GOSSIP PROCESS
Diffusion centrality considers diffusion from the Sender’s perspective - in this case, Dan Niles ahead of NVDA earnings and his post on X yesterday.
I expect a large beat & raise when $NVDA results are released on 5/22 given more supply available from $TSM. Given the stock is currently trading 15% below its 5 year average forward PE but expectations are EXTREMELY high, I would expect a small positive reaction from the stock.
AI landscape: If I compare the surge in spending on AI today to that of the internet in its early days:
1) From the launch of ChatGPT in late 2022 through Q1 of 2024 it has been roughly 5 quarters. Nvidia, the enabler of Generative AI, is expected to see its revenues increase over 4x from ~$6B (Oct qtr of 2022) to an estimated $25B for their soon to be reported Q1 (April qtr of 2024).
2) NetScape Navigator, the first mass internet web browser, was launched in December of 1994 and through Q1 of 1996 would be an equivalent 5 quarters. During this time, Cisco, the leading enabler of the internet infrastructure buildout, saw its revenues increase from $434M (Oct qtr of 1994) to $1,087M (April qtr of 1996) up 2.5x.
3) Cisco’s revenues peaked at up ~16x by the January of 2001 qtr at $6.7B compared to late 1994 and the stock increased 4000% to become the most valuable company in the world. Nvidia by comparison since the end of 2022 has seen revenues increase over 4x and their stock 533% to become the third most valuable company in the world.
4) From a valuation perspective, NVDA’s forward PE is in fact 15% below its average for the past 5 years. NVDA trades at ~35x forward twelve months PE for ~100% revenue growth in CY24. Cisco traded at a forward12 month peak PE of over 135x during the Tech Bubble for nearly 60% revenue growth so this is nowhere near a bubble for NVDA’s stock.
5) I believe that customers have been double and tripling ordering NVDA chips since the start of the AI boom but are unwilling to cancel orders as they await shipments of Nvidia’s new Blackwell chip in late 2024. While investors may anticipate an air pocket in demand before the Blackwell launch, I would expect a period of digestion in early 2025 once customers have received their initial Blackwell orders.
6) I expect increasing declines of 25-35% going forward for NVDA’s stock now that lead-times have come down from roughly one year to 3 months for their chips. As an analogy, Cisco’s stock saw declines of 26% in late 1995, 38% in 1997 and 34% in 1998 on its way to increasing ~4000% to its peak in 2000 from the end of 1994. I believe investors rightly will become more worried with Nvidia, much like they did with Cisco, if/when excess orders will get cancelled or spending will slow down now that supply is catching up with demand.
7) The spending on AI is being driven by some of the most valuable and cash flow positive companies in the world today such as $MSFT $GOOGL $AMZN $META. This compares favorably to much of the spending during the internet buildout which was more debt fueled with a mentality of build it and they will come and a focus on “eyeballs” and not profits to some extent.
In summary: I believe the AI infrastructure buildout could be as powerful for NVDA as it was during the internet infrastructure buildout for Cisco when revs increased ~16x over 5+ years and the stock rose ~4000% but prepare for larger bumps and bruises along the way. I expect to see multiple 25-35%+ drawdowns over the next 3-4 years while Nvidia’s stock ultimately goes up 3-4x from current levels along with revenues.
We can also add the target raises across the board yesterday from a few different IB’s which raised their target price on the stock as further Sender Messaging:
Barclays
Susquehanna
Baird
Stifel
Rosenblatt
And lastly, the interview on Bloomberg with NVDA, Dell and Service Now where Hwang stated that AI will force each nation to protect the sovereignty of their data. It was a fascinating discussion in which Dell and Hwang stated their beliefs that Data is a Natural Resource, just like Copper and Lithium.
Huang further stated that no country can afford to outsource their intelligence on first principle. And that the resource must be harnessed and transferred to AI.
