The Prof G Pod with Scott Galloway - Prof G Markets: Nvidia’s Superpower, Reddit’s Democratized IPO, & the Capital One-Discover Deal
Episode Date: February 26, 2024Scott discusses what’s unique about Reddit’s upcoming IPO and shares his thoughts on its $60 million AI content licensing deal with Google. We also break down Capital One’s acquisition of Discov...er, and Scott makes a prediction around whether or not it will be approved. Finally, Scott and Ed take a look at Nvidia’s supreme impact on the global markets. Learn more about your ad choices. Visit podcastchoices.com/adchoices
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This week's number, 100,000.
That's how many people are on the waiting list for
soho house membership true story right before i got a divorce my wife bought me viagra
so i bought her a gym membership all right hold on i'll do i have another one true story
this weekend i went on a hike and i found a dead prostitute and then i realized i'd been walking
in circles that has nothing to do with anything, Ed.
I'm not even sure I understand it.
It just made me laugh.
So, Ed, true story.
This week, I decided to give my son a lesson in sex education.
So I brought in a banana and a condom.
And he said, what's the banana for?
And I said, I can't get hard on an empty stomach.
That's my favorite joke of 2023, Ed.
You're welcome.
You're welcome. You're welcome.
Hi, Ed.
How are you?
That was both not that funny and misogynistic.
That's not easy to do in such a short amount of time, Ed.
That was good.
I was excited about that.
Are you a member of SoHouse, Ed? I am indeed, yeah.
Oh, wait, their stock is crashing. That's funny. Real time. Look at that.
Yeah. Yeah. No, I was surprised when it went public because I think the whole thing is that you want it to remain exclusive. So are you a member?
Yeah, I applied like three years ago to the Miami house and for a year and a half,
I didn't get in. And then
they called me and said, you're in, or they just charge your credit card. That's how you find out
you're getting in. And I'm a member of a few membership, Tony membership clubs in London.
I really like them. I like the, I'm very down with the whole exclusive snobby thing.
I'm quite aware of that.
I like it. I like it. And I'm a member of Zero Bond in New
York and I really like that. It's old men and hot women. Two of my favorite things.
Two of my favorite things. By the way, the Prof G community has been putting together a
Prof G bingo card. I was just looking at that this morning. Here are some of the highlights.
Mm-hmm. We got champagne and cocaine,
mendacious fucks,
on a risk-adjusted basis,
when I was on the board of the New York Times.
That's good.
Peanut butter and chocolate.
I don't know if you know this, Ed.
This is pretty good.
Plus, but it needs to sound like you've just been punched in the back.
And then finally, any dick joke.
Any dick joke.
What are we missing?
I don't know.
That's pretty good.
I say literally a lot.
Yeah, that was one of them as well, yeah.
Yeah.
There's a lot.
There's a lot at the end of the day.
Yeah.
You know, something, ass play.
I'm a big fan of that word right now.
We have some work to do here.
Yeah, no, we're going to work on it. Well, if anyone else has any other suggestions,
send it to me on Twitter at Ed Elson, or send us a note to officehours at propertymedia.com,
and we're going to build this card out.
Is this how you finally get a date to take to the Soho house,
is you basically whore out your Twitter handle?
Yeah, exactly. Yeah, that's how I do it.
Okay. Get to the news, Ed.
Let's start with our weekly review of market vitals.
The S&P 500 hit a new record high.
The dollar slipped.
Bitcoin dropped slightly.
And the yield on 10-year treasuries rose.
Shifting to the headlines.
Rivian stock fell 17% after the company announced
it will make fewer electric vehicles than expected this year.
Rivian also announced plans to lay off 10% of its workforce.
Streaming platform FuboTV has filed an antitrust lawsuit
against Fox, Warner Brothers Discovery, and Disney.
As we discussed a few weeks ago,
those companies plan to launch a joint streaming
platform dedicated to sports. Fubo claims that that joint venture is anti-competitive.
Walmart is acquiring smart TV maker Vizio for $2.3 billion. That move should give Walmart
more opportunities to sell ads through Vizio's TV operating system. JP Morgan Chase has signed
a naming rights deal for Inter-Miami Football Club's home
stadium in Florida. That's JPMorgan's first naming rights deal in professional soccer.
And finally, Reddit and Google have agreed to a content licensing deal worth $60 million per year.
Reddit will grant Google access to its posts and data to train its AI models,
and this comes ahead of Reddit's expected IPO in March.
Scott, thoughts?
I was shocked that Rivian stock fell.
I didn't invest or do anything about it,
but I would have guessed
that Rivian would have had a good quarter.
It appears, what's interesting is
the data around EVs is actually pretty ugly right now.
