WSJ What’s News - Nvidia’s Margins May Not Be Expanding, But Its Customer Base Is

Episode Date: August 29, 2024

A.M. Edition for Aug. 29. After Nvidia’s earnings fail to live up to the hype, HSBC analyst Frank Lee says the company’s growth potential remains strong—though he sees room for rival AMD to become a distant second. Plus, Brazil’s Supreme Court threatens to ban X. And, bosses find ways to pay workers less as the job market softens. Luke Vargas hosts. Sign up for the WSJ’s free What’s News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Ecolab Water for Climate. Less water, more growth. Results will vary. Learn more at Ecolab.com slash EWC. Ecolab Water for Climate. Transforming the way the world thinks about water. More evidence of a weakening jobs market as bosses scale back pay for blue collar hires. Plus, Hong Kong clamps down further on descent as a pair of news editors are convicted of sedition and we'll look at whether Nvidia can keep relying on AI spending by big tech. Besides the four hyperscalers which are the key customers driving their capbacks, you've also seen a strength in enterprise spending. And then I think they've alluded to sovereign AI as well.

So these are our customers that have been growing quite fast and have become more important for them going forward. It's Thursday, August 29th. I'm Luke Vargas for The Wall Street Journal. And here is the AM edition of What's News, the top headlines and business stories moving your world today. The top headlines and business stories moving your world today. We begin today with the latest sign that the labor market is cooling. New data from ZipRecruiter.com has found that after pay for white-collar recruits fell last year, that trend has now spread to new hires in construction, manufacturing, food, and

other blue-collar sectors. Listings for retail jobs have seen the most pronounced fall in posted pay of nearly 56%, though that follows an even bigger jump last year. Meanwhile, average wages have shrunk in agriculture and manufacturing by about a quarter and 17%, respectively. In addition to slashing pay, recruiters and corporate advisors say companies are also moving job openings to lower-cost cities or offering them as lower-paying contractor roles.

Two businessmen at the heart of one of the largest global frauds in decades have been convicted in a Swiss criminal court for their roles in facilitating the looting of a Malaysian Sovereign Wealth Fund. That says Saudi national Tariq Obaid and Britain Patrick Mahoney were found guilty of fraud, criminal mismanagement, and money laundering for their involvement in siphoning more than $1.8 billion from the fund. Journal Europe Finance editor Alex Frangos told us how the scheme came to light.

Alex Frangos This Malaysian the scheme came to light. This Malaysian sovereign wealth fund called 1MDB borrowed a ton of money, most of which was stolen by a mastermind kingpin named Jolo who stole the money and spent it on a very lavish lifestyle. He financed the movie The Wolf of Wall Street. He paid off politicians. He partied with Paris Hilton and Leonardo DiCaprio. He bought fancy art. It really only started to be uncovered about nine years ago when the Wall Street Journal broke open the story. Andy Barth And while Lowe remains at large, Alex says several other players in the scandal have now been brought to justice.

Alex Hilton We've also had two high-ranking executives from Goldman Sachs who either pled guilty or were convicted of crimes related to 1MDB. The Malaysian prime minister was sentenced to a prison term and there are still other trials ongoing. So it is maybe from a cynical point of view one of those rare scandals where there has been some justice. A lawyer for Obeid said he's appealed the findings and continues to deny committing

any offense, while Mahoney's lawyer also denied that his client had committed any offense and said he would appeal. Yelp has filed a lawsuit against Google, claiming that the search giant abused its dominant position to stifle competition in local search and search ad markets. According to Yelp, Google prevents businesses from reaching customers without paying the company and deprives competitors of traffic and revenue. The suit comes after a federal judge ruled earlier this month that Google engaged in illegal practices to preserve its search engine monopoly, a verdict that opened the door for

more lawsuits. A Google spokesperson said yesterday that the company would vigorously defend itself. Brazil's Supreme Court has threatened to ban social media company X within 24 hours unless it appoints a new legal representative for the country. It is the latest blow in an escalating fight between Brazil's highest court and X and could close off an entire market for the company. Earlier this month, X said it was closing its operations there after a judge ordered the platform to remove accounts deemed to be propagating hate speech and misinformation, though the move didn't affect users' ability to access X in Brazil.

X didn't respond to a request for comment. And a court in Hong Kong has convicted two former newspaper editors on charges of conspiring to publish and reproduce seditious material in a trial widely seen as a test of the city's future tolerance of press freedoms. Both journalists worked for the now-defunct Stand News, one of the city's last outlets to openly criticize the government amid a crackdown on dissent that followed massive pro-democracy protests in 2019. The pair pleaded not guilty. According to a summary of the ruling, the judge said Stand News became a tool to smear

and vilify China's government and the Hong Kong authorities. The offense is punishable by up to two years in prison and a fine under a colonial era sedition law. Coming up, HSBC analyst Frank Li joins us to look at whether Nvidia can keep relying on massive spending by America's largest tech companies in order to fuel its growth. That's after the break. Your team requested a ride, but this time not from you. It's through their Uber Teen account.

