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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The problem with the future is that it hasn’t happened yet. Betting on companies whose value largely resides in educated guesswork is therefore not for the weak of stomach. Nvidia, Palantir, AppLovin and MicroStrategy — the four best-performing US technology stocks of 2024 — are all putting investors through their paces.
Nvidia, through its sheer size, inspires more cortisol than most. The $3tn chipmaker, whose silicon powers the artificial intelligence boom, almost tripled in market capitalisation in 2024, but is down about 6 per cent this year. Its fourth-quarter earnings comfortably beat analysts’ expectations, but investors are more focused on what comes next.
For now, all is going to plan. Boss Jensen Huang says demand for the company’s new high-powered Blackwell chips is “amazing”. Profitability is being squeezed a little by the new ranges, but revenue for the current three-month period should be higher than previously thought. The trouble is that beyond that, detail is elusive. Every quarter is a new nail-biter.
Buying a company’s stock is always a bet on distant income streams; the lion’s share of value comes from “terminal value”. For example, take the next five years’ worth of analysts’ estimates of Nvidia’s cash flows, according to Visible Alpha, discount them back at 10 per cent a year, and they’re worth just over $500bn today. That means 80 per cent of Nvidia’s $3tn market value consists of money due after 2030.
Much can happen in those short windows of time. Just ask the millions of investors who had never heard of Nvidia five years ago. And tech stocks are unusually sensitive to sudden shifts. Nvidia, for example, gets about one-third of its revenue from just three customers, who in turn sell on its goods to others. Its sales to China are subject to tariff policy which, as the Trump administration has shown multiple times already, can turn on a dime.
The other members of this fantastic four are having a tougher time. Software company Palantir has slumped on reports that the Pentagon wants to slash budgets, potentially unhelpful to a company that gets more than half of its revenue from governments. It still, though, trades at around 50 times forward revenue, making Nvidia’s 16 times feel positively staid. MicroStrategy, meanwhile, has its own unique quirks: it’s mostly a piggy bank filled with bitcoin, the price of which — always mercurial — has sagged.
AppLovin’s reversal is particularly sudden. The company, which brokers ad space within gaming apps, tanked after two short seller reports suggested its rapid growth might be less sustainable than it looked. Slower-moving, more predictable companies are much less vulnerable to that kind of attack on investors’ future cash flow confidence.
For Nvidia, some things, at least, are certain. Its biggest customers — companies such as Microsoft and Amazon — have buckets of cash and are determined to spend it on chips. At present, they have few, if any, other options when it comes to AI processors. And investors, for now, are relaxed. The stress test has been passed; another will be along soon enough.