Decoding the NVIDIA Trade - With Michael Batnick

Channel: Alex Kantrowitz

Published at: 2024-06-26

YouTube video id: 2ELu1WKkzWQ

Source: https://www.youtube.com/watch?v=2ELu1WKkzWQ

let's decode the Nvidia trade examining
why it became the world's most valuable
company last week and what comes next
with one of the world's most astute
investors that's coming up right after
this welcome to Big technology podcast a
show for cool-headed nuance conversation
of the tech world and Beyond we're
joined today by the great Michael
batnick he's a managing partner in rol's
wealth management he's the co-host of
the compound and friends which is one of
my favorite shows and also the host of
the animal spirits podcast Michael
batnick welcome to the show great to
have you here for the first time what an
introduction world's most student
investors I've definitely never been
called that before but thank you for
having me I'm excited to talk about and
all things TCH yeah well you guys were
in Nvidia way way early and so I think
it's well earned I wasn't I wasn't Josh
was okay yeah so Josh Brown I mean
anyway it's it's group credit here we'll
give you guys listen I followed Josh
into enough things all right he got
lucky in this one credit to him okay
sounds good so let me read you a couple
stats about Nvidia we're obviously like
talking it's been kind of an interesting
week they were the world's most valuable
company for a minute last week uh
they've Fallen a little bit back to
Earth this week but still they are
they've done incredible this year um and
they are really the story of this AI
boom so this is what we can say about
Nvidia today they are a $2.9 trillion
company although I'm sure it's going to
be higher when the Market opens we're
talking Tuesday right before the Market
opens they're up 145% year-to date
they've added $1 trillion in market cap
since February and this is from Fortune
if Nvidia were to lose the gains it has
made this year overnight the S&P 500
would have to come down approximately
4.5% so they're really carrying the
market um first question for you is
there any precedent here like is this
something we've seen before no it's a
short answer and uh I I'll just say In
fairness to the comment I made about
Josh years ago he was actually dead
right on this I remember he wrote a
great blog post saying that semis were
the new Dow transports the way that
information is disseminated it's no
longer on rail it's on these little tiny
chips and he absolutely nailed that
trade to answer your question has
anything like this ever happened there
have been lots of fabulous growth stocks
over the years and decades but there
hasn't been at least as far as I know in
fact you know what no there hasn't been
there has never been a company of this
size growing this quickly in May the
company reported in the data center
alone 400 this is the obviously their
main business
430 year-over-year Revenue growth
overall Revenue growth was 262 per.
you've never seen a company in the
trillions of dollars growing their Top
Line and bottom line uh this
quickly right but the question is like
how do you uh value the company because
there were right so there were two there
were two interesting headlines in
Bloomberg over the past couple days days
um like side by side one was like uh
Nvidia is growing so fast Wall Street
can't keep up and then the next one was
Nvidia enters a massive correction so
let's go one by one uh on those so the
first one in terms of being able to
Value the company um so this is uh from
from Bloomberg uh in the age of
artificial intelligence uh no one can
figure out what the chipmakers revenues
are actually going to be not the Wall
Street analyst covering Nvidia or Nvidia
Executives themselves analysts aren't
making piing up numbers they take their
cues from management like they do with
every other company however even
nvidia's leadership is struggling to
anticipate how much money the chipmaker
will generate 3 months into the future
and this is the actual data since
Invidia sales began exploding in the
fiscal quarter that ended in April 2023
Revenue has exceeded the midpoint of the
company's own forecast by an average of
133% so basically Nvidia is setting this
bar for what it expects to earn and just
blowing it out by double digits almost
every quarter and then the question is
okay so how do you value it because it
is somewhat expensive if you look at its
valuation according to this story at
least it is somewhat expensive I think
the easiest historical analog that
people are comparing Nvidia to is
understandably the
dot uh boom and bust in the late 990s
and Cisco was was the poster child for
that Cisco got as expensive as I think
it was 130 forward times earnings right
now Nvidia is trading somewhere between
40 let's call it 40 times forward
earnings and the question Alex as you
stutely asked is like well what what is
the proper valuation and this is what
makes it so fun and so exciting is you
don't know we'll find I'll tell you what
the proper valuation is three years from
now we'll find out what it what it was
um but what should a company trade at
that is growing this quickly that is
defining a new category that can be
world changing that has margins like
this that has no competitors uh I don't
know what the right answer is but it
probably shouldn't be traded at a market
multiple call it 20 times or so so it
certainly has earned a premium that it's
trading at the question is okay yeah
growth stocks deserve a premium but how
