Last year, there was a lot of reasonable speculation that Cisco $CSCO from a quarter-century ago was analogous to Nvidia $NVDA now. The thinking was that Cisco was selling the hardware that new internet companies needed. (That was analogous to selling the picks and shovels to gold miners more than 100 years earlier.) When the dot-com bubble popped, late-model used Cisco equipment sold for ten cents on the dollar crushing demand for new Cisco product. The stock cratered.
Many saw a similar pattern in Nvidia, the company selling the AI accelerators and GPUs used to program the LLMs powering the AI revolution; or at least letting us make funny photos based on text prompts. Nvidia is by far the best company in the world in this space and stratospheric revenue growth, a multi-trillion stock market capitalization, and a multiple of 40x free cash flow all indicate the kind of Cisco-level enthusiasm that causes people to make the comparison.
I downplayed the comparison in two different ways last year. First, like Cisco, Nvidia was engaging in vendor financing, but the source of funds was Blackstone and Magnetar meaning Nvidia wasn’t taking the non-payment risk. I also noted that Nvidia’s big customers were mega-cap companies with massive amounts of free cash flow like Google $GOOG, Facebook $META, Amazon $AMZN, and Microsoft $MSFT. While it’s unclear whether these companies will earn a return on the hundreds of billions of dollars of cap-x they’ve spent on AI, no one doubts their ability to pay the bill. Cisco was selling servers to companies like Pets.com and other internet retailers who were selling dollar bills for 90 cents and hoping that if they gained enough market share, they could monetize the eyeballs. The $NVDA customer base is much more secure than the $CSCO one was.
That situation may be changing. Nvidia just announced a $100B investment into OpenAI. The headline is jaw-dropping, but looking a little deeper, the agreement is for OpenAI to spend that $100B on Nvidia’s chips. So, Nvidia is giving money to OpenAI that OpenAI will spend buying Nvidia product and increasing $NVDA “revenue”.
But it might be worse than that. Last week, Enrique Abeyta @enriqueabeyta wrote that OpenAI just announced a big deal to spend $300B with Oracle $ORCL. Enrique notes that OpenAI is burning through $25B dollars every year and doesn’t have $300B. They company needs massive funding just to stay in business let alone to fund its purchase commitments. This is reminiscent of Enron which announced huge multi-year unfunded deals shortly before going bankrupt. If Enrique is right, and OpenAI is an Enron analogue, then that’s going to blow a $100B hole in $NVDA revenue estimates and a $300B hole in $ORCL expectations. These companies trade at big multiples precisely because of the huge revenue growth. And that brings me to Stephen Innes and the biggest problem of all…
Earlier today, at the Dark Side of the Boom, Stephen @steveinnes123 wrote:
Step back and the view is spectacular. Four American giants now tower above $3 trillion each, and the five biggest names command one-fifth of global market capitalization. Nine of the ten largest U.S. companies are essentially AI proxies. America has become both the stage and the actors, carrying world markets as if it were Atlas himself. Every worry — deficits, tariffs, sticky inflation, labor fatigue — has been stuffed into back rooms while the spotlight shines on Silicon Valley’s relentless narrative of efficiency and supremacy.
And that’s the biggest issue facing the market right now. We have massive concentration with a record-small number of companies all in one industry all trying to solve one problem that are keeping the market at a high P/E multiple. It’s been fine so far because these companies have managed to produce earnings growth that validates their ever-climbing stock prices. They have so much cash that they can fund hundreds of billions of dollars of AI-related cap-x without worrying about when or if they’ll earn a return on it.
However, I think it’s worthwhile to heed Stephen and Enrique’s warnings. If Enrique is right and OpenAI is making commitments they can’t fund, it’s going to be a problem for highly valued Nvidia and Oracle. If those stocks start to get re-rated to something resembling a more-normal multiple, it’s not hard to think that you’ll see declines in the prices of Google, Meta, Apple, Microsoft, and other mega-cap tech stocks. Half a dozen companies are holding up market valuations. It would only take one or two missed contractual payments from OpenAI to cause the sector to re-rate. Your options are to stay invested and buy some insurance (hedge), or to YOLO. I like the former option.
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