Nvidia earnings are all about guidance; Microsoft and Nvidia invest in Anthropic

Key Concepts

• Circular AI Deals: Partnerships where companies invest in each other and commit to using each other's products and services.
• Frontier Model Provider: A company developing and offering advanced AI models at the cutting edge of the field.
• Infrastructure Capacity: The computing power and resources necessary to train and deploy large AI models.
• Hyperscalers: Large cloud computing providers like Microsoft, Amazon, and Google.
• Custom Silicon: Specialized hardware designed for specific tasks, such as Google's Tensor Processing Units (TPUs).
• Free Cash Flow Yield: A financial metric indicating the cash a company generates relative to its market value.

Partnerships and Investments in AI

The transcript discusses significant new partnerships and investments in the artificial intelligence (AI) sector, particularly ahead of Nvidia's third-quarter earnings report.

Microsoft and Nvidia Invest in Anthropic

• Key Point: Microsoft and Nvidia are investing up to $15 billion in Anthropic.
• Context: This deal is described as a "circular AI deal," where companies commit to using each other's products and services.
• Perspective: While some view these deals as a "yellow caution flag" indicating a potential AI bubble, the speaker, Doug Clinton, founder and CEO of Intelligent Alpha, views them as a natural progression.
• Rationale for Anthropic: Anthropic, compared to OpenAI and Google, has had relatively less access to capital. This partnership is seen as a strategic move to secure the necessary infrastructure capacity to deliver their products and derisk capital access issues.
• Future Expectation: Clinton anticipates more such deals from Anthropic as they aim to be a frontier model provider.

Nvidia's Upcoming Earnings and Outlook

The discussion shifts to Nvidia's highly anticipated third-quarter results and future prospects.

Key Metrics to Watch

• Guidance for Fiscal Q4: This is identified as the most crucial metric.
• Revenue Expectations: The street is looking for approximately $62 billion in revenue for fiscal Q4. Nvidia is expected to guide up by 2-3%, potentially exceeding expectations, which would be a relief given the current AI trade.
• $500 Billion Demand Figure: Jensen Huang's statement at GTC about $500 billion in demand between the current year and next is a significant factor. This figure suggests a potential 10 percentage points of growth upside to current street revenue estimates for the next year.
• Commentary on Next Year: Investors will be looking for more detailed commentary on how this demand will translate into revenue for the upcoming year.

China Business Outlook

• Current Stance: Nvidia is not modeling any revenue from China.
• Uncertainty: The future of this business is highly dependent on US-China trade relations.
• Upside Potential: From a stock perspective, any revenue from China would be considered upside, as it's not currently factored into models.
• Jensen Huang's Statement: Jensen Huang recently stated that Nvidia does zero business in China.
• Restrictions: Despite the "unlock" of H20 restrictions from the US side, the Chinese side has remained "stubborn."
• Conclusion: Until a deal is reached between the US and China, it's unlikely Nvidia will see significant revenue from this market.

Investor Sentiment and Stake Sales

• Peter Thiel's Hedge Fund and SoftBank Selling Stakes: The transcript addresses concerns about these sales.
• Clinton's Perspective: Clinton does not view these sales as a source of concern.
• Supporting Evidence:
  • Demand: The immense demand for Nvidia's products, as indicated by the $500 billion figure, suggests continued strong sales. Hyperscalers are struggling to build data centers fast enough.
  • Capital Reallocation: For SoftBank, it's likely a reallocation of capital, potentially into other AI investments. The firm is still seen as "long AI."
  • Peter Thiel: While his hedge fund may have sold, Founders Fund, where he spends more time, remains focused on AI.

Competitive Landscape for Nvidia

The competitive environment for Nvidia is also examined.

Shift in Competitive Landscape

• Minimal Shift: Clinton believes the competitive landscape has not shifted meaningfully in the past 12 months.
• AMD Deal with OpenAI: The AMD deal announced a few months ago is considered the biggest "wild card" but is not seen as fundamentally changing the competitive dynamics.
• Nvidia's Dominance: Nvidia remains the "go-to place" for every hyperscaler.

Google's Custom Silicon Advantage

• Emerging Narrative: Google's announcement of Gemini 3.0, optimized for their own TPUs, presents a potential narrative for Nvidia.
• Google's Unique Position: Google is the only company with a decade-long history of building custom silicon (TPUs) at that level.
• Reliance on Nvidia: Despite Google's custom silicon efforts, other companies are still far behind and rely on Nvidia.

Nvidia's Valuation

The discussion concludes with an assessment of Nvidia's valuation.

Valuation Assessment

• Characterization: "Healthy but still comfortable."
• Comparison to Mag Six: The free cash flow yield on the "Mag Six" (likely referring to the six largest tech companies) is around 2.5%, compared to the 10-year yield of 4%.
• Growth Prospects: Companies like Nvidia are expected to grow free cash flow in the mid-teens for the foreseeable future.
• Bubble Concern: Clinton does not believe the Mag 6, including Nvidia, reflects a bubble, stating that the valuation is not "crazy."

Conclusion

The transcript highlights significant strategic partnerships in the AI space, particularly the substantial investment by Microsoft and Nvidia in Anthropic, aimed at securing infrastructure and capital. Nvidia's upcoming earnings are expected to be strong, driven by robust demand, with particular attention on future guidance and the impact of the $500 billion demand figure. While competition exists, especially from Google's custom silicon, Nvidia's position as the primary provider for hyperscalers remains dominant. The valuation of Nvidia is considered healthy, not indicative of a bubble, given its strong growth prospects and free cash flow generation.