You're seeing kind of a, I don't know,
a normalization or a lot of these companies
who, the big American companies who said they were totally pivoting to electric have said not so fast
and they've pushed back their targets for being all EV. Rivian lost more than $43,000 for every
unit delivered to customers in the fourth quarter, worse than the $31,000 per vehicle lost last
quarter. So I guess essentially it's economically irresponsible not to buy a Rivian. It sounds like you're being subsidized to the
tune of $43,000 per vehicle. It took Tesla 17 years to be profitable and Rivian is 14 years old.
And this is the stat that's scary. US EV sales have slowed to 47% year-on-year growth down from
70% growth last year. So growth is slowing down. I really
like the Rivian. I've ordered one and I haven't, I like not owning a car. So I haven't put in,
I have this nice lady calling me saying, it's time to outfit your Rivian. And I don't do it
because I don't want to own a car. I really enjoy not having, I enjoy being carless.
Wait, what? You've ordered a Rivian, but you don't want the Rivian?
I ordered one a couple of years ago because these waiting lists do it's like why i want to be in a you know in
zero bond or so else or actually my favorite in uh in london where i didn't take you but i took
caroline and mia because um they they take up my brand you sort of take down my brand you're sort
of like the i don't know you're sort of the
whatever the term is you're like the the gremlin the amc gremlin like the gremlin did not help the
amc brand anyways but maison estelle is is my favorite anyways i don't i don't know why i
brought that up back to rivian i ordered a rivian i like the idea of these waiting lists they do
the oh this is where i was headed okay thank. Thank you. The illusion of scarcity. The waiting list connotes that there's going to be some scarcity
and you have to wait. And I think that's a fantastic marketing tool. And I thought these,
these auto companies are just geniuses. And I don't know if it was Tesla that really broke
new ground here, but basically Tesla would get their customers to finance their car.
Sorry. I just want to point out, I think the best part of this is that now that the Rivian
is available and they're asking for you to buy their car, you don't want it anymore.
You only wanted it when you couldn't have it.
That's exactly right.
That's exactly right.
I don't want to sleep with anyone who'll sleep with me.
I mean, come on.
That means there's something wrong with them.
Where were we?
No Fubo.
Antitrust, okay.
I don't think that's going to go anywhere.
These guys are fighting for their lives.
Between YouTube and Netflix and the other tech companies who will just throw $5 million at original content just for shits and giggles so Tim Cook or Jeff Bezos can roll into the Academy Awards.
These companies are struggling.
Disney and Warner Brothers, their stocks are at lows.
So the fact that they're going to consolidate strikes me as it's more out of necessity than trying to find a way to raise prices.
But maybe they will be successful.
Do you have any thoughts here?
Yeah, I mean, we can go through the complaints that FUBA laid out, which are pretty compelling.
I mean, the first one is this idea of bundling. And that's the complaint is that these higher than what they charge to other distributors
third was this strange thing called non-market penetration requirements i've never heard of this
but these are apparently restrictions on the percentage of fubo's customers that they can
actually sell certain licensed content to and then the fourth is just the joint venture in general
which fubo says is like the final step to eliminate competition in the
sports streaming market. The one thing I find not so compelling, here's a quote from the complaint.
Each of these companies has consistently engaged in anti-competitive practices that aim to
monopolize the market, stifle any form of competition, and create higher pricing for
subscribers. Now, the trouble here is the last part of that sentence, higher
pricing, because according to analysts, the joint venture is going to cost around $40 to $50 a month.
And you compare that to other offerings, YouTube TV, their cheapest plan is $70 a month. And you
compare that to Fubo's cheapest plan, which is $80 a month. So if the analyst's predictions are true,
it would appear that this joint venture is actually going to benefit consumers
with lower prices, in which case the complaint doesn't really hold.
The analogy we use is that Russians, British, and Americans figured out a way to get along
when the Nazis started rolling into Poland with a superior military infrastructure. And
the analogy
holds here, and that is this is going to make for strange bedfellows because everyone is getting the
shit kicked out of them by Netflix. And to a lesser extent, I would argue, or maybe a greater
extent, I think we're talking about this, YouTube television. So these guys need to do something,
and they need to cut costs. And one way to do that is through consolidation and with an offering like this one that is sort of so compelling. They still have very strong
relationships with the leagues. They're still known for, it's kind of the place you go to watch
the Super Bowl or the final March Madness, whatever it might be. But I don't, FUBA,
what also, there is a way to kind of thread the needle here, and that is the FTC and the DOJ.
If I had to guess what will happen is that upon antitrust review, they will come back
and say, we'll allow it, but you have to X, Y, and Z.
And one of those things might be similar to the way they approved, I think, Microsoft's
acquisition of whatever it was, Activision or Blizzard, whatever they call it.