big is to big and can a company that's
in the trillions now $3 trillion doll
and it just became the largest company
briefly for a minute surp passing apple
and Microsoft it's only the 12th or 13th
company over the last 100 years to wear
the crown of the number one company in
the S&P 500 it's there's not been a lot
of turnover at top there's only 12 names
and Nvidia is one of them uh and so I
would argue and I think there's there's
a ton of arguments on the internet
about is this a bubble does this make
sense and you've got the market people
like myself talking about historical
precedent and growth rates and
assumptions uh and then you've got sort
of generalist business people talking
about well doesn't competition have to
come in their margins are unsustainably
high but I think what is missing from
the conversation is like actual experts
that might have more insight on the
business and how quick they can grow of
course we're all sort of estimating
guessing the best we can so I don't know
what the proper multiple should be for
this company but it is doing something
no company has ever done it continues to
beat the loftiest of estimates and as
long as it does that I actually I
shouldn't even say that I was about to
say as long as it does that it's going
to be fine who knows it might there
could be a point in time one of these
quarters where it does beat and the
stock drops 20% you can't predict how
the crowd is going to react you just
can't right and I'm going to get into
some of the objections uh that people
have on Nvidia and we can go through
them including the competition side uh
in a bit but let's talk a little bit
about what happened uh this week with
this kind of I called it a massive
correction it's actually a mini
correction but it's a lot of money um so
this is again from Bloomberg like a day
after Wall Street can't keep up it says
Nvidia enters correction territory as
slump races $430 billion in market cap
like you know that's a that's a lifetime
of work for most most companies but it's
losses there there's there's
14 there's 14 companies in the S&P 500
that are bigger than the market cap that
was raised in 3 days that's it only 14
companies are more than $430 billion
that's that's as big as master card and
it did it in 3 days so yeah the numbers
are getting like alarming and startling
right and this is from from the story
The uh Nvidia entered correction
territory on Monday as the ongoing
selloff erased a historic amount of
value for the AI focused chipmaker uh
actually I'll pick a bone with the chip
maker detail but we'll go uh we'll go
through that in a in a bit it said the
stock fell
6.7% the and the 3-day drop erased 430
billion of nvidia's market cap the
biggest 3-day loss for any company in
history so is it just that with Nvidia
because it's growing and because there's
so much volatility or because there's
like so much uncertainty there's going
to be volatility is that just something
that's going to be baked into it what
happened over the last three days is
abnormal in terms of the market cap
losses but for a company that's doubled
and doubled again and doubled again or
whatever the performance has been for it
to lose 133% in 3 days is
completely normal I mean that is there's
nothing abnormal about that except for
the size and the mag you know the
magnitude of the drop and matter of fact
it so it had a 13% drop give or takeover
the last three days it did that back in
April remember the correction back in
April which actually came and went so
the stock was in a was in a 20% draw
down and I think we sort of forgot about
it because since that draw down it uh it
almost doubled and again that draw down
that I'm describing happened from April
to May and then from from then to here
the stock almost doubled that's
crazy yeah and when you talk a little
bit about uh valuations talking about it
shouldn't have a market valuation but it
could have a growth valuation so can you
explain a little bit about what you mean
there in terms of like all right so it's
making a certain amount of money we're
not going to Value it as every other
company in the stock market but there's
that um there's another range that it
should be in yeah so Nvidia has gotten
cheaper over the course of the run
because the fundamentals have outrun
even the incredible share price so over
the last so last
year uh Nvidia earned a19 that was her
earnings per
share uh over the last 12 months it's
done
$612 so its earnings per share has sex
tupled over the last year which is
astronomical and so wellit hold on ref
sorry I'm I'm losing my train of thought
what was a question about like so in
terms of do we value this as a gross
stock or right right right right and
what does that mean exactly right okay
so so stocks like air quotes are a the
discounted cash flow right you discount
all the future cash flows and you get to
a current value you use some sort of
discount whatever the appropriate may be
which of course nobody knows we're all
guessing and so with a company like this
where it is growing so quickly it's not
what did it earn last year or what did
it earn this year it's what can it be
what can it be expected to earn over the
next 12 months over the next 24 months
and you never really know how far out
the like we are going when we discount
these things but the fact is that
valuation matters and it doesn't matter
it doesn't matter today because the
buyers today are momentum buyers and
that's not that's not disparaging
momentum is a great strategy and
