Secrets of NVIDIA's Surge, Google Gemini's Image Generation Disaster, Reddit IPO

0:00Nvidia shares go bananas and save the stock market. Reddit's going public. Look out. Gemini's image generation goes off the rails. And wait, the Major League Baseball pants are see-through. All that and more coming up right after this.

0:17You're used to hearing my voice on the world bringing you interviews from around the globe. And you hear me reporting environment and climate news. I'm Carolyn Buehler. And I'm Marco Werman. We're now with you hosting The World Together. More global journalism with a fresh new sound. Listen to the world on your local public radio station and wherever you find your podcasts.

0:44Welcome to Big Technology Podcast Friday edition, where we break down the news in our traditional, cool-headed, and nuanced format. We're here, as always, with Ranjan Roy of Margins for a terrific show for you today. We have so much to cover. I'm excited. Great to have you here, Ranjan. Welcome to the show. I wish I owned NVIDIA, but I do not. I do not. At the beginning of the year. So this is one of the things I predicted for 2024 that NVIDIA's share price would be flat over the course of the year. I saw a competition coming and thought that it couldn't potentially run up anymore. One of the worst predictions I've ever made, the company is so far up 65 % on the year,$700 billion in market cap, and it popped$277 billion on Thursday alone, which is the largest single-day stock market increase ever, beating Metas from earlier, I think, last year.

1:48And basically, the GDP of many small countries combined. So what do you think about this NVIDIA run? I actually just published a story literally in a minute on big technology, talking a little bit about what's behind the surge and why I was wrong. But I want to get your reaction to the response, what it means for NVIDIA, but also for generative AI. Is this the sign that this stuff is all happening now? All right. So my favorite stat on this is NVIDIA, on top of the$277 billion added in a single day, which is a stock market record. In 84 days, they went from$1 trillion to$2 trillion in market capitalization.

2:27This is a company that just a few years ago, four years ago, was only worth$100 billion and was not one of the major players on par or ahead of many of these other tech giants. So this is, I mean, this is the definition of a meteoric rise. And this last earnings report, it kind of justifies the numbers. That's the craziest part of this entire thing is that, again,$22.1 billion in revenue. The craziest thing to me, again, is that's a 265 % rise year on year in revenue. And on top of that, earnings were up 769%. And one thing I was reading that's interesting is their valuation has actually gone down in the last year and a half.

3:12Their price to earnings ratio relative to their meteoric rise. This is a company that is theoretically getting cheaper even on the back of this insane stock rise. Yeah, it's crazy. Like you look at the surges in revenue. Last year's fourth quarter,$8 billion in revenue. This year's fourth quarter predicted to be$20 billion in revenue. So if they even met expectations, they were crushing it. They did$22 billion in revenue. And I think the most interesting stat here, and I'm just going to point it out, we can talk about it, is that their data center revenue was up 409%. 409%. And what's that data center revenue?

3:52A lot of that is companies like, I believe, Microsoft and Amazon buying those GPUs, the H100s and the A100s from NVIDIA and hanging on to them. So when they want to offer clients AI capabilities, they can do that. And a stat in NVIDIA's earnings report was that more than half of the increase in their data revenue went to large cloud providers. So it is interesting to me because, you know, what I'm thinking about, is this sustainable? Is there a there there? That is like, wow, that's incredible. But also it's like kind of warning signs for me. Like we still don't know if there's, you know, widespread provable use cases here.

4:34And if this is largely on the back of like Microsoft and Amazon spending some of their excess profits, like how excited can you be about this in the long run? Oh, man, I was hoping that I would get to introduce the potential bear case. But what I was looking at here, I agree. I'm ahead of you this week, man. I got you. I know, I know. But the thing is, I still say this all very cautiously because, again, the numbers were so good. The story is so good. They still have a supply problem, not a demand problem, according to Jensen Wong. and I believe it. So it's still hard to find any kind of downside in here, but trying to find a little nuance here.

5:14One thing I was thinking is NVIDIA is trading like a commodities company right now. Commodities companies typically trade high fixed cost, but then when there's a surge in demand for that commodity and the price of that commodity skyrockets, the profit margins of the commodity companies skyrocket as well. You see this in every oil company over time, in any other kind of tradable commodity. And chips and GPUs right now are trading like commodities, and they're in a pure boom cycle, unquestionable boom cycle. So that 770 % rise in net income is on the back of what's essentially a commodity super cycle.

