February 2024
Watch previous episodes here:
Ep. 73 Brokerage vs. RIA: Is There Really A Difference?
Ep. 72 Highs & Hazards: Market Surges and Banking Risks
Hello, everybody, And thank you for joining us for another episode of THE FINANCIAL COMMUTE. Your favorite place to find out what's going on in the world, how does it affect you and what you can do about it. I'm your host, Chris Galeski, joined by partner and Wealth Advisor, Joe Seetoo. Joe, thanks for joining us.
Chris. I'm excited to be here. Thanks for having me on.
2024 started out to be pretty interesting in the markets.
Absolutely.
Some big headlines out there. The few things to touch on before we get into kind of the biggest news story last week, Discover Card and Capital One had a $35 billion all stock merger. I mean, large mergers like this don't typically happen if they don't see some opportunity for growth or success.
And in a deal like that, obviously these banks might not be worried as much about a recession as maybe those headlines or the fears of higher interest rates preventing a deal like this. What are your thoughts there?
Yeah, I mean, naturally, you know, you're not going to have companies emerging of this magnitude unless they feel there's synergies naturally between the two companies. I mean, also you look back, it was 12 months ago, we're dealing with a banking crisis. Right. And so I think, you know, what's different with these larger firms and banks than you deal with the smaller ones is that, you know, this is an opportunity for them to gain market share, for them to capitalize on the dislocation in interest rates, the fact that consumers need to refinance some of this debt and that they can use their multiple channels of revenue.
Right. To continue to push their brand out there and to capture that market share. So really pretty interesting merger that we're witnessing right now.
Without a doubt. I mean, when I hear stuff like this, I immediately go look at stock prices and, you know, like I know deals like this don't get made overnight. You don't just wake up one day and say, I'm going to go buy, Discover Finance. All right. It's a decision that takes place over several months and quarters. But we were in sort of a banking crisis about 12 months ago.
And so if you just look at the share price of Discover stock, Discover stock was 50% cheaper five months ago, back in October.
Yep.
So it's like why this deal happened today at a stock price, 50% higher than maybe five or six months ago. I don't really have that answer.
Yeah. Timing's everything on those kind of things. And I'm sure they would have liked to have closed the deal back then. But, you know, these big deals take time to get through.
Yep. So today is Monday, February 26th, and it's announced that today Amazon officially becomes a member of the boring Dow Jones Industrials and those top 30 industrial size companies. But wait a minute. Amazon is a technology company, right?
But it's not. It's classified as a consumer discretionary company, which is fascinating as well. But big news that Amazon is joining the top Dow 30, I think that they've been trailing performance of the S&P 500 for quite some time, largely because the S&P 500 is tilted a little bit more towards technology. Just some interesting components is that the S&P 500 is valued by the largest market cap weighted market cap of those companies.
But the Dow Jones is the weighted stock price of those top 30 companies, and that's exposed.
And it was kind of an old school methodology. They came up way up, you know, 120 years ago where they created that index. So certainly the market cap weightings and even other ways that they do benchmarking. I think nowadays is much more germane to how actually to measure performance.
Yeah, definitely. So moving on, obviously the Dow adding Amazon, which you know, with Amazon has Apple and Microsoft and Salesforce is their top technology companies as part of the the Dow 30 something interesting that happened NVIDIA blew out earnings last week. And if you think about NVIDIA here, here's something interesting to note. Nvidia's market cap is higher than all of the companies in the S&P 500 energy sector combined.
Right? So that means the market cap of one company, NVIDIA is larger than all of those energy companies and the total net income for the energy sector is $847 billion versus in video, which if you take their last quarter and annualize it, it's around 48 billion. So not only is it larger than all those companies in the energy sector, but the energy sector produces three times more net income.
Yeah, right. And I mean, certainly it talks to the the fact that the the market seems to think that the growth in AI... Nvidia is going to largely be the beneficiary of that when you just look at what they've done and the results have been pretty astounding right. I mean revenue was 22 billion in the fourth quarter, right?
It was up to 165% on a year over year basis. The bigger thing I think, though, is the fact that their gross margin is in the 77% range. It actually expanded here over the last 12 months. Right. So there are $2 trillion market cap company. They're the third largest in the United States and fourth in the world. And I think, you know, another interesting statistic is that I think they're bigger than all but 11 countries GDP.
So, you know, countries like I mean, these are not small countries, Australia, Russia, South Korea. And so when you point out, yes, it's actually bigger than the U.S., the energy sector, it just speaks to the fact that they've positioned themselves as an 800 lb gorilla with the GPU chips that they're making in the air space.
It's so fascinating. You know, we were listening to a podcast and they were sort of talking a little bit about how Nvidia is just sort of a unicorn, right place, right time making these great GPU units that were needed for gaming, Bitcoin mining, other areas of the technology world. But then all of a sudden you introduce A.I. or generative A.I. and the need to have to have faster computing and to have to update all of your data in storage centers with this faster computing power and NVIDIA being the one that has the golden chip that that that can be used today.
And I'm not saying that you know, what Nvidia does can be replicated by anybody else, but to me it just seems like technology moves so fast that that anything can happen. I mean, we saw something like this happen in the early 2000s with BlackBerry. We'll get to that a little bit, but some more interesting takes on NVIDIA.
