Why This Top Tech Fund Manager Doesn’t Own Nvidia Stock

One of the best-performing technology funds in recent years has a major contrarian streak regarding the market’s current biggest star, Nvidia NVDA.

Since June 2016, Fidelity Global Technology, the largest tech stock fund in Europe, has owned no shares of the semiconductor manufacturer, even as its stock has surged on the back of the artificial-intelligence-fueled demand for its chips.

Despite this, under lead manager HyunHo Sohn, the $20.6 billion fund’s performance has put it in the top decile among technology funds in Europe over the past decade. In that time, the fund has returned 21.4% per year, compared with the category’s average of 17.3%, the Morningstar Global Technology Index’s 20.9%, and the Morningstar US Market Index’s 15.0%. (In the US, the average tech stock fund is up about 16% per year for the last decade.)

Even as Nvidia stock has extended its rally since the firm’s fourth-quarter earnings, Sohn is staying on the sidelines. “There was nothing in Nvidia’s results to change my view,” he said in commentary provided to Morningstar on Feb. 27. He sees the current environment as just the first stage of a long-term buildout for AI infrastructure, and he believes that in the meantime there are more attractively valued ways to invest in this technology.

The stocks Sohn points to as alternatives with which to play AI in the long term include:

• Taiwan Semiconductor Manufacturing TSM
• Samsung Electronics SSNLF
• Elastic ESTC

Performance Hit From Avoiding Nvidia

It’s notable for any technology fund to own no stock in such a dominant player. The average tech stock fund in this category holds nearly 13% of its portfolio in Nvidia. Fidelity Global Technology’s benchmark, the MSCI ACWI Information Technology Index, has a 9.6% weighting in the company’s stock. This choice from Sohn, who has been managing the strategy since March 2013, especially stands out given the massive run in Nvidia’s share price. The stock is up 60% so far in 2024, 240% over the last four years, and an average of 67% per year for the last 10 years.

Having zero weighting in Nvidia has contributed to a slump in Fidelity Global Technology’s recent performance. It ranks in the 53rd percentile of the category (which has 335 funds) for the past year. Over the past 12 months, the fund has returned 31%, compared with a gain close to 46% for the Global Technology Index. Still, those returns put it ahead of the competition. The average tech fund has gained 29.1%, and the broader market index has risen close to 25.0%.

Why Fidelity Global Technology Doesn’t Own Nvidia

Fidelity Global Technology did own Nvidia shares between July 2015 and June 2016, but that was an exception to its rule. In a November commentary on the strategy, Sohn explained: “The fund does not own Nvidia, which is a good company run by solid management. However, the company itself is in the technology infrastructure and can be erratic and cyclical—which I think the market underestimates.”

Despite this stance, Sohn considers AI a valid investing theme: “I think AI is an interesting technology and has great long-term potential. Many companies are investing in setting up AI infrastructure, and as a result, we’re seeing increased demand in areas such as graphics processing units and AI networks.”

That said, Sohn believes the market is getting a little carried away. “In my opinion, AI adoption may turn out to be slower than expected,” he says. “People often compare generative AI to the iPhone movement, and while the latter was an innovative consumer product that saw very rapid adoption, generative AI is a business application—one that will need to be considered alongside regulation, compliance, security, and data governance.”

He explains: “That’s why, despite all the hype around AI, we haven’t seen many companies able to successfully monetize AI. So there could be a period of digestion with this technology, and that’s one of the risk factors I’m keeping an eye on.”

A Tougher Read on Nvidia Earnings

Sohn remains unimpressed even with Nvidia’s stellar recent results. “Nvidia has delivered very strong numbers three quarters in a row, led by data center GPU sales. While this quarter’s numbers are respectable, they are not quite the blowout numbers seen in previous quarters—in fact, the magnitude of revenue beats is lower than in the last two quarters,” he wrote this week.

“Although still above consensus, Nvidia’s latest results tell us that it is getting tougher for the company to continue beating expectations as they are elevating and remind us of the law of large numbers—the eventual convergence to a true value,” he continued. “It is difficult to predict how big this phase will be because end demand is hard to forecast, and other factors, such as strategic build, peer pressure, and supply chain tightness, create rush orders.”

Sohn wrote, “The first phase of the buildout will need to moderate at some point as AI monetization is not growing as fast—hence, digestion and comps are getting tougher.” In addition, “Justifying current valuations requires bullish long-term assumptions, such as GPU pricing staying expensive and limited credible competition from AMD AMD and Intel INTC as well as hyperscale internal chip developments.”

Other Stocks to Play the AI Trend

Sohn says, “Instead of chasing stocks already priced to perfection, I continue to approach the AI theme in a stock-specific manner, looking for underappreciated names.”

The areas he’s looking at for AI exposure include “underappreciated hardware” stocks. “If Nvidia continues to deliver, other companies, such as Taiwan Semiconductor Manufacturing and Samsung Electronics ... will also benefit.”

Another group comprises companies in the IT service/software businesses that are tied to AI monetization. “Nvidia revenue can only be sustainable if AI is monetized well,” he says. “IT service companies with domain expertise that can help customers along their AI journey and data companies” include software firm Elastic and cloud computing stock Nutanix NTNX.

Lastly, Sohn points to “misperceived AI losers, such as digital music businesses and customer service companies, where AI is likely to be less disruptive than anticipated.”