Is Nvidia’s Surge a Sign of a Boom in AI or a Bubble Beginning to Form? 5/25/23

0:01Right now in fast boom or bubble, NVIDIA blowing the doors off the AI trade and taking the sector along with it. But is this NVIDIA pixie dust part of a future fairy tale or the beginning of a nightmare ending for investors? Plus, Bill Ackman back on the attack against his old rival Carl Icahn. In a lengthy tweet, Ackman calling the situation between Icahn and short seller Hindenburg fascinating. Icahn Enterprises plunging nearly 14 percent today. And later, Elon Musk heading back to Twitter spaces. He'll be talking to, of all people, Ford CEO Jim Farley. What will they talk about? And fresh off ringing the Nasdaq opening bell, PLL founder Paul Rabel will be alongside to talk streaming and big changes with his league.

0:41I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq MarketSite on the desk tonight. Tim Seymour, Karen Feinerman, Dan Nathan and Guy Adami. And we start off with what could turn out to be a pivotal moment in the rise of AI. Shares of NVIDIA soaring more than 24 percent today, its biggest gain in more than six years after the chip maker set it to seeing surging demand for AI products. The company adding more than$185 billion to its market cap just today, a shade shy of the single biggest one-day gain ever for any S &P-traded company. The move boosting shares of other artificial intelligence plays, AMD, Microsoft, Alphabet, C3, AI, all outpacing the market today.

1:19In just the last hour, Marvell Technology getting a boost after its earnings report. That company's CEO saying AI has emerged as a key growth driver for the company. Christina Parsonovos is more on the Marvell side of the story. Christina. Yeah, you said it. Really, shares just started soaring right after they said that they're projecting 2024 AI revenue to double without really defining what encompasses all that AI revenue. The key word, though, AI, and that's exactly what the CEO said just within the first minute of the call. He did say eight times, just eight times in the first minute. I know Guy usually likes to hear that.

1:56But yes, it was a two cent adjusted earnings beat on revenues of$1.32 billion. Yes, Q2 guidance also came in higher, but only just slightly. If you look at revenue, though, and you look at the breakdown, both consumer sales and auto industrials both fell short of expectations. CEO Matt Murphy saying they are, quote, expecting revenue growth, like you said, to accelerate in the second half of this fiscal year accompanied by gross and operating margin expansion. but they do admit in this press release, and they're probably going through the earnings call right now, that they are still in the early stages of their AI ramp.

2:32So AI is the word that's helping and the fact that they're projecting much higher for revenue growth for that, but I'm still waiting to see the definition. What encompasses that? Just switches? Keep us posted on that, Christina. Thank you. Christina Bartzenevolos. So with all this AI euphoria, begs the question, is this the start of a boom in AI or is this the mark of a bubble brewing in the space. Ooh, I hear it now. Sorry, it took a second. I thought it was coming from outside. Those are sound effects. Bubbles. Boom or bubble? What was the boom sound? Can we hear that again? One more time. Fire, yes.

3:11Oh, okay, got it. Sorry. Crack staff and EC. They worked all day on that one, didn't they? Apparently they didn't use AI for that, though. is it's not going away, clearly. I mean, the Internet didn't go away in 99, 2000 either. Obviously, it was here to stay, but valuations got stretched. I mean, I think with Scott McNilly at Sun Microsystems tried to do the math around why his company, it was not sustainable growth the way the market was projecting. And the history is repeating itself right here. NVIDIA is an extraordinarily important company. It's receiving a premium valuation on the back of everything we've been talking about.

3:48on a day where it adds$200 billion at one point today. There are only 45 companies in the world that have a market cap of$200 billion. Think about it for a second. Traded 160 or so million shares, and that's not short covering. Dan talked about it last night. There is no short interest whatsoever in NVIDIA. These are people now pouring into the name and getting out of other sectors. So is it here to say yes? Is it euphoric? Absolutely. Bubble? No. But valuations certainly are. Does the backdrop of the markets in terms of the things that we're facing up against, potential Fed rate hikes to come, debt ceiling troubles.

