All Aboard AI
There is no question that all the buzz in financial markets now, centres around Artificial Intelligence (AI).
Google Trends – Interest in AI
It has been a tough few years for those of us tasked with coming up with credible and insightful commentary on the key issues of the day for financial markets. You could be forgiven for thinking that the intersection on the venn diagram covering expertise in epidemiology, land warfare and scary super-computers that are going to take over the world is pretty small. Think again, this is financial punditry we are talking about.
The current darling of the AI craze is US chip company, Nvidia. Right on cue, Nvidia just announced stellar results driven by interest in AI and the shares leaped 24% in a single day.
Nvidia Share Price
As we will see, the shares of Nvidia are very highly rated. However, those of us who remember the technology bubble around the millennium have seen this film before.
At the time, Scott McNealy was the CEO of Sun Microsystems, one of the darlings of the dot com bubble. At its peak his stock hit valuation of ten-times revenues. A couple of years afterward he had this to say about that time:
“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
No, no, no Scott. What were you thinking? Those are rookie numbers. Nvidia currently trades on roughly 35 times revenues, approaching $1tn market cap.
Given the obvious enthusiasm for the shares I thought I would check in on what the major shareholders thought. The two largest shareholders in Nvidia are Vanguard and Blackrock who own around 16% between them and have recently been adding to their holdings.
What does the Nvidia analyst at Vanguard think? Absolutely nothing because they don’t exist. Vanguard couldn’t care less about what Nvidia even does, much less its valuation because they are passive index trackers that simply allocate fund flows according to market cap. Vanguard likes Nvidia exactly twice as much at $300 as it did at $150. You can see how things might get out of hand.
What lessons can we draw from this? Here’s a couple from Ben Hunt at Epsilon Theory
And one from the godfather of physics
“I can calculate the motion of heavenly bodies, but not the madness of people.”
Isaac Newton