Monday, 24 June 2024

By Ryan Dinse Editor, Crypto Capital and Alpha Tech Trader

[4 min read]

Dear Reader,

Is Nvidia Corp. [NASDAQ:NVDA] in bubble territory?

And if so, when it pops, what happens to the market?

That’s the question many people are asking these days.

Check out the chart:

Nvidia just passed Microsoft to become the world’s most valuable listed company.

Such rapid success can bring its own set of unique problems.

Get this…

Apparently, the company is having problems keeping engineers who’ve seen the value of their stock options—a common part of tech sector salary packages—soar.

Some employees are retiring after getting these windfall gains, in some cases, over $10 million worth!

Maybe that’s what’s happening here?

A host of insiders are selling shares to bank some of their windfall gains.

A warning sign?

Perhaps…

Still, the chipmaker remains the hottest property in town.

They continue to beat analyst revenue expectations because their GPU chips are the best in the business for training AI (artificial intelligence) models.

And they’re probably one or two years ahead of their nearest competitors, though that gap will close over time.

Nvidia are pressing home their advantage by building out the AI eco-system as fast as they can.

This is the key point of today’s piece.

Understanding how they’re doing this is why Nvidia manages to beat analyst expectations every quarter.

The longer they can do this, the longer the share price holds up. But if it slows down too soon, look out below!

Let me explain…

The Nvidia flywheel

As it stands, Nvidia trades at a price-sales (P/S) multiple of 40. That’s pretty high.

To give you a comparison, Cisco was trading at a PS ratio of 35 times on 24 March 2000, at the peak of the dot-com boom.

Intel was at 16 times, Qualcomm was at 22 times, and Oracle was at 27 times.

Clearly, Nvidia is in danger territory right now.

But what’s propping up its valuation right now is the pace of revenue growth.

Nvidia is delivering triple digital revenue gains of 208% year over year.

Tech investors pay up for revenue growth. They always have and always will.

The trillion question is: How long can it sustain such amazing revenue growth?

This is where Nvidia’s flywheel strategy comes into play…

A flywheel is a self-perpetuating revenue model where success begets more success.

It’s the ideal sales model because once the flywheel starts turning, the effort required for each incremental sale gets easier.

Nvidia has its own version of this, and it’s what supports the current earnings expansion.

You see, many of Nvidia’s customers are partly owned by Nvidia’s investment arm.

They’ve invested in around 32 start-ups independently or with other AI-aligned firms, like Meta and Amazon.

The investments include participating in a US$1 billion round in Scale AI, Figure’s US$675 million raise, and Paris-based Mistral AI’s US$640 million funding round.

These are all AI companies involved in data, robotics, and specialist generative AI software solutions.

And guess what they all use this newly raised money to buy in large quantities?

Nvidia’s GPU chips of course!

CoreWeave is another big Nvidia investment worth mentioning.

The AI cloud specialist raised US$7.5 billion recently to finance its own expansion ambitions.

They’re building data centres around the world which will help onboard the rest of the world on to AI.

And again, they’re an instant customer of Nvidia too.

Of course, Nvidia isn’t the only big tech company investing up and down the AI ecosystem.

Microsoft, Meta, Amazon, and Google are all at it, too.

But it’s only Nvidia with its ready for sale microchips that has this instant flywheel effect in place.

The other big tech companies are hoping to have a stake in a future world of AI, but they don’t get the immediate revenue sugar hit that Nvidia does.

This flywheel effect is what explains Nvidia’s stunning share price growth versus almost every other AI company.

It helps the revenue figures justify the stock price by telling a story of surging AI demand. But the hidden truth is Nvidia itself is helping drive this demand.

What happens if the flywheel slows down?

That could get messy…

Dot com on repeat

It’s a mug’s game predicting tops for any company and I’m certainly not doing so here.

In fact, as long as the flywheel can turn, the Nvidia share price can keep rising.

But as I look further into the world for signs of widening AI adoption, I can see it’s still not at the inflection point where natural demand can take over.

Indeed, last quarter, several big-name software companies, like Salesforce Inc. [NASDAQ:TEAM], saw their stock prices plummet on signs customers were easing back on spending rather than ramping it up.

And the industry chatter I follow says many C-suite executives – while keen to be seen to be active in the AI race – are a little nervous about committing to expensive solutions too soon in such a fast-changing space.

They want to see some more proof of AI’s benefits before they commit to big IT changes.

In short, the adoption of new AI solutions isn’t going gangbusters…yet, at least.

Will that change?

I’m certain it will, but the timing is the big unknown.

You need to be ready for a number of scenarios.

If the dot com boom is a guide to the future, this is a plausible path to keep in mind:

1. Everyone buys Nvidia and other AI infrastructure stock because no good ‘application’ stocks to buy. Like how everyone crammed into ‘networking’ stocks in 1999.
2. The flywheel eventually loses momentum as real-life adoption is slower than hoped for. Nvidia misses an earnings estimate, and the stock tanks, bringing the AI sector – and maybe even the entire stock market - with it.
3. Everyone loses interest in AI, thinking it is an overblown waste of time but the bulk of the infrastructure needed is now in place.
4. The 100-bagger applications start to appear and revolutionise the world.

Of course, history doesn’t always repeat, but it does rhyme. So I think we’ll get some version of this.

The bullish counter to this possibility is that game-changing end-user applications will come much sooner than the dot-com era ones did.

And remember, you’ve got companies like Apple, Meta, Google, and Microsoft, with their billions of daily users pushing hard on AI, too.

There are many moving parts to this story.

But if it does turn out to be a ‘Field of Dreams’ scenario there’ll be a lot of egg on Silicon Valley faces!

