Weekly Stocktake - Lunar Capital

Nvidia – Powering Sovereign AI Ambitions

Nvidia, the leading designer of graphics processing units (GPUs), reported another strong quarter of growth. For the first quarter of fiscal year 2026, the company’s revenue rose 69% year-over-year to $44.1 billion, while operating income increased 28% to $21.6 billion. The slower growth in operating income relative to revenue was primarily due to a $4.5 billion inventory write-down, resulting from U.S. government restrictions on the sale of Nvidia’s H20 chip to China.

Despite this, Nvidia’s performance remains impressive when viewed over a longer horizon. Compared to the same quarter two years ago, revenue has increased more than fivefold, and operating income has grown more than ninefold.

Currently, Nvidia dominates the market for GPUs used in training and processing data for generative AI. In 2025, big tech companies—including Microsoft, Alphabet, Meta, and Tesla—are expected to collectively spend approximately $350 billion on capital expenditures, with a significant portion directed toward building AI infrastructure.

These large tech firms have played a major role in Nvidia’s recent revenue growth. In the latest quarter, just two customers accounted for 30% of total revenue. This concentration presents a potential risk: if these companies scale back their AI investments, Nvidia’s growth could be materially affected. Acknowledging this, Nvidia has been actively working to diversify its customer base. The company is increasingly targeting national governments as customers for its AI systems. Recently, Nvidia announced deals with Saudi Arabia’s new AI initiative, Humain, and the United Arab Emirates, aimed at helping these countries develop national AI infrastructure. CEO Jensen Huang also revealed plans to travel to Europe to finalize agreements with several countries interested in building sovereign AI capabilities.

Nevertheless, big tech firms remain Nvidia’s primary revenue drivers. These companies are among the few with the scale and business models to monetize AI sustainably, which supports continued investment in AI infrastructure.

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This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.

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Snowflake – a Stock for Staff

Weekly Stocktake / By VCS Agency

Snowflake is a company that provides a platform which enables businesses and organisations to organise and share data across multiple cloud environments. Recently, the company has been shifting its focus toward helping customers leverage their data for artificial intelligence (AI) applications.

Last week, Snowflake reported its financial results for the first quarter of fiscal year 2026. Revenue for the quarter reached $1 billion, representing a 26% increase year over year. However, the company also reported an operating loss of $447 million, up 28% from the same period last year.

Snowflake has observed a shift in its customer base since the COVID-19 pandemic. During the pandemic, its primary customers were startups that spent aggressively on cloud services. In contrast, the current customer base consists largely of larger, more cost-conscious organisations with stricter budget controls. As of the latest quarter, Snowflake serves 754 companies from the Forbes Global 2000 list and has 606 customers that each generated over $1 million in revenue over the past 12 months.

Despite strong revenue growth and a solid customer base, Snowflake faces challenges as it continues to scale. Like many smaller publicly listed companies, Snowflake uses stock-based compensation to attract and retain talent, as it may not be able to match the cash compensation offered by larger technology firms. However, this approach can lead to shareholder dilution, as it increases the total number of shares outstanding.

In Q1 2026, stock-based compensation accounted for just over 40% of Snowflake’s revenue; its operating margin was also -44%. The company managed to keep the total number of shares roughly in line with the same quarter last year by repurchasing shares from existing shareholders using its cash reserves. While this strategy helps offset dilution, it carries the risk of inefficient capital allocation, especially if shares are repurchased at high valuations.

Snowflake has demonstrated consistent revenue growth in recent years. However, its increasing reliance on stock-based compensation to support this growth may become a concern for investors if not addressed.

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Walmart: Pricing for Perfection

Weekly Stocktake / By VCS Agency

As of Friday, Walmart was trading at a trailing price-to-earnings (P/E) ratio of 42, with a market capitalization just under $800 billion.

In its Q1 2026 results, Walmart reported revenue of $165.6 billion, a 2.5% increase year over year. Operating profit rose by 4.3% to $7.1 billion, outpacing revenue growth. This improvement was driven by an increase in gross margins and higher membership income and advertising revenue, indicating effective cost management and a growing contribution from value-added services.

The company’s ecommerce segment played a significant role in its performance, growing 22% year over year. This growth was primarily fuelled by store-fulfilled pickup and delivery services. Notably, this quarter marked the first time Walmart’s ecommerce operations turned a profit.