4:23Tim, does that backdrop make this look more attractive, do you think, or more troublesome? Well, debt ceiling and recession and higher rates and Fed and stuff that we're overcome with every day, I think this has a slightly different driver, right? And to the extent that you're talking about a secular trend and, in fact, a rage, it's something that I think is important to differentiate. I think mega cap tech is outperforming because of some of those reasons. I think they're safe. It's safety growth. And we've seen that over and over again. If you look at semiconductors as a group today, they now broke out, broke through that March 23 resistance level.

4:59And if you look at pieces of the market that take the market higher, not all stocks. And we do this all the time on the show. This is the kind of news that does take the market higher. So I would just say that you look at the analyst community. We often are critical when they suddenly upgrade on higher pricing. You can't really blame the analyst community when they come in and say, here's what we did. We're going to have record sales in the quarter of the April quarter. And we're actually going to have 80 percent growth in the July quarter. And we can now see demand over the next multiple quarters.

5:33And that's why you're getting those upgrades. Karen, you're long in video. I am long. Bravo. Oh, thank you. at AMD. But I actually, I am not sure whether NVIDIA is more expensive today or less expensive today, right? I thought those numbers were so incredibly extraordinary. And remember, they're in the picks and shovel business, which we always like to talk about. That's where you want to be, not in the hunting for gold. So could there be, is there a bubble? Yes, I feel like we're really early. We're in the early innings of a bubble. Oh, there we go. Nice. So, and I can't help but think, you and I were texting a little bit about this while you were on the show last night, about that being a potential sandbag.

6:19If you think you're going to do$11 billion-ish, then you don't put out$11 billion. Right. So what do they really think they're going to do? And they also talked about what. No, I. And you also talked about making it their way. Sandbag, the terms we're using here. Right, I know. Throwing some bubbles around sandbags. I know. It's extraordinary, but we don't see this very often. And I feel like we're we're are we in the middle of the stock? We're closer to the middle of the stock mania maybe than the actual mania of the of the evolution of whatever A.I. is, which encompasses everything. I know we often just put in the term pixie dust.

6:54We talk about stocks, but this they're really in an extraordinary position. And so I'm not at all surprised. I actually thought there would be some even higher targets. So you just stay long. I'm just staying long. Long. You're not hedging. You're not doing any other. So the stock's cheaper today. I think the stock is cheaper today. It is cheaper. It's certainly cheaper on an expected P.E. basis. Right. So now that may be OK. Top, you know, time to go. But I am staying long. All right. So no congrats here. I've been short via puts to find risk. And it's not about the technology. It's not about the secular shift.

7:29It's not about any of this stuff. It's really about valuation. It's about expectations. And in that quarter, the guide that they gave was truly astounding. I can't remember that percentage on such a short period. This company reported earnings just three months ago, gave guidance, right? And the way they beat and what they just guided for does tell you that there's obviously something going on. But it really speaks to what I think is a supply demand sort of issue here. And you saw that announcement from Microsoft that was just a few weeks ago with AMD. OK, they're looking for other sources here, right?

7:58They need to kind of get the supply that they need. And AMD has gained 50 percent since it gapped down 9 percent on May 3rd after their quarter in guidance. And so when you think about visibility, what the lack of visibility that NVIDIA had three months ago for demand for this product, the lack of visibility that AMD had just three weeks ago for similar sorts of products, it doesn't actually make me feel that good about what the back half of this year might look like. I suspect there's lots of double ordering, maybe triple ordering, maybe quadruple ordering for these sorts of chips right now. But the other thing I'll just say is, like, listen, this is the semiconductor industry.

8:34They make chips. They make CPUs. They make GPUs. Sometimes some companies are able to put them together. They make them smaller. They make them faster. They make them cheaper. And it's very cyclical, right? And so it's not like these are just this is an upgrade cycle, right? So all of a sudden, these data centers that have been built out over the last 10 years by the hyperscalers and that sort of thing, they need faster chips to do this thing that was introduced to us last year, really on a consumer-facing basis, this generative AI. And now all these companies are going to rush around and say, I need large language models.

9:03I need this. I need to compete. But here's the thing. I mean, the application of these processes are not going to be something that a lot of these companies are going to be able to, like, monetize that quickly anytime soon. The chips are really expensive. OK, the cost of compute is really expensive. I mean, a whole host of things. So I know that was a little bit too much. So what I'm saying is right now what the market is doing is not rational. But we've seen this before. OK, like we've seen it again and again in lots of different hype cycles around technology. So my trade was a trade. I kept on rolling up puts.