It's an Uber account that allows your team to request a ride under your supervision with live trip tracking and highly rated drivers. Add your team to your Uber account today. NVIDIA's latest quarterly results seem to have left investors wanting more, with the chipmaker's stock dropping after its earnings release yesterday. However, our next guest thinks there are still blue skies to come for the company. Frank Lee is the global head

of tech hardware and semiconductor research at HSBC and he joins me now this morning from Hong Kong. Frank, we've got Nvidia shares today somewhere in the neighborhood of $120, whereas you've got a price target on the company of $145, at least going into earnings. What stood out to you from the company's latest report, and are you sticking with that target? Yeah, so, Luke, we're still pretty comfortable with our target price on Nvidia. We believe that this growth story next year still remains very solid.

We still see very strong demand. I think one thing, the reassurance we've been seeing is the hyperscalers And this most recent earnings have all reiterated their investment in AI and especially on AI GPUs for servers So I think that was one of the key concerns that you know People had previously how sustainable it can continue to be with this cap expense and that I think that question Larges renounced or at least going into next year I mean just on that we have been reporting that Nvidia has been the main winner so far in the Amazon, Google, Microsoft meta capex spree really over the last few quarters, but

their investors won't tolerate massive capex forever without a corresponding jump in revenue. How important is it for Nvidia and Nvidia's investors that those tech customers start seeing meaningful return on their spending? Yeah, that's a great question This is a question that was actually just asked as well in the most recent earnings And I think the way we can think about it is two ways one is that there is already some Modernization as far as the efficiency of what Nvidia offers in terms of their solution monetization as far as the efficiency of what NVIDIA offers in terms of their solution. Secondly, I think if you look at also their customer profile, one thing that perhaps is not as obvious to people is that besides the four hyperscalers, which are the key customers

driving their CapEx, you've also seen a strength in enterprise spending. And then I think they've alluded to sovereign AI as well. So these are basically customers that have been growing quite fast and have become a more important customer for them going forward. Clarify for us what they're buying. I take it it's not necessarily applications for generative AI or large language models. Is it something else?

The enterprise spending is they're not quite spending the same amount. But what Nvidia is doing now is they are giving their customers more optionality to buy basically more Customizable solutions for AI and so this sort of speaks into what's happening next year as well Because if you look at their bro map one thing that's been interesting is that you know for the last 12 18 months Probably the biggest you know

Drivers in the video besides demand has been the ASP uplift. For ASP, what we mean by ASP is the average selling price. They've seen massive ASP increases almost every six months. But next year, what we're seeing is a little bit of a slowdown in that spec migration. So they're offering basically some lower spec products for their customer base, for their different customer base. That will necessarily come, though,

with a hit to their margin, right, as they sort of roll out more market-friendly offerings. Yeah, I mean I think if you look at either the margin profile, which was something that was just addressed as well, is that they did not raise their full year gross margin guidance for the year, but based on the full year number, the implicit gross margin is going to be somewhat of a decline in the fourth quarter. So we're going back from the mid 70s, probably down to the low 70s.

It's still a very solid number for a hardware company, but I think there's a realization that these margin profiles cannot stay at 75, 80% indefinitely. Is that something investors are gonna accept? I think as long as they can generate their bottom line growth, right? If you look at most investors, the way people look at the stock is still very much driven by what's the revenue momentum.

And finally, Frank, let's talk about Nvidia's competition, which of course isn't sitting still. We've got established rivals like AMD trying to push their own chips, but we've also seen that US export controls that were meant to keep Nvidia's highest and chips out of China have also started to possibly bring a few more companies into the mix. Does Nvidia need to be looking over its shoulder increasingly? Yeah. So again, this is probably the elephant in a room is that, you know, the competition has always been something that the market is quite concerned about.

But what we can say is a year after this whole AI trend has started, we haven't really seen much competition. is quite concerned about. There hasn't been that much progress been made on developing these ASIC chip I think probably the most credible thread is really AMD as a second tier player What's interesting for AMD is that with Nvidia's potentially slower? Roadmap next year does that give a window of opportunity for AMD to kind of narrow the gap? There is you know, maybe an upside opportunity for a very distant number two I think is going to be an interesting question and third I distant number two, I think, is going to be an interesting question. And third, I think on China, the in-house localization of China, there is, again, a

long-term threat of that. But the bigger picture question, though, is that China isn't that big of a market for them anymore. At its peak, China was probably 20%, 25% of revenue. Now it's probably less than 10%. The China point is always something that's on people's minds. But if you're Nvidia, it's not as important to your future earnings as it used to be.

Frank Lee is the global head of tech hardware and semiconductor research at HSBC. Frank, thank you so much for joining us on What's News. Thanks, guys. And in other news that's moving markets today, Asian chip stocks have broadly retreated, tracking Nvidia's overnight tumble. Leading the declines were South Korea's SK Hynix, which dropped more than 5%, and Samsung, which closed down about 3%. And shares of CrowdStrike are trending lower off hours after it cut its outlook for the

year. Last month, a bug in the cybersecurity company's software triggered one of the world's worst-ever computer outages, leading it to provide up to $60 million in incentives to customers. CrowdStrike's stock has fallen more than 20 percent since the outage. And that's it for What's News for Thursday morning. Today's show was produced by Kate Bullivant and Daniel Bach with supervising producer Christina Rocca. And I'm Luke Vargas for the Wall Street Journal. We will be back tonight with a new show. Until then, thanks for listening.