Walmart continues to operate on thin margins. The operating margin for the quarter stood at 4.3%. The company has indicated that it may need to raise prices due to tariffs imposed by the Trump administration. Even though tariffs on Chinese goods have been reduced from 135% to 30%, prices remain elevated compared to previous levels. With approximately one-third of its goods sourced from China, Walmart has limited capacity to absorb these additional costs without materially impacting profitability.

Tariff-related uncertainty has also complicated demand forecasting. While Walmart can adjust short-term forecasts monthly, major retail events like Halloween and Black Friday require projections made up to a year in advance. This volatility makes it more challenging to plan pricing strategies and inventory levels effectively.

Large, well-managed retailers like Walmart typically perform well during economic downturns. Their scale allows them to offer lower prices than smaller competitors, capture higher income clients and market share, and maintain a relatively stable operation through financial resilience.

Walmart’s strong balance sheet, operational scale, and growing ecommerce offering, continue to provide a competitive edge in a challenging economic environment.

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The Legacy of Disney

Weekly Stocktake / By VCS Agency

Last week, Disney released its Q1 2025 financial results, reporting a 7% year-over-year increase in total revenue to $23.6 billion. This growth was primarily driven by the entertainment segment, which includes both linear television and direct-to-consumer (DTC) services. Operating income rose 15% year over year to $4.4 billion, mainly due to a sixfold increase in operating income from the DTC business.

Despite the growth in streaming, Disney continues to face challenges in its linear network segment, where revenue has been declining as audiences shift toward digital platforms. However, linear TV remains a major contributor to profitability, generating over 61% of the entertainment segment’s operating income. In contrast, the DTC segment, while rapidly growing, currently contributes just over 26%. Competitors like Netflix and Amazon, which entered the streaming space earlier, have been able to capture market share from traditional media players like Disney.

A key strength for Disney lies in its library of intellectual property, which has been developed in-house development and through acquisitions. This content portfolio fuels multiple revenue streams across its business segments.

One of the most effective ways that Disney monetizes its IP is through its Parks and Experiences division, which includes theme parks around the world. This division generated $8.9 billion in revenue—up 6% year over year—and $2.5 billion in operating income, a 9% increase. Notably, this division accounts for more than 55% of Disney’s total operating profit.

Looking to further expand its global footprint, Disney recently announced plans to open a new theme park in Abu Dhabi. While Disney will lead the design of the park, construction will be funded by local partners. In return, Disney will receive a share of the revenue generated by the park.

The Parks and Experiences segment may be particularly vulnerable in the event of an economic downturn. A potential recession could dampen consumer spending on travel and leisure, impacting park attendance and profitability.

Disney also faces intense competition in the entertainment space. Netflix is singularly focused on its core DTC business and does not have to manage legacy media operations or a theme park division. This focus may give Netflix a strategic advantage as the media landscape continues to evolve.

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Amazon – Navigating the Tariff Jungle

Weekly Stocktake / By VCS Agency

Amazon’s ecommerce (retail sales) marketplace business aims to offer the broadest possible selection at the lowest possible price to customers. This strategy has enabled Amazon to gain significant market share over the last two decades.

Last week, Amazon released their Q1 2025 results, revealing a revenue of $155.7 billion, up 9% year over year, and an operating income of $18.4 billion, up 20% year over year. Sales in North America increased by 8% to $92.9 billion, while the international segment generated $33.5 billion, up 5% year over year. Amazon Web Services (AWS), Amazon’s cloud and AI business, generated $29.3 billion in revenue, up 17% year over year. Despite AWS generating the lowest revenue among all business segments, its operating income accounted for over 60% of the company’s operating profits.

This quarter however has not yet reflected the full impact of the trade wars. Amazon has warned that tariffs could significantly impact their business. It is estimated that a quarter of all products sold on Amazon’s retail business are sourced from China. Currently, tariffs on goods imported from China to the US stand at 145%. Amazon noted that they have over 2 million sellers on their marketplace. While some sellers may pass the entire cost onto customers, others might absorb some or all the tariff costs to gain market share.

Amazon is not solely an ecommerce marketplace. The company boasts an extremely profitable and growing cloud and AI business. Additionally, Amazon has an advertising business that has generated just under $60 billion in the last four quarters. The company plans to spend about $100 billion in capital expenditures, primarily directed towards further building out their AI capabilities.

Due to their size and wide-reaching platform, Amazon is in a relatively strong position to weather the tariff storm and potentially emerge stronger once the tariff dust settles.

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Alphabet – Search and Beyond

Weekly Stocktake / By VCS Agency

Steve Jobs once said that if a company doesn’t look to cannibalize its own products with better ones, another company will. This is easier said than done.

