Market Pulse
Sunday, August 25, 2024
Welcome to this week's Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
This week we have two main stories:
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
In the latest sign of a consolidating AI market, chipmaker AMD announced on Monday an agreement to acquire ZT Systems, a designer and builder of custom server equipment. [1] The $4.9 billion purchase comes in the wake of a string of recent AMD acquisitions, including a record $35 billion deal for semiconductor company Xilinx in 2022. [2]
Post-acquisition, AMD plans to spin off ZT Systems’ production business, which competes with legacy manufacturers like HP and Dell. Instead, AMD will focus on the firm’s systems-design business, which creates AI-boosting software solutions like those made by Nvidia. [3] In recent years, Nvidia has dominated the AI chip market, in part due to an end-to-end approach that offers both physical and software tools for enterprise data centres. [4]
With ZT Systems’ engineering team, AMD likely hopes to build out its own comprehensive suite of tools to promote the adoption of its MI300 chip series, rolled out last year. [5] So far, AMD’s data centre market share remains a fraction of Nvidia’s, with quarterly segment revenue standing at $2.8 billion and $22.6 billion, respectively. [6] [7]
Despite Nvidia’s head start, however, we are concerned that competition will eventually catch up with the firm’s current valuation. With a $3.12 trillion market cap, Nvidia trades at a forward price-earnings ratio of about 42.8x, compared to the Nasdaq’s already lofty 29.0x average. [8]
Considering some recent stumbles, including delays on a long-awaited chip series, Nvidia’s market share in AI no longer looks unassailable. [9] Chipmaker Intel’s valuation, on the other hand, provides a compelling contrast.
Intel currently has a $90 billion market cap, significantly below both Nvidia and AMD ($253 billion). While Intel has faced some challenges in the recent past, including disappointing Q2 results and major restructuring efforts, the firm is taking strides to close the AI gap that has opened up between it and rivals. [10] As AMD’s latest acquisition shows, things can change quickly in the race for AI market share.
Intel and Nvidia are in our Flagship portfolio
In a sharp rise from previous months, the UK is now the most preferred European stock market among institutional investors. According to a recent survey by Bank of America, the share of investors indicating they would be overweight UK equities over the next year jumped to a net 30%, up from less than 10% a month ago. [11]
Investors now prefer the UK over all European peers, with Italian, French, Spanish, and German markets receiving net underweight marks. Switzerland, meanwhile, also posted a significant gain, increasing to more than net 20% overweight.
Much of this change can be attributed to global market volatility earlier this month, which encouraged investors to seek out safe-haven assets. Within the equity universe, the UK market is typically seen as defensive, expected to remain robust during volatile periods. In fact, the FTSE 100 has outperformed the S&P 500 over the past month by nearly 1.5 points.
The results of this survey also reflect stabilising developments in the British political environment over the past several years. Far from the chaotic episodes associated with recent Conservative governments, including Lizz Truss’ disastrous unfunded tax cut scheme in 2022, Labour’s more reasonable economic policies have helped moderate financial markets. [12]
Finally, the UK’s persistently attractive valuation levels have also helped boost investor interest in British markets. Compared with both US markets and European peers, UK equities have recently traded at significant discounts based on earnings levels. [13] While we currently hold just two UK-based firms in Flagship (Rio Tinto and Diageo), we continue to actively monitor British markets for emerging opportunities.
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
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[1] AMD
[3] Axios
[4] The FT
[5] The FT
[6] AMD
[7] Nvidia
[8] Barron’s
[10] CNBC
[11] Bloomberg
[13] Schroders
