11-26-24: Super News on Super Micro Computer and Nvidia

by Louis Navellier

November 26, 2024

Last Wednesday, Nvidia officially capped off third-quarter earnings announcement season when it told investors that its third-quarter sales rose 93.6% to $35.08 billion compared with $18.12 billion in the same quarter a year ago. The company’s earnings rose 110.8% to $19.31 billion, or 78 cents per share vs. $9.25 billion, or 37 cents per share. Excluding extraordinary items, Nvidia’s operating earnings were 81 cents per share. The analyst community forecast sales of $33.07 billion and operating earnings of 74 cents per share, so the company posted a 6.1% sales surprise and a 9.5% earnings surprise. Looking forward, the company raised its next quarter’s sales estimate to $37.5 billion, just above the analyst community’s consensus estimate of $37.1 billion. Overall, this was another great, though not spectacular, report, since Nvidia always delivers high expectations going into its quarterly report, plus positive future guidance.

What I find most amazing is that Nvidia’s explosive sales and earnings growth has been largely fueled by its H100 Core GPUs, but starting in the current (fourth) quarter, Nvidia’s new Blackwell GB200 GPU will likely dominate its sales for the next couple of years. Since Nvidia spent approximately $2 billion developing the Blackwell GPU, it has no competitors, and as it develops even more powerful GPU successors to Blackwell, I do not expect any competitor to “crack” Nvidia’s monopoly on generative AI.

Even five years from now, by the end of the decade, there will not likely be any successors to Nvidia, since the transistors in each chip will be approaching the atomic level, so the reality of physics alone will prohibit Nvidia (or anyone else) from making its CPUs faster. Beyond the 2020s, Nvidia plans to utilize quantum computing to speed up generative AI after its GPUs hit their physical limits, so Nvidia has a quantum cloud simulator, now up and running, to make that transition. Nvidia’s Eos supercomputer has teamed up with Google’s AI division to speed up the design of quantum computing components.

Also, I’m pleased to report that Super Micro Computer (SMCI) has gotten its “mojo” back and has been resurging after the company squashed some uncertainty that has been hanging over the stock for a few months, especially after the company’s auditor, Ernst & Young, resigned after a short-seller’s report alleged accounting inconsistencies. In my opinion, SMCI’s biggest problem seems to be centered around its massive order backlog, which may take more than four years to fulfill. That’s what’s caused these allegations about the company’s accounting practices and, specifically, how it books its sales.

Fortunately, Super Micro Computer hired a new independent auditor, BDO USA. With this new auditor, SMCI also stated that it should be able to complete its annual 10-K filing for fiscal year 2024, as well as file its 10-Q reports for the first quarter in fiscal year 2025 in a timely manner. Super Micro Computer also submitted a compliance plan with NASDAQ. If the plan is accepted, SMCI will avoid being de-listed and have a new deadline to submit its 10-K and 10-Q reports to maintain its listing.

Super Micro Computer continues to dominate liquid-cooled AI chips in data centers, which are becoming faster and faster all the time. So, the company’s server solutions remain in strong demand, and Super Micro Computer even revealed recently that it shipped a record 100,000 GPUs in the most recent quarter.

Recently, Super Micro Computer also noted that it expects total sales of between $5.9 billion and $6.0 billion and earnings per share of between $0.75 and $0.76 for its first quarter in fiscal year 2025. This compares to previous guidance for revenue of between $6.0 billion and $7.0 billion and earnings per share of between $0.67 and $0.83. Overall, Super Micro Computer’s preliminary outlook still represents 186.4% to 191.3% year-over-year sales growth and 120.6% to 123.5% year-over-year earnings growth.

Another company in the news is Target, which missed analysts’ consensus fiscal third-quarter earnings estimate by 19.6%, lowered its forecasted earnings and warned that high inventories would impede its future results despite a good start to holiday sales. This is not the first time that Target has suffered from inventory issues. The company has had an erratic earnings surprise history and is struggling with same-store sales growth. Despite cutting its prices on approximately 5,000 items, which boosted its fiscal second-quarter results, Target appears to continue to lose market share to Costco and Wal-Mart. The fact of the matter is that U.S. consumers are very smart and if items are not priced right, they shop elsewhere.

