Dave Mazza: AI leadership rotates beyond megacaps to new winners

Hill Investments Discussion on Nvidia, AI Trade, and Market Risk

Key Concepts:

• Nvidia: Leading AI chip manufacturer, experiencing valuation concerns despite strong earnings.
• Magnificent Seven (Mag-7): Group of large-cap tech stocks (including Nvidia) heavily influencing market indices like the S&P 500.
• AI Trade: Investment strategy focused on companies benefiting from the growth of Artificial Intelligence.
• Semiconductors (Semis): Chips crucial for computing, experiencing year-to-date gains, particularly in memory segments.
• Down the Stack Investing: Shifting investment focus from AI chip manufacturers (like Nvidia) to supporting components like memory and storage.
• VIX: CBOE Volatility Index, a measure of market expectations of near-term volatility.
• High Beta Stocks: Stocks that tend to be more volatile than the overall market.

1. Nvidia and the Impact of Potential China Sales

The discussion began with Nvidia’s stock reaction to news regarding potential US administration allowances for chip sales to China. Despite the generally positive outlook, Nvidia experienced a pullback. Dave from Hill Investments characterized this as a “one step forward and two steps back” situation in the “arms race” of chip technology. He noted that while the semiconductor sector has performed strongly year-to-date, driven largely by memory stocks like SanDisk (the top performing stock in the S&P 500 YTD), Nvidia’s growth has largely been “baked into its valuation.”

He stated that the market has already “priced in” the possibility of some future sales to China, even though the Chinese government is attempting to limit access. Specifically, China previously accounted for approximately 15% of Nvidia’s global sales, a figure that has diminished in recent quarters. However, Nvidia’s revenue and earnings have remained robust without Chinese sales, demonstrating the strength of demand elsewhere. He believes a return to Chinese sales would provide a further “kickstart” for Nvidia, but certainty is needed before a significant market lead can be re-established.

2. Rotation Down the AI Stack

A key point raised was the investor shift “down the AI stack.” This means moving investments away from solely focusing on GPU manufacturers like Nvidia and towards companies providing essential supporting technologies. Micron was highlighted as an example, with its stock showing gains. The rationale is that AI functionality requires not just the chips themselves, but also sufficient memory and storage capacity.

Dave explained that companies like Micron (memory) and SanDisk (storage), previously considered underperforming, are becoming increasingly important as the AI trade evolves. He emphasized that powerful data centers require both AI chips and the necessary memory and storage infrastructure. This broadening of the AI trade is occurring alongside market concentration in the “Mag-7” stocks.

3. Market Concentration and Risk Management

The discussion acknowledged the significant market concentration in a small number of large-cap tech stocks, the “Mag-7.” Despite concerns about this concentration, the speaker noted that revenue and earnings growth to date have largely been driven by these companies.

Regarding risk management, Dave highlighted the surprising lack of volatility (as indicated by the VIX) despite geopolitical turmoil and domestic issues like the probe of Jay Powell. He described the current market environment as a “reassessment” of the “high beta trade,” with high beta stocks, meme stocks, small caps, and even metals experiencing gains.

He anticipates increased volatility, particularly in 2026 due to the midterm election year. His recommended approach is a selective investment strategy combining mega-cap tech with other areas to mitigate risk.

4. Market Dynamics and Investor Sentiment

The speaker observed a shift in investor behavior, with a focus on future earnings potential rather than current performance. Investors are looking “months, if not years ahead” to anticipate future growth drivers. This forward-looking perspective is contributing to the continued interest in the AI trade, even with uncertainties surrounding China sales.

He also noted the strong performance of “high beta” stocks and “meme stocks,” suggesting a degree of risk appetite in the current market.

5. Notable Quotes

• “Nvidia, of course, which has been the AI leader, has kind of stalled out a bit, frankly, because so much of its future earnings growth has been baked into its valuation.” – Dave, Hill Investments, on Nvidia’s current market position.
• “Investors have really, particularly when it comes to the AI trade, really started to look months, if not years ahead of where that’s coming from.” – Dave, Hill Investments, on investor focus on future growth.
• “You can’t have these powerful data centers without both the AI chips themselves and then the memory and storage to make it all happen.” – Dave, Hill Investments, emphasizing the importance of the entire AI stack.

6. Technical Terms Explained

• GPU (Graphics Processing Unit): Specialized electronic circuit designed to rapidly manipulate and display images; crucial for AI processing.
• Beta: A measure of a stock's volatility in relation to the overall market. A high beta indicates greater volatility.
• VIX (CBOE Volatility Index): A real-time market index representing the market's expectation of 30-day forward-looking volatility.
• Mag-7: A shorthand for the seven largest US technology companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).

7. Logical Connections

The discussion flowed logically from Nvidia’s immediate reaction to the chip sales news, to a broader analysis of the AI trade, and finally to overall market risk management. The shift “down the AI stack” was presented as a natural evolution of the AI trade, driven by the realization that supporting technologies are essential for realizing the full potential of AI. The discussion of market concentration and volatility served as a cautionary note, emphasizing the need for a diversified and selective investment approach.

8. Data and Statistics

• SanDisk: Top performing stock in the S&P 500 year-to-date.
• China’s contribution to Nvidia sales: Previously around 15% of global sales, currently significantly lower.

9. Synthesis/Conclusion

The key takeaway is that while Nvidia remains a leader in the AI space, the AI trade is broadening beyond just chip manufacturers. Investors are increasingly recognizing the importance of supporting technologies like memory and storage, leading to a rotation “down the AI stack.” Despite current market stability, investors should anticipate increased volatility, particularly in 2026, and adopt a selective, diversified investment strategy that balances mega-cap tech with other areas to manage risk. The market has largely priced in potential China sales for Nvidia, and the company’s strong performance continues even without that market.