Nvidia Has Lost $1.5 Trillion — Is The Worst Still To Come?

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Treasury yields rose on bets that the Fed will raise interest rates in December when couchally the odds of a rate hike hit 86%. The dollar gained, and finally, Nvidia shares dropped another 5%, as the fallout from Jensen Huang's affair continued. The Jensen Huang scandal has sent Nvidia stock plummeting for a second day in a row. New reports emerged yesterday alleging Nvidia purposefully intervened in an investigation into mega-speed international, the company run by Alice Huang. Ms Huang is the woman with whom Jensen Huang was having an affair. The stock is now down more than 10% since news of this scandal broke, racing nearly half a trillion dollars in market cap. It is also off more than 30% from its record high in early October. More than one and a half trillion dollars in market value has been erased in less than five weeks. So here to break down what is happening to Nvidia, what it means for the rest of the chip market. We are speaking with Gil Luria, head of technology research at DA Davidson. Gil, this has just been a fascinating few days. I mean, I don't think anyone would have expected that the thing that would bring Nvidia to its knees is basically an affair, a scandal between Jensen Huang and an alleged Chinese spy. I want to get your views on the stock and where it's trading at this point. But let's just start with your initial reactions. What do you make of everything that is unfolded this week? Well, it's very disappointing to say the least. And I would argue that just this story has cost Nvidia a trillion dollars just a story because all the other chip stocks were up 10%. And so if Nvidia is down 10% when all that means then video is really down to 1%, which is a trillion dollars. That's a very costly mistake. The risks here are that the investigation does find wrong doing that Nvidia knowingly sold chips to China that it shouldn't have, that Nvidia's knowingly sold chips to compute providers they knew would provide access to Chinese companies. That's the big risk because that would limit Nvidia's business going forward. Nvidia still has a healthy Asia business outside of China. And if it turns out that a lot of that Asia business or at least some of that Asia business was just funneling to China, that would be an actual risk to the numbers. Beyond that, if the investigation concludes that there was more unethical behavior from Mr. Wang than already disclosed, he will likely have to step down. And while the Nvidia can survive and still succeed without Jensen Wang and the AI ecosystem can survive and succeed without Jensen Wang, let's not forget the Jensen Wang is a big reason we have this AI ecosystem. He was delivering, they were using GPUs for AI in 2006. He delivered the first GPUs to Elon Musk and Sam all men at OpenAI at the time in 2016. We wouldn't have what we have today if it wasn't everything that Jensen Wang has done since then to build the CCO system. Doesn't mean it can't succeed without him. But it would be a very disruptive move for Nvidia and the ecosystem if he had to step down. Is it possible to put numbers on the risk at this point? Because that's kind of the investor's job right now. I mean, on the one hand, you've got the risk that they knew what was going on and that they knew that they were smuggling chips to China if that is indeed what was going on. And so you might have maybe some changes to export policy from the government. It might mean a risk to their Asia business. But I think one of the harder things to sort of ascertain how important it is is how essential Jensen Wang is to Nvidia. And I feel like investors are divided on this question. I mean, how much of a problem is it for Jensen Wang to be out of CCO? And is it possible to assess in dollar terms what that means for the valuation of the company? I know I sort of throw in a lot of questions at you there, but can you tackle them? Well, that's what we have to do now, unfortunately. So we have to think about at least the portion of the Asia sales if they were funneled to China. Let's say order of magnitude up to 20% of Nvidia's revenue. Backward looking may have been funneled to China. Now, that doesn't mean that we'd have to reduce our numbers by 20% because the demand environment right now is so healthy that you could probably still sell all the chips that Nvidia can make next year without selling anything into Asia. And just to clarify your comments that I give just for our listeners, the allegation is that Jensen Wang that Nvidia was selling their chips to mega speed international, which is this Singaporean essentially shell company and that those chips were being smuggled into China. And you're suggesting that perhaps it's larger than this. Perhaps there are other companies outside of China but in Asia where a similar thing was going on. That is what you're suggesting might be a risk, right? Correct. That is possible. And in fact, there have been arrests and allegations around people smuggling GPUs into China that are not associated with mega speed. So it wouldn't be completely out of left field. And in fact, the demand from Asia was probably healthier than you would think based on the fact that all the AI is the most of the AI, vast majority of the AI is happening in the US and in China and not in many other regions. So this has been a concern for investors that's been dormant. But now this story raises that to the surface. And then on, again, much harder to quantify the impact on Nvidia of Jensen Wang leaving. Again, there wouldn't be no Nvidia, certainly not this big without Jensen Wang. And again, I would argue