Has NVIDIA found the repeatable template to untold riches or is it getting lucky?
NVIDIA might be the stock of the future!
Why is NVIDIA going up to such insane levels? Every forum, especially the regards at r/wallstreetbets seem to have segregated themselves in separate camps.
Long NVIDIA vs Short NVIDIA.
Some would say that the price increases are irrational, and the market is poised for a correction. While that may or may not be true, if we analyze the nature of the world we live in, I’d say NVIDIA – or any other semiconductor manufacturer with the kind of IP NVIDIA has will follow a stable, secular growth trajectory.
NVIDIA is fundamental to our existence and will continue to be so in both the short and long term but will benefit from 2 completely different participants.
The long-winded short-term reason
Booms and busts have been a part of the investment cycle as long back as we could tell. Most of these cycles are unintentional. They gain steam purely by virtue of happenstance, by being at the right place at the right time.
But there is something fundamental that happens at the start of each of these cycles. And these 2 come together by virtue of coincidence. The availability of easy money and a big Fad. I am using the ‘Fad’ terminology very loosely because it may just be a very necessary item that the population is obsessing over, but for our purposes, we shall term it as the ‘Fad’. Some examples include:
The Dutch Tulip Bubble: The Dutch had come into a lot of cash by colonizing major parts of Southeast Asia. And Tulips w
ere for some reason the big Fad.
The Housing Bubble: There was a lot of free money extended through credit by the US government, and homeownership was the Fad. Everyone wanted to be a homeowner.
Bitcoin: The world was going through insane levels of quantitative easing, which means almost free money at near 0% interest rates, and somehow Bitcoin became the Fad.
Fads are a dime a dozen. There will always be Fads no matter what the economic state is. But the bubble starts when cash becomes available. At this point in time, AI is the fad. It is probably not as meaningless of a Fad as Tulips but it is a Fad nonetheless. What is even scarier is that the run up is happening at a time when money isn’t as easy to come by. So, what we are seeing is not even close to what could have been possible if we had near 0% interest rates again. At best this is a semi-bubble.
What is going to happen over the next few years is that a lot of AI startups will get funded, as VCs try to jump on the bandwagon. Even YC, one of the more popular VC entities have, to an extent indicated that they are going to prefer AI firms. These firms using AI may or may not be long term winners, but in the short term, they will spend money aggressively to gain more processing power provided by NVIDIA in the hopes of making it work.
NVIDIA wins irrespective of if the AI spawns win. These firms will still be spending that sweet VC money till the point when VCs are exhausted. With interest rates going up, there is a chance that the VCs will not have as long a runway as they had during the Bitcoin and Blockchain boom. But it seems like they have enough steam to carry this over the short term.
The long-winded long-term version
The biggest moneymakers have always been the ones who controlled the bottlenecks. Without them the process isn’t viable anymore. Just like the Suez Canal, which has been a major money maker for Egypt for decades because if one can’t use the Suez, the vessels would have to go around the coast of Africa to reach Europe. So, Egypt has always charged a premium entry fee to all comers. And people were more than happy to pay it because, ain’t nobody got time for going around Africa.
Similarly, based on my observations it does seem like the world is moving to an AI heavy model. This is an industry that stands to revolutionize anything we can think of – from Media & Entertainment, Finance, Healthcare, Productivity. There will be atleast 3-4 dominant AI solutions catering to each of these industries in its end state. These firms will no doubt be profitable but there will be 1000s of other people writing code trying to upstage the hegemons. But as I mentioned earlier, NVIDIA sits at a point in the AI ecosystem that is simply irreplaceable.
Margins for AI companies will eventually dry out as more and more players try to disrupt the system, but it is highly unlikely that someone will come around to try and disrupt NVIDIA. Ain’t nobody got the capital for that.
NVIDIA and other similar firms occupy a position in the value chain that lets them essentially dictate the terms of their relationship with their customers. With such inflated pricing power, I don’t see NVIDIA getting dethroned anytime soon. Over the long term, it will be the shareholders/public that will be feeding NVIDIA their quarterly profits instead of the VCs.
NVIDIA is the perfect bargain, even at these levels, to be a candidate in the coffee can.
Final thoughts – Is NVIDIA Lucky?
Sometimes what baffles me is, how can a single firm be the main character for 2 back-to-back Fads? Who is writing this script? There used to be a time when Fads took on different shapes and forms. During the Tulip bubble it was the Tulip producers who benefited. During the housing bubble it was the Builders.
But NVIDIA was the chief beneficiary during the Blockchain bubble, where it gave chips to mine coins. And now it is again the chief beneficiary of the AI-semi-bubble, where it is providing chips to provide AI processing power. Is this a trend then? There is a good chance that the next big Fad would also rely heavily on chips because no matter what anyone does these days, it invariably relies on superior processing power!
If the next big Fad is quantum computing, or sending people to Mars, or implanting chips in our brains or even an AI powered League of Legends with top-of-the-line graphics that we all collectively decide to play – everything will be reliant on a good versatile processor that NVIDIA seems to have.
So, no matter what the next Fad is, BOOM, there’ll be NVIDIA, shooting up like a cocaine addict after an underground rock concert.