Animal Spirits Podcast - Episode Summary Title: Talk Your Book: Looking for the Next NVDA
Release Date: December 23, 2024
Host: Michael Batnik and Ben Carlson
Guests: Angus Shillington (Equity Research Analyst, Vaneck) and Nick Frosty (Associate Product Manager, Vaneck)

Introduction

In this episode of the Animal Spirits Podcast, hosts Michael Batnik and Ben Carlson delve into the current dynamics of the semiconductor market, with a particular focus on Nvidia (NVDA) and the burgeoning enthusiasm surrounding Artificial Intelligence (AI). The discussion is further enriched by insights from Angus Shillington and Nick Frosty of Vaneck, who bring their expertise on the Vaneck Semiconductor ETF (SMH) and the evolving landscape of technology investments.

The Dominance of Nvidia and AI Enthusiasm

The conversation kicks off with the hosts pondering whether the fate of the stock market is heavily reliant on Nvidia's performance and the broader AI wave.

Michael Batnik [00:56]: "It feels like it, but I don't know. I'm sure something else will come up."

Ben Carlson [01:01]: "Yes, that's the answer, Ben. The answer is yes."

Michael Batnik [01:12]: Discusses the widespread conversations about AI's potential and personal experiences with AI tools like ChatGPT and Claude, highlighting a "honeymoon phase" where enthusiasm is high, but practical, everyday use is still emerging.

Insights from Vaneck's Angus Shillington and Nick Frosty

Ben Carlson [04:02] introduces guests Angus Shillington and Nick Frosty, who provide an in-depth analysis of the semiconductor industry and the role of Nvidia within it.

Semiconductor Industry Landscape

Angus Shillington [04:42]: Explains the significant lead of the United States in data centers, attributing it to the country's leadership in technology, Silicon Valley's influence, and a robust venture capital ecosystem. He contrasts this with other regions like Europe, India, Latin America, and China, noting the US's dominance due to its comprehensive tech infrastructure.

Cyclicality and Evolution of the Semiconductor Sector

Michael Batnik [06:10]: Reflects on the historical cyclicality of tech stocks, particularly post-dot-com bubble, and seeks Angus's perspective on the current cyclicality and evolution of the semiconductor industry.

Angus Shillington [06:33]: Draws parallels between the post-dot-com era and the current AI-driven market, emphasizing that leadership within the sector remains crucial. He suggests that strong leaders like Nvidia have demonstrated structural resilience, viewing the sector as less cyclical and more about sustained leadership.

Nvidia's Market Position and Diversification Strategies

Ben Carlson [07:38]: Highlights Nvidia's substantial influence, constituting 21% of the SMH fund and being the only $3 trillion company within the category. He notes recent market movements indicating competitors are beginning to catch up.

Angus Shillington [08:18]: Discusses Nvidia's dominant position with a 90% market share in AI-related GPUs and high gross margins. However, he emphasizes the importance of diversification, acknowledging that while Nvidia remains a leader, the semiconductor market is fragmenting with competitors like Broadcom gaining traction.

Portfolio Management and Investment Strategies

Michael Batnik [16:57]: Queries how the analysis of a dominant company like Nvidia translates into portfolio management within Vaneck's funds.

Nick Frosty [17:15]: Explains that the SMH ETF follows a market-cap-weighted approach with a 20% cap on any single stock, rebalancing quarterly to maintain diversification. This strategy ensures that no single holding, including Nvidia, can disproportionately influence the fund's performance.

Comparing Current Trends to Past Tech Cycles

Ben Carlson [19:15]: Asks how the current semiconductor environment compares to the dot-com bubble era.

Angus Shillington [19:15]: Highlights that the application of semiconductors has vastly expanded beyond PCs and desktops to include fridges, cars, and virtually every aspect of modern life. He underscores that AI optimization is now integral to semiconductor applications, unlike the slower adoption during the dot-com era.

The Future of Nvidia and Emerging Competitors

Ben Carlson [15:25]: Ponders the potential decline of Nvidia and whether the rest of the semiconductor space can compensate if Nvidia's dominance wanes.

Angus Shillington [16:57]: Emphasizes that while Nvidia's business fundamentals remain strong, its current valuation may not be sustainable long-term. He anticipates a potential correction in Nvidia's stock price, suggesting that other companies within the semiconductor space will rise to fill the gap, thereby maintaining overall sector stability.

Vaneck's SMH and SMH X Funds

Angus Shillington [27:38]: Introduces SMH X, an adjacency fund focusing on fabless semiconductor companies similar to Nvidia. This fund aims to identify and invest in companies with innovative business models that outsource manufacturing, allowing for higher margins and greater flexibility.

Nick Frosty [28:27]: Elaborates that SMH X includes 22 of the largest, most liquid fabless semiconductor companies. This strategy is designed to capture the next wave of industry leaders who, like Nvidia, are poised to innovate without the heavy capital expenditure tied to manufacturing.

The Role of Capital and Innovation in Semiconductor Success

Ben Carlson [32:59]: Raises concerns about the capital-intensive nature of semiconductor companies and their reliance on substantial financial resources.

Angus Shillington [33:08]: Differentiates between companies like TSMC, which have achieved global dominance through exceptional execution and customer service, and fabless companies that innovate with minimal capital expenditure. He underscores the importance of leadership and adaptable business models in sustaining long-term success.

Challenges and Future Outlook

Ben Carlson [35:07]: Brings up Intel as a cautionary tale of a once-dominant company struggling to maintain its position.

Angus Shillington [36:19]: Discusses Intel's challenges, including leadership changes and strategic missteps, while highlighting the critical importance of having multiple leading-edge semiconductor manufacturers to mitigate risks associated with geopolitical tensions and supply chain dependencies.

Closing Thoughts and Fund Utilization

Ben Carlson [27:53]: Inquires about how advisors can incorporate Vaneck's funds into broader portfolio management.

Angus Shillington [28:25]: Explains that SMH X is designed to complement SMH by focusing on the next generation of fabless semiconductor leaders. He assures that the fund is structured to remain robust with a sufficient number of constituents to adapt to market changes and emerging opportunities.

Conclusion

The episode wraps up with a recap of the key discussions around Nvidia's pivotal role in the semiconductor market, the importance of diversification within the sector, and the strategic insights provided by Vaneck's Angus Shillington and Nick Frosty. The hosts encourage listeners to explore Vaneck's offerings for diversified exposure to the evolving semiconductor landscape.

Michael Batnik [41:34]: "Thank you to Nick and Angus. Remember, check out vaneck.com to learn more about SMH and SMH. Email us at animalspiritscompoundnews.com. See you next time."

Notable Quotes

• Michael Batnik [00:56]: "It feels like it, but I don't know. I'm sure something else will come up."
• Ben Carlson [01:01]: "Yes, that's the answer, Ben. The answer is yes."
• Angus Shillington [06:33]: "I don't think about it as cyclical. I think about it as at the leadership layer, very structural."
• Angus Shillington [08:18]: "We're massive believers in mental models. You never want to be trying to get off the train right at the last Station, that's a disaster."
• Ben Carlson [15:25]: "Is it, you don't know really where you are in terms of the stock market cycle."
• Angus Shillington [16:57]: "The Nvidia business will continue to grow really nicely and this is going to be a great year. They've got a great new product coming down the pike. But the question is what's the multiple and are earnings projections too high?"
• Nick Frosty [17:15]: "SMHX is looking for the next Nvidia inside of SMH."
• Angus Shillington [36:27]: "We have to fire up that intel foundry."

Key Takeaways

1. Nvidia's Dominance: Nvidia remains a cornerstone in the semiconductor industry, particularly within the AI segment. However, its substantial market cap necessitates careful portfolio management to avoid overexposure.

2. Diversification is Crucial: Vaneck emphasizes diversifying holdings within the semiconductor space to mitigate risks associated with any single company's performance.

3. Evolution of the Semiconductor Market: The application of semiconductors has expanded significantly, with AI optimization driving new growth opportunities beyond traditional computing.

4. Future Leaders: Funds like SMH X aim to identify and invest in the next wave of fabless semiconductor companies poised to lead the industry.

5. Historical Context: Comparing the current semiconductor boom to the dot-com era highlights the importance of leadership and strategic adaptability in sustaining market dominance.

6. Geopolitical Considerations: The conversation underscores the strategic importance of having multiple leading semiconductor manufacturers to safeguard against geopolitical disruptions.

For more insights and detailed information on the discussed ETFs, visit vaneck.com and subscribe to future episodes of the Animal Spirits Podcast for continued coverage on markets, life, and investing.