we wouldn't have this enormous and growing AI ecosystem without Jensen Wang. But as we sit here today, there are stewards to this industry that are well beyond Jensen Wang. I would include Andy Jassi and Satya Nadella and Sundar Pachai. And to some extent, Sam Aldman, Dario Nade, Hattan, Lisa Sue. There are enough stewards that can carry the AI ecosystem forward. There's no succession at Nvidia. So that's a problem they have to solve immediately. They have to create a succession plan immediately because even if the investigation concludes that there was no further harm done by Mr. Wang and that he can stay and CEO, even if there's just a small chance that they may have to replace them. They should start the succession program now internally and externally because this is a fast moving industry and it is the largest still a large company in the world. They would need to move fast if they indeed need to take sanctions against Mr. Wang. So just looking at the stock, it has gotten destroyed on this news. As I said, down more than 30% from its highs in October. It's down around 15% on the year. I'm just looking at the multiples here on a forward PE basis trading at a multiple event. of 12 right now. So the multiples fallen more than 50% over the past year on a trailing PE basis trading at 22 times earnings. So you've got Nvidia here which is trading at a lower multiple than companies like Walmart, Costco, Procter and Gamble, Coca-Cola. These are names that you would never expect to be trading at a premium to Nvidia and yet that is what is happening right now which really has to beg the question of is this a buying opportunity? Is there a moment here where investors should say actually let's run into this fire and let's buy this up? What do you think? There's a buying opportunity in 70s but Nvidia is now one of the highest risk summons and the risk reward now is quite the risk is high, the reward is high, there are other summons where the risk is lower and the reward is also high. Broadcom, AMD, Micron. These are also stocks trading at a very big premium to the market in spite of the fact that they're going to grow 50 to 100% next year in a healthy market and therefore have a very low multiple if you believe that the data center bill that will continue past that delays and all and they don't have this to deal with. Yes, maybe there will be further restrictions on sale to China but they're not going to have to deal with this kind of episode or it's pretty unlikely that they'll have to deal with this kind of episode and so the risk there is much lower, the reward there's still high and then just has to go down the priority list based on the fact that you have this much uncertainty right now. Is it your expectation that one of the consequences of this would be that those chip makers take out more market share now and that we'll see a lot of customers basically saying, okay, I don't want to be a part of this. I'm going to shift over and find a new supplier. I wouldn't necessarily include that in the risks apart from the fact that in China, they're going to buy less chips. In China, it's going to get harder to get your hands on GPUs but in the rest of the world, the customers trust Jensen Wang even within these events, there's a lot of trust that's been developed over the last few years. Again, he's orchestrated this whole ecosystem. There's been a lot of cooperation and so there's some level of stickiness in Jensen Wang. Now, whoever the predecessors will have to maintain those relationships and maintain the product roadmap because it's a very aggressive product roadmap. In video, the secret sauce is their products are always better than everybody else's. Everybody else can just argue that their product is cheaper and video products has continuously been better and continues to maintain a leap. That would have to be something the next leader to the extent that Mr. Wang has to be replaced. The next leader would have to maintain that. But short of that, I wouldn't expect there are big customers to shift based on this story or based on the developments in China. Switching topics slightly, core weave reported earnings, the stock popped as much as 8% in after I was trading though it did come back down after. Core weave has been one of those companies that you have been flagging for a long time now as one of the naughtier players in AI. It seems that investors have started to recognize that. Obviously, we've seen that the stock has gotten hammered. The spreads on its credit default swaps have exploded. The yields have exploded as well on the bonds. But this looked like maybe a moment where investors say maybe there's hope for core weave. What did you make of the earnings? What does it tell us about the rest of the AI? So the market for selling compute is absolutely the best it could be. There's so much shortage of compute that the demand is so high that this is the ideal environment for core weave. And yet, if you take their adjusted operating income times four divided by net TV, which will give you a return metric, they return 3% on their investment. Their cost and capital, if you take their interest expense multiplied by four divided by the debt, was more than 9%. This is a negative carry trade, even in the best market for compute and value. If they can't get a sufficient return right now, I don't know when they ever will. If they can't raise capital, which is what they said, we can't go to the debt markets anymore for unsecured debt. They basically just said that on the call, they have to raise equity now. They have to ask for their customers to prepay up to the full level of capex. And even in this environment, that tells you that this, when