Prof G Markets: NVIDIA’s $1 Trillion Valuation, Pairs Trading, and Understanding Analyst Estimates

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1:27This week's number, 5 ,475 miles. That's the distance between London and Costa Rica, where my team was bonding on the beach. True story, when Ed got back, he went to the doctor complaining of stickers on his butthole, and the doctor said, Those are stickers from a banana.

1:47Ed, how are you? How do you feel? Too much? No, I think that's just right. That's just right. I'm getting so many emails about my profanity, I'm just going to lean into it. I'll show them.

2:09welcome to prof g markets today we're discussing nvidia's trillion dollar valuation pairs trading and earnings estimates here with the news is prof g media analyst eduardo elson direct from rica de costa so we got here last night at around six and we doing some work and then we sat down for dinner at eight and immediately as we sit down for dinner giant thundering rainstorm just starts descending down on us so i think it's i think it's a sign from the gods that they want us to keep working but that happens a lot down there it's very jungly right first off where are you staying where i don't even know where you guys are i just know you have my credit card where are staying we're in a place called tamarindo yeah i've been there cala luna wow and what's the hotel like it's awesome i'm i'm we have we have four suites and one room um so guess who got the room but i'm currently in in claire's suite right now well if you stopped having sex with bananas we might we might they might trust you to share a room anyways uh and what what are the activities plan for the team in costa rica so we're going we're going surfing tomorrow i think maybe on saturday we're going snorkeling uh they have atv rides which i'm pretty excited for and then we're going to be parting at night it's going to be it's going to be good so you can go atv riding the rest of the team cannot because it's very dangerous is that right so true story i started a brand strategy firm in my second year of business school and i pitched yamaha motors came to the high school of business and said, we need, we want to do a student project.

3:45We want someone to help us understand the youth market for motorcycles for Yamaha. And so I said to my soon to be business partner, like, this is our opportunity. Let's write them a proposal and try and launch our business. And, you know, I'm first semester, second year at the high school of business. And so I wrote a proposal saying, look, you need to be serious about this. I'm going to go out and survey 2000 teens. I just took a market research course, which makes me an expert in market research. And we'll come back and after surveying youth, we'll come up with some insights and product recommendations.

4:19I pitched them and I didn't know what to charge. So I called a friend of mine who had been recruited by and hired by McKinsey. And I said, what would McKinsey charge for this? And he said, we charge a half a million bucks. So I put$250 ,000 and my partner was like, what the fuck are you thinking? We're second-year MBAs, and you're trying to charge it from a quarter of a million dollars? You have no background in consulting. I have no background in any of this. And then I remember I had an apartment in Rockridge, Oakland, and I was paying$280 a month and went to the mailbox. This was back when I actually looked at mail, opened it, and there was a check from Yamaha Motors for$100 ,000 and a voicemail from Matt Takazawa saying, sorry, we've been really busy.

5:02We didn't get back to you. We're really excited about this project. you should have already received the first payment. And I remember when I saw the check and I looked at it and realized what had happened, I got physically scared that I had just done something illegal. And that was the beginning. That was the launch of Profit Brand Strategy, which then became Profit, which I then sold to Dentsu and is now a, I think a five or 600 person firm. And there's a lesson in all of this is that the key to starting a business is starting. and just committing to doing good work. And they were very happy with us.

5:37They used us several times. But our first engagement was with Yamaha Motors. Anyways, ATVs are really dangerous. They don't look dangerous. They're very dangerous. So you and no one else can go ATVing in Costa Rica. Anyways, talk to us about the markets, Ed. Let's start with our review of Market Vitals.

6:02The S &P 500 finished May down a fraction of a percent, while the tech-heavy Nasdaq was up nearly 6%. Bitcoin was down 3 % on the month, and the yield on 10-year treasuries closed out the month marginally up. Shifting to the headlines. Elon Musk has officially reclaimed the title as world's richest person from LVMH CEO Bernard Arnault. That's thanks to an increase in Tesla stock and a decline in LVMH. The Wall Street Journal reported that executives and early investors in SPACs made$22 billion by selling shares before they plummeted. SPACs, also known as blank check companies, they are shell firms that are created to take another company public, have lost more than$100 billion in value so far, and at least 12 have gone bankrupt.

