Terry Smith avoids Nvidia shares for fear of excessive AI hype

TOKYO — Nvidia shares have nearly tripled this year, and Wall Street analysts are largely positive about the chipmaker.

But Mr. Terry Smith is not impressed.

The asset manager, dubbed Britain’s Warren Buffett by the British press, is skeptical, saying the world’s biggest stock lacks predictable earnings streams and a strong track record of high returns on capital. He avoids the stocks, although he admits that such a move would hurt the performance of his portfolio.

“I’m not sure we know what the future of AI looks like because there are almost no applications that people are paying for,” Mr. Smith said in a Nov. 5 interview in Tokyo.

“Will they be willing to pay in sufficient volume and at a sufficient price to justify this? Because if not, the suppliers of the chips will have a problem.”

His caution speaks to one of the biggest concerns about the future of the artificial intelligence industry: Will the revenue generated by the technology ultimately justify the billions in investments companies have made?

The doubts contributed to a selloff that wiped out about $900 billion (Singapore $1.19 trillion) from Nvidia’s market value from a high in June to a low in August, although shares have since recovered.

AI enthusiasts point out that Nvidia’s biggest customers, including Microsoft and Alphabet, have pledged to invest more in capital spending after pouring a record $59 billion into data center equipment and other capital assets in the third quarter. Strategists expect the company to post a net profit margin of 56 percent in fiscal 2025 as tech companies continue to increase AI spending to keep up with competitors.

But Mr Smith believes such high margins may not last.

“Even if AI is the next big thing and we pay enough money to justify it, will there only be one manufacturer of these chips?” he said. “When you get fantastic returns, that attracts competition.”

“If you actually look at the people who are the big users of the microprocessors supplied by Nvidia, such as Microsoft, Amazon and Oracle, they have already developed their own in the past,” he added.

Mr Smith’s Fundsmith Equity Fund returned 9 per cent in dollar terms this year, underperforming the MSCI World index of developing market stocks, which gained almost 20 per cent.

The underperformance was due to “the concentration of performance in a handful of stocks,” Mr. Smith said, adding that the increasing popularity of index funds was fueling the trend.

“The popularity of index funds is concerning,” he said. “A lot of people call them passive. But they are not passive. They are a momentum strategy. And the momentum will continue until that is no longer the case.” BLOOMBERG