things get even a little tougher, they're not going to make it. It's cool. We've just one of those stocks that you just, you have to stay away from at this point. I mean, the risk is too high. As you point out, like they have to go out and raise more money, and it seems as though in this capital environment where investors are very, very anxious, certainly more anxious than they've been in the past several years, going out and raising tens of billions of dollars, hundreds of billions of dollars, it's just going to be a lot harder to do. Oh, absolutely. And to tie the two stories together, part of what core we've shareholders felt was downside protection was this notion that NVIDIA would bail them out. NVIDIA has already bailed them out three or four times. And there was this notion that they'll just keep bailing them out. NVIDIA didn't bail them out. Jensen Wong bailed them out. If he's not there, that supposed input goes away. So yes, absolutely stay away from core we've. Galeria is head of technology research at DA Davidson. Gil always appreciate your time. Thank you so much. After the break, look at the inflation report. And if you want a deeper look at the backlash surrounding data centers and where things stand after the midterms, be sure to check out extra credit our biweekly newsletter from the Profty Markets research team. Dan Shalon just wrote a great piece on the topic. Go to profgmedia.com to read and subscribe. Are you tired of hearing about business, tech and finance from the bros? We are the Tiger Sisters, a top business podcast with the Vox Media Podcast Network. Tiger Sisters releases every Monday, and we decode money, power and love. And who doesn't love all those things? We are the Internet's Wall Street and Silicon Valley big sisters. Tune in every Monday for late night sister talk meets boardroom strategy. 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War with Iran has driven much of the recent inflation, pushing energy prices higher. Pressure eased in October, energy prices rose 0.7% after jumping 5.2% the month before. This time inflation was more broad-based. Food prices, medical care and housing costs all climbed. Stocks fell on the news and the two-year treasury yield, which tracks expectations for Fed policy. Most closely jumped 20 basis points to 4.78%. Joining us to discuss this inflation report and the economy at large was speaking with Justin Wolffers, professor of public policy and economics at the University of Michigan and the founder of Platypus Economics. Justin, great to see you. Let's start with this inflation report. You wrote on X, you said quote, "One hopes inflation starts returning to normal, but that is a hope right now, not a reality. What do you make of this report?" I tend to be congenitally optimistic and often end up, I'm always trying to be honest, but I fail, but I often end up dovish and right now I'm finding myself on the whole ocean of things. There is a story and it's a very, very defensible, I'm going to give you on the one hand, on the other hand, because that's the honest way. doing this. Look, there is a story that inflation really should be floating back to earth. When we're outside of a time of supply shocks and tariffs and energy shocks and being above target for six years, we tend to look number one at wages for what's going on with inflation. And then we might say, well, wait, which by the way, 3.1 percent quite low. So businesses costs aren't rising very fast. The second factor we'd look to would be productivity. And it's very, very hard to get a reading on productivity in real time. I mean, they publish numbers just them more noise than news. But if anything, you would be optimistic. And so based on sort of the underlying set of cost pressures out there, you would expect inflation to be drifting, not just to two of it, potentially below it. We're not doing that. So what I just gave you, by the way, is the I'm not so worried view of the world, the underlying cost pressures seem pretty contained. We know that there was an energy shock. We know we have to wait for it to work its way through the system. I think there's a, I do want to say it's a totally respectable argument. I'm just finding it harder to believe the alternative argument is that inflation has somehow taken hold that and one of the big puzzles we talk about, academic economists talk about is inflation is highly persistent. Why is it so persistent? Well, right now, I don't have the why, but I do have the crocky. It feels like it. And so inflation had been high. It looks like inflation's continuing to be high. This month, there's not particularly afflicted by an oil price thing. I was sort of hoping for better news. To what extent is this a story of tariffs and Iran? Because those two things seem to be really the major drivers of the inflation that we've seen over the past year or so. And that seems to be a particularly relevant question, because now, after these midterm elections, where you saw this blue tsunami, this blue tsunami, there is an expectation among some investors that maybe those two major policy decisions that were enacted by Trump will potentially be reversed. I don't know if we should actually be confident in that notion. But it's something that investors seem to be pricing in a little bit. Certainly when we look at the price of oil, which has come down quite precipitously since the midterm elections. So to what extent is that playing a role in the inflation story and is there any reason to believe that those two things will disappear and that if they do, that we'll be back on the right track? Let me take the easy part of the question first. The easy part is some folks are optimistic