They said, okay, but you have to continue to sell these games for the following platforms. You can't just limit it to Xbox. I wouldn't be surprised if they do that here. They
said, okay, Fubo's complaint is legitimate. And part of the remedy here is we're going to allow
you to merge, but you have to sign an agreement saying that you will continue to offer this
product to these people at a price as determined Wilmot? I like this a lot.
If you think about what is sort of the unsung hero of Amazon,
people talk about the cloud.
It's got the biggest cloud business,
great business growing fast.
It's obviously known as a retailer.
The unsung hero is Amazon Media Group.
And that is the one that sells ads.
If you go put pampers in your basket,
and Amazon loves an ad for loves might pop up.
The pinpoint accuracy,
the behavioral targeting they can do,
Amazon gets 9% of its total sales from ad revenue.
And I would bet that they get a much greater percentage
of their profits from this
because that 9% is much higher margin
than their retail business,
probably not as high as the cloud business. Whereas Walmart only gets 50 basis points or about half a percent of their total sales
from ad. And Vizio is the third largest TV retailer in the U.S. by market share,
and its own operating system has over 18 million active accounts. So they're basically,
they're not only buying, they're not interested in the hardware. They're not interested in being
the TV business. They're interested in a direct-to-consumer platform that has 18 million active accounts that they can start pulling data from and then sending them targeted ads, right? And then charging all of these brands who they have a relationship with to get in front of people. it really is because you look at Vizio's ad revenue. It made around $600 million in ad
revenue last year. Walmart's already selling around $3 billion in ads. And then, you know,
as we've been mentioning, this is all a catch-up play for Amazon. Amazon's selling $47 billion in
ads. So the question I'd have is, how does acquisition have any real effect on the top line when it comes to ad sales?
Because it feels like Walmart has to get a lot more creative in some way.
And I wonder what that strategy will be.
Maybe it's algorithmic recommendations.
I was thinking maybe it could even be product recommendations where you can actually buy items from Walmart on the TV, depending on your viewing
habits. Perhaps you have some thoughts there on what Walmart might do with this.
Well, a couple of things. One, as a CEO, you're thinking about marketing mix,
or you're thinking about revenue mix. So right now, Walmart trades at a much lower multiple.
And Doug's thinking, okay, how come I can't get an Amazon like multiple? And they say, well,
your primary source of revenue
is a difficult low margin business called retail. Whereas Amazon has tens of billions of dollars in
this high margin business called advertising. So while it's going to take them a while to catch up,
if ever, as long as they're growing that business faster than their core business,
slowly but surely that multiple that the market provides them on earnings
should begin to expand. Because the analysts will look at their underlying business and go, okay,
retail, okay business, they're huge, huge top line, 4% of a giant number is still a giant number.
But they would like to see those high margin businesses growing faster than the core business,
because what that implies is margin expansion. So I think
this is a good move. And these guys play for the long term. Walmart's been around for whatever,
60 years. So if they can grow this business 20% a year and get it to be a $5, $7 billion,
70-point margin business and maintain those margins, and they get a really good multiple
on this, they get a 10 to 20 times even to multiple on this part of the business, or it takes the multiple on inter-Miami because of Messi and because Miami is a gross city.
So it ends up these naming rights tend to be really good deals. Most brand experts will say
that just the impressions of having Troy Aikman on the AFC finals or whoever's going to be
announcing the MLS games says, and here we are at JP Morgan Stadium.
That constant reminder of the name and the brand is really powerful.
So it all comes down to what the deal was.
Do you know how much they paid for it?
It's not been disclosed.
One thing I found pretty funny, though, is the length of the contract.
It expires in two years, which is the same year that Messi's contract expires.
So this is all about Messi. That's funny. Reddit? Reddit, I think it's going to be really
interesting. And what I think is most interesting about Reddit is not their deal they're doing for
$60 million, but they're planning on giving a lot of their consumers an opportunity to buy into the
IPO. So this is how an IPO works.
Reddit is going to go out at a valuation, call it a 5 billion. So they'll issue 10% of the company
in stock. They'll go out with $500 million in shares, say they price it at 20 bucks a share.
So they'll issue 25 million shares. And then Goldman markets the shit out of this thing and
goes around with the CEO and says, this is why Reddit is an amazing company. And then all the institutions,idelity or these guys, you just hardly get any.
They save it for their big institutional clients that generate a lot of fees. And what Reddit is
saying is we're going to hive off a large portion of the book here or of shares available at the
IPO for our most loyal users of Reddit. It's kind of trying to democratize the IPO process.
It has some risk because these individuals, retail investors, are known as flippers.
They're not known as institutional long-term holders.
Typically, when you're selling stock, what you want is someone who's not going to sell,
someone who's not going to just do a quick trade because you want long-term holders,
which reduces the available float and keeps the stock higher, if you will.