5:54And does that last forever? Does that keep growing at the same rate i mean it's traditionally these things don't work like that right and i hear commodity and i'm like okay everybody can make the same exact thing but i guess i'm thinking about that in the wrong way no no you're not because i'm thinking about like commoditization so talk a little bit about the difference here no no i i'm saying again any natural resource that's finite but highly in demand right i mean lithium oil whatever else these things gold traditionally especially when there's like a new use case for them, go through a super cycle of some sort and then, you know, skyrocket in price and then normalize in some way.

6:34And the companies that essentially trade and sell those or produce those and mine those effectively are the ones who benefit right into their profit margin. And that's exactly what we're seeing right now. So I think you already raised the question around, is it just some giant orders from Microsoft and Amazon that are kind of padding these numbers at the moment. Will this demand continue? Because again, 265 % revenue growth when you're talking in the tens of billions of dollars is insane. But it happened. Will it continue to happen into next year? And, you know, forecasts are up to$96 billion in revenue for 2025.

7:12These are giant numbers and these are giant amounts of growth on top of a large base. So anyone who's bet against them has been horrifically wrong, but it's such a tough story right now. I mean, it's a good story, but for them to fulfill this and actually live up to it, it's going to be tough. So analysts are now raising the price target to, in some cases,$1 ,100 per share. It's at$799 now, and it's$2 trillion in market cap. So, you know, throw another$300 on and it's close to$3 trillion. Like, that is insane. Like, could this be the most valuable company on the stock market? Could this effectively be Saudi Aramco, right?

7:59Just like sitting on the natural resource and just saying, all right, you want some? We control the supply. Come get some. I think there's one other thing I'd read that was pretty interesting around potential issues underlying these numbers. it was the idea there's so there's a company called core weave a startup that raised 221 million dollars back in october and they actually use their nvidia chips as collateral for that fundraise and they're raising from like hedge funds like kotu and you know other kind of like standard momentum players and the that you see their names everywhere on these big bets and it's the crazy thing so on one hand nvidia is investing in core weave they're investing cash into core Weave.

8:43They're investing chips into CoreWeave. Those chips are then being used to collateralize additional debt funding from other companies and other institutional players. And then NVIDIA is booking that as revenue as well, the chips that they are giving and that are then being collateralized because they're effectively selling to them. And CoreWeave sells their product is essentially data centers that use NVIDIA chips. So you start to see there's such weird cash flow, things happening the same way when we've talked about, you know, for OpenAI, when their funding is essentially in cloud credits, there's a lot of non-cash things happening right now that, you know, you can imagine if there's any kind of downturn, all these accounts receivable that the $10 billion in accounts receivable that NVIDIA is sitting on, will they be able to collect that cash?

9:34I don't know if this can happen. I'm trying to come up with a bear case. That would make me a little nervous about this company. yeah we're trying here we're trying but they've had great numbers and they have a good story absolutely and uh you know speaking of interesting investments i can't wait to talk about sam altman being like the third largest shareholder in reddit but we're gonna hold off on that when we get there we'll talk about that on the reddit the reddit section which is it's such an interesting story um okay so let me just also let's go a little bit deeper here in terms of the um the companies that are buying the stuff and the size of it.

10:11So I want to throw this out there and give you a chance to respond because I'm curious what you think. So Mark Zuckerberg, talking about how top heavy this is, Mark Zuckerberg said that there's 350 ,000 NVIDIA GPUs within Meta by the end of the year. That's the amount that they're going to have, 350 ,000. Okay. I was speaking with ServiceNow, which is a big NVIDIA client. It was named in the earnings report. And Jensen Wong shouted it out on CNBC a couple of times in terms of being a good customer. Okay. So their chief technology officer and head of DevOps, Bob Casey, told me that they have built an NVIDIA super cluster within their company.

10:55And he said that, he's like, I'm not going to give you the exact number of chips, but I'll give you a range. I'm like, I'll take that as a reporter. We'll take the range. He said it's between hundreds and a thousand, between hundreds and a thousand. So they're training their models on somewhere between hundreds and a thousand chips. They're a big company. They're 150,$160 billion on the public market. Meta has 350 ,000 of these chips. And by the way, NVIDIA said that the big cloud providers make up more than half, right of this so more than half could be 51 it could also be 90 and after hearing the you know those two numbers and the contrast i would venture to say that clearly not not all but a large percent i mean and i would say more than let's say 70 80 percent of nvidia sales are going straight to these big tech companies is that crazy well i think this is that's it's an interesting point you make too around is what's the appetite for that data and processing power really going to be?