9:35I kept on losing money. We call it the trading business. Good money after bad. That's me. I'm the dumbest guy on the desk. You guys know that. But I like to think that I have a good handle for what's going on. I just think the likelihood of this stock to be able to go up another few hundred billion is not particularly great. So did you roll up again? Yeah. You did? Yeah, to July. Okay. What do you think happens to me now in July? Well, I think there's going to be the fever is going to break at some point. And I think that because I just don't know how you make money from here right now. Like look at today.

10:03Microsoft was up 4 percent. Okay. Google was up 2%. Think about it's raising the biggest boats in the market here, and then all the crap, the things that you think are pure play or whatever, and this Marvel we just heard. Marvel's got exposure. They all have exposure because they're upgrading their current chipsets and their certain offerings. So it makes sense to me, but I'm not saying it's shorted, but I wouldn't buy anything here. Earlier in the week, we talked about Micron, China, all that thing, and NVIDIA was interesting to me. I think it was Monday. And NVIDIA actually made comments about, and I'm paraphrasing, but the potential devastation if this rhetoric, if this escalated in terms of U.S.-China and what it would mean to the sector.

10:43And I'm like, that's really interesting that they said that. Then you come to realize NVIDIA's got a lot of, they got a lot of skin in this U.S.-China game. Where do they make their chips? So what could happen? I mean, this didn't go away magically. President Biden has said he thought that U.S.-China relations would improve. Six hours later, President, she said, I don't know what you're looking at, pal, but it ain't getting any better anytime soon. So that's not going away either. So I think the dance point, if you're looking for a potential downside, it still comes in the face of all these things we've been worried about for quite some time.

11:16Our next guest warns enthusiasm surrounding AI stocks is distracting investors from recession risks. Economist David Rosenberg is founder and president of Rosenberg Research. David, great to have you with us. It certainly, when you look at this sector, it doesn't feel like we're talking about these companies living in an economy that is about to go into a recession, an economy that's about to hit hard times. What do you think, I'm just curious, what do you think the Fed thinks about this sort of bubble-like action in a sector of the economy? Do you think it makes them think that their job is not done?

11:50Well, I would say that there's no question, I think, that we have a price bubble. And, you know, we had a price bubble with the dot coms and the Internet back in the late 1990s. But there's the financial bubble. But then there is, you know, the real impact on the economy. And you could not argue that the Internet was a game changer for productivity. So we had a real time shift in productivity and what that meant for the corporate cost curve in general. and you had a financial bubble at the same time. And so they can coexist. I mean, if you look at the six-month chart of the NASDAQ 100, you have to be blind not to see that, okay, this actually looks very weird and it's way overextended.

12:37But if I'm at the Fed, I'm looking at this as Paul Trudor Jones said, you know, I think last week on Squawk Box, that this is a major productivity accelerator. and you're at the Fed, you're thinking, OK, this should actually help reduce the corporate cost curve and should be disinflationary. And so it actually, from a real economic sense, would work towards their anti-inflation objectives. David, it's Tim. Thanks for joining us. When we look at what interest rates are doing and what people think the Fed and having more conviction that the Fed has more conviction staying the course, it certainly adds to your thesis and the thesis that, first of all, the cost of financing a lot of these corporates, their earnings profile are changing dramatically and that rates are staying higher for longer.

13:25Talk about how you think that the Fed, or maybe you don't, but where the Fed is truly on their course here, but what that means for equities, especially when so much of the corporate earnings structure has been tied to zero rates for so long and that equities aren't repricing that. Well, you know, it depends, which index you're looking at and which sectors you're looking at. So I don't think you can look at the stock market right now as some sort of homogeneous entity, okay? So if you added up the three most economic-sensitive sectors of the market, you added up the banks, you added up consumer discretionary, and you added up the transports, okay?

