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💦 TWCPrimePlus+: AI Chips Ahoy

💦 TWCPrimePlus+: AI Chips Ahoy

Are we in an AI bubble?

Tyler Morin
November 25, 2023

Hey there weekend warriors,

Welcome to Saturday Deep Dive #2. Last weekend we tackled weight loss drugs and their impact on the market. This week we’re getting into the AI chip market and whether we’re in a bubble.

For those of you still on the fence about TWCPrimePlus+, I hope you’ll consider joining for just $69 per year or $7 per month (monthly) if you like what you see.

As always, I’d love your brutally honest feedback and would be interested to hear what you’re interested in hearing about next week.

Keep on snapping necks and cashing checks,

— tyler

Chips Ahoy

Current appetite for AI chips… (Source: Giphy)

Listen, you might be at your job. But you will never be as bad as the OpenAI board is at theirs…

These “masters of the universe” really ousted the LeBron James of AI (Sam Altman) last week. But you already knew that because it's literally the only thing that the internet has been talking about since last Friday.

But what got lost among the A+ sh*tposting by Sam and the next-level power moves made by Satya Nadella and Microsoft is why the hell did Sam actually get booted from OpenAI? Officially, the board was butt hurt by Sam not being “consistently candid in his communications...”

Turns out it might have had to do with his billion-dollar side hustles...

It wasn't exactly a secret that Sam was dabbling in other projects. Like, say, the proposed iPhone for AI that he was working on with Jony Ive (the guy who designed the real iPhone). Oh, and, of course, the less sexy, but arguably more lucrative scheme to challenge Nvidia with an AI chip startup.

Sam was reportedly in discussions to raise a boatload of money to get both projects off the ground. No word on how his new (but old?) role as CEO of OpenAI will impact his extracurriculars.

Perhaps Sam was onto something…

Because AI chips are hot in the Streets right now.

And if AI chip companies were clubs, Nvidia would be the Roxbury. Shares are up 230% this year alone. Which probably has something to do with the company owning ~80% of the artificial intelligence chip market.

Source: Google Finance

Why? Their tech is leaps and bounds above the competition. Especially Intel. Nvidia’s GPU (Graphic Processing Units) have proven to be the best in the biz for