So everyone wants a long-term investor. At least
that's the excuse the investment banks use for giving most of the allocation to their biggest
clients, which are supposedly long-term holders. So there's some risk here that these Redditors,
if you will, might just go in for a quick flip. I like this. I think it'll bring a lot of attention
to the brand. And that's the big challenge here, because at $5 billion in market cap, companies that are $5 billion usually get very little analyst coverage, and the media is usually not that concerned with them. But Reddit is an interesting company. I also like the fact, I don't know about you, but I find that I'm using Reddit more, and the company grew, I think it's going to do about $800 million this year. One thing that's sort of
interesting is pre-pandemic, through the pandemic, they grew from 400 to 2,000 employees. They've
stayed flat this year. I wonder if they're going to trim some of that. If they do it,
they would do it before the IPO. But this is a company that I'd like to invest in.
So I think this is an interesting one. And also, I like that it kind of plays a little bit in the
AI space that if you think about it, my thesis is that the underlying technology of AI is going to be commoditized.
That you have the chips, you have the LLMs, and then you have the coal that goes into the furnace, the content.
And I wonder if the LLMs, the open AIs of the world, the llamas, the Geminis, the anthropics, if that stuff gets commoditized, it's very hard to differentiate
on a technical level. And the real differentiation is on the chip level, see above NVIDIA's earnings,
or on the content side, whoever has access to the most interesting firehoses of content.
So I think Reddit, if they position themselves well, might get a couple billion dollars in
market capitalization just based on the expectation that they'll be able to garner a lot, either build their own LLMs
or extract really, really big fees, much greater than 60 million.
That fee, 60 million, it reminds me of the Axel Springer deal. It's just not that much money
for one of the most valuable data gold mines in the world. I mean, just to put this in context,
Reddit has 800 million monthly active users,
70 million of those use the app daily,
and it's the seventh most visited website in the world.
It gets more traffic than Amazon and Netflix.
And they've decided that unfettered access to that
is worth $60 million,
which, by the way, would only increase their revenue by around 7%.
I mean, you mentioned it's high margin and there's value to that, but they're already making $800 million a year.
So to me, this was just another example of a media company kind of underselling itself when it comes to this pivotal moment of data access for AI companies.
So I had the same concern,
and I did a little bit of research here,
and it's not a long-term contract.
I think the Reddit realizes
they're sitting on something really valuable,
but probably what this did was it probably,
it shores up their profitability for the year
going into an IPO.
It's 60 million of revenue,
probably 59 of it hits the bottom line.
So it might be the difference between them breaking even or not breaking even and being profitable. It establishes them as, you know, this is the first fee that people are paying for this content. And then they'll put it up for bid again. And I'm pretty sure, I'm not certain, but I'm pretty sure it's a fairly short-term contract, similar to that JP Morgan contract for the naming rights at InterMiami. You also brought us something that's a really key point, and that is,
it's the seventh most trafficked site globally. And if you look at the average market capitalization
of the top 10, it's something like $1.1 trillion. It's Amazon, it's Meta, it's Alphabet. There's a
strange one in there, but they're all companies that have several hundred billion
dollar market caps or even multi-trillion dollar market caps.
Because at the end of the day, oil doesn't run the economy anymore.
It's attention.
We're in an attention-based economy.
And if you can capture, if you can be one of the platforms that captures more attention
than any one but six companies in the world, your prospect for turning that into
money is really, really strong. So the reason I like this, the reason why I'm going to try and
get in on this IPO or even buy some in the aftermarket is it's unlikely that the seventh
most trafficked site in the world won't be able to figure out a way to be worth more than $5 billion.
But now is that moment. It's got to take advantage of that moment right now,
I would argue.
Well, as long as it keeps growing.
In addition, a quarter of their user base
is between the ages of 20 and 29, i.e. you.
And people love people like you
because you do stupid things.
You go to the show house
and you spend money on weird shit.
Actually, I do all the shit you do.
You do all of it.
You're so much worse.
It's crazy.
Arrested.
Okay, but it's too late to fix me. I am deeply, deeply broken.
Yeah, I have a terrible, terrible teacher.
Yeah, no doubt about it. No doubt. Yeah, do as I say, not as I do here.
Exactly.
We'll be right back after the break with a look at Capital One's acquisition of Discover. We're back with ProfitG Markets.
In one of the biggest deals for the banking sector since the financial crisis, Capital One is
acquiring Discover for $35 billion.
That is, if the deal gets approved. It could be a tough sell to bank regulators, the FTC,
and the Justice Department. Last year, Capital One was the fourth largest credit card issuer in
the U.S. based on the value of its outstanding receivable loans. Discover was the sixth largest.