14:09they have the highest torque to GDP. They're down more than 30 % from the cycle highs. They're actually behaving in the exact same pattern they have going into the past four recessions. You look at the S &P 600 or the Russell 2000, they are still, even with the better tone this year, they are still in fundamental bear markets. So, you know, look, when you have a situation where the S &P is basically now 27 % technology, and technology is growth, which means it's a long-duration asset that, yes, will look through the gyrations around the business cycle. It doesn't mean they can't get hit. And we saw what happened back in the early 2000s.

14:54But by definition, growth stocks are going to react a little differently to the economic cycle than the pure cyclicals. And the cyclicals are giving you, just like the inverted yield curve is giving you a recession signal. David, thank you for joining us. Appreciate your time. David Rosenberg. Interesting to think that on the other side of this bubble, inflation of stocks related to AI could be disinflation because of the productivity gained. And that maybe if we get to 3 % or 4%, that the last couple of percent, the last could be productivity gained. Not today. Not today. No, no, not today. Years out.

15:31Years out. Yeah, except. But the biggest part of the Fed's problem right now is the job market. I mean, what's going on right now is more to me what we're talking out over the next two to three years. And I theoretically everything we all know that the last three decades have been disinflationary based upon what technology has done. But I don't think this is going to help the Fed right here. I think inflation is very sticky. All right. Meantime, another high profile Twitter spaces collaboration is just minutes away. This time, Elon Musk is going to host Ford CEO Jim Farley, but two rival auto chiefs sitting down talking business on Twitter.

16:06Kind of odd, right? For more, let's bring in Phil Lebeau. Phil, as I recall, you know, Jim Farley in the past has sort of needled Elon Musk, needled Tesla, talked about them openly. It's sort of like a frenemy situation. A little bit of a frenemy situation. I think there is a healthy respect between Elon Musk and Jim Farley and vice versa in terms of EVs, developing EVs. Jim Farley will tell you, I mean, and I've asked him this on air, he will tell you privately, he has immense respect for what Elon Musk and what Twitter, or excuse me, Tesla have done and what they've developed here. So this Twitter Spaces conversation will be interesting.

16:45They're saying it's about expanding EV adoption. So what does that mean? We'll find out in the next 20 minutes. But I would be curious to see how this conversation goes. And really, if they if they break new ground in terms of what can be done to accelerate EV adoption. Yeah. Phil, thank you. Keep us posted on what goes on. Phil LeBeau. Who would have thought five months ago we'd be monitoring Twitter spaces for breaking news? But here we are. Now, listen, we thought, well, I shouldn't say we. I thought this would be a great way for them to monetize the platform with Twitter spaces. That's probably a year or so ago.

17:21That didn't happen, right? And Twitter still, the platform is probably still a bit in trouble here. But it's clear that they want to use this now as an avenue to sort of discern and put out news, which is a good thing. So I actually give Elon Musk credit for this, for sure. Yeah, and people want to talk to Elon Musk, that, you know, maybe he will be the draw for other big voices on Twitter. If Elon Musk called you up, Karen, said you wanted to do a Twitter Spaces with me, you'd probably say yes. I'd listen to that. Yeah, I would say yes. Yeah, of course. Me too. Right? I mean, he is interesting, no doubt.

17:54How about, well, let's see. Dan. Oh. If Elon Musk said to you or tweeted at you, hey, Dan, would you do a Twitter Spaces? He did tweet at me. I tweeted back at him. I got kicked off Twitter. I mean, like, listen, I think he's fully, you know what? I mean, I think that he's using this as a little trick to get Twitter engagement going. You know, like the thing is a trick way to get Twitter engagement going. Well, because he's the owner of the platform is one hundred thirty four million users. No one else is really doing a whole heck of a lot on the platform. The platforms is zero people. Just go look at it.

18:24It literally feels like a dead stick. I mean, go on there. There's nothing. What's a dead stick feel like? I'm just telling you, I mean, like none of us are. We used to spend a lot of time during the shows tweeting and doing all this stuff and engaging with viewers. And that's not going on anymore. And so to me, I think it's funny that he follows up after what seemed like an absolute dud of like an experience for DeSantis launching his presidential bid last night. I know there were a lot of people on it. They had a lot of problems on it. There was a lot of criticism. Like, why is he the guy who's interviewing these sorts of people or whatever?