momentum buyers in of Nvidia have been
rewarded heavily and momentum buyers of
all big Tech have been heavily rewarded
but I don't think the marginal buyer
today really gives a about what
Nvidia might earn in 2026 they just
don't now it will matter because these
are actually businesses that we're
investing in and in this respect Cisco
might or might not be a good analog but
there is a potential lesson here to
learn Cisco the business compounded its
earnings at something like
15% in the 15 to 20 years after the
bubble
burst the stock got destroyed because it
wasn't discounting 15 to 20% earnings
per share growth it ended up discounting
like 40 to
50% and so valuation matters
eventually but if Nvidia can continue to
do what it's been doing and that's
beyond you know I have no idea uh but if
it can if it can do I'm making this up
$8 next year $10 the year after $14 in
2027 the stock can be at a the stock can
be $5
trillion that's
crazy so yeah let's let's talk a little
bit about the objections to like you
know this is sort of the bull case
here's the be case right or um actually
maybe just some general questions about
this run and whether it can keep going
first question I have for you is is this
something that is kind of like the next
Tesla right like Tesla sort of became
something of a meme stock like it had
earnings but it also became this like
place where you put money if you
believed in like the EV Revolution and
just wanted to you know Park your money
somewhere and it was like worth you know
multiple times of a Ford even though it
was selling less cars than a Ford uh is
this something that could happen with
Nvidia that like maybe some of the Tesla
money has flown into Nvidia and it
becomes something of like a uh you know
almost a bigger G maybe like a GameStop
with with
earnings yeah it's an interesting
question two things have happened over
the last couple years in businesses that
parallel each other that I think are
really fascinating one is is Tesla and
you mentioned Ford and GM and everybody
else chasing Tesla because they were
taking a lot of market share creating a
new category uh the electric vehicle and
it was it was growing rapidly but then
competition came in too heavily they
overproduced and now there's too many
EVs and uh there's too much Supply and
these companies are not doing well the
same thing happened with Netflix and all
of its competitors everybody saw what
Netflix was doing with streamy and of
course the the competition didn't want
to cannibalize itself understandable
they were late to do so but then during
the pandemic everybody was watching
Netflix and the stock price was being
rewarded because these these SAS
businesses or the the recurring Revenue
businesses um were Trad at a ridiculous
premium and so all of their
competitors jumped into the deep end and
what they really did was they followed
the Road Runner off the
cliff and uh I think uh the question is
is the similar trajectory going to
happen with Nvidia are its competitors
are I don't even know who their
competitors are honestly I don't even
know who does what they do I know some
of the other names like I don't I'm not
a I'm not a uh chip expert I I don't
understand this these sort of things but
the question is are they going to
overbuild for an AI world that might not
be quite as powerful as everybody is
projecting another be case which I'm
sure we're going to get to is maybe this
is bearish maybe it actually maybe it's
actually bullish uh the fact that so
many of its of its revenues is
concentrated in five
customers is that is that a good thing
uh because what happened with Cisco is
that all of its customers basically went
bust right but the but the flip side is
like okay well how much how much is
Amazon going to to to buy from Nvidia
and the and the other players like how
much is Facebook going to spend did they
already spend 80% of what they're going
to spend in the next three years I don't
know how how financially uh intensive
these businesses are I mean obviously
you know a lot better than I do but I
think that's that's the big question is
what does this look like how much did
their customers spend and where when
does competition really come in right
and like something like 45% of nvidia's
data center revenue is coming from the
big cloud providers like those five
customers right so I'm curious while you
brought it up do you think that it is a
liability or or a strength I think you
can make both you can make good points
on both
sides um yeah talk us through the
arguments yeah I I think I think the B
case would be these are the biggest
companies in the world right they're not
going to go under like the Cisco buyers
exactly they have the best balance
sheets they are
spending billions billions I uh of on
R&D a year I know what the number is for
some of these companies but I think I I
think is Apple spending $25 billion a
year in R&D whatever the numbers are
they're they're they're immense and so
they've got the pockets and they are
committed to funding the next big thing
this this AI thing whatever it turns
into then I guess the flip side would
be okay but that's like baked into the
pie like even if you assume that they're
that their prior spending is going to
continue where are the incremental
buyers for these days data
centers um I don't I don't know well I
mean what's your take is is that bullish
or bearish yeah it's it's a good
question I mean b the whole thing is
predicated on whether this AI quote
unquote Revolution will continue to go a
