MARKETS & INVESTING
A CONTRARIAN VIEW ON AI : SEARCHING FOR THE PICKS & SHOVELS
Generative artificial intelligence ( AI )— epitomised by ChatGPT — has taken the world by storm . The chipmaker Nvidia ’ s blowout guidance in its most recent quarterly earnings report shows just how briskly this new technology is being adopted . Wall Street had previously been forecasting about $ 7 billion for Nvidia ’ s fiscal second quarter revenue guidance , but the company now says it will be closer to $ 11 billion . This is remarkable given that Nvidia is hardly under-followed . It simply crushed even the most wildly optimistic estimates , and the stock jumped more than 25 % on the news . At Orbis we have researched Nvidia on multiple occasions over the past 15 years . As much as we have admired the company ’ s technological prowess and its impressive financial performance , we have never been able to get comfortable with its valuation . As contrarian investors , there will be times when we miss out on stocks like Nvidia , but we believe it is critical to stay focussed on valuation . Importantly , one can still participate in exciting growth opportunities while remaining disciplined . We have been focussing on the ‘ enablers ’ and ‘ facilitators ’, or the ‘ picks and shovels ’ of the sector , such as Taiwan Semiconductor Manufacturing Company ( TSMC ).
The backbone of AI It is a company we have followed even longer than Nvidia and it has been owned in several Orbis portfolios over the years . We have long admired TSMC ’ s technological leadership , its relentless focus on execution , and its customer-centric culture based on mutually beneficial long-term client relationships . Nvidia is one of those customers . TSMC is the sole foundry that makes two of the key Nvidia chips that appear uniquely well-suited for training and running large language models like ChatGPT . In semiconductor jargon , Nvidia is a ‘ fabless ’ semiconductor company , meaning that they design chips but do not make them . TSMC , on the other hand , focusses on manufacturing – a business that requires leading-edge expertise and enormous amounts of capital . As such , the barriers to entry are high and only becoming more formidable over time with each new generation of chip technology . When Nvidia is winning , TSMC is quietly benefiting as well . In addition , TSMC will likely be the manufacturing partner of choice for other fabless companies who are designing chips for AI workloads . We believe this makes TSMC an excellent way to participate in the AI boom without having to guess which chip designer will be the ultimate winner . Perhaps most importantly , we don ’ t need to pay a steep valuation for TSMC . Its shares can be purchased for less than 20 times earnings , a lower valuation than the typical global stock , despite TSMC ’ s superior fundamentals . Compare this to Nvidia , which trades at a dizzying 23 times consensus revenue forecasts for the fiscal year ending January 2024 . This implies what we believe are overly aggressive assumptions about future growth and sets a high bar that very few
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