18:57It's just like, I don't know, man. I thought that this guy is a very dangerous guy. He's the richest guy in the world who owns this big platform. He can do whatever the hell he wants with it or whatever. I think that we're whistling past the graveyard. If we're just going to give him a pass every time he wants to put up a space and think that this is going to be all like Kumbaya. Mel? Yes, Scott? I didn't go to the medical school, but I don't think dead stick is something you want to have. But, Tim, to your question. Yeah, I'm just curious. I believe that aviators talk about dead sticks as, like, the pilots.

19:26If something were to happen in their aircraft and they're no longer able to control their plane, very top gun thing, they talk about a dead stick. It's actually an Armageddon is where I got it from, the classic. Did you have an internship behind the band in the cockpit, too? Because you definitely have every other job. Continue this in the break. In the break. Coming up, retail stocks on the move in the after hours. Gap, Alton, and other retail names. All reporting results. Details from the quarter's next. Plus, the billionaire battle lives on. Investor Bill Ackman reigniting his feed with Carl Icahn with a dig at how Icahn Enterprise does business.

19:58More on that when Fast Money returns.

20:08Welcome back to Fast Money. We've got a double dose of retail earnings starting with Gap shares surging on a substantial improvement in gross margins. That conference call is underway. Courtney Reagan has the very latest. Court. Hi, Melissa. Shares up about 15 percent on a surprise profit from a retailer that's frankly struggled under some inventory missteps and executive turnover. Gap revenues are in line. Comparable sales down 3 percent as expected. By brand, the namesake Gap brand wasn't as bad as fear. It was actually up 1 % for comparable sales. Banana Republic continues to struggle. Comps down 8%.

20:39Old Navy down 1%. That was expected to be higher. And Athletic comps down 13%. Merchandise there, frankly, just didn't resonate. Margins did grow 570 basis points thanks to lower freight costs and less markdowns. Guidance, though, mixed. Lower second quarter revenue expectations, but full year sales are reaffirmed. Women's was the best category for Old Navy and Gap. Active and kids, those were softer. There was some slower demand from the lower-income shopper at Old Navy. That was noted as well. Overall, store sales stronger than online sales, down 4 % and 9 % respectively. And to your point, that call is still ongoing.

21:16Melissa? All right, Court, thank you. Courtney Reagan. Tim? Yeah. Well, it's great that the gross margins are better. The company needs to make some profit. They've announced a second-quarter dividend. Hooray. But the lapping very difficult comps on freight and distribution, I think, are not reasons to do somersaults or cartwheels. Maybe somersaults is what you're doing when you're hitting those. So I think good story. Let's watch it. The trends I see in retail are not encouraging and they're not encouraging in apparel or discretionary retail. Look at Nvidia. Sorry, look at look at Lululemon, which acts like Nvidia or used to look at Nike, which I'm short.

21:53And I think you're going to continue to see some of this margin erosion. Short interest is 14 percent, which is why this is, you know, if you look, inventories were down 27 and a half percent year over year. So that's a good thing in this environment, actually, which means margins will be probably better for a couple of quarters. Doesn't mean they're out of the woods by any stretch of imagination, but it means the stock can probably get back to 11 bucks, which has been a level of resistance a couple of times. So are you investing here? No. Are you trading the stock? Yeah, I think people will cover their shorts.

22:21We've seen it before. You saw what happened in Abercrombie and Fitch. These are broken businesses whose stocks can rally in this environment. That's what we're seeing right now. Let's get to Alta now. Shares are dropping despite a top and a bottom line beat and strong full year guidance. Let's get back to Courtney with the details. Courtney. Hi there, Melissa. Yeah, so Alta slightly raising its full year revenue guidance, reaffirming earnings and comparable sales forecast. Comparable sales up 9.3 percent. It's pretty much in line with expectations, but really strong compared to the rest of retail.

22:49Services like hair and makeup, that was up double digits in the quarter. On the call, CEO Dave Kimball said promotional activity is increasing and sales in the mass category continue to grow faster than prestige. Kimball said it's hard to know, though, if that's due to consumers price sensitivity or strong engagement with those mass brands. It's been a trend that's continued. Skincare, the best performing category and Ulta continue to see pressure from shrink. So another retailer calling out organized retail crimes specifically, also noting higher levels of aggression and violence. that is impacting Ulta's forecast going forward.