Axis Tactics 15th October, 2024 - Nvidia, Novo Nordisk and the Problem with Ubiquity

A note on Novo Nordisk, Nvidia. And separately, some Equities we do like....

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Everybody Loves the Sunshine (Roy Ayers, Ubiquity)

The Future is impossible to predict and no easier to value. So, if you’re going to bet on the next big thing or presume that your next investment is going to swallow up the entire market-place based on its record thus far, all I can suggest is - please don’t pay too much for it because it might not work out that way.

To illustrate, let’s start with 2 of today’s darlings. First up, Novo Nordisk. Both Novo (also Eli Lilly) have been very successful in making the Fat Boy, Slim. The Bulls and believers point to a market size that is set to grow by a decent multiple over the next 5-10 years and this is the bedrock for most of the optimistic calls on the stock’s prospects. But even if the market for such obesity treatments is set to grow by 5x or 10x over the coming decade, do you have a rough guess as to how many competitors have products in the pipeline, at varying stages of development? Somewhere over 120, based on IQVIA industry data from back in March 2024. Likely that number is higher now. Furthermore, what’s your guess on how many might have greater efficacy and fewer side effects than the current top 2? I’m not sure myself…but I would only want to bet on one or other player within this landscape, if I did know. And right there, is the problem with Ubiquity. A pervasive and quasi-monopolistic (or duopolistic) landscape, dominated by 1 or 2 well-settled Companies invariably leads to full-fat valuations (I know about the pun) and pricing to perfection. Hence, their longer term investable attributes might have to be wider than simply obesity. As the barriers to entry seem too low here and the moats are limited - it seems more than a little plausible that a few of the c.120 drugs on trial could seriously upset the share price composure of NVO or LLY, over a medium term timeframe. Good companies they may be and well run, they certainly are - but the right price for their future is hard to estimate and hence, a little prudence wouldn’t go amiss.

And onto another super hottie, Nvidia. Nvidia’s business now is predominantly B2B, with their audience being extremely largely capitalised, cash-rich multinational corporations. Anyone that has had the joy of trading commodities will know that the cure for high prices is high prices. Supply and Demand eventually find their happy balance. And the same logic applies to Nvidia. For now, Nvidia is living its best life (raw materials supply issues, notwithstanding). But if you were an Nvidia customer and (i) You had loads, really loads, of cash and (ii) You don’t mind getting down and dirty with a bit of R&D (iii) You had strong Tech expertise, in house - What would you be doing, right now? And the answer is…..Vertical Integration aka DIY. At some point, these Nvidia customers will develop their own in-house capabilities and will eventually no longer need to source this kit externally. Not tomorrow - but we are talking about the price of the future here and how that future is reflected in today’s valuations. Hence, would you pay an extreme price now for an Nvidia future market share which could look markedly different to today’s market share. Just because something is everything and everywhere today doesn’t mean it will be like that in future.

And in other news, we’ve included below a list of ideas from our Value-Driven Stock Screen that might pique your interest…