Street Analysis

Stock market has turned into a full-fledged casino in a last couple of years is the phenomenon we covered in a previous post. We shall look deeper into the poster children of that in a current post, namely Nvidia (NVDA) and Tesla (TSLA).

As we have indicated earlier, the market valuation has been steadily increasing on the backs of zero interest rate policy (ZIRP) for well over 5 years now at least or even 10 years really, if we consider the fair valuation perspective.  That is in light of a CAPE ratio or Cyclically Adjusted PE Ratio otherwise known as Shiller PE or PE10, which is an inflation adjusted price to earnings (PE) ratio over the last 10 years, not just last one year.

However, year 2022 shall be marked as an inflection point now in a 4 decades long trend of declining interest rates eventually hitting near zero during the COVID time. Now, after having gone thru the inflection point in 2022, the interest rates are on the small yet steady rise and for the right reason. It is to basically correct the excesses of the past. Now, that is a bond market. However, the stock market has not awakened to a new reality yet similar to it’s brethren. Gold has in fact made a violent move upward to reflect the same new reality over the course of last couple years.

The new reality is that the U.S. empire is crumbling in front of our own very eyes and the rude awakening is in the offing. The casualties cannot be overstated once the Armageddon hits us. We do not think that even bond market has fully reflected a new reality yet, it is a good start. We have no idea where actually it will settle, yet, we know that it will NOT be near zero interest rate of a COVID time that many day dreamers still eye for. They are either too ignorant of the history of interest rates or too arrogant to think they can manipulate the interest rates for ever.

In an earlier post, we have briefly touched upon the great invention cycle of a last couple decades starting with 1) personal computer or PC revolution of 1980s 2) Internet in 1990s 3) Wireless or Mobile Phones in early 2000s followed by smart phones in late 2000s 4) Artificial Intelligence (AI) in 2020s. As we all know it very well and bulk of the world fully benefited from it, the world has changed entirely due to these inventions with the basics of life such as electricity and light bulb, telephone (wired), radio, television, and transportation (steam engine, automobile, airplane).

During each of these invention waves, clearly the world alongside inventors goes crazy to make the best out of it. Some succeed wildly whereas others fail miserably to make the world a better place and/or make a buck out it. Such is the time now that the world has gone crazy again – this time in the name of AI.

Ever since the ChatGPT product was unveiled in November of 2022, the world is not the same. There is so much talk that the AI will take all the jobs away and we need a concept such as universal basic income (UBI) guaranteeing an income for everyone. Clearly, the reality lies somewhere in between from the wildly optimistic or unrealistic dream talks or hyperbole and AI not disrupting the world.

Clearly, the disruption is here like any other disruptive technology and it is here to stay until the world adapts to the new technology driven standards. That in fact is the job of any technology – automate things, make things easy and efficient for all and disrupt the labor force as a side effect. In turn, society adapts and enjoys the fruits of its hard labor.

This brings us to the heart of the discussion as to how Nvidia and Tesla became the poster children of a current mania. If we take these two out-of-the mix or roll back the clock to prior to 2022, the meme stock mania of early 2021 (post COVID or just as we were emerging out of it) surrounding GameStop (GME) and AMC Entertainment (AMC) stocks. While most everyone was imprisoned in four walls of his/her home, the retail traders started investing in the market like playing games on their phones and catapulted the market to unprecedented heights. Zoom, the market darling, was selling at 100 times price to sales ratio, which has come back down to earth now.

Had it not been for the AI invention then the market would have lacked any real catalyst to be where it is today! However, enter AI in the game in November of 2022 and voila, now we have a new market dynamic. Since then, it is like a gold rush of 1848-55 in California. Nvidia is in the thick of that gold rush (unlike black gold that is oil) for the power-hungry big techs such as Magnificent 7 also known as Mag 7 as briefly covered in an earlier post. These big tech companies want to maintain their stranglehold on the market and consumer and rushing to buy as many Nvidia chips as they can with their plump profit margins.

As a result, Nvidia sales boomed from just under $27 billion in both calendar years 2021 and 2022 skyrocketed to over $165 billion in last 12 months. Unbelievable feat, no company has ever done it since it is inconceivable in light of any grand success. One can propel the business rocket to increase the sales from millions to billions, though, from such high number of billions to be on track of increasing to almost 10 times run rate, annually $200 to $250 billion within the next year or two (at the current pace of investments) is akin to having only one Warren Buffett in this world. He is called a legend for a reason.

