An Nvidia Challenger Files For An IPO + Can A New CEO Turn Nike Around?

24:46And the demand was there amongst retail investors. And SPACs went out. And they were largely shitty companies. And a lot of retail investors lost a lot of money. The demand from retail. and who do you invest? If you're a retail investor that wants exposure to AI, where do you invest right now? It's basically Microsoft or NVIDIA. What else do you invest in? That's it. There is so much demand for an NVIDIA-like competitor, even if it's a distant, distant, distant number five, that there's a market for it. Now, the first sign is that Barclays and Citi are not tier one. Let me be clear. Barclays and Citi are the underwriters of this IPA.

25:25Yeah, they're the underwriters. So what that says is Morgan Stanley, J.P. Morgan, and Goldman Sachs said no. Otherwise, one of those guys would be on the cover, which isn't to say it isn't a good company, which isn't to say that it won't get a good reception in the marketplace. But that's sort of the first, I don't want to call it a red flag, but the first indicator here. The red flag that is the size of Kansas here is that 87 % of its revenues come from a company backed by, I think, the UAE that is building its own LLM that also owns or has the opportunity to buy shares in the company. I mean, it's kind of a related party conflict, overly concentrated customer base that is the stuff of nightmares.

26:06Having said that, I would like to invest. this whoever i mean there's a couple reasons i'd like to invest i like the idea of bringing attention sunlight and capital to anything in this space that is not nvidia or open ai it would be great for other competitors to emerge so i would love to be supportive of this company i want to follow it i want to talk about it i want to water as many new companies in this space as possible such that it just doesn't develop into the Wintel, only much more concentrated. The second is, I just think there's a decent chance this company gets an enormous pop because, oh, it's AI.

26:48Oh, it's a competitor to NVIDIA. Sure, I'll throw some money at it. And it's going to go out at a$7 billion market cap. Say there's a 1 in 50 chance it becomes a quarter of NVIDIA. Well, that would be$750 billion. That would be I mean, do the math, that's still an okay investment. So this is a lottery ticket, but it's a lottery ticket on the super, whatever it's called, the super jackpot or the Powerball that all of a sudden we woke up and it's like, it's$1.1 billion. The prize here is so enormous for anybody that establishes momentum and traction. So it's not the ilk, it's not the pedigree you'd want in a company like this right now.

27:31I wouldn't be surprised if the thing doubles on its first trade. Well, I find it interesting that they're almost borrowing marketing tactics from the fast food industry. And that is, you know, when Burger King sales start slowing, a very surefire way to stoke demand and interest in the company is to come out with a triple whopper or a double king XL. Basically, just create a fun-size item of the product that you're already selling. So having said that, I'm just going to read you some of the main details from the S1. The first page in gigantic font, it takes up the entire page, says, quote, bigger chips are faster and more efficient for AI.

28:18In the prospectus summary, quote, the third generation Cerebris wafer scale engine is the largest chip ever sold. It is 57 times larger than the leading commercially available GPU. It has 52 times more compute cores, 880 times more on-chip memory, and 7 ,000 times more memory bandwidth. The sheer size of the wafer-scale chip allows us to keep more work on silicon and minimize the time-consuming, power-hungry movement of data. In other words, the sales pitch is that size matters. That's basically it. But then again, they also say that it's 20 times faster than NVIDIA's chips. And to your point, if it's a good marketing tactic, maybe that's all that matters.

29:05Maybe people read that, they hear how big this chip is, and they think, this is great, we want to get involved. So I sort of find it a little bit ridiculous, parts of this. I'm certainly concerned about that 87 % number going to one company. But there is an argument to be made that this kind of stuff could work and coming out with font-sized AI could generate the momentum they need to actually do well in the stock market. If they can do anything, if ends up that any of their IP, any of their niches, if defense contractors or pharmaceutical firms find that this monster, supersized chip works for them, it's going to be worth a lot more than$7 billion.

29:48So this is highly volatile, but the upside here is asymmetric. Yeah, it's like a meme stock play. Yeah. I could easily see this thing on any signs of life going to$30,$40, or$50 billion, 7x versus, assume the downside is zero. But we should be clear, this is not at all value investing. This is not based on the fundamentals. And I do want to get your take on the fundamentals. So they did 136 million in the first half of this year. That number is up 15-fold from the previous year. However, as we pointed out, 87 % of that revenue is coming from one company, and that is G42. And just I want to get your take a little bit on G42.