Ok. So, the senders have sent the message. I received a point by point concept around the investment from a famous fund manager, a group of sell-side copy analysts that raised their target and then a direct message from the leather jacket wearing Hwang himself.
Now, let’s take a look at the Receiver of the message.
RECEIVING THE MESSAGE
Over time, each individual hears information that originates from different sources in the network, and in turn randomly pass that information on. The society discusses each of these pieces of information for T periods. The key point is that there are many such topics of conversation, originating from all of the different individuals in the society, with each topic being passed along for T periods.
In our case, Society is defined as those with an interest, investment, position or trading idea in NVDA.
The T period, in this specific case will end after the earnings are digested and traded in the market the following session.
So, think about it like this: Niles broadcasts that on the Event day (T) for NVDA that they will Beat and Raise Guidance.
But he also says that he believes expectations are so high that it will ultimately lead to just a small price increase in the stock.
We have 2 pieces of info from the Messenger and as such, the Receiver files it away.
KEY PLAYERS
Centrality to Gossip.
In other words, the more that the information is “passed on” the more Central that provider of information becomes. Think about it like this, I watch a video from Bloomberg about NVDA and I pass it on (gossip) because I thought it was valuable. The more often that video gets referenced and sent to others, the more Central it becomes. And in this case, it is not Bloomberg that is the Sender, rather it is Jensen Hwang himself.
And so, Jensen becomes the key Central figure in the story of NVDA. Just like Elon and Bezos and Gates and Buffett.
Accordingly, we end up with a bunch of Senders and each of those need to be categorized and ranked by their respective knowledge, following and a host of other inputs, by the Receivers.
Right? So, I am a receiver, and I am choosing to rank between the 3 options above (using the 5 IB price targets as 1 unit) in order of which is the most important to the Society.
For me, I would use Hwang as 1, Niles as 2 and the IB’s as 3.
This ranking system is then done throughout each Receiver across the entire Society. Some may have Niles as 1 and Hwang as 3 and so on and so on. Eventually, though, Society ranks and sorts these 3 Messages and that provides “weight” for the upcoming event.
In other words, if Niles is 1st ahead of earnings, then his idea that the stock will beat and raise but only rise marginally will be the concept that the Message Receivers trade off.
But what if Niles is wrong? What if NVDA does not beat and does not guide higher?
Well, then the Receivers will angrily punt their respective positions in the stock and NVDA will go down sharply.
And of course, you can build on the potential outcomes yourself from this very basic outline.
PUTTING IT TOGETHER
I mean, this is trading. You have an absolute ton of data, rumors, positions, key players (the Ax in the old days in a stock) and the whole idea of the outline above is trying to create a structure that ranks and sorts the information produced by the Senders into something that is actionable.
That’s it.
And it doesn’t matter if you’re examining charts by Peter Brandt, or opinion tweets by Elon or Ackman. It’s all the same. The sender is the Central Node, the Diffuser, and us as the receivers need to sort, rank and determine just what level the message actually is.
And if we do it well, it will help us profit.
And if we do it poorly, we will lose trading capital.
Keep an eye on it.
‘It’s no use talking about it,’ Alice said, looking up at the house and pretending it was arguing with her. ‘I’m not going in again yet. I know I should have to get through the Looking-glass again – back into the old room – and there’d be an end of all my adventures!’ So, resolutely turning her back upon the house, she set out once more down the path, determined to keep straight on till she got to the hill.”
-Lewis Carroll “Alice in Wonderland”
I thought about this masterwork when reading the latest piece from Marko yesterday. He seems the last man standing on the Risk/Bear camp. He seems determined not to go through the looking glass and join the fun his brethren are having like Tom Lee and Ed Yardeni.
MARKO
“A negative stance on equities has hurt the performance of our multi-asset portfolio over the past year, though this has been in part compensated by an OW in commodities and high cash and fixed income yields. However, with very high equity valuations (as well as tight credit spreads and low levels of volatility), we do not see equities as attractive investments at the moment and we don’t see a reason to change our stance.
