Nvidia set to report earnings next week: Tech investor Paul Meeks on what to expect

Key Concepts:

• Nvidia earnings, H20 chip, China export restrictions, US-China trade negotiations, AI bubble, AI infrastructure spending, PE to growth ratio, Magnificent Seven (Mag-7) stocks, Applovin, digital advertising, EBITDA margin.

Nvidia and China:

• Earnings Expectation: Paul Meeks anticipates Nvidia's upcoming earnings report will "meet and beat" expectations.
• China Concerns: The primary concern revolves around the uncertainty surrounding Nvidia's business in China due to ongoing US-China trade negotiations and export restrictions.
• H20 Chip: The status of the H20 chip, designed for the Chinese market, is unclear, with its availability being "on again, off again."
• Reverse Tariff: A potential 15% "reverse tariff" on Nvidia and AMD products sold in China is a looming threat.
• Negotiations: Nvidia is reportedly in negotiations to sell higher-powered chips to China, but the export control restrictions remain a key question.
• US-China Deal: Meeks believes the US and China will eventually strike a comprehensive deal encompassing these tech-related issues, including the future of TikTok in the US.

AI Bubble Discussion:

• Bubble Fears: The discussion addresses concerns about an AI bubble, with references to Sam Altman's recent statement suggesting a potential bubble.
• Timing: Meeks believes that despite potential oversupply issues in the long run, the AI infrastructure build-out still has momentum and is not close to collapsing.
• Timeline: He anticipates "clear sailing" for at least the next year (through 2025) and expects strong AI infrastructure spending to continue through 2026.
• Valuation: He uses the PE to growth ratio to assess valuations, noting that Nvidia's PE to growth is not "egregiously overvalued" compared to other companies of similar quality.

Mag-7 Stock Preferences:

• Dislikes: Meeks expresses skepticism towards Tesla ("Never have") and Apple due to lack of top-line growth and cost pressures from domestic manufacturing. He views domestic manufacturing announcements from Apple as a "bad sign" for shareholders.
• Likes: Among the Mag-7, he favors Microsoft (though considers it "a little bit expensive"), Meta, Alphabet, and Amazon.
• Alphabet: Alphabet is favored due to its relatively lower valuation compared to the Mag-7 and the S&P 500 before its recent strong quarterly report.
• Amazon: Amazon is expected to recover from a disappointing Amazon Web Services (AWS) performance in the previous quarter.
• Meta: Meta is still favored despite recent pressure from reducing AI talent spending, as Meeks doesn't believe this signals the end of AI investment.

Applovin Recommendation:

• Favorite Stock: Applovin is identified as Meeks' favorite among larger tech companies.
• Market Opportunity: Applovin is targeting a new market with significant growth potential, currently holding only a small market share.
• Revenue Growth: He anticipates accelerated revenue growth for Applovin.
• Profitability: Applovin divested a lower-margin business, resulting in a pure-play digital advertising company with an EBITDA margin "well over 80%," which Meeks considers a "rock star profile."
• Digital Advertising: Applovin is a pure play in digital advertising.
• EBITDA Margin: EBITDA margin of well over 80% after divesting a lower margin business.

Conclusion:

Paul Meeks provides a nuanced perspective on the tech market, balancing optimism about AI infrastructure growth with concerns about China-related uncertainties and potential overvaluation in certain sectors. He favors companies with strong growth potential and reasonable valuations, highlighting Applovin as a particularly attractive investment due to its high-margin business and growth prospects in digital advertising.