30:27So this is an AI holding company that is based in Abu Dhabi. They do AI everything. I mean, the website, It says AI research, AI cloud computing, AI data centers, AI healthcare, investing, etc., etc. And they are largely controlled by the royal family of Abu Dhabi and largely funded by the UAE Sovereign Wealth Fund. My instinct when I see these kinds of companies is that this is very rich people who don't really know what they're doing. Another word for that is, another term for that is dumb money. You know, people who have more money than they even know what to do with. That is my instinct. Having said that, though, Microsoft is also a significant investor in G42.

31:20They have partnerships going on with OpenAI and Dell and IBM and Microsoft. They could be legit. But my question to you would be, is the fact that their biggest client a Middle Eastern royalty-backed holding company? Is that good, bad, or does it not matter? Okay, so there's some good and there's some bad. So let's talk about the bad. Related party transactions in 1999 and 2007, when I was starting my tech companies, what we found is that basically it was if you had a software company or even Brand Strategy, my firm profit. In 99, we were killing it because there were all of these startups who needed a brand identity and a logo and a strategy and a positioning and a website.

32:05So it was just champagne and cocaine. When the market collapsed in 2000, just all of our new clients dried up because all of the new guys were gone. They just got swept off the decks. And a lot of times you found that all these new software startups, Broadcom and all this e-commerce shit we were buying, they were selling to all these hundreds or thousands of e-commerce startups. And then overnight, 60 % of them were gone. We were kind of all selling software and shit to each other in the kind of the new brave world of the ecosystem. There are so many new AI startups that the fear is, okay, if there's a chill here, these guys get swept off the deck first.

32:43The scariest thing here is the concentration of one client, right? Now, having said that, But you can imagine that the Gulf and the entire world looks at the amount, looks at this sector and says, this is going to be probably the sector that creates the most shareholder value the quickest in a long, long time. And it really bums us out that 97 % of it is in one nation and 80 % of it or 70 % of it isn't with a seven-mile radius of SFO International Airport. And as we try and transition, we being the Gulf states or the UAE in this case, from a fossil fuel-based economy to a services, tech, hospitality, education, and in this instance, technology-based economy, we would like to have a presence in AI.

33:27So the related party transaction here is really uncomfortable. Having said that, when your related party has the deepest pockets in the world, it's kind of a good related party. And they'll be very supportive of the company moving forward because they would like to see the center of gravity, at least a little bit around AI, move into that region. So red flags, red flags everywhere. I'm a buyer. Yeah, just one final comment from me on these sovereign wealth funds. The public investment fund, which is Saudi Arabia, Mubadala, which is UAE. These funds, in my view, are the most susceptible to bullshit.

34:06They are not disciples of the boring is sexy argument which you have made. These are people who invest hundreds of billions of dollars into whatever is the technology du jour. They'll invest billions into buying Premier League teams. They're building cities that have artificial moons. I mean, these people love sexy stuff. And so the idea that there is a company that is pitching the world's biggest GPU cluster, i'm just not at all surprised that the biggest backer is someone in the gulf with a shit ton of oil money what i have found the worst thing they could have done for their brand was this brand called masayoshi son and that is the whole um we were fiasco softbank got this reputation for coming in and just overfunding stupid fucking ideas and it's tightly linked to this what you would describe as dumb money in the Gulf.

35:04If you spend any time in the Gulf and you spend any time with these guys, I would argue on average, they are more professionally managed than the majority of VC hedge funds in the West. I mean, a rookie move is if you meet a new VC or fund and they think they're going to fly into Riyadh and just like hold out a hat and that billions of dollars is going to drop into their fund, they're in for a rude awakening. That's what's happening, no? No. I feel like those are the headlines. Fair enough. I don't experience it personally. But what I certainly see in the headlines is that you take a flight, you have your brand, you hold your hat out, and they dump billions of dollars in.

35:42Oh, no, no, no, no. For every fund that's raising money there, there are 100 going there and going to a cool resort in the desert and going to the Superfund conference and then coming back with no money. As a matter of fact, they've switched their objective to no longer letting money leave the region. But what they want is what's in it for us. We need to get, we want to create jobs. We want to, we know we, we know we're running out of oil. We don't know if it's 40 years or 70 years, but we know we're running out of it. So we need to make this transition. And the transition is not only making money abroad, but it's building sustainable industry here.