Housing Costs (and Therefore Inflation) May Remain Stubbornly High

A new report from the Cleveland Fed said that it may take until mid-2026 for rental costs to moderate. As a result, the shelter cost component (Owners’ Equivalent Rent) may remain elevated and keep CPI rates stubbornly high. This may end up in the Beige Book report and convince the Fed to stop cutting rates.

Part of this housing inflation is due to a long-term shortage of housing units, which was exacerbated by the surge of hurricanes this season. Last Tuesday, the Commerce Department announced that housing starts in October declined to a 1.31 million annual pace due largely to an 8.8% decline in the South due to Hurricane Milton. Housing starts plunged 33% in the Northeast while rising to the highest level this year in the West. Building permits eased 0.9% to a 1.42 million annual pace in October. Overall, we should get a clearer picture of the housing industry next month, since the seasonal distortions should dissipate then.

In other economic news, all the talk about tariffs hurting the U.S. are largely emanating from Europe, since Germany is in a recession and the EU is acting “scared” of Trump’s tariff retaliations, fearing that if they do not cut their tariffs to U.S. levels (e.g., 2.5% on imported vehicles), then Trump 2.0 may raise tariffs to lofty EU levels. European Central Bank President Christine Lagarde, who was openly hostile to Donald Trump before he was elected, has been leading the anti-tariff crusade, despite the fact that the EU imposes much larger tariffs than the U.S. Britain’s media is also guilty of trying to scare the world about higher tariffs under Trump 2.0, but please remember that the UK shifted to the left and is now under Labour Party leadership, which was actively campaigning against Trump with nearly 100 “special advisors” operating in Pennsylvania and other key swing states, arguing against Trump’s tariffs.

What Donald Trump wants to do is merely level the playing field with new tariffs, but only if those other countries have higher tariffs (e.g., the EU) or unfair government subsidies (e.g., China). Since most of the world has taken advantage of the U.S. and relies on exports to the U.S. to boost their domestic economies, they are afraid of Trump trying to level the playing field. The most difficult country to deal with may be our neighbor Mexico, since under NAFTA (the North American Free Trade Agreement), the U.S. is not supposed to put tariffs on goods imported from Monterrey and other big industrial centers in Mexico.

Since the trade between Mexico and the U.S. is so large, this will be a much more delicate situation to negotiate. Furthermore, since the U.S. needs cooperation with Mexico to negotiate border security and fight the dominant drug cartels, Mexico may prove to be the Trump Administration’s biggest challenge.

More Reasons for Thanksgiving — Living in America

Compared to the rest of the world, the U.S. has a series of advantages we should always recognize, especially during Thanksgiving week. First, the U.S. is both food and energy independent. Second, our 50 states effectively act as economic laboratories and compete with one another, which creates a naturally entrepreneurial environment where prosperity rises. Third, the U.S. has better demographics than other countries, so while China, Europe, Japan and many other countries see their populations shrink, the U.S. still has “household formation” due to many pro-family states as well as the fact that the U.S. is better at assimilating immigrants than other countries. I should add that although immigration was a contentious election issue, I suspect that most of the immigrants that are working here will be allowed to stay here.

Donald Trump’s “drill baby drill” pledge is also likely to have profound consequences. First, the efforts to restrict LNG exports and prohibit drilling on federal land is effectively over. Trump’s nominee for the Secretary of Energy, Chris Wright, is a fracking expert, so the production of both crude oil and natural gas is expected to steadily rise. As a result, natural gas is expected to be tapped to double the utility grid to fuel rising electricity demand for AI data centers as well as electric vehicles. President-elect Trump pledged to cut the price of gasoline in half, which may be tougher than he expects, but if energy prices remain low, it will put more money in consumers’ pockets and boost consumer spending.

Lower energy prices will be another cause for Thanksgiving over the next few years.

Obviously, big changes are coming. Perhaps the biggest economic change for Trump 2.0 is to help the manufacturing sector break out of its 2+ year recession, which will potentially help boost GDP growth to a 4% annual pace, reducing the deficit and potentially leading to a balanced budget by the end of his term, especially if he can also deliver a “peace dividend” by achieving an expanded Abraham Accord (an alliance with Israel and Saudi Arabia to deter Iran), plus ending the fighting between Russia and Ukraine. If Donald Trump can achieve more peace around the world, even a 5% annual GDP growth is possible.

