Blain’s Morning Porridge Aug 25 2023: What Nvidia and Tesla reveal about stocks – maybe it’s time to be dull, boring and predictable.
“Moths can’t really help themselves but be drawn to the flickering flame. They are almost as daft as stock analysts”
Nvidia and Telsa trade on hopes and expectations, FOMO and huge PE multiples. They are very different investment propositions but reflect the bubble market. Maybe it’s time to revert to dull, boring, predictable returns in fixed income secured by real assets?
This morning’s porridge is late because midway through penning it I looked out the window at a surprisingly blue, blue sky, and the sun glinting of the tide on the river. I decided to go for a swim. Sorry, but readers can wait just a little bit longer. Who knows what may happen tomorrow, so seize the day and the opportunities as they occur.
Telsa trades on a P/E of 65. Nvidia on a P/E of 245. Which one would you buy?
Yesterday’s market was largely about Nvidia. The stock rallied 9% after its spectacular numbers and outlook on Wednesday – apparently crushing the market shorts – but ended up pretty much flat after everyone realised good news is never just good. Maybe folk are beginning to worry about the multiple other sides of the story.
Nvidia’s up/down day is a good example of how convoluted market psychology can be – good news must be great, except when it becomes a sell-the-fact moment. Even though Nvidia beat expectations y’day, everyone pumping the strength of the AI market bubble was looking to sell on a high because beating expectations consistently in the future may not be so easy in the future. (Which is why everyone over the age of 45 thinks about Cisco whenever they see a Nvidia stock chart….) One of my colleagues made the “sell the fact”call on Nvidia early doors y’day. Nice.
For those of you who don’t remember the turn of the last millennium and the dot.com bubble… many folk perceive a link between Nvidia’s dominance within AI and the way in which Tesla has been able to maintain itself at the forefront of the burgeoning Electric Vehicle sector.
There are significant differences.
Nvidia is a genuinely massively revenue generative profitable company, with history responding to the market’s development and a clear tech advantage in the design and production of AI infrastructure chip-tech. It exists in a complex Tech ecosystem where experience, checks, balances, due diligence and highly attuned financiers understand the SWOT (strengths, weaknesses, opportunities and threats) around established and new entrants – although even the smartest banker is oft carried away on the tide of hype.
One of the reasons for Nvidia’s profitable success (as opposed to a trillion dollar startup that never made a cent in profit) is because its part of the market, not a “distruptor”, but just doing it better – which is why it dominates the AI supply chain.
In contrast, Tesla has proved itself a superb purveyor of its own narrative in its own ecosystem. That is Musk’s real talent – PJ Barnum rather than Gottlieb Daimler. Tesla thrives because his narrative dominates – common sense is largely excluded by the hype. The reality is Tesla may have a cash pile, but struggles with sustainable profits that might justify its crushing valuation. It is slashing prices and margin in an increasingly competitive landscape. Maintaining its ultra-valuation relies on sustaining the all important “narrative” which has been based on a whole succession of “foundation-myths”. These include:
- Tesla will dominate EVs in an auto-sector paradigm shift – Nope, Tesla initiated the EV revolution via the Tesla Battery, which is basically thousands of Duracell bunnies linked in parallel.
- Musk is an inventive engineering genius – Nope, a serial entrepreneur.
- Telsa has collected unique data which will enable owners to rent out their cars as self-driving taxis – Nope, self-driving remains the nuclear fusion of the auto-industry, while Uber and dozens of other taxi companies make the sector profoundly unprofitable and competitive.
- Telsa’s is not a car company but a capacitance company – Nope, Telsa home batteries are pretty much what other batteries are.
- Telsa will outcompete the competition – Nope; big, established and new EV makers are producing better cars, innovating new lighter, longer-range batteries, leading to an oversupplied markets as buyers wait to see what future will emerge.
- Tesla will dominate charging – Nope, new batteries are in view that will allow 1000 mile ranges, removing range-anexity concerns and reducing the need for charger roll-out.
- Etc, etc, etc…
When did Tesla last introduce a new model? Remind me.
The case for Nvidia is more grounded. Its microprocessors are the bed-rock, the foundation and the raw material of the AI revolution…. which is, as we are so oft reminded, going to change everything. Based on the numbers and outlook from earlier this week we can expect the lolly to keep rolling in with sales set to go stratospheric in Q3! Its backing up its share-price with a $25 bln stock buy-back programme. Yay.. What’s not to like?
But, no one thinks Nvidia is truly unique (as Telsa claims to be). In the more sober world of big tech, no one believes in Foundation Myths.. (except Masayoshi Son, and look where We-Work got him…)
I got a heads up from a reader yesterday on what the market really thinks:
- “On Nvidia, it’s certainly not as simple and one way as most Nvidia drunk Wall Street analysts currently suppose. [CEO] Jensen has certainly built a deep and wide moat around Nvidia, pro tem, but AI will shift progressively off the Cloud onto edge devices over the next five years, hence why Nvidia wanted to absorb Arm. Apple, Amazon, Google and Alibaba are among many others are developing match winning proprietary silicon to that end. And don’t forget the arrival left field of wafer scale tech — Cerebras —as an alternative to tens of thousands of ganged together GPUs.
Cerebras is a fascinating company – and I’m thinking of doing a degree in computing just to understand exactly what it does and how. Basically, it’s taken years to refine itself, but now the firm is able to service AI across multiple windows. It aims to “build” 36 Exaflop “wafer-scale engines” and entered a partnership with G42 to build supercomputers to service AI demand. Its already won profitable contracts in the AI Cloud-space. It helps Nvidia’s H100 is basically out-of-stock forcing the many firms looking to self-build AI to buy its products.
Nvidia is still a fascinating company… but at a 245 PE ratio in a rapidly evolving and massively competitive space with established and new threats.. even a basic SWOT analysis shows it’s a bubble – a pretty one, but a bubble that could well pop when the inevitable new, new thing emerges.
And therein lies the problem. Bet the house on a bubble.. or
Maybe it’s time to look elsewhere for dull, boring, predictable returns from fixed income rather than trying to ride the coat-tails of the stock roller-coaster. In Alternative Assets I’m looking at a whole range of new investment ideas. If anyone has any interest in investing in litigation finance, aviation, and trade-finance, then give me a call to talk about potential double digit returns secured on underlying cash-flows.. Less racy than trying to front-run triple digit PE ratios.
Out of time, have a great weekend, and back to the day job..
Strategist Shard Capital