Combined, they'd overtake JPMorgan Chase as America's biggest
credit card company. To break down what this deal means for the credit card industry,
let's speak with ProfG Media's editor-in-chief, Jason Stavis. Jason, the credit card industry
is quite opaque. Could you give us an explainer on how it all works at a structural level?
Sure. Let's start with the credit card itself
and the name on the card.
If we have a credit card,
we tend to think of it as a Chase Sapphire card
or an REI card, United card.
So that company is marketing the card.
That's the marketing partner.
And sometimes it's a bank,
but more often these days,
it's a retailer or an airline or someone like that.
So that piece of the business is they go
out and they send out brochures and emails and they try to get you to sign up for the card.
And then they run the rewards program or whatever bonuses come with that particular card. So that's
kind of the top layer of the credit card stack. Now, that company might be a bank or it might be
somebody else. There's always a bank involved, and that's the issuing bank. Those are the folks that you deal with once you've signed up for the card. They're the people that
send you the bill every month, and they also play a critical role in the credit card transaction
itself. They're the ones that provide the cash to pay the merchant when you buy something with
the credit card, and then they eventually collect it from you. Then there's the acquiring bank,
which is the merchant's side of the equation.
So when you go in to buy something with a credit card, your bank provides the cash to
the merchant's bank, and then the merchant provides you with the goods.
Now, connecting all those pieces together is the credit card network itself.
And that's what we know of as Visa, MasterCard, or relevant to today's news, Discover.
And what they do is they operate a vast and super high-speed computer network, which facilitates
the information transfer.
So you go into the store and you say, I want to buy this item with this credit card.
They take that transaction and all the critical details.
They run it over to your bank, the issuing bank.
Then the issuing bank runs a credit check and decides if you're within your credit limit
and if this is not a fraudulent transaction.
And then they tell the credit card network,
yep, that's fine.
And then Visa or MasterCard or Discover, whoever,
they run that information back to the merchant.
So when you put your card down on that box,
a whole bunch of information is zipping around the world,
mostly on the back of Visa, MasterCard or Discover.
So those are the four pieces,
the marketer, the issuing bank, the acquiring bank, and the network.
So this joint company, as we mentioned, this would become the largest credit card issuer in the US
by loan volume. The current number one is JP Morgan. This combined entity would take on
$250 billion worth of loans. And it feels like that number is going to be the big subject
of the antitrust review.
I'm wondering, from your perspective,
how you think Capital One and Discover
are going to get this deal past the regulators.
Yeah, the trick for them
is going to be to shift regulators' attention
from the banking lending side of the business,
which is what everybody is focused on,
to the card network side of the business, which is what everybody is focused on, to the card network
side of the business. So in general, larger credit card issuing banks charge higher interest rates,
and they are more likely to charge an annual fee. And so the concern is this industry is not
heavily consolidated now. Together, these two entities will get about 17% of the transaction volume. That'll make them third by
transaction volume. And as you said, they'll be first by loans. But as these companies get larger,
the concern is that they'll charge more in interest and fees and everything else. So Capital One can't
really do much about that. That's kind of the statistics that they deal with. But what they can
do is say, look, there's two businesses here, and the other business is the business of facilitating these transactions, the networks.
And right now, they will argue there's a virtual duopoly in that space. Visa and MasterCard
dominate the transaction business. And their rates move in time with one another. So they
recently raised those interchange rates across the board, and they did it at the same time.
They have a lot of pricing power, and they don't have a tremendous amount of incentive, Capital One will argue, to innovate in
the way that they help merchants protect against fraud, provide other services, etc. So what Capital
One is going to say is, look, we are merging our credit card businesses, but most importantly,
we're putting a ton more economic muscle and marketing power behind the Discover card network.
And they will say, we're going to make it a lot bigger. And when we make it a lot bigger,
and they've already said this, they said they're going to put 25 million customers onto the
Discover network. They're going to put several hundred billion dollars in transactions onto
the Discover network. When they do that, they're going to say, we're going to have a third
real competitor that's broad-based, widely distributed to Visa and MasterCard. That will
bring down interchange fees, and that will create more competition in the space and improve the
quality of the service, all of which over time, they will argue, should flow towards lower consumer
prices across the board. This feels to me like something that's, because it's consumer brands
that people know that might attract a lot of populist senators
from the left who think it's a terrible idea and block it. What are your thoughts?
So we've seen some criticism. The Consumer Finance Board just recently put out a report
showing that, in fact, when these companies get larger, they're more likely to have higher
interest rates. I think, though, that the argument Capital One's going to make is pretty strong
because what's changing is the way that we buy things and pay for things, right?
So debit cards are on the rise.
Neither Discover nor Capital One is a major player in debit cards.
So this would allow them to compete more with the banks that traditionally offer them.