Speaking of Ukraine, a G-20 meeting was held in Brazil last week, where lame duck German Chancellor Olaf Scholz reportedly provided other world leaders with the details of his conversation with Vladimir Putin. Most world leaders welcome an end to the Russia/Ukraine conflict, but two other lame duck world leaders from North America (President Biden and Canada’s Prime Minister Justin Trudeau, who is deeply unpopular and expected to lose in the next election in October 2025) were not much help. Biden didn’t help end the war when he provided Ukraine with limited authority to use long-range missiles that can hit up to 139 miles inside Russia. Russia retaliated by firing an intercontinental ballistic missile into Ukraine.

The U.S. Embassy in Kiev was evacuated based on fears of a missile strike. The Biden Administration also approved the use of land mines in Ukraine to deter a Russian advance. This escalation obviously does not help to end the long Russia/Ukraine war, but it may cause Putin to seek an end to the conflict if he can get some NATO guarantees to end their expansion as he awaits Trump’s inauguration next January.

Europe Dips into a Recession – Following Germany’s Lead

Due to mounting layoffs in Europe, The S&P Global Purchasing Managers Index (PMI) for the euro-zone slipped to 48.1 in October, down from 50 in September. Since any reading below 50 signals a contraction, the S&P Global PMI is evidence that the entire euro-zone is slipping into a recession. Germany is already in a recession and the S&P Global PMI slipped to a 9-month low of 47.3 in October.

The second largest euro-zone economy, France, had its S&P Global PMI plunge to 44.8 in November, down from 48.3 in October. As a result, the European Central Bank (ECB) will likely cut key interest rates more in upcoming months to try to stimulate the euro-zone and stop rising unemployment. Due to the anticipation of ECB rate cuts, the euro fell to $1.0335 intraday against the U.S. dollar, its lowest level since 2022. As global interest rates decline, it should also help U.S. Treasury rates to decline in 2025,

As Germany heads into its election in February, the leading candidate to become Chancellor is Christian Democratic party head, Friedrich Merz. The big debate in Germany is whether or not it should loosen up its strict “balanced budget” practices, adopted after the Great Recession of 2008-09, which is why Germany has the lowest level of government debt of the G7 countries. Merz has argued for more budget “flexibility” (debt), especially for major spending projects, like infrastructure, energy and defense.

In other words, Merz is open to tweaking Germany’s aversion to debt in order to stimulate overall economic growth. As a result, more German government bonds may be sold after the February elections.

I should add that, in the wake of VW Group’s job and plant cuts, auto parts supplier Schaeffler on Tuesday laid off 4,700 jobs across Europe and closed two of its 10 locations in Germany. Schaeffler, which supplies parts to BMW, Mercedes-Benz and VW Group, said it would cut about 2,800 jobs in Germany as part of an effort to save $316 million a year by 2029. So political pressure on German politicians is brewing, since high electricity prices are making its manufacturing sector less competitive.

Additionally, Europe’s largest battery manufacturer, Sweden’s Northvolt, filed for bankruptcy on Thursday, and demonstrated how difficult it is to compete with China on battery manufacturing. Northvolt has $5.8 billion in debt and only $30 million in cash.

VW Group, will still use Northvolt battery cells, the company was never able to make batteries as efficiently as Chinese battery giants, BYD and CATL. The fact that VW Group is planning on selling an electric vehicle (EV) made by Xpeng, says it all, since legacy automakers simply cannot compete with China on low cost EVs. Bottom line, the rest of the world is struggling, so we can be thankful to live in America and be an American during Thanksgiving week.

Navellier & Associates owns Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), Costco Wholesale Corporation (COST), and Alphabet Inc. (GOOGL), in managed accounts. We do not own Walmart (WMT), Target Corp (TGT), or Volkswagen AG Unsponsored ADR (VWAGY). Louis Navellier and his family own Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), Costco Wholesale Corporation (COST), and Alphabet Inc. (GOOGL), via a Navellier managed account, and Nvidia Corp (NVDA), and Costco Wholesale Corporation (COST), in a personal account.  He does not personally own Walmart (WMT), Target Corp (TGT), or Volkswagen AG Unsponsored ADR (VWAGY).