12:00Because this is one thing we've talked about a lot on this show that, you know, that AI, generative AI models will get smaller and smarter rather than giant, big, huge, and that's the only way to go. And that's definitely the approach that obviously the big tech companies have all been taking. So yeah, I think that, and we said we would get into it in terms of like what this means for generative AI. Right now, we kind of, I don't want to say the COVID era extrapolation that we've written about that this kind of short-term trend is going to necessarily be the future, but, you know, is it really going to go in this straight line up that it has over the last year or two or is the way the actual infrastructure for generative AI, the way it's built going to change?

12:50And I definitely am a believer that things will get smaller and smarter rather than just everything is absolutely gigantic. However, the overall aggregate demand is not going to slow down, I think. So if that means that Microsoft and Meta hoarding chips is the path forward or just there's more buyers in the future, what that means for NVIDIA is still unclear. Exactly. So a few things. First of all, like there has to be clear, widespread, profitable use cases for this run to continue. Right. That's the whole thing. That's the whole game. If they don't have that, then this will not continue, period.

13:30And they said that 40 % of their data center revenue is on inference. Right. Which means 40 % is where the models that have been trained are being used in production. So what we can basically say there is that most of the money that they're getting for data center is training. We're still in the very early era of trying to see whether Genitiv AI can work. And we don't really know if this is going to continue until those companies with the 60 % of spending take those models, put them out in production. When that ratio flips to more inference than training, then we really know whether they have a business.

14:06Doesn't that sound right to you? like that and i like that maybe in the end the only company that makes money on this is nvidia and the provider because it's true i mean what are the stats it's like every chat gpt query costs some small number of cents but you know net what do you actually need to pay chat gpt plus to actually make it even break even if not at a loss like i mean no one has come close to cracking a profitable business model around actual utility of generative AI. And, but it's good for NVIDIA right now, but I like, that's interesting. I like this, this idea. Well, ServiceNow told me that it's profitable.

14:45Like there will be companies that have like pockets of, you know, spending and then clear ROI. So, but we'll see, it has to be everyone. And a lot of it's going to happen not in the ChatGPT world, but in the SaaS world, like the one that ServiceNow plays in. Yeah, no, no, you're right. That's it. The enterprise versus consumer distinction. Another thing we've talked about a lot here and, and yeah, maybe consumer facing generative AI efforts are probably not going to look like they do right now where we all have access instantly, usually for free to the most powerful giant models on earth. Is that going to be the same in a year or two?

15:23Probably not. Exactly. So I want to take a minute also to unpack some of the reporting that I put into this story this week to kind of explain why I was so wrong about where NVIDIA would go and why I thought it had sort of plateaued. So I had seen all these other companies, Intel, we had Pat Gelsinger on the show and AMD and even the big tech companies building their own chips. Everyone was finding ways to build chips with functionality similar to NVIDIA. and i thought okay like this can last for a while but it can't last forever and eventually these these nvidia chips are so expensive twenty thousand forty thousand dollars um that they're gonna you know the market will find ways to undercut it especially with the supply constraints and that is true that is happening right now some of these chips these accelerators or other gpus from other companies are as good as nvidia chips and if that was the entire equation then i would have been right.

16:21But what I underestimated, and this is important that NVIDIA has software that they also sell to the people that are training and doing inference with these models. And they're using that software combined with the NVIDIA chips, basically to power this entire AI moment, right? So without NVIDIA software and just NVIDIA chips, very little of this happens. And that could be anything from like off the shelf models they have. They have models called like, for instance, Nemo that you can take off the shelf and put in conversational agents or also this other model called Triton, which you can use for inference.

16:59And it's under a big umbrella called CUDA, which like Jensen mentions, Jensen Wang, the CEO of NVIDIA mentions on the call and everybody was like, what's CUDA, you know, but apparently this is a huge portion of their success is the combination of the hardware that can do the processing and the software that you use to do it. and that stuff is hard and not easy to transpose to a different set of chips so if you go to amd and you're trying to use their chips you have to learn a whole different way to build these train these models run these models and that has been the key reason why nvidia has been able to surge this way it's not that it has this massive technical uh advantage over others it's this i mean in terms of the hardware it's the software lock-in that's very very important what do you think about that?