pace because the technology is good
enough right now that it's worth
investing in for companies who want to
build with it but it's not mature enough
to the point where like it's a definite
GameChanger it's like a it's almost like
potential Game Changer the good thing
and the good news and I think this is
why like there's a floor here is because
and we talked about this a little bit on
the compound when we spoke a couple
weeks
ago these companies will continue to use
in video chips even if generative AI
sort of hits a wall right like those
chips are very useful to do ranking on
reels or to help with the metaverse So
Meta is Comm which said this year it's
going to go from 350 to 650,000 Nvidia
h100 gpus or equivalent which is an
incredible increase right like they're
going to continue to spend on it because
it makes the entire product better and
is used the AI that sort of underpins
everything um but you would need to see
more progress in this generative AI move
talking about better chatbots but also
capabilities like agent-like behavior
and reasoning that can sort of unpack a
command and like go through a bunch of
different steps and we're not 100% there
yet so um it seems it seems like they
are going to be able to continue to sell
um and they are going to be able to sell
to these customers but there is still
that big question mark of like where
does this all end up and from everything
that I hear it's going to be the next 18
months that will basically decide like
if they do 18 more months of development
of these models within open AI within
anthropic within Microsoft and meta and
don't see sort of Step change increase
in results then this thing is going to
slow down but if they continue to see
the the results they've seen through
each generation of the models then I
mean Nvidia you're right could just keep
selling like crazy because and this is
sort of like the the thing I was
pointing out when I poked at the chip
maker title is It's just not the chips
it's the chips it's the software used to
train and it's the networking the even
the bands between servers that will
allow the companies that are training on
Nvidia models to be able to do more
efficient and better training uh or
sorry on Nvidia chips to be to do more
efficient and better training because
everything is just so connected where
like you look at the competitors and
they don't have it so like when you
asked before like what's the competition
to Nvidia my my perspective on this
really is that the competition is is
really the the um the AI boom slowing
down more than it is any other company
that's going to come in and take their
lunch so you mentioned like we'll know
in the next 18 months or so whether or
not businesses are getting an Roi on all
the spending because right now we know
that they're not I forget what the
numbers are but for every $10 billion do
spent they're whatever it is it's moving
the the ne by like 3% but do you think
that they're going to get the ROI
necessary to continue to spend I think
that that's a great question I think
that's so I think within the next 18
months we're going to know if the models
get better I think the ROI question
might be even further pushed out and so
we haven't heard a lot of clamoring
about Roi yet like there's this one like
seoa uh Capital number that's been
thrown out that like 50 billion for
every 50 billion spent maybe three
billion has been returned right which is
really really bad um but it's top of the
first inning no like exactly does that
is that number even relevant at this
point no but it is a preview of what
we're going to start to see as we sort
of as these timelines get extended
further right because like right now
there's this sort of move be because the
improvements are so clo like the
potential improvements are so apparent
that people are willing to spend because
they think they're coming but if they if
they don't come then the ROI question
becomes uh much more clear because
you're not looking at like all right if
we spend this this year we're going to
get this you know in one or two years
right is it it's like you know are how
how can companies basically say stick
with us it's going to be a 5-year
project or a 10-year project that's it's
not really done often in software
projects well that they're able to do uh
soft uh semis have typically been a very
cyclical industry right and there's no
real reason to expect this to be
different if the economy were to go into
a recession MH you would think that
these companies would pull back no yeah
exactly so and that's sort of another
question that I had for you is which is
you know there all these different
things that could happen and this in
this moment right is it a change in the
AI story is it a move to let's say a
drawback in the economy and is it
possible for the sort of the the money
to flow out of the stock as fast as it
went in that's a good
question uh yeah but listen I mean we
just saw a 20% draw down uh that
happened in a couple of weeks and it
like I said it it gained like 90% after
that
so I'm talking about from one to this
Peak from March over I don't know a 5we
period it lost
20% but I guess what I would say is can
can this thing get cut in half
absolutely it can get cut in half but
does that prove the does that prove that
the Bears were right I don't think so
growth stocks get cut in half all the
time Nvidia I mean this is this is
obviously very different because the
business was different uh this is this
is pre the gigantic data set of Revenue