36:16They're trying to build a huge industry and even a city focusing on gaming, you know, video games. they're building huge universities. NYU has a huge presence in Abu Dhabi. I think it's a little bit reductive and I don't know. I think you're falling into the trap of believing that you've seen the headlines and the stories. They've made bad investments. Oh, no doubt. But I also think they've made good investments. And my experience with them has been that they are just as, if not more sophisticated than any other alternative investments investor. Anyways, come to Riyadh. You and I are going to Riyadh.

36:59Yeah, exactly. I think that's where we're headed here. I think either MBS is in the room with you with a gun to your head, or we're going to get them on the podcast. One of those two things is going to happen. Neither of those is true. And I want to be clear, I have no investments or vested interest in the Gulf right now. Just to be clear. Just to be clear. We'll look into that. We'll be right back after the break with a look at the path forward for Nike.

37:35Tuesday on NBC, Jimmy Fallon and Bozema St. John host a highly anticipated new competition show. I hire 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best idea win! On brand with Jimmy Fallon. Series premiere Tuesday on NBC. I'm Christian McCaffrey, pro running back, and Abercrombie is an official fashion partner of the NFL. I'm not kidding when I say NFL by Abercrombie broke the internet last year, and I think this season's lineup is even cooler.

38:16and so does my wife who keeps stealing all my hoodies. Stay fit for the season and Abercrombie's newest arrivals. Shop NFL by Abercrombie in the app, online and in store.

38:35When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans. Send event invites and pin messages so no one forgets mom's 60th. And never miss a meme or milestone. All protected with end-to-end encryption. It's time for WhatsApp. Message privately with everyone. Learn more at whatsapp.com.

39:08We're back with Profture Markets. Nike withdrew its full-year sales guidance ahead of its new CEO's arrival later this month. The company also postponed its investor day, signaling that a meaningful turnaround will take some time, and the stock fell 7%. As we discussed previously, Nike tapped company veteran Elliot Hill to take the helm amid declining sales. Revenue for the most recent quarter dropped 10 % year over year. CFO Matthew Friend said pulling the guidance would give Hill, quote, much-needed flexibility to evaluate Nike strategies and business trends. Scott, based on your experience, one, what do you make of these Nike earnings, revenue down 10%, and two, what do you think the new CEO, Elliot Hill, needs to do here to stage a comeback for Nike?

39:53You know, I like this company so much. I have a bias. I want you to go first, Ed. I think you racist views of the Gulf. I'd like your views on Nike, on the swoosh. And by the way, they're really nice white people. Go ahead. No one's going to buy this. No one's going to buy the reason I believe that they're investing in these companies because I'm racist. Anyways, go ahead. What do you think of Nike? Well, I think what's interesting is that there's not one part of the business here that is working. It's basically bad across the board. So you're seeing revenue declines in direct revenue, in brand revenue, in wholesale revenue.

40:41You're also seeing revenue declines across every region. So it's down 11 % in North America. It's down 13 % in Europe. The slowest decrease was in China, which is down 4%. But that's sort of the rising tide with all boats, as we're seeing, you know, China is somewhat improving, or at least it's falling less fast than it was before. So the financial picture for Nike is very simple. Things are just bad across the board. The only other interesting detail is the fact that they decided to withdraw their full-year guidance, i.e. their financial forecast for the next 12 months. And instead, they're only offering quarterly forecasting.

41:21And their explanation for that is that, you know, we have a management shake up. We've got a new CEO. We're in a transition period. I can't tell if that is an appropriate excuse or not. So I would like to get your take on that. What do you make of a company like Nike as big as Nike saying, we actually don't know what the next 12 months looks like because we've got a new CEO coming in. Is that a valid excuse or is it a little bit bullshit? I think it's the latter. I think when you're a company like Nike, you should have such a deep bench, you should have such a talented CFO, you should be able to draw on such an incredibly talented CEO, which I think the new CEO is, that you should be able to handle learnings calls and forward-looking projections.

42:06So if you really feel that way, that you need to free up. The excuse they gave that it would essentially, what was it said? That it would much need a flexibility to evaluate Nike's strategy and business trends. That's why companies are taken private. Because when you have a public company, you're sort of promising that you're going to give a certain level of transparency, especially when you're an S &P company like Nike. So that is yet another signal that these guys really don't have their shit together. And even if you were to come on and say, I'm new, this is what I'm thinking, and have the CFO report in a very no mercy, no malice way, you know, this is what's going on, I think analysts would be fine.