Alphabet recently released their Q1 2025 results, reporting a total revenue of $90.2 billion for the quarter, which is a 12% increase year over year. Google Search, which accounts for the bulk of Alphabet’s revenue and profits, generated $50.7 billion, marking a 9.8% year-over-year increase.

There are growing concerns that Generative AI could significantly impact Alphabet’s Search business. As more users opt for AI-generated summaries, fewer people may click on ads during their searches.

Generative AI is still in its infancy, and there is no clear leader in the AI race. At the beginning of the year, big tech companies planned to spend $300 billion on capital expenditure to primarily develop their Generative AI capabilities. Last year, Alphabet spent $53 billion on capital expenditure, and they have indicated plans to increase this to $75 billion this year, a 41% increase compared to 2024.

The Google Cloud segment saw a significant increase in revenue, growing by 28% to $12.3 billion for the quarter. This growth was attributed to Alphabet’s sales of Cloud, AI infrastructure, and Generative AI solutions. Alphabet mentioned that the demand for their AI solutions continues to outstrip supply, which they are using to justify their planned $75 billion capital expenditure this year. This despite the uncertainty caused by the Trump administration and the increasing risk of a US recession which could negatively affect the demand for Alphabet’s products.

Alphabet’s balance sheet shows a 64% increase in the Property, Plant, and Equipment line item since the end of 2022. In comparison, the rolling 12-month operating income for Alphabet has increased by 57% during the same period. The concern is whether Alphabet can generate a return quickly enough to justify their substantial investment in AI capabilities.

Meanwhile, other big tech companies are also racing to become the dominant force in AI. The risk is shared in their efforts to not be left behind.

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Netflix: The Saga Continues

Weekly Stocktake / By VCS Agency

By the end of 2024, Netflix had over 300 million subscribers in 190 countries. Netflix estimates that this translates to an audience of roughly 700 million people. Last week, Netflix released their Q1 2025 results, reporting revenue of $10.5 billion, up 12.5%. Operating income was $3.3 billion, representing an operating margin of 31.7%, up from 28.1% in the same quarter last year. Netflix has set a goal of doubling its current revenue by 2030.

Over the last few years, Netflix has steadily increased the prices for their services. In the US, the price of the standard plan rose from $13.99 in 2019 to $17.99 this year, a 28% increase. Netflix has also kept its content spending relatively stable, which has allowed the company to increase profitability substantially. Two years ago, Netflix cracked down on password sharing. According to Netflix, this had a net positive impact, as more people created their own accounts compared to those who left the platform entirely.

A core pillar of Netflix’s strategy is to fund and create original content. This approach gives them full creative control and rights, enabling them to produce more content centred around their intellectual property without incurring substantial leasing costs. Netflix has had significant success with this strategy, creating shows like Stranger Things and Squid Games, which have become culturally significant shows with large fanbases. Netflix has also refused to lease its content to other platforms. This strategy has helped Netflix draw in and retain customers despite the intense competition.

However, Netflix still faces stiff competition from other streaming platforms, linear TV, and the entertainment industry as a whole. The risk is that Netflix might lose its ability to engage subscribers, leading to non-renewals. However, as it stands, the company is in a strong position. The market values Netflix highly, with a price-to-earnings ratio of over 45.

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JP Morgan – Banking on Volatility

Weekly Stocktake / By VCS Agency

JP Morgan Chase & Co. reported their financial results for the first quarter of 2025. The company posted a revenue of $45.3 billion, marking an 8% increase year over year. Net income for the quarter reached $14.6 billion, up 9% from the same period last year. JP Morgan’s return on equity was 18% for the latest quarter. The company also reported an overhead ratio of 52% for the quarter. Despite the market volatility, JP Morgan’s share price has decreased by just under 2% since the beginning of the year.

The significant growth in revenue was primarily driven by the company’s Markets & Securities Services division, which saw a 19% increase to $10.9 billion. Notably, revenue from equity markets increased by 48% to $3.8 billion, the highest ever recorded by the company. This stand-out performance was attributed to increased market activity and trading volumes, which boosted revenue.

JP Morgan also capitalized on the increased market volatility through its derivatives business. Derivatives are financial contracts whose value is derived from the price of an underlying asset, such as stocks, bonds, or commodities. As volatility increases, the prices of the actual derivative contracts increase, and vice versa.