growth but Nvidia lost almost 70% of its
market cap a couple of years ago right
so can you see a spectacular crash in
this thing sure you can I sort of feel
like too many people want that to happen
for that to actually happen why do
happen yeah there still seems to be and
it's listen I'm making this up it's hard
to like it's hard to like quantify what
I'm saying here but there still seems to
be a lot of Doubt but listen again for
every doubt you could say hey
it's three point it's 3.3 trillion what
are you talking about doubt I guess what
I would say is if if I had to guess and
we're all just guessing here these
things these things end in bubbles
usually and as dumb as you think they
might be they always get dumber and have
we reached the level of sufficiently
dumbness that's like the three trillion
dollar question who knows yeah and we
got to go to break but before we do I
got to ask you one question what did
Kathy Wood see when she decided to sell
so much Nidia before the whole runup
yeah this is I was talking about this uh
the other day
I don't like to kick people when they're
down but uh this is a tough one this is
a really tough one she um she sold it
before the
run
and listen she has a difficult job but
to make matters worse like she never got
back on and there was a lot of
opportunity for her to do so and uh when
you Market yourself as The Innovation
fund and you missed the biggest
innovation of the last uh I don't know
how many decades since the internet
potentially that's a yeah that's got to
hurt
it um it must uh you know that that fund
has really languished it hit couple
during the pandemic with the zoom and
some others Tesla but yeah especially
now Tesla's dragging it down um I don't
know how many predictions that Tesla is
going to end up being a 15 trillion
dollar Company by 2030 will help will
help that fun okay let's take a break
and then talk about what what uh Nvidia
looks like looking ahead um how
sustainable this is going to be and does
the stock transform uh and become B
basically part of people's portfolio
maybe like an apple has to this point
where it's held by institutions and not
um and and not as volatile okay we'll be
back right after this and we're back
here on big technology podcast with
Michael batnick he's a managing partner
at R holdz wealth management the host of
the compound and Friends Podcast and
also the host of animal spirits Michael
great having you here for the first time
having fun definely yeah yeah definitely
definitely the right stock to be talking
about uh before the break I mentioned
like does this thing become a a stock in
people's portfolios like an apple right
where apple is like of course it's an
impressive company but the stock has
become effectively something that
institutions hold almost I don't know
almost like a standard part of their
portfolio no matter what you got to be
equal Apple at least right yes exactly
so is this something that Invidia can
achieve how hard is it to get there no
no it can't
um I think the reason why Apple became
so ubiquitous in portfolios Across
America is because the brand the became
so ubiquitous Across America I don't
know what the average American has in
their house in terms of the iPhone maybe
an Apple TV an iPad an iMac or what what
have you Nvidia is just not the same uh
and it's never going to be the same it's
never going to be the household brand
and so I think uh it's just it's not
going to get there no chance okay so
then also in terms of the split right
the split seemed like something that
people that would encourage a lot of
people to buy I remember okay I was at a
the of the bagel shop here in New York
and a woman walked up to me and she goes
hey do I know you from MSNBC I'm like do
you mean CNBC she said yeah and she's
like yeah I've been saving up to buy an
Nvidia oh no yes did you think she meant
to share a stock one sh yeah yeah or
basically she was like I'm in these
stocks but I can't afford Nvidia okay so
she was waiting yeah listen we we know
we know economically a split doesn't
matter but guess what it matters it
matters because exactly what you just
said people think a stock that's cheaper
becomes more affordable rightly or
wrongly and perception is reality in the
stock market
sometimes and so but it's interesting
because it did split and now it's going
through this correction but maybe over
time it will just make more money come
into the
stock uh yeah
CounterPoint in like 15 sessions it
gained uh 40% so again this this this
this pullback I don't know if this is if
this is it if it goes lower or higher
this is not nothing this is the most
normal thing ever if you chart any stock
that's gained 150% in 6 months it gives
a little back nothing goes straight up
in fact uh the price action over the
last couple of weeks became alarming if
you looked at Nvidia as a percentage of
the S&P or the q's or whatever it had
been going straight up and that type of
price action is concerning so you need
this if you're if you're bullish on
Nvidia long term or even like short to
medium term this should not concern you
you should say okay good like because
the the higher it goes vertical then
you've got like a really unstable
potential situation why is that
concerning uh it just becomes it just
becomes delicate and fragile MH uh I
don't I wish I had like better words to
to describe it but when something goes
straight up uh it's just not it's not
healthy Market Behavior you don't want
to see a buying Mania because buying
Manas inevitably lead to selling Manas