17:46Yeah, I mean, that is on one side, I definitely like the nuance of what they offer in with the Nemo or Triton relative to others, trying to even wrap my head around that or understand that is something that I trying to under evaluate the competition is difficult. But I think it definitely helps the story. Again, the idea that this is an ecosystem play, this is not just a hardware play and i mean jensen huang definitely says that customers seem to you know align by with that so i think if that's proven over time and really comes to fruition then that 96 billion dollar revenue target in 2025 doesn't look so ridiculous anymore exactly and i should just plug that next week we're gonna have brian uh canazaro who's the vp of applied learning research at NVIDIA coming on the show to go much deeper into this software and AI coding element of NVIDIA.

18:44So I'm about to record that. I'm looking forward to that. But the bottom line is NVIDIA surged$277 billion in a day. The stock market was jittery. Like days into this earnings report, they were selling off NVIDIA. And now it's like, it's all time highs again. So, you know, I'm just like kind of curious to get your take. Just give us a, you know, overview state of the economy, right? We're at all time highs. It seems like NVIDIA saved the stock market. The Fed doesn't even need to lower rates. It can keep them where they are. And we're still making these highs. Eventually they're going to lower.

19:21Is this like good? It's tough though, because we've talked about this, the stock market is at all-time highs, but it's not a broad-based surge. We've talked about this when we started the year. This was one of our big predictions around what is going to happen to the magnificent seven who are still driving the vast majority of gains. And it's clear that that kind of concentration of performance is continuing into 2024. So is it good? Is it not good it's it's tough to say especially right now but i think what we saw in 2023 is certainly continuing in 2024. you know ranjan i watched this moment and i'm like there's there's gonna be a crash like there has to be a crash i don't know why i feel that way but it just feels like the run-up has been so hot and heavy so quickly that it's like can this sustain is that an irrational panic no i i think what's gonna happen is against generative ai we have seen i've seen firsthand And my kind of tell is when large companies put out press releases before products exist just to say that they're using something.

20:31And you've seen that endlessly where every company tries to say, we're doing experiments, we're incubating with generative AI, but it's nowhere near operationalized. And I think every company is going to understand that this is not some magical technology that you just plug and play and everything works perfectly. it's going to take time and there's it's definitely it will come to a head and companies will not realize the magical real you know dreams that they were sold and i think that at least calms things down i'm still very bullish on the technology and do believe it kind of transforms the economy and that's not an understatement i'm going to say but but but still it's going to take longer than we think.

21:12And I think the entire thing will take a breath at some point. You know what's going to be a good litmus test? If this does well, and I'm running for the hills, and that's the Reddit IPO. Okay. So Reddit filed for an IPO this week. They put out the numbers, and the numbers are sad and depressing and tiny. They have 72 million daily active users, and that's after 19 years of operation and they're still losing money they lost 90 million dollars last year so here's the thing they have been an ad business for a long while and i think they're going to position themselves to wall street as an ai business which basically means they just signed this 203 million dollar deal with google that google can train on all the reddit posts and if reddit uh becomes this repository for anybody looking to train a model where they can pull off these 200 100 50 million dollar deals and help make these models where they need it you know where i get these models where they need to get that's great news for reddit and they're going to come out as an ai stock based entirely on hope they really don't have any track record here outside of this google deal the stock uh the last private round valuation was 10 billion dollars They're talking about a$5 billion haircut when they come out on the public markets.

22:37If that stock pops based off of AI hype, then I know it's time to just pack up the go bag and hang out in a cave for a while. Okay. We got to separate out financial performance discussion with the AI story. Let's first talk about the financial performance. I still would take issue again with the idea that it's only 70 million daily active users. And I mean, this is a giant company. And I say this a bit emotionally because I'm like on Reddit for many minutes, sometimes hours a day, have been very active in many subreddits for years. So I have a very strong emotional connection to the platform. But actually, their advertising business went from essentially, you know, like a complete mess to a fairly smoothly operational thing.

23:32Still getting to$800 million in revenue is no small feat, especially from where they were six, seven years ago. Actually, there's a lady named Jen Wong who had basically time digital in the mid-2010s had run. I remember when she went over, I thought it was a really interesting hire because, you know, she was very successful over at Time Inc. at the time and has really grown this into a mature ad operation. You could even see it if you use Reddit in the quality of the ads you receive in terms of the targeting, the formatting. Like they're turning, they're actually making it a real advertising business.