Rates are restrictive and likely to stay so for longer, inflation readings have been higher than expected (on average), investor positioning and valuations are high, lower cohorts of consumers are showing stress, and geopolitical uncertainty is at the highest level in decades.
We dont think that narrow themes like AI chips can compensate for all of those traditional market challenges that historically worked against the cycle. We thus maintain a defensive tilt in our model portfolio, with an UW in equities and credit vs. OW in commodities and cash.
This month, we neutralize our previous US vs Euro credit OW to reduce the implied long duration exposure from this cross-market trade, given headwinds from QT and the current positive growth impulse in the Euro area vs the US.
In equities, we continue to favor Japanese and Chinese equities over the US; the former are boosted by inflation and BoJ policy normalization, while Chinese equities are supported by additional housing policy relaxation measures, investor UWs and cheap valuations.”
And there you have it.
I mean, it is interesting. He admits that his thesis has not worked to this point but that the current conditions of the market do not warrant a change. This is very different than Mike Wilson’s mea culpa the other day. In that note Wilson stated that the change in conditions did warrant a change in his thesis.
The other piece to the note is his last paragraph in which he favors Japan and China over the US. I, as you know, am long and deeply in with the Japanese long side of the equation, but I have my China exposure expiring in a few weeks at Option Ex for June. Maybe, just maybe Marko is onto something here with China. It will demand more work and clearly the Sender has not been at the top of his game over the past 12 months…but it is worthy of Keeping an Eye on It.
SMID’S
Marko and his team also had this nugget, which is a very strong stance for sell-side copy on the Small and Mid Caps.
SMid cap marketing feedback across Asia and Europe suggests consensus is acknowledging todays risks but not positioned for them. Many have expectations of an accelera tion in growth and upside to equities, with falling inflation and interest rates…despite this hiking cycle having been the biggest in the West in at least half a century, on the most lev eraged balance sheet (gov+corp+consumer), while facing the weakest real GDP growth, and all with equity valuations offering no rerating upside. We are therefore sticking to our views with renewed conviction, staying cautious on SMid and believing that equities will not beat the return of the US 20 Yr Gov bond from here to the next recession.
That is a strong statement. Equities will not beat the return of the 20yr (TLT) from today to the next recession.
Keep an eye on it.
DAILY NOTES
Seeing a fair amount of Volatility in Silver - back and forth 2% in Asia/European action. Expect this to be the new normal.
Copper squeezing higher, up another 1%.
RVX (Russell 2k Vol) at its lowest reading since Covid.
On June 3rd we will get a rare solar situation with the Parade of Planets. Six planets will align in a straight line and be visible just before sunrise in the Northern Hemisphere.
Before Covid, a Medium Fry at McDonalds was $1.79…currently it is trading at $4.19 a 134% increase.
New study shows that Paper Straws actually contain Forever Chemicals and might be worse than Plastic Straws.
The Fed does respond to political pressure…a new study.
Fed Governor Waller strikes back against El-Erian and the criticism that the FED is too data dependent.
Waller addresses the critique that the Fed is "overly data dependent" This "doesn't make sense to me" given how little the SEP has changed between over the last 12 months Terminal rate projection was consistently around 5.1%-5.6% Q4 2024 rate has been around 4.7%, +/- 0.4 pp.
"What do I mean by good data? What grade do I need to give future inflation reports? I will keep that to myself for now but let’s say that I look forward to the day when I don’t have to go out two or three decimal places in the monthly inflation data to find the good news."
Don’t look now, but Bitcoin closed above $71k yesterday.
Russian Wheat harvest getting smoked as cold weather continues to hurt. This, coupled with Midwest weather put a sharp bid into the US Wheat complex yesterday. The KC Wheat July-Dec ‘24 spread continues to hold around -35c so all is good there.
Trade Em Well Today