We're also seeing all of these alternative ways of payment, right?
So Venmo, PayPal, although they have credit cards,
when you use the core services of PayPal or Venmo, you're not using Visa or MasterCard's networks.
So there's a lot of activity in that space. And I think it probably makes sense to encourage the
strengthening of the Discover network. And also from Capital One's perspective, this gives them
sort of some additional security
against these much larger banks that they operate against. Because I think it's important to keep
in mind that while Discover competes on a similar playing field or a similar level of business with
JP Morgan and with Citi, they are a much smaller entity overall. They don't have all these other
lines of business. So to me,
the compression in the credit card space, the consolidation in the credit card space,
is probably a reasonable trade-off to make for strengthening the Discover network and for sort
of encouraging economic might and marketing muscle into this complicated payment transaction space.
Scott, it's been a pretty tough year for banks overall.
I mean, we saw Goldman reporting its lowest profits in years.
Morgan Stanley's profits were declining.
Citigroup had a net loss.
The only real winner this year has been JP Morgan.
I'm wondering what you think this merger could mean for Capital One, but also what you think the rest of the banking industry is thinking about
this. I think that, and what you brought up is interesting, JP Morgan's earnings are all the
more interesting because its peers didn't do that well. I think this would be good for Capital One.
I think it would be good for Discover. This is verticalization. I think it probably gets blocked,
and I'm not saying it should be, but it strikes me that this is just something that's going to—a lot of senators who are worried about antitrust and concentration of power will find be to drag this out long enough such that if there's a new administration, I think Trump would let this
go through. There'd be, you know, Lena Kahn is not going to be in the Trump administration
if there is a Trump administration. So I think they've decided to kind of lay down the gauntlet
to see if they could get it done. But this just strikes me as something that is unlikely to get
through.
But I think it'd be great for shareholders.
The credit card business is an amazing business.
My understanding is they borrow money at 3% and they loan it out at 18 or 20.
By the way, under the auspices of The Algebra of Wealth, a book coming out in April by yours
truly, if you use credit cards a lot, it probably means you're going to struggle economically.
And I don't want to be a snob. I've used credit cards before. Some people have no choice, unfortunately, because they've
got to buy groceries. But if you're entering into a cycle of using your credit cards at those
interest rates, people don't really understand, or most people don't understand interest rates,
it really is a downward spiral. And you become sort of captive to these onerous interest rates. People don't really understand, or most people don't understand interest rates. It really is a downward spiral, and you become sort of captive to these onerous interest rates.
And I want to be clear, there's good debt. Credit card debt is really bad debt. Even some student
loan debt is good debt. If you get it federally backed and it's at a low interest rate, if you're
smart, you're going into a profession and getting credentialing that will substantially increase
your earnings, there is good debt. Credit card debt is arguably the worst debt. And I would say never even go
there. We'll be right back after the break with a look at NVIDIA's earnings. We're back with Profit Markets.
The entire market held its breath last week as it waited for Nvidia's latest earnings.
With the stock up about 230% in the past year,
investors questioned whether another earnings beat would be enough to drive shares even higher.
Well, it turns out the company didn't just beat expectations, it crushed them.
Nvidia reported its fourth quarter revenue increased 265% from a year earlier to $22.1 billion.
Analysts were expecting $20.4 billion.
Meanwhile, its profits rose 769% in the same period. Its forecast for the current quarter
also surpassed expectations. On the earnings call, CEO Jensen Huang said for the next two years and
beyond, quote, fundamentally, the conditions are excellent for continued growth. Sure enough,
the stock rose more than 14% to an all-time high. So, Scott, earlier in the week, Goldman's trading desk
called NVIDIA, quote, the most important stock on planet Earth. Would you agree with that statement?
I'm not sure that NVIDIA right now is the most important brand in the world, the most important
organization, because it is literally the tail wagging the entire world right now. And as of sitting here today,
NVIDIA is worth almost as much as the entire German stock market. We were gushing over Meta's
historic earnings, where they added more market capitalization in a single day than any company
in history. Guess what? They're now number two. In the few minutes after their earnings release
last night, NVIDIA added the value of Ford, Ferrari, and
General Motors. I mean, it's just, it's striking. And there's a few things, a few observations other
than how this, you know, in addition to this company continues to just blow away expectations.
And obviously AI is probably the most profound or dramatic technology and value creating entity of
the last, probably since the iPhone, you'd argue. Anyways, a couple of things.
One, we have been,
and we're writing about this in No Mercy.
We have, and I don't know if you know this, Ed,
but I'm about to have my, what's his name?
Tyson, the guy,
the guy who's on all the fucking TikToks,
the astronomer.
What's his name?
What's his name?
Neil deGrasse Tyson.
