Doug Kass: The Beginning of the End of the Fun for Nvidia and AI

I have written more than 30 Tales of Nvidia NVDA columns in my Daily Diary on TheStreet Pro describing what I believe to be bonafide concerns about the semiconductor company and its high-flying stock.

These concerns include, but are not restricted to, supply outpacing demand during the AI buildout, the pace of adoption, that the real return on AI investment may be disappointing (as there might be a mismatch between capital spend and revenues being generated), potential production problems and the ultimate size of the total addressable market.

Notably, Nvidia's profit margins have peaked and will shrink going forward:

I have concluded — in that series — that AI and Nvidia's NVDA role and prospects in the AI industry might be more than discounted in the share price of industry participants.

Up until recently investors have ignored most of my concerns — as well as a number of thin reed indicators like the CEO's large stock sales, the fact that Jensen Huang had become a rock star of major proportions (he now signs t shirts) and even the existence of a NVDA EPS Watch Party:

And then there is the excitement of Nvidia's modest (relative to capitalization) $50 billion buyback (announced last night):

A Tale of Two Cities

Warren Buffett buys back Berkshire BRK.A BRK.B shares when it is at 1.2x or less book value. (Berkshire Hathaway's issuance of options is virtually at zero.)

Jensen Huang buys back Nvidia's shares when it trades at 64x book value. (And when he buys it, at least in the latest round of $50 billion, it barely offsets the issuance of options.)

Finally, here is an objective summary and solid analog of Nvidia to Cisco CSCO during the dot-com boom/bust by the lynx-eyed Dan Niles (we will no doubt hear the opposite view from the other Dan in the business media today!): 

Bottom Line

I see volatility and underperformance ahead as the share prices of Nvidia and others digest their large gains — reflecting, in large measure, the growing likelihood of increasingly small sales and profit beats (especially relative to the consensus). 

This commentary was originally posted Thursday, Aug. 29, in Doug's Daily Diary on TheStreet Pro. 

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