that there's now a blue Congress, rather than a red Congress, and that will somehow bring the supply shocks around and tariffs under control. I am markedly less optimistic. The President put those in place despite a red Congress, there was also against them. None of this went through the House, none of it went through the Senate, none of it would have passed. Much of it was not legal, and the President's strategy was, I'm going to do it, and I know that the Supreme Court acts on long and variable lags. The Blake certainly got two years left. I would expect more of the same, so I don't expect those shocks to be undone anytime soon. At least not on the sort of directs, Democrats have the Congress pathway. I think the more indirect pathway is either that this rubbing makes it so that Congress is happier to create more space between it and the President, and plausibly you get to a veto override, but she takes someone who's watched too many episodes of the West Wing to believe that, but I've watched enough. I believe we can do anything in America. We just have to put our hearts and minds to it. In the other pathway that I see actually runs through the viewers and listeners, which is, folks have fed up with it, and the President is, for reasons that are not fully articulated responsive to political pressures. We have seen examples of it where he didn't like the price of beef, so he reduced tariffs on beef. If he's taking a rubbing and he doesn't like it, maybe there is a pathway back, but I wouldn't be penciling in a reversal of either of those supply shocks anytime soon. Did this change your outlook on the economy in any sense? I mean, I can't tell what actually changes, now that we have a Democratic House and a Democratic Senate, because it seems as though my view aligns with yours, which is, I think this guy's just probably going to double down on his decisions. He does not like to admit defeat. He's said that he's going to veto everything, so one of the things that I can't quite pulse out is, does this actually change much? Does this change the trajectory of our economy? What do you think? So, I largely agree with you, but I actually want to highlight the different ways in which we agree, because I think it gives the audience an insight if there are two ways of looking at the world, and they both end up in the same place, that's kind of interesting. What I found interesting in the way you made the case is you were talking about the man, and you're understanding his desires, to be a little glib you were playing the role of psychologists, which we have to do, we do have to look inside the minds of Donald Trump and Kevin Washington, hopefully nobody else, and you said based on my understanding of their psychology, this is what I anticipate, I'm not saying that's wrong, I'm just saying I'm unqualified, I try not to do that. I also think like everyone's got that view, and there's no reason to think my understanding of human psychology is better than anyone else's, so I'm not knocking your approach, I'm just saying I'm not good at it, that's why I don't do it. The alternative is to talk in terms of the structures institutions and incentives within which they operate, and that's what I was trying to do. And the point is they lead us to the same place, so I was making the case that the Trump agenda has gone ahead without Congress, so if you change the identities of the people who are in the seats that were irrelevant to the process, all you're doing is changing the name cards at an institution that was irrelevant. That doesn't feel like that's going to change things. The other incentive would be re-election, well this guy's been term limited, so the incentive and constraints upon him aren't very different today than what they were before the election. And so that's a little bit more, you know, that you're playing the role of economists, meets psychologists, don't play in the role of economists, meets political scientists. Both the useful perspectives, what was interesting is both led us to the same perspective. Something that's also been kind of interesting is Kevin Hasse, the director of the White House National Economic Council, who acknowledged that this inflation report was disappointing, and it seems as though the strategy, especially from Kevin Hasse, after a lot of these pretty brutal inflation reports where prices continue to outstrip wage growth. Usually he just sort of downplays and denies, and in this case he actually recognized that this isn't good. I'm wondering if you think that there's any meaning that we should be drawing from that. Does that perhaps signal some difference in the way that the administration is going to approach inflation in the economy? I didn't see the press conference. Was he smiling while he said it? I bet he was smiling. He loves to smile. Probably a little bit. Yeah. Yeah. I mean, you have a great smile too, Ed, but your neck Kevin Hasse, first of all, actually let me be realistic. You just said inflation is uncomfortably high. It's 4%, and a White House spokesperson acknowledged that reality. This was news. Facts true. News at 6. Wow. We say, look, the dad and me, which says you always encourage good news, says, "Oh, that's great. Good work." I love the turn to honesty, and I just want to applaud it, and just think of the immense empathy it took for him to acknowledge the prices were higher. Whoever Kevin Hasse's therapist is, you're doing great work. So, look, you're sitting the bar so low it hurts. That's totally reasonable to do, because it is a break. Second, let me now just be cynical. If I had Kevin Hasse's role, and I thought what I wanted to do was shape public opinion, which is a different