Just as if we ever will see another Warren Buffett in this world remains to be seen, can another company ever achieve a feat of Nvidia remains to be seen. In all likelihood, the answer is no. Even if it were to happen, it takes centuries, not years or even decades for that matter. Just as there is only one Warren Buffett in the investment world, in the religious world, there is only one Jesus, one Buddha, one Muhammad, one Lord Rama and one Lord Krishna. They were there for a reason – they all descended upon this earth to make the world a better place.

Clearly, Nvidia is a pure play of business and there is no comparison with the religion, so anecdote is strictly for comparison of how often such rare events can occur in the history of a mankind.

In fact, the growth rate of Nvidia has started slowing significantly, just as expected with the law of large numbers, as shown in the following graph. Accordingly, the price to sales ratio has started to come back down to earth as well now to around 25 from well over 50 just as it did for Zoom in a meme stock mania during the COVID time.

What this means is that the investors in Nvidia have to do the real math to arrive at a proper valuation so do all the stock market investors, rather participants, since they are not investors anymore. As covered in the earlier posts, these participants are uninformed or rather misinformed, ignorants, speculators or gamblers.

Nvidia may well have a competition in the future and that can only dent the growth and profit margins further. If and when that does hit the market, the market cap of over $4 trillion that Nvidia wields can cut down easily by half, if not much more.

Current market participants have literally hijacked the market from true investors as one can easily and quite frequently see, unfortunately, the mega-moves in the market for certain upside or downside surprises that never existed before. One cannot ever imagine a move of 20% to 30% up or down in a day for large cap companies or certainly not the kind of frequencies we see these days. Given that market psyche, it will not take much for these trigger-happy market participants to punish Nvidia by 20%, 30% or even 50% as well.

Anyways, that is a sad-state of the market these days. Just as America is crumbling in front of our very eyes in the political realm, stock market is crumbling in terms of it’s very foundation and rule of the game. The only rule now is that there are no rules whereas before it operated within certain boundaries and set of rules with rare exceptions.

Enter Tesla and the game gets even worse. Company is selling at over $1 trillion market cap, which is nothing but a hot air with all “pie in the sky” back of the envelope math. It’s automobile business is barely worth one tenth of the market cap that Mr. Market has accorded to Tesla currently. Even the largest automaker in the world, Toyota, commands just one fourth of it. Even if every single car in the world, which it will not be, is made by Tesla, it will not command anywhere near the market cap it currently has. Now, the competition in the electric vehicle (EV) space is heating up big time and the numbers show all over the world including Europe and China aside from United States. That bodes very poorly for Tesla’s automotive business.

That leaves Tesla with the two other pieces for which the investors are day dreaming – Robots and Robotaxis. It is one thing to dream, though, an entirely different to pay for it. Mere concepts or even successful pilots can mean only so much, certainly not an over trillion-dollar market cap without an ounce of a revenue on that front.

Add on that madness, the ‘masala’ of a trillion-dollar incentive package for Elon Musk as a chief executive, it perfectly rounds out the current set and perfect unhinged combination of market, investors (participants) and corporate governance gone rogue, not to mention our political leaders. I have a Brooklyn bridge and Taj Mahal to sell. Anyone would like to buy?

In fact, Elon Musk is a genius of an extraordinary proportion, no doubt, to have achieved two great things for the mankind and deserves a lot of credit for that: 1) Creating a mass market for EV’s and 2) Creating a serious competitor or rather complement to NASA via SpaceX. However, in spite of all that, here is my prognosis: He is going to loose a lot of his wealth, in tune of 50% easily just as all the hot air of Tesla stock goes to bust. In turn, he may well loose his place from the world’s wealthiest person and drop out of top 5 or even 10. It is such a fall from grace that we normally do not witness from these most wealthy folks as bulk of that wealth is pretty solid. We have not seen it in the past due to rock solid companies. However, Elon Musk is an exception on many fronts and this might as well be one of them!

Frankly, it surprises me that he has not gradually sold out of Tesla and taken advantage of this market madness. In fact, he is pumping it up even more with a trillion dollar package – the exact opposite action one would expect from a shrewd businessman. Instead of getting out quietly and cashing out with a solid gold from all this hot air, he seems content with all that the hot air balloon has to offer. Though, he did do that to a fair degree in the past couple years, so he did use some of his genius traits there to cash out. Who knows? That is precisely what he wants to do or even more with all the media attention of late with a trillion dollar package.

However, he is up against the time and swimming upstream. The window of opportunity is very limited and before the “fools of the market” realize, he has to realize to cash out a good portion of his wealth. As of now, he owns close to 20% of Tesla which I think is a lot to own in the hot air stock, meaning roughly half of his net worth is tied to Tesla or about $200 billion, much of it is at mega-risk.

Big tech stocks including Mag 7 similarly are in stratosphere, hence, once the reality dawns on the market participants, they all will be punished accordingly.