Terry Smith shuns Nvidia shares on fears AI hype is overblown

TOKYO – Nvidia’s stock has almost tripled this year, and Wall Street analysts are overwhelmingly positive on the chipmaker. 

But, Mr Terry Smith is not impressed.

The money manager, who has been dubbed by the British press as Britain’s Warren Buffett, is sceptical as he says the world’s largest stock lacks a predictable earnings stream and a strong track record of high return on capital. He is avoiding the shares even as he acknowledges that such a move undercuts his portfolio’s performance.

“I’m not confident that we know what the future of AI is because there are almost no applications people are paying for,” Mr Smith said in a Nov 5 interview in Tokyo.

“Will they be willing to pay on a sufficient scale and a sufficient price to justify this? Because if not, the suppliers of the chips are going to have a problem.”

His caution strikes at one of the biggest concerns about the future of the artificial intelligence industry: Will the revenue generated by the technology ultimately justify the billions of dollars of investments the firms have ploughed in?

The doubts contributed to a sell-off which erased about US$900 billion (S$1.19 trillion) from Nvidia’s market value from a June peak to an August low, although the shares have since rebounded.

AI enthusiasts note that Nvidia’s biggest customers, including Microsoft and Alphabet, have pledged to pump more into capital spending after splashing a record US$59 billion into data centre gear and other fixed assets in the third quarter. Strategists expect the company to record a net profit margin of 56 per cent in the 2025 fiscal year as tech firms continue to boost AI spending to keep up with rivals.

But, Mr Smith thinks such hefty margins may not last.

“Even if AI is the next big thing and we’re going to be paying enough money to justify it, is there just going to be one manufacturer of these chips?” he said. “If you are making fantastic returns, it attracts competition.”

“In fact, if you look at the people who are the big users of the microprocessors that Nvidia is supplying, such as Microsoft, Amazon and Oracle, they have a history of developing their own,” he added.

Mr Smith’s Fundsmith Equity Fund returned 9 per cent this year in dollar terms, trailing the MSCI World Index of developing-market stocks which has gained almost 20 per cent.

The underperformance is due to “concentration of performance amongst a handful of stocks”, Mr Smith said, adding that the rising popularity of index funds is fueling this trend.

“The popularity of index funds is worrying,” he said. “A lot of people call them passive. But they are not passive. They are momentum strategy. And the momentum will last until it doesn’t.” BLOOMBERG