24:06That being said, before we get into AI, I still just don't understand how they lose that much money because. Crazy. And it's apparently over half of their expenses are engineering salaries. It cannot be that difficult to operate Reddit. I'm not sure what they're building. The beauty of it, it's like Craigslist almost in simplicity. Like, you know, it should be run by like, you know, some infrastructure engineers just making sure everything's running a little bit of, you know, innovation efforts, but not even really because everything works so well. It's the moderation that's done for free that actually drives so much of the value and quality of the platform.

24:51So I think I'm still confused and I'm very curious when they go public, if people dig into that actual expense items and salaries and try to figure out what are they actually doing with that money. Something like 400 million last year on R &D, which is amazing to me. Like what exactly did they research and what exactly did they develop? but let me give the counter argument on ads and then we can move to AI. Because I said this on CNBC today. And, you know, if I have to eat crow, so be it. But my perspective on this is you go onto Reddit, it has, you know, your which bucket do you actually end up in for buyers, probably social media, right?

25:30The ads are bespoke, you have to build ads in the Reddit format with the Reddit language. Like I went on my feed today, top ad was an ad for Weight Watchers, it was a good ad. and it was one of these like am I the asshole type posts at IATA talking about some like weight loss method and Weight Watchers is like no you're not you know you're on Weight Watchers etc and you don't have to cut out foods or whatever and but the thing is that's not going to appeal broadly enough across Madison Avenue to make people want to advertise on Reddit which is why I think that there is a natural cap to that business what do you think no I completely disagree because the intent of a Redditor, I think is so much stronger if you speak to them in their language.

26:16And I say them being me as well. That like you, I mean, every time I buy anything, I literally go to that relevant subreddit and look for what people talked about that product. I don't trust reviews on any website, certainly not Amazon. Like all my due diligence on purchasing takes place on Reddit. And I know I'm probably at some level of extreme behavior within that, but it's still in the tens of millions. And I think growing that out to the hundreds of millions. And I think that's a good segue into the Google AI deal, because I have, I think we've talked about this. I wrote about this in the past.

26:55I think it is the most valuable repository of information, the corpus of text on the Internet. And it was actually in October of last year, there was a big backlash because they basically cut off their API access to most third party that were using. And that included, you know, a lot of like client apps that present Reddit in different ways. And there's a huge uproar. I thought it was the smartest thing they could possibly do because they preempted having everything scraped and having everything kind of losing control of it and understanding it's an incredibly valuable set of information. Again, and I say that as the discussions in depth around every product that is created and sold, every piece of media that's watched and listened to, everything that's taking place there is quality.

27:50And so to be able to use that, I think it's interesting for Google to be able to present that because it'll make it a lot more accessible to people who are too scared or unable to go on Reddit. To find quality, because there have been some times I've been on Reddit and it hasn't exactly been quality. but no if you this is where this is they always had the cold start problem and i think that's always been what's limiting to scale is you go on there where to start if you're not using it regularly like investing the time to know where to subscribe and uh you know what to look for and how to read and you know these kind of things it takes time it's not a completely intuitive platform.

28:36And I think, and I've even seen, cause they're actually a great example of like, if you turn on the algorithmic feed and the app is by default algorithmic, you get a lot of like funny gifts and videos and stuff like that. So that's definitely trying to appeal to the casual user, but, but I promise you, I promise you it's there. Well, I'll just say that. Um, so they asked me about whether it can be a meme stack because of wall street bets. And I actually visited, Wall Street Bets before I was on air today. And they're all being like, nope, we're going to short this stock. And so I'm like, listen, I was on Wall Street Bets and they're going to short it.

29:15So no meme stock here. And now I'm on the front page of Wall Street Bets today. Oh, really? Nice. This guy said, we're going to short it. And everyone's like, yep, we're going to short it. So that is a problem because they're going to open it up to 75 ,000 Reddit users. We'll see what they do with it. Yeah. I actually think I don't like that. I've definitely written in the past where robin hood's early access i hated that idea and everyone whoever every stock that went through the early access collapsed because it was you know i read it just trade normally it's a nice story to say you're going to give access to redditors but i mean they can invest afterwards but i would actually take the fact that wall street bets is saying we're going to short it as a testament to the quality that you get on there that it's not just sheep saying yeah it's It's actual critical analysis and it's quality.