Andrew Dice Tyson.
What's his name?
Mike Tyson.
Neil deGrasse Tyson.
Neil deGrasse Tyson.
Anyways.
Andrew Dice Tyson.
Andrew Dice Tyson. Yeah. By the way, did you see Mike Tyson working out the other day at
the age of whatever he is? I did. That was incredible. He's my age. I love that. He's my
age. We got to get you guys in the ring together. Oh yeah. That, that, yeah. Yeah. No, if you're
looking, if you're looking to finally get a job as the front desk guy at Soho House, as opposed
to joining these places, that's what you need me to have
Parkinson's with in about 30 seconds. Did I tell you I used to box? I used to box.
I know. I know. Yeah. You broke your nose boxing, right?
I was so handsome before I was boxed. I mean, can you imagine just how good looking I was
before my nose speared, right? Anyways, we have a little bit of every star of every planet of every sun in us.
We are the material.
We literally are everything.
And the universe has basically one imperative, and that is it wants to prosper.
And the way you prosper is you grow and you expand.
So the most fundamental thing across our biology, across companies, is that one, we want to survive so we can procreate.
And two, companies just want to grow. And even at our small Prop G Media, we don't necessarily need to grow. But here's the thing,
growth is everything. It's everything. Because guess what, guys? You want to move up from Soho
House to Zero Bond to Maison Estelle. You want to make more money. Everybody wants to make more
money. Growth creates opportunity. It's everything. Growth is everything. Almost every business
problem in your personal life, I hate to say this, money solves most problems. Not all problems,
but it solves a lot of them. And a lot of people have all these adages about money can't buy you
happiness and everything. And they say that because people want to feel better about the
fact that we have terrible income inequality and our economy is becoming increasingly unfair.
But the bottom line is money solves a lot of problems. In the corporate world, growth literally solves
every problem, every problem. As long as you keep growing and you have big gross margins,
you will figure it out. You will figure it out. And so the incentive to grow is just so hardwired
into you that you not only think about growing your revenues, your thought is, well, I'll grow employees because I see employees in the hallway. And I say, well willing to pay $1,000 a month, what do you think corporations are willing to pay
to defy gravity and increase their revenue growth while maintaining or reducing their costs?
And that is the Ozempic that is AI right now. And there's one company that kind of has a lock on it,
and that is NVIDIA. And their ability to just perform and execute this way, both across
the supply chain, their marketing, the exceptional margins they have, we have never seen anything
like this. These are historic numbers, historic market capitalization. Here's another crazy stat.
Since the beginning of the year, in six or seven weeks, they've added the value of Tesla.
I'm so blown away by this company right now. I think it has so much potential,
so many economic implications. Everyone thinks that Jerome Powell is watching the earnings release. People think that interest rates may not get cut now because of these earnings,
because they're so incredible. Every tech stock is up. I mean, it's just, it's un, I'm blown away, Ed.
I'm totally blown away.
Let's go to Soho House, order some cocktails, and let's toast, let's toast this Huang guy.
Is that his name?
Jensen Huang?
Jensen Huang.
But before we do that, how about we talk about the valuation?
You want to hear my story about Jensen Huang?
Did I tell you my story about Jensen Huang?
Go ahead.
I think you, but. Probably. I'm forgetting it. it yeah i've probably told it before anyways i'll tell it
again uh so i'm at can and i'm doing this talk for wpp at wpp beach i think it's called and i
roll up there and i do my talk and everyone you know afterwards come over all the fans come over
and i can't take a picture and this guy comes up to me he's like i love your videos i'm like yeah
yeah there's a line do you want a picture he's like there's a pause and he's like sure
and we do a picture i'm like nice to meet you boss big line i got going and someone just came
to me like you know that was jensen hong right i'm like oh jensen hey hey
i'm like i'm like hurry along hurry along a lot of people in this line sir
but yeah he came up he likes our videos he likes our videos ed that's a flex for you yeah that's I'm like, hurry along, hurry along. A lot of people in this line, sir.
But yeah, he likes our videos.
He likes our videos, Ed.
That's a flex for you.
Yeah, that's good stuff. That's good stuff, isn't it?
Yeah, his flex was a little bit bigger today.
Yeah, a little bit bigger.
A little bit bigger.
Let's talk about the valuation.
Trading 96 times earnings.
Compare that to Google at 25.
Compare that to Meta at 32.
Microsoft 37. I mean, this is an extremely rich valuation. And we've discussed that with Asworth. I think the main question here
that the market is asking itself is the macro question, which is how big do we think the AI
chip market is actually going to be? That's what all of these valuations are sort of depending on.
But it feels as though the numbers are just varying so much.
I mean, currently the AI chip market, it's $25 billion market right now.