6:49Job openings in April surged above$10 million, that's the highest in three months, And the unemployment rate rose to 3.7 % in May. That's up from 3.4 % the month before, but it's still near historic lows. And finally, Washington passed the debt ceiling bill, which will suspend the borrowing limit and rein in government spending until 2025. Notably, the deal slashes the IRS's budget by around$21 billion. Scott, what are your thoughts? So the SPAC thing is super interesting and not surprising. It's shocking, but not surprising. You can't punish people for having the wisdom to sell when a stock is high.

7:29And investors at the end of the day are investors because they want to invest and then ultimately they want to sell. The question is, at some point, is it more than just reputational risks they're taking? Are they taking risks with other people's capital, retail investors' capital? And when they're on wherever they are, whether it's Richard Branson saying, this will inspire new generations. I mean, essentially, Virgin Galactic was a vessel to transfer wealth from retail investors that were excited about the prospects of the commercialization of space to his failing crews and airlines. And basically, give me money.

8:05I'm going to sell stock as fast as I can. And then I'm going to prop up my old earthbound companies. And there's nothing illegal about that. The question is, at some point, if you own over a certain amount and you go online and start promoting a stock, should there be some sort of regulation that basically makes you an insider? I wonder if SPACs should even be allowed to exist. It just seems pretty insane to me, the idea that we have a vehicle where you can raise public funds for ideas and companies that don't exist. Yeah, well, I mean, there's two ways to look at this. retail investors want to access.

8:44They don't want to feel as if they're being held out and only the quote-unquote those rich white people get to play in tech and get to invest early. So to a certain extent, there's a fulcrum between or a tension between infantilizing investors and protecting them. And so that's where you find, you know, what is, how do you thread that needle? Because as my colleague at NYU says, as Guatemala and the best regulation is life lessons. And SPACs were essentially a form of investment banking. They've been around a long time, but it was essentially a group of people who said, I'll be an investment banker and take companies public that the investment banks don't want to take public.

9:26And here's the issue. For $2 to$3 million, you get, I think, 20 % of the company. So say it's a company that goes out at a valuation of$500 million and you own 5 % of it, why wouldn't you just go on CNBC and use your Twitter following to try and get people excited about it, get it to a billion, and then hit the sell button and in exchange for a million bucks, you've just made$50 million. In terms of job openings, it's good news, bad news. It's great that the job market is strong. We're at historically low unemployment. It's bad news for inflation. And there's a bunch of things that work here. And that is because of anti-immigration laws, we've lost about 2 million immigrant workers.

10:09So there's just fewer people to staff a lot of positions. We've also had 2 million, I think it's 2 to 3 million people retire early. And that is post-COVID. They think, you know what, I've had it. They saw their stocks go up. They have some money, some retirement money. And they're like, I'm just not going back to work. And we also lost a million Americans. So the labor force has shrunk. A lot of women were taken out of the workforce because they shoulder most of the burden at home and those burdens were, you know, dramatically increased mostly because of remote schooling. What's interesting around that, just as a side note, is that female participation in the workforce has not only returned to where it was, it's now at an all-time high.

10:48But we have an absolute shortage of workers. I think there's 1.8 open jobs for every person looking for a job. Let's talk about the debt ceiling bill, too. What are your initial reactions to that? We predicted that the deal was already done and that strategically Biden, who is a pragmatist, and Speaker McCarthy, who cannot afford to have this go sideways. If it goes sideways, he's out. He'll be one of the shortest serving speakers in history, if not the shortest serving speaker. So I believe they got together a few weeks ago and said, all right, how do we get this done? And Biden said, I'm not going to negotiate with terrorists.

