Prof G Markets: An Nvidia Challenger Files For An IPO + Can A New CEO Turn Nike Around?

25:47Oh, 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 one 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. dollars. 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.

26:31I 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.

27:17In 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 you know if it's if it's a good marketing tactic maybe that's all that matters maybe people read that, they hear how big this chip is, and they think, this is great, we want to get involved.

28:11So 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 it 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. So this is highly volatile, but the upside here is asymmetric.

28:53Yeah, it's like a mean stock play. 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. So this is an AI holding company that is based in Abu Dhabi.

29:30uh they do ai everything they they i mean the website it says ai research ai cloud computing ai data centers ai healthcare investing etc etc um 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 term for that is dumb money. 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. They have partnerships going on with OpenAI and Dell and IBM and Microsoft.

30:24They 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 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 so 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.

31:13They 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. This is the scariest thing here is the concentration of one client, right? Now, having said that, 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.

31:59Yeah. 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, you know, technology based economy, we would like to have a presence in AI. So 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.

32:45So 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. They 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.

34:03If 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 head—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.

34:41Oh, 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.

35:15They'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.

35:58Yeah, 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.

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38:10We'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's 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?

38:55You know, I like this company so much. I have a bias. I want you to go first, Ed. I think you probably have. I mean, unlike your exceptionally biased bordering on 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 this company is 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.

39:38So you're seeing revenue declines in direct revenue, in brand revenue, in wholesale revenue. You'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.

40:17their financial forecast for the next 12 months. And instead, they're only offering quarterly forecasting. And their explanation for that is that, you know, we have a management shakeup, 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.

40:53You 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. So 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 needed 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.

41:31So 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. But 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 for the next two or three quarters that are just very good at what they do.

42:04And 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. What 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.

42:55And then once they discover trends, getting stuff from design or concept to shelf much faster. And 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. Basically, every public company, man, 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.

43:35I don't care if you go to Cape Town or Seoul or Cambodia, 11-year-olds playing football in the yard are wearing Nike. And 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.

44:24And 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 that I find kind of interesting, what you're saying about the brand and how strong it is, we 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.

45:18and 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 estee 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.

46:00Because 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.

46:42We 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 choosy 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 or the Mandarin Oriental.

47:22One, 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.

47:57It's the Faena in South Beach and people can figure it 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 but 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.

49:01I'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 to unbelievable margin. But 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.

49:42A 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. So 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.

50:25Yeah, 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? Well, 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.

51:03I'd like to think, unfortunately, they're mostly being kicked in the butt by TikTok. But anyways, and 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. So 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 Iger. Zaslav has made a third of a billion dollars to lose 60, 70 percent of his shareholders valuation.

51:48And 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. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon.

52:23Mia 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.

52:48In kind reunion As the world turns And the dark flies In love

53:18Nike withdrew its full year sales guidance ahead of its new CEO's arrival. Fucking Jingo-esque. I'm sorry, go ahead. Go ahead. Nike withdrew its full year sales guidance ahead of its new CEO's arrival. If they were white, would you think they're smarter? Their kids go to Princeton. Does that help?