Yeah, I mean, I think the point you're bringing up, though, is that they're the excess profits. Right. And we're talking largely about capitalism, right. Where companies. Right. And business owners and entrepreneurs create businesses that need a certain need and it's not a monopoly. Right. And so over time, where you're going to see is and the question becomes, are there going to be other competitors that can come in?
Right. Similar to what happened was like an Oracle or Cisco in the dot com bubble where. Right. The Oracle servers are the go to business at that time and ultimately what you saw was competitors coming in and undercutting them on pricing and turning away market share. What was interesting about that company, right, was that they hit a their all time valuation high in 2000.
It took them 14 years to get back to peak valuation.
Wow. 14 years. I mean, Cisco, you go back to the nineties in the Internet, everybody said Cisco was prepared to kind of take advantage of all of this the way that the Internet is structured, how you get access to it. Cisco is going to be the darling and boy, it's telling a different story 25 years from now.
Yeah. I mean to your point, they're right. I mean, it's $70 a share. It's currently trading at 50. It never got back to its peak valuation. Everyone thought again they were going to be the go to for the Internet at that time. But I think that talks to the point about a great company. It doesn't always translate to a great investment.
Right, Right. And so I think that's a question clients have to ask themselves. You know, at this point, am I really going to pay $800 a share for NVIDIA. I'm not saying they shouldn't.
The price that which you're willing to buy something largely dictates what your return from their forward is. Buying into it today is different than buying into it ten years ago. Fortunately for our clients, because we take such a diversified approach, we have captured on the uptick of NVIDIA, not directly, but it's inside the mutual funds that we use.
But you know the question because this is really a valuation call with NVIDIA selling it, whatever it was, 50 something times earnings or 37 times forward earnings. Yeah, yeah. Like 37 times forward earnings. This is really a question on valuations. And when we're in a momentum driven market in the long run, when you're in a momentum driven market, valuations don't really matter because momentum is driving it.
But in the long run you better believe that valuations and price actually matter.
Well, I think the question becomes too, and it may be for several years because they are in such a unique position that they can meet expectations and exceed them, but that the market I think becomes very unforgiving. If you ever miss right on your expectations, you could still have blowout earnings and blowout revenue. But if for whatever reason the market is expecting, you continue to grow at those levels and you don't miss share prices getting cut and, you know, cut down very dramatically, very quickly.
Right. And, you know, again, with the space of technology and how fast it can change and your competitors, it again reminded me of BlackBerry Research in Motion. Yeah. I mean, you were lying 20 years ago. Just about everybody who had a cell phone had that nice little BlackBerry with a keyboard in that that's their rolling thumb tap like BlackBerry stock today is is trading at around $2.60 a share.
At its peak in 2008 was over $140 a share. And what happened? Well, the introduction of an iPhone and the Android into the mobile phone market stole market share and ended Research in Motion's, you know, a monopoly on technology or mobile phones. It seems to me like this happens time and time again in this space. Yeah. So history doesn't repeat itself, but it does.
It rhymes. Yeah. Well, and again, I think it comes back to where there's excess profits, right? Companies will naturally be attracted in a capital market structure like we have in the United States and in other countries too, to essentially put pressures right in force to erode or to capture that market share away. The question will become, can Nvidia continue to innovate ahead of their competitors?
Right. And to continue to deliver the results their clients? Well, I mean, one of the interesting things that I would point to is the fact that because when you dig into their results, right, their clients are Amazon, Apple, Mazda, Facebook, what's interesting is the revenue that they are recognizing. Nvidia is in terms of what would typically be an expense right from on the balance sheet or the profit and loss statement of those clients is actually capitalized on their balance sheet and depreciated over time.
So if I'm Amazon and I say I need to update my data centers, yeah, and I'm going to go buy a bunch of GPUs from Nvidia and I spend, I don't know, $10 billion to do that. How does that work out?
So what's happening is it's not being recognized as is an expense, i.e. it's not hitting their earnings today. They're taking that 10 billion, they're putting it on their balance sheet as an asset for the GPUs that they bought. And then over the next 4 to 7 years, they're amortizing that. Right. So essentially, let's just easy math, five years, 2 billion per year that is expensed on against their PNL off of the balance sheet.
And it's a much easier way to essentially smooth their earnings, right? Yeah.
So it's an accounting metric.
It's just like how buying back stock improves your price to earnings.
Yeah. Which by the way the $25 billion buyback that NVIDIA has in place right now certainly is isn't hurting their share price as well.
As as excited as I am for companies and the innovation that the U.S. has. You know, I just like to be careful and make sure that we're taking on the right, right amount of risk. You know, just a few things to note. It wasn't long ago Sears was a top ten stock in the U.S. Yeah, AOL was synonymous with Internet access in the 1990s.
Look what happened to them. Yeah. And in 2003, the most popular social media network, starting with the letter F was Friendster.
Friendster.
So just some interesting things. I mean, it's so much fun to see the growth of the markets in technology and innovation here in the U.S. We want to be careful with valuations, future expected returns and how we're protecting capital as well. Yeah, absolutely. Joe, thank you so much for joining us. Please stay tuned for another episode in the coming weeks.
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