Though strangely enough, an AI ‘act 2’ could be the real opportunity for you as an investor.

Watch this space…

Regards,

Ryan Dinse,
Editor, Crypto Capital and Alpha Tech Trader

Ryan is a former financial advisor who over seven years helped more than 600 clients and had more than $150 million under management. This experience taught him that the mainstream investment industry has no interest in helping clients strive for greatness. He was told to make ‘safe’ investment plays and settle for average returns. It wasn’t good enough for Ryan.

In 2016, he embarked on a renewed mission: to help ordinary people lock onto extraordinary trends before they go mainstream. He’s an experienced small-cap trader and an expert in cryptocurrencies. He first bought Bitcoin [BTC] in 2013, when it was around US$600. Today, it’s around US$30,000.

His crypto advisory is a must for anyone looking to make digital assets a part of their long-term portfolio. Check it out here.

His tech advisory Alpha Tech Trader aims to identify and latch onto strong emerging opportunities in the tech sector, wherever they are in the world. Get more info here.

By Bill Bonner Editor, Fat Tail Daily

[4 min read]

Dear Reader,

‘The best government is a benevolent tyranny tempered by an occasional assassination.’ 

Voltaire 

There are the elites... and there are ‘the people.’ 

Yes, the rich are different. But it’s not just a matter of money, they also have power.  

It is as if they lived in ‘two separate countries,’ says Stephen Moore. 

The elites live on the two coasts. They send their children to good schools and universities. They work in the ‘talking professions’; that is, they don’t sweat with hammers, drills, grills, machines or chemicals. Instead, they bend ideas, information and spreadsheets — as investors, lawyers, journalists, professors and managers. They earn more money. They live in bigger houses. But they weigh less, on average, than MAGA supporters...and they wouldn’t be caught dead at a Trump rally. 

As socialite Ms. J. Gordon Douglas once put it, among the elite, ‘you can’t be too rich or too thin.’ 

The Rasmussen polling organisation took their pulse at the end of last year, reporting the results in January. They defined the elite as having at least one postgraduate degree after graduating from an Ivy league college, $150,000-plus income, and living in a ‘dense urban area’. This probably defines more of a super-elite than the top 20%...but it is something the rest of them can aspire to. 

What did they find? Moore summarises: 

‘Nearly three-quarters of the elites surveyed believe they are better off now financially than they were when Joe Biden entered the White House. Less than 20% of ordinary Americans feel the same way....Elites are three times more likely than all Americans to say there is too much individual freedom in the country. Astonishingly, almost half of the elites and almost 6 of 10 ivy leaguers say there is too much freedom. 

‘An astonishing 72% of the elites — including 81% of the elites who graduated from the top universities — favor banning gas cars. And majorities of elites would ban gas stoves, nonessential air travel, SUVs and private air conditioning.  

‘Most elites think that teachers’ unions and school administrators should control the agenda of schools. Most mainstream Americans think that parents should make these decisions.  

‘Oh, and about three-quarters of these cultural elites are Biden supporters.’ 

Moore comments: 

‘The snobs thumb their collective noses at the unrefined working-class Americans. The elites believe they are intellectually, culturally and morally superior to the working class and rural America….Crime, illegal immigration, inflation, fentanyl and factory closings aren't keeping the elite up at night because in their cocoons, they don't encounter these problems on a daily basis the way so many Americans do today. Not too many main street Americans are losing sleep about climate change or LGBTQ issues.’ 

But the situation does not describe merely a political divide. It is not just a matter of Republicans versus Democrats... not a case of good guys versus bad guys. If you vote for Donald Trump you may think you will end the elites’ control. But that’s not how it works. If you rid yourself of one group...another will take its place. Like the poor, the elites will always be with us. 

The coming election will make little difference...no matter which way it goes. Because both parties are frauds. They merely represent different aspects of elite America; neither represents ‘the people’. Both have been corrupted by power and money; both have signed on to the important parts of elite agenda — more spending, more war, and more debt. 

Both Republicans and Democrats have been suborned... neither dares oppose the powerful elites that support them. That’s why debt ‘ceilings’ never hold... budgets are never balanced... and US troops still lounge at more than seven hundred overseas bases – decades after the need for them disappeared. 

Soviet America

Historian Niall Ferguson likens the US situation circa 2024 to a “late, Soviet America.” He notes that in 1990, observers were noticing a “ghastly and tragic... loss of morality” within the USSR. “Apathy and hypocrisy, cynicism, servility, and snitching,” were running wild. Nearly half the population thought that theirs was an “unjust society.” USSR leaders were old party hacks — Brezhnev, Kuznetsov, Andropov, Chernenko — or just ineffective. 

The Soviet economy was largely fake... almost all of it directly or indirectly controlled by the Communist Party. The government ran chronic deficits... supporting a bloated military that looked powerful, on paper, but couldn’t win a war.  

“Sound familiar?” asks Ferguson: 

‘Look at the most recent Gallup surveys of American opinion and one finds a similar disillusionment. The share of the public that has confidence in the Supreme Court, the banks, public schools, the presidency, large technology companies, and organized labor is somewhere between 25 percent and 27 percent. For newspapers, the criminal justice system, television news, big business, and Congress, it’s below 20 percent. For Congress, it’s 8 percent. Average confidence in major institutions is roughly half what it was in 1979.’ 

We gave up trying to solve the nation’s problems a long time ago. Today, we merely try to anticipate them. 

It’s not the Democrats’ fault. Nor the Republicans’. Both are tools of degenerate elites, who are likely to drag the country further and further into debt, inflation... and war.  

Expect a long period of chaos — financial, political and social. And watch out for the guillotine. 

Regards,

Bill Bonner,
For Fat Tail Daily

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