NVIDIA Corp

Nvidia has been operating on an average two-year release cycle between product generations, further evidencing the faster than accounted for pace of technological innovation in AI hardware. The performance improvement, between generations of GPUs, has been so vast that these tech companies need to invest in the latest architecture to remain competitive. Our funds remain positioned toward companies that are monetising AI by enhancing their core products and services, rather than those whose business models rely on selling AI tools or cloud computing capacity as standalone offerings.

We made several changes to the portfolio in May. A new position was added in the Information Technology sector with Nvidia (NVDA), the leading semiconductor company, known for its dominant position in semiconductor chips used in the training and inferencing of AI-models. Despite its status as the clear leader in AI and a beneficiary of rising AI capital investments, the stock has significantly underperformed other semiconductor stocks over the past year, potentially setting up for a reversion in relative performance. We believe the launch of the company’s next-generation Rubin architecture later this year could be the catalyst that will drive another wave of data center upgrade cycles as hyper-scalers take advantage of the step-up in energy efficiency.

Nvidia is positioned as a market leader in the current AI infrastructure cycle, achieving a $5 trillion market valuation backed by trailing 12-month revenue of $215.9 billion and a massive 53% operating margin. The company is part of a select group of hyperscalers generating significant free cash flow, which is crucial for funding the ongoing capital expenditures in AI. The commitment from OpenAI to purchase Nvidia GPUs is projected to account for as much as 13% of Nvidia’s projected $272 billion in 2026 revenue, highlighting its integral role in the AI ecosystem. This strong cash generation capability differentiates Nvidia from the speculative nature of the dot-com boom, positioning it favorably for long-term growth.

NVIDIA Corp has been a significant beneficiary of the AI boom, with its free cash flow contributing two-thirds of the overall increase in NTM free cash flow estimates for AI-related stocks. Despite the market's rich valuations, NVIDIA's position in the semiconductor space, particularly as a supplier to hyperscalers, positions it well for future growth. The divergence between market cap increases and actual profit generation from AI indicates that while NVIDIA's stock has surged, the underlying fundamentals remain strong, suggesting further upside potential. The firm is focused on capturing opportunities in this environment, particularly in high-quality names like NVIDIA.

NVIDIA Corp has been a significant beneficiary of the AI boom, with its free cash flow contributing two-thirds of the overall increase in NTM free cash flow estimates for AI-related stocks. Despite the market's rich valuations, NVIDIA's position in the semiconductor space, particularly in relation to hyperscaler spending, underscores its strong fundamentals. The company is well-positioned to capitalize on the ongoing demand for AI technologies, which is reflected in its substantial market cap growth. The divergence in valuations within the market suggests that NVIDIA, along with other quality names, presents a compelling investment opportunity.

The commentary discusses the current state of the memory semiconductor industry, including NVIDIA's position relative to memory manufacturers. It notes that memory manufacturers report higher gross margins than NVIDIA and TSMC, indicating a competitive landscape. The text highlights that while chip demand grows over time, it is primarily driven by improved economics of lower chip prices, which aligns with Moore's Law. The commentary also mentions that High Bandwidth Memory (HBM) accounts for a small portion of DRAM demand and that the current margin boom is largely due to surging commodity DRAM prices rather than premium pricing for HBM.

Nvidia has seen its share price multiply 15-fold since the end of 2022, reflecting the strong demand for GPUs that power massive data centers. This surge is driven by unprecedented investments from tech giants in AI infrastructure, which has positioned Nvidia as the company with the largest market capitalization in the world. The bottlenecks in chip foundries and memory makers further highlight the demand for Nvidia's products, as these companies struggle to meet the large orders from hyperscalers. The exponential growth in orders and prices is driving up earnings expectations for Nvidia, making it a compelling investment.

Nvidia has positioned itself as the leader across all parts of the technical component layer within the AI technology stack, including AI silicon, networking, cooling, and total rack systems. The Compute & Networking segment at Nvidia has increased from 41% of revenue in FY2022 to roughly 90% in FY2026, with operating margins rising from 37% to over 60%. This has resulted in one of the highest free cash flow margins in the S&P 500, reshaping the business towards data-centre quality infrastructure platform economics. We believe Nvidia's strong market position and ongoing innovation will support a double-digit five-year IRR.

Nvidia is positioned as a key beneficiary of the AI spending surge, contributing significantly to market returns. The manager notes that 'four stocks – Nvidia, Micron, Broadcom, and Sandisk – will account for 40 percentage points' of the S&P 500's earnings growth this year. This highlights Nvidia's critical role in the ongoing AI arms race, suggesting strong future performance potential. The strategy's long-held position in Nvidia reflects confidence in its ability to capitalize on the current demand-led super cycle, despite the awareness that record profits will eventually lead to new supply and impact returns.

Nvidia is positioned as a leader in the AI infrastructure space, having anticipated the demand for AI computing systems and secured critical supply chains early. The company has evolved from designing individual circuits to creating complete 'AI Factories' that integrate chips, networking, memory, software, power, and cooling. This integration allows Nvidia to achieve superior performance and avoid commoditization, capturing more of the system's margin. As AI demand accelerates, Nvidia's ability to coordinate design and supply-chain management makes it an indispensable partner in the industry.