I was reading about the retail theft is that that was in large part caused because of some of the technological advancements from Meta Platforms where they were allowing people to sell things on Facebook marketplace. It’s a very, very convenient way to sell and get rid of things. I’ve used it very frequently, but I guess unfortunately it makes them very — it creates some incentive, you know, to go, maybe steal some things and sell things on there. I guess that’s an issue that, you know, Meta Platforms and all these other apps are going to have to work through, but just kind of, to answer your original question, I enjoy living here.

RS: So basically it’s not as bad as they make it seem on the news. You think it’s hyperbolic?

JL: Oh, absolutely. Absolutely.

RS: All right, Julian Lin runs Best Of Breed Growth Stocks. Really appreciate you coming on.

JL: Thanks for having me Rena.

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