In the Chips – Fat Tail Daily

‘Ooh-wah, ooh-wah, ooh-wah
‘Ooh-wah, ooh-wah, ooh-wah
‘Why do fools fall in love?

‘Why do birds sing so gay
‘And lovers await the break of day?
‘Why do they fall in love?
‘Why does the rain fall from up above?
‘Why do fools fall in love?
‘Why do they fall in love?’

Frankie Lyman and the Teenagers

According to the news reports, Wall Street’s latest Icarus…the company that flew higher, faster than any enterprise in history…may have gotten too close to the sun. On Tuesday, it lost altitude.

This story appeared yesterday morning. Business Insider:

‘Nvidia just recorded the biggest single-day wipeout by a US company’

CNBC filled in the details:

‘Nvidia shares fell 2% in premarket trading on Wednesday after Bloomberg reported that the company received a subpoena from the Department of Justice as part of an antitrust investigation. The slide comes after Nvidia dropped nearly 10% during regular trading, wiping $279 billion off its market cap.’

Ooh-wah!

What is superficially amazing about this is that Nvidia, the company, is still doing spectacularly well. Revenues are up 122% over last year…and still soaring. Net income is hitting new high after new high — up 168% over Q2 of last year.

But once again, we see that nature imposes her limits. Woe to the poor human who ignores them.

Why can’t a company be worth $3.3 trillion, still trade at 60 times earnings… and go on to glory?

For that matter, what’s wrong with a stock market that is worth 200% of GDP? And why should a nation stop at one-and-a-half times as much debt as GDP? Why not two times as much…or 10 times as much?

Why do fools still fall in love… and men marry women, typically… rather than ostriches or rubber tires?

Dear, dear reader… we are so happy you’ve asked. We’ve been mulling these questions for months and are pleased to be able to answer them.

As a stock price rises, so do expectations. The more remarkable the stock price, the more remarkable things the company must do. Eventually, feverish investors expect things that no company could ever do.

Nvidia led the industry in making computer chips suited to AI applications. Tech geniuses think AI will be a big thing and have been pouring billions into the development of new, AI enhanced products and services. Meta’s Zuckerberg, for example, said he would ‘rather risk building capacity before it is needed, rather than too late’.

Nvidia made the sales… and made history. But there was no way it could ever sell enough chips to justify a $3 trillion market valuation.

The problem for Nvidia was a matter of time. There was no guarantee that AI products would pay off. Who will buy them? Will they be more like luxury brands… with high margins? Or commodities and supermarkets — with stiff price competition that limits profits?

We wait to find out. But in the meantime, other manufacturers, eyeing Nvidia’s fat margins, develop their own AI chips. Already, the warning lights are flashing a faint signal. Nvidia’s net profit margin is falling… ever-so-slightly, but tellingly.

Tech cycles tend to move quickly. So, a company such as Nvidia, now ‘in the chips’ in more ways than one, has to invest heavily in staying ahead of the tech curve. But this means it can’t pay out its earnings to shareholders. When, then, do owners ever get paid? When does a tech company such as Nvidia develop a comfortable, steady business… with a ‘moat’ to protect itself from competition… allowing it to pay substantial dividends, over time, to its shareholders?

Maybe never.

But wait… we’re not just talking about Nvidia. We’re talking about why rain comes falling down from the sky…and not up from the ground. We’re talking about the ooh-wah-wah…why trees don’t grow to the sky…nature’s limits…nature’s rules…and why fools fall in love.

More concretely, we’re talking about why the stock market can never get too far ahead of the real economy…and why the Buffett Indicator still works.

Stay tuned.

Regards,

Bill Bonner,
For Fat Tail Daily

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.