11:24And McCarthy said, look, I've got to throw my weirdo some red meat. give me something symbolic that I can claim as a victory that is meaningless. And we'll take this right up to the 11th hour and then we'll get it done such that I can claim victory. You don't really have to give up much. And we can get back to the, you know, we can act, at least pretend to be responsible fiduciaries for the American public. And it looks like that is exactly playing out. They've took it to the 11th hour and President Biden has given some gives that are mostly symbolic, that are almost meaningless, taking IRS budget down from$80 billion to$60 billion, which is, okay, meaningful to the IRS.

12:02Just to clarify in the IRS, it's not going down to$60 billion this year. It'll only go down$1.5 billion this year. And then$20 billion will be, over the next two years, allocated away from the IRS to other government programs. So, all in all, you're taking out$20 billion over three years. They're kind of reducing it by around 9 % each year. The meaningful budget cuts are in the IRS. And the thing that I think is that I find ridiculous is that the IRS is the one agency responsible for generating more government revenue. And that's the whole problem that we're trying to solve here. We're trying to reduce spending.

12:40We're trying to fix the deficit. But part of doing that also means increasing government revenue, which the IRS is responsible for. And we've talked about this before. I mean, And a couple of years ago, we were celebrating that Biden was going to invest$80 billion into building up the IRS, into increasing audit rates, which have fallen 93 % over the past 60 years, so that wealthy people and corporations start actually paying their fair share. Instead, the Republicans and Democrats have agreed upon, actually, we'll just cut back the one thing that's going to make us money in the long term. Am I alone in feeling like this doesn't make any sense?

13:19It's insane. I mean, first off, you got to give it to the Republicans. They managed to get 47 or 48 percent of the popular vote by representing the top 1 percent. And the wealthy have weaponized and corporations have absolutely weaponized the tax code in government. They make the tax code exceptionally complex. They get from 400 pages to 4000, all sorts of loopholes, all sorts of tax credits, which means the following. If you're the IRS, it costs X to audit a middle-income, a middle-class household. I mean, your taxes are pretty simple. You'll put down what you make. You won't even automize or you do a standard deduction.

13:56Boom. If you start writing off half your rent or try to, a red flag will go up. It'll take a case officer an hour or two hours. Boom. You'll have to pay penalties. Super easy to audit you. If somebody wants to audit FedEx or if somebody wants to audit George Soros, you need a team of a dozen people for six months. And so every dollar you cut in funding to the IRS, the government needs 23 % of GDP to operate. They have to get it from somewhere. So if they're not going to get it from wealthy people because they're too expensive to audit and they just don't have the resources, they've got to raise taxes on everybody else.

14:35So any cut in budget at this point of the IRS is nothing but a transfer of wealth from lower and middle and upper middle class income households to the rich and to corporations who the IRS can no longer afford to audit because of the complexity of their taxes at the hands of a tax code that is purposely complex such that I can weave and bob when you know how to navigate by starlight, you want to run your boat races at night. And that's what the wealthy and corporations and Republicans have figured out a way to do. This is nothing but a transfer, again, of wealth from the poor to the wealthy and corporations.

15:16We'll be right back after the break with a look at NVIDIA's rise to the trillion-dollar market cap club.

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17:51We're back with PropG Markets. Chipmaker NVIDIA hit a market cap of$1 trillion. dollars. NVIDIA is the ninth company in history to reach that milestone, and there are only five other companies worldwide worth more than a trillion. Those are Apple, Microsoft, Google, Amazon, and Saudi Aramco. NVIDIA's stock explosion is a result of the AI boom. NVIDIA is the premier designer of graphics processing units, or GPUs, which are essential for building and training AI models. Sales rose 19 % last quarter, and the company's revenue forecast for the current quarter was roughly 50 % higher than analyst estimates.

18:29So Scott, clearly NVIDIA is riding the AI wave, but there are a lot of other companies that should probably be riding it too. AMD makes chips, so does Intel, so does Qualcomm, which have historically been NVIDIA's biggest competitors. But as it stands, NVIDIA's market cap is roughly six to seven times larger than theirs. What about NVIDIA is making it such a winner? If you think about market valuation, it's really two things. It's performance and promise. And probably not in that order. It's probably more important to have promise and performance. We got to give it to them. In terms of performance, they have essentially never missed their earnings.