Aswath, in his valuation, projected that it would be worth
around $325 billion by 2033, so in 10 years. AMD projected
$400 billion, but by 2027, so in five years. And then the other thing I've been thinking about is
this Sam Altman news, which is that he apparently wants to go out and raise $7 trillion to build out
AI infrastructure, which basically just means AI chips and data centers.
So the numbers are just totally all over the place,
but it feels like whatever that number is,
whatever that TAM is on AI chips,
determines the valuation here.
So I'm wondering if you have any thoughts
on how we can reach, I don't know,
a sober understanding of how big this market really is.
Maybe that's not possible, but maybe there are even some learnings from when you were building
Red Envelope in the dot-com era. I'm sure there were crazy projections about what the internet
is going to create in market value. Well, the market is just intoxicated. I'm intoxicated
with this thing right now. And even just yesterday, I would have had a bunch of money going to
NVIDIA as long as they appear to have a near monopoly on this. I would not want to short
this stock right now. I just think it's, you know, the animal spirits have taken over.
I think it's probably going to potentially set the table for the IPO market.
The other thing, as you were saying this, and this is, you know, the socialist in me coming out,
I'm not a socialist, I'm a capitalist, but the bleeding heart liberal, is that, okay,
this company is the value of the German stock market. And one in five households with children
in America is food insecure. I mean, it's both inspiring that
America creates this alchemy of innovation, capital, free markets, hard work, risk-taking
that results in this type of value creation, but we can't figure out a way not to have veterans,
homeless veterans? I mean, it's just sort of, how the fuck can we not figure out to guarantee every American basic child care, health care, that you won't be homeless, that if your wife gets lung cancer, it doesn't mean you're going bankrupt.
And if you're nine years old, we're going to make damn sure you have three meals a day.
How can we create $220 million in one company in one day, but we can't figure that shit out. It just strikes me as
we are such a dichotomy of the best and worst of capitalism. And that's unfair. I don't want
to assign it to capitalism. I think we can figure this out. But I think this is another example of
the bottom line is the tax rates on corporations are just too low. They're just too low.
With this kind of value creation that companies are registering, there's just absolutely no reason why we shouldn't be able to create the revenues that support the programs, that give people some sense of dignity in what is the wealthiest place, you know, the wealthiest country in the world. You mentioned this idea of it's sort of a runaway train.
You wouldn't short the stock right now.
God, no.
What about investors who haven't gotten in yet? Because I could imagine that there are a lot of investors who might feel that they're showing up too late to the party, that the valuation's too
high at this point. But at the same time, it might be pretty naive to not show up at all.
So if you aren't in NVIDIA,
how would you be thinking about this right now?
Well, one, what we tell people, invest in index funds,
because if you're in an index fund,
you're kind of getting 8% of your money,
whatever it is, probably going to NVIDIA
because NVIDIA is now such a big part of the market.
Yeah, it's the third highest weighting in the S&P 500 now, by the way.
So when the earnings went up, this pushed the S&P to a new record, pushed the NASDAQ up 2%.
It even pushed the Nikkei, which is the Japanese stock market index, to an all-time high.
So yeah, it's part of the haystack.
But if I were trying to play this, I would be thinking, all right, what are the kind of dumb
mundane companies that might really benefit? What are the picks and shovels? Who's going to get the
crumbs here? This is now the biggest cookie in the world. Where are the crumbs going to fall?
Well, it's funny that you mentioned the picks and shovels because NVIDIA is the pick and the
shovel here. It's that. So yeah, it's a great question. How much
more downstream can you get? I mean, there's TSMC, there's AMD, there's Intel, but also all
of their valuations are going crazy. Maybe you could go look at the startup market, but I'm sure
their valuations are going crazy too. So yeah, it's an interesting question. Where has the market not found value in this space,
which everyone is paying attention to? I don't have an answer for it yet.
Let's take a look at the week ahead. We'll see earnings from Lowe's, Salesforce,
Baidu, and Paramount. And we'll also see the personal consumption expenditures index for
January.
Do you have any predictions for us? My prediction is what we talked about. I think Capital One
and Discover gets blocked unless Trump gets elected, and I don't even like to
think that. But I think the Elizabeth Warren crowd sees red meat in this and is going to
go after it. And people hate banks. Somebody or several
politicians are going to scare them that their fees are about to go up. So I don't think this
murder goes through. This episode was produced by Claire Miller and engineered by Benjamin Spencer.
Our executive producers are Jason Stavis and Catherine Dillon. Mia Silverio is our research
lead and Drew Burrows is our technical director.
Thank you for listening to Prof G Markets from the Vox Media Podcast Network.
Join us on Wednesday for office hours.
And we'll be back with a fresh take on markets every Monday. You held me
In kind
Reunion
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