In his prepared remarks, CEO Jamie Dimon highlighted the dual nature of the current economic landscape. On the positive side, potential tax reforms and deregulation could provide significant benefits. However, challenges such as tariffs, trade wars, persistent inflation, high fiscal deficits, and asset price volatility remain considerable risks.

JP Morgan’s strong balance sheet continues to be a cornerstone of its stability. The company achieved a Common Equity Tier 1 (CET1) Capital ratio of 15.4%. The CET1 ratio is a measurement of a banks available capital expressed as a percentage of a bank’s risk weighted assets. The higher the CET1 ratio, the higher the loss absorbing capabilities. JP Morgan has a total loss-absorbing capacity of $558 billion.

As the global economy navigates through uncertain times, JP Morgan’s “fortress balance sheet” gives the company the potential to manage future volatility and capitalize on emerging opportunities.

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Not Tariffic

Weekly Stocktake / By VCS Agency

Last week, the US Government released a list of tariffs and levies to be applied to all countries. These tariffs will range from 10% to 50% on 185 countries, significantly higher than what analysts and commentators had anticipated. The effective tariff rate, which is the customs duty revenue as a proportion of goods imported, is expected to range from 20% to 25% for 2025. The last time the effective tariff rate for the US was this high was nearly 100 years ago.

What is the USA, through the Trump presidency, trying to achieve?

Trade Balance
In 2024, the US had a trade balance (Exports – Imports) of -$1.2 trillion. US consumers have benefited from better and cheaper products from other nations, while US companies have externalized a large portion of their manufacturing to countries with a lower cost base. Big Tech companies such as Apple and Nvidia design their products in the US but outsource many components to companies like TSMC in Taiwan, which manufactures highly sophisticated semiconductors.

The intention with tariffs is to make the cost of goods imported to the US higher, which will then make manufacturing these same goods in the USA more viable. Ultimately, someone must pay the additional costs of the tariffs, and these will be consumers in the USA unless the companies selling these products absorb some these costs. Establishing complex manufacturing capabilities is not a trivial matter and could take years to do.

US Dollar as Reserve Currency
The US dollar is the world’s reserve currency. This creates a natural demand for US Dollars thus keeping its price elevated. This is a major contributor to the trade deficit in the USA, making it cheaper to import than to manufacture in the USA.

The reserve currency status of the US dollar has provided the USA with significant power over the international financial system, for example by limiting access to the international financial markets with sanctions or even through confiscating the funds of countries that it deems are enemies.

US National Debt
The US national debt reached just over $34 trillion last year, rising from $395 billion in 1924. Since the 1980s, the debt as a percentage of GDP has increased from just under 40% to over 120% in 2024. As the debt-to-GDP ratio gets higher, it becomes more challenging to pay off the debt, because the interest bill continues to take up a larger portion of the national budget.

As one would expect, the creditors of the USA, i.e. the institutions funding the USA by buying their bonds, have started expressing deeper concerns about the sustainability of this huge growth in debt.

How could you respond to this?
At Lunar Capital, our view was that the US markets have been over-priced since last year. We have maintained a slightly higher position in cash and have increased our exposure to businesses outside of the US, such as Alibaba, Naspers, MELI and Anglogold.

There are still high levels of uncertainty in the markets, which are been reflected in the drop in share prices and the markets around the world. At some stage, some great companies will present good buying opportunities.

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De-Lululemon

Weekly Stocktake / By VCS Agency

Lululemon, the Canadian athleisure brand, released their Q4 2024 results last week, reporting a revenue of $3.6 billion, up 13% year over year, and an operating income of $1 billion, up 14% year over year. For the full year, net revenue in the Americas increased by 4%, while net revenues from their international segment surged by 34%. The international segment accounted for 25% of Lululemon’s total sales for the year, while the US accounted for 61%.

Despite these strong results, management indicated signs of a more frugal consumer. Over the past three years, consumers have faced high inflation, and recently the looming threat of tariffs on the US’s trading partners could potentially decrease Lululemon’s gross margin. Year-to-date, Lululemon’s stock price has decreased just over 23%.

Known for selling $100 yoga pants, Lululemon recorded a relatively high gross margin of 60.4% for the most recent quarter. A high gross margin often allows a company to handle sudden increases in input costs without necessarily having to increase the prices of their products suddenly.

However, Lululemon is in a challenging position. Last year, they released a collection of products that didn’t resonate with US consumers. A company that prices its goods extremely high but fails to deliver on its original appeal to its customers, even the most loyal, could easily lose them to competitors offering similar products at lower prices. It is then extremely difficult to win those customers back.

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