42:43But to kind of go back into, we don't know what's going on. We want the freedom to figure this out. Come on, you're fucking Nike, for God's sakes. You should have that. You should have five people sitting around the table that could probably be the CEO in the earnings call in the next two or three quarters that are just very good at what they do. And the fact that they don't have that, it reflects poorly on the board and the bench, if you will. Now, down 10 % on a company this size is no doubt. That is nearly a meltdown for a company like this that is so diversified around the globe. I wonder if this was a bit of a kitchen sink quarter, if they kind of threw all their bad news in here.

43:24What do they need to do? I'd be very curious to know, and you never like to say this out loud, I'd be very curious to know what their revenue per employee is. It feels to me like a pretty significant layoff is coming. But what they need to show is some momentum around shrinking the product development time and getting kind of, if you will, I don't want to say cool again, but on trend again, getting out there and getting much more in touch at a ground level with some of their cooler, smaller retailers being more on trend. And then once they discover trends, getting stuff from design or concept to shelf much faster.

44:00And I think they should be able to figure that out. Also, they've just left these niches and these doors wide open for Hoka and for On. At the end of the day, I agree with you. They shouldn't be saying, oh, we're in such disarray that we're not going to be able to do it. You know, basically every public company, man, you know, 97 % of public companies managed to do this and none of them have the, or very few of them have the resources and the depth of the bench of a Nike. So I just think this brand is just, I don't care where you go. I don't care if you go to Cape Town or Seoul or Cambodia, 11-year-olds playing football in the yard are wearing Nike.

44:46And the brand has always reinvented itself. They have such powerful marketing roots. They're not even needed to reinvent itself. It just resonates so deeply that I like this company a lot. I think at these price levels, I mean, I'd be prepared for it to go down more. but this is, you know, I'm thinking about setting up a trust for my kids. And this is one of those stocks that I would put in there and just say, okay, look at it in 20 years. Two things I find quite interesting. One is, I think you're right that the CFO kind of did a shitty job here and the rest of the management team while the previous CEO, John Donahoe, is out.

45:22And it sort of reminds me of like the Gareth Southgate problem, where we have this tendency to just assume that everything's going bad because the head honcho sucks. And now the head honcho is out, and we're seeing that maybe actually the rest of the management team sucks too. Maybe the players on the field are not performing as well as they should. But we're so obsessed with blaming the manager, in this case, the England manager, or in this case, the Nike CEO, that we just get so caught up with that. And then when they leave, we're like, oh, maybe it's an us problem that we didn't realize. The second thing I find kind of interesting, what you're saying about the brand and how strong it is.

46:03We often hear this idea of brand as moat, that if you have a strong brand, it can act as a really strong moat to prevent competition from your competitors. And, you know, 10 years ago, I feel like we would have used Nike as the shining example of this. We have said, you know, Nike is far and away the winner. It has a huge moat because it has such a strong brand. But I look at what's happened in Nike here, and I look at what's happened to a lot of other iconic brands recently that you have been talking about and that you've written about in your blog. Starbucks, for example, Disney down more than 25 % in the past five years.

46:44Estee Lauder basically cut in half over the past five years. And it feels like at this point you could maybe make the opposite case, which is that, you know, a strong brand when it's strong looks like a moat until eventually it isn't. Because what looks like might be happening is that these companies have become so reliant and so dependent on their brand that it ends up being their downfall. They think that they're invincible because we're Nike, because we're Estee Lauder. Who could come after us? It's an interesting observation. And that is, So the algorithm for printing money from the end of World War II to the introduction of Google has come up with a mediocre product, a mediocre car, salty snack, mediocre shoe, mediocre carbonated drink, and then wrap it in these amazing brand codes of youth, masculinity, European elegance, sex appeal, and use this incredibly cheap medium.

47:40and we didn't realize how cheap it was, called Broadcast Media, where all of America was watching one of three channels and just pound away at these associations, and people would pay two bucks for 20 cents a peanut butter paste because it meant that you loved your kids more because choosing moms chose Jeff, or that I was a more competitive, strong, masculine, individual American person if I bought$210 Air Jordans. Since the introduction of Google, the rise of quality and innovation has just been dramatic. And the example I use is hotels. Whenever I traveled, and I've been traveling 180 to 220 days a year for the last 30 years, I would stay at the Four Seasons with a man in Oriental.