19:07They've only missed their revenue projection seven times out of the last 75 quarters. They either meet or beat all of their expectations. So the street and analysts just say this company just continues to deliver. It's also better to be lucky than good. They make graphic processing units, and it turned out that the exact type of processor to do this, the exact type of chip, foots really well to the needs for generative AI. And now Intel is playing catch-up. And essentially, AMD, NVIDIA, and Qualcomm focus on chip design, and TSMC focuses on manufacturing. Intel tried to do both. They were vertical.

19:44And what's interesting, and I've said this a lot, is that most companies beyond a trillion are vertically integrated. but NVIDIA is a designer, not a manufacturer. In sum, NVIDIA was just able to see around the corner better than the other folks. I mean, it's just incredible. It's up 163 % year to date. I think it's responsible for something like 10 or 15 % of the S &P's gain. The question is, what does this mean in terms of valuation? There's just no doubt this company is incredibly well positioned with a market cap of$952 billion. It's worth as much as, get this, Intel, AMD, Qualcomm, and TSMC combined.

20:19And it's trading at an enterprise value to EBITDA of 145 versus 18 at Meta or 22 at Apple or 17 at Google. The question is, is this company overvalued or is it an amazing company, really well positioned? And I think the answer is yes. I think relative to valuation, I wouldn't get near this thing. So something you mentioned, Intel's strategy, which used to be a juggernaut, it's down 45 % in the past five years. Their strategy was, okay, we're going to design and we're going to manufacture their chips. That's very different to NVIDIA, which outsourced manufacturing to TSMC and Samsung. And now here we are, and their GPU is 39 times faster than their previous one.

21:02It's the premier GPU in all of AI training. NVIDIA is clearly making the case that businesses should strive to be specialists versus generalists. Do you think that that applies to all business and where does it not? This is a tough one because I've been preaching for a long time that you can't get above a trillion dollars without vertical integration. Because in order to get above a trillion dollars, you have to have such an incredibly strong culture and brand. You need to control the entire consumer experience. You know, verticalization is kind of the trend over the last 30 or 40 years. These guys have bucked the trend and they've been focused more on design.

21:37Now, what they have done is they've sort of taken the Uber and Airbnb model and said, we're going to leverage other people's massive multi-billion dollar investment in chip making plants. I mean, chip plants cost billions. And I think what they may have correctly assessed was that there's a lot of manufacturing capacity. What's lacking is truly differentiated chip design around a very specialized IP as it relates to graphics that ends up being really relevant to generative AI. And they just hit the bullseye here and they probably have better margins because they don't have this five or seven year lag or wait time trying to build a multi-billion dollar chip plant.

22:20Now, the question is, does that make them vulnerable at some point when they don't control the manufacturing? And if manufacturing capacity slows, are they stuck out in the cold? I think that's the question around whether this company can get much further beyond a trillion dollars without controlling its manufacturing we should talk about the ceo as well this guy jensen huang who i had never heard of until a couple weeks ago just some interesting character traits he always wears a leather jacket in every public appearance mia found this stat which is that there are only two photos on the reuters photo database that show him not wearing the leather jacket.

23:01He has an NVIDIA tattoo on his arm. He's got this massive Reddit following. The NVIDIA subreddit page has over 1 million members. Are we kind of witnessing the birth of the next storyteller CEO, sort of the next Elon Musk? Well, again, this goes back to instinct. And our instinct is that we need a super being. Our brain is big enough to ask very complicated questions, but not big enough to answer them. So into that void slips a super bang. When societies become more educated their reliance on a super being and church attendance goes down But we still need those super beings. So the jesus christ of an information age is no doubt steve jobs technology is the closest thing we have to spirituality and mysticism No one has any fucking idea how their iphone works.