job than telling the truth, and watching his behavior, I believe he understands his job as being shape public opinion, and telling the truth is an important. If you'd been basically lying and grinning for 24 months in a row, and you've got another 24 months to go, then what you might want to do is try to signal, hey guys, look at me, I sometimes tell the truth, in order to keep some attention on you, and then what you want to do is what is the least costly time to tell the truth. If you had asked me at the beginning of the presidential term, what is the least expensive time to tell the truth? They would have said the day after the midterms. So, I reckon you might be honest for two to three months, get some credibility in the bank, and then spend it down like crazy, as we enter the next part of the cycle. Look, a different answer, probably a more serious one, is inflation doesn't, I don't care about Kevin Hasse's views, inflation doesn't care about what Kevin has says the reality is inflation is uncomfortably high, it has momentum, has it doesn't know anything you and I don't know. And you know, if folks are feeling that this is a difficult moment right now, it is final question. You said that you were hawkish. It's likely that we're going to see another rate hikes soon. I assume that we're going to see in your view several rate hikes coming at this point. It's hard to escape that conclusion. So you've got unemployment really quite, I just want to be really upfront and acknowledge the reality. Unemployment is pleasingly, thrillingly, beautifully, delightfully low and it fills my heart with joy. I'm not saying it's easy for everyone, but it is easier than when unemployment is higher. And then you've got inflation, which appears to be keeping on keeping on beyond the initial impulse. And you've got folks at the Fed saying things like they still believe that we're not yet at the neutral rate. So in some sense, they believe either we've got our foot slightly on the accelerator or slightly off it. And they're not yet sure they've even tapped to the break. And I think the argument for tapping the brakes seems pretty strong, which means that yeah, we have a couple ahead of me ahead of us. I just want to come back. I want to just read you one thing that I thought was clever. I mean, it's not, yeah, it is. It comes to your first question, which is, you know, what's going on underneath this inflation report? There's all this shock and that shock. We discount this and we discount that. Mike Konskull is a very smart guy. He wrote, "Fooned and energy came in heart." But if you exclude that, or goods came in heart, if you exclude that, shelter came in heart. If you exclude that, the rest of non-core housing services came in a heart. And if you exclude that, well, there's nothing left. And that's the sort of story you have to tell in order to believe that we're on our way back down right now. And the thing is there is something seductive and possibly even true about those stories. There are a whole lot of one-offs running in very complicated ways. And that's part of why we are, where we are. And the question is, do you think it's, you know, three or four one-offs hitting us all at once, or do you think there's one underlying story? And I've started to move from just waiting for the one-offs to work their way out of the system to starting to believe a little more. Actually, there's just one thing going on and it's called inflation. Justin Wolfers is a professor of public policy and economics in the University of Michigan and the founder of Hotpuss Economics. Justin, we always appreciate your time. Thank you. A pleasure. Anthropic has officially set its IPO price, and the valuation is already a lot lower than it used to be. The company is now targeting a $1.3 trillion valuation. That might sound high, but you have to remember that just a few months ago, the target valuation was $2 trillion. In other words, if Anthropic were a publicly traded company, its stock would have fallen nearly 40 percent. That is a huge drop. Now, some investors are quite surprised by this, but if you've been following this show, then you probably aren't that surprised, because this is exactly the scenario that we predicted a few weeks ago, as I wrote in my newsletter, Anthropic had two options going into this IPO. They would either have to delay going public or they would have to lower the price. Why? Because the AI exuberance that they have gotten accustomed to in the private markets no longer exists in the public markets. How do I know this? Well, we can simply look at other publicly traded AI companies, which have been getting hammered over the past year. AI names like Broadcom, Micron and SK Hynex have seen that multiples get cut in half. Meanwhile, Nvidia, the king of the AI trade, has gotten taken to the cleaners as well. The stock is down 16 percent in the past year, and it's off more than 30 percent from its October highs. And so, several weeks ago, we asked a simple question, what would happen if Anthropic traded like Nvidia? The answer is quite simple. This valuation would go from $2 trillion to $1 trillion. We are not quite there yet at 1.3, but we are certainly getting close. Sentiment is waning, valuations are returning to earth, and as sexy as Anthropic might be, this new IPO price is evidence that the era of AI euphoria is about to come to an end. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss, and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dachelond, Cristina Donahue and Mia Sforvario, and our social producer is Jake McPherson. Thank you for listening to Prof.T. Markets from Prof.T. Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.