48:21One, because someone else was paying. And two, they were always an eight. On a scale of one to 10, they were always an eight. And if I was in Madrid, I didn't have the time or the insight to figure out, is there a better hotel than the Madrid Four Seasons, which I know is going to be lovely. Now, with the introduction of Google, TripAdvisor, your social graph, Instagram, within about five minutes, I can figure out the Rosewood Villa Magna is absolutely where I want to stay in Madrid. I mean, that's just it. Or when I'm in Sao Paulo, yeah, the four seasons would be great. But again, actually the Rosewood there is probably, in my opinion, the best hotel in the world.

48:55It's the Faena in South Beach and people can figure that out now. So it sounds passe, but all of a sudden product and innovation are the new bomb. and the notion that you're putting forward that they got too reliant on the mode of the Nike brand and not focused enough on new product, new innovation, new marketing channels. I think that's a worthwhile or a fair criticism. But having said that, there are certain brands and certain items where brand plays a bigger role. You are a Panerai, it means you're having a midlife crisis, maybe a little bit of erectile dysfunction, have a little bit of money.

49:35but but if you have sex with me if we can if we have kids your kids are more likely more likely to survive than if you yes that's that's what everyone thinks exactly yeah then if you have just go with it then if you have sex with ed who's wearing a fucking swatch watch so your watch your watch the the degree you got from college the only reason your girlfriend's with you is because she heard you went to Princeton, Ed. I've already spoken to her about this. Your car and also your shoes are really powerful forms of self-expressive benefit. And the self-expressive benefit of Nike that registers across two, three, probably four million consumers around the world is still unbelievable, translates unbelievable margin.

50:21But the brand era, I agree with you, the brand era is officially over. Now, I don't know if you'd call it the supply chain era or the innovation era, but the way you communicate a better supply chain or the vessel for communication for supply chain or innovation is still the brand and the logo. Anything that's on HBO, I'll trial. A big thing, a big show coming from HBO, I'm like, oh, I'll watch it because they just have a finer filter. Any hotel from Rosewood, I will try because it does have, in my opinion, a finer filter. Now, Does that mean brand is as big a moat? Absolutely not, because I have Instagram, I have my social graph.

50:59So what you're saying holds true. A company like Nike can, if it's not careful, fall further faster. But just based on that base of awareness and aspirational value and self-expressive benefit, they have just tons of permission. If they come out with a decent product line, I think you're going to see those revenues start to pop again. Yeah, I think that's right. Let's take a look at the week ahead. We'll see the consumer price and producer price indices for September. And third quarter earnings season kicks off with J.P. Morgan, Wells Fargo, and BlackRock all reporting. Scott, do you have any predictions for us?

51:39Well, just based on what you said, I do think there's a, I think churn is really important. And I'd like to think there's some churn going on right now. Companies like Starbucks, Intel, Disney, Nike, Estee Lauder, Warner Brothers. These companies are, as they should be, getting kicked in the nuts. And that makes room for new competitors, I'd like to think. Unfortunately, they're mostly being kicked in the butt by TikTok. But anyways, in a weak Chinese consumer. But you are seeing a changing of the guard. Too many old people running these companies. Too many old people who are getting paid too much fucking money for lackluster performance.

52:21So all super talented executives. But I would speculate that Bob Iger and David Zaslav are going to announce or at least put in place some sort of succession plan in the next year or two. these are people who are both great executives especially bob eiger zaslav has made a third of a billion dollars to lose 60 70 percent of his shareholders valuation and then the final one is i think fabrizio freda the ceo at estee lauder that company has shit the bed the last five years they're probably due he's had a great career a storied career he's made a lot of money he deserves it. But I wouldn't be surprised if in the next three, six, 12 months, I used to get the timing right, we see succession strategies announced at Warner Brothers and Disney, and we see a new CEO at Estee Lauder Company.

53:14This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Thursday for a conversation with Mark Zandy, only on Prof.G Markets.

54:00And the dark flies In love

54:16Nike withdrew its full year sales guidance ahead of its new CEO's... Fucking Jingo S. I'm sorry, go ahead. Go ahead. Nike withdrew its full year sales guidance ahead of its new CEO's... Would you think they're smarter? Their kids go to Princeton. Does that help?