Chipmaker Nvidia is set to present its quarterly results today. In the investors' panel on BNR Nieuwsradio, Thijs Knaap, chief economist at APG, shares that he is less focused on the stock price increase and more on the price-to-earnings ratio.
"The growth in Nvidia's revenue and profit is very impressive, with revenue expected to hit USD 100 billion annually. The profit alone is roughly equivalent to the GDP of the Dutch province of Overijssel, which has a population of about 1.2 million people. In comparison, Nvidia employs around 30,000 people, and they thus generate enormous revenue. However, it's currently an expensive stock, with a price that's over seventy times the earnings. This means that investors expect the company's revenue and profit to grow even further. The big question everyone will be looking at during the presentation of the quarterly results is what the profit growth will be. It's great that the company is so successful now, but will this trend continue?"
According to Knaap, there are two potential risks. "Every innovation, including artificial intelligence (AI), experiences a peak of inflated expectations, which are not always fully realized. My sense is that we are nearing the end of that peak, and AI may not be as big as we think. The other risk is that Nvidia's currently unassailable position as the only company in the world that can supply the necessary chips could be threatened. For instance, if another company comes up with an easier or cheaper alternative to Nvidia's chips, it will be very challenging for the chipmaker to maintain this growth."
Interest rate cut
The investors' panel also reflected on the recent announcement by Jerome Powell of the U.S. Federal Reserve (Fed) that the time has come for an interest rate cut. "It's nice that what everyone already expected has now been stated outright," says Knaap. "We've reached the point where inflation seem to be under control, and now the Fed's dual mandate comes into play: they are not only looking at inflation but also at labor market figures. And now there are particular concerns about rising unemployment. At 4.3 percent, it's still on the low side, but it's a full percentage point higher than a year and a half ago, and that rise seems to be accelerating."
What always surprises Knaap is that Americans seem to struggle with tracking the number of jobs. "Last week, that figure was revised downward by no less than 800,000 by the relevant department. In the Netherlands, we're used to everything being perfectly administered, and we know exactly how many jobs there are, but in the U.S., it's much less precise." However, there is a nuance, Knaap emphasizes. "There are 160 million working Americans, so that 800,000 only represents half a percent. On the other hand, a half-percent difference on an unemployment rate of 4.3 percent does make a significant difference."
Knaap stresses that the dynamics that could indicate a recession still seem far off. "That's when people get laid off, so they spend less money. Companies then sell less and have to lay off employees as well. The Fed wants to get ahead of that dynamic, which is why they are now starting to lower interest rates, even though unemployment is still on the low side. They're playing it safe and will probably start with a small cut."
Investment
The chief economist also touched on the investment APG made in July on behalf of ABP in the Foundation Fund II of Main Capital Partners. This is a fund that invests in small companies developing software solutions. The investors' panel, which also included Koen Bender (director of Mercurius Vermogensbeheer and pensioenpotje.nl), further discussed Unilever's plans to spin off two brands and focus less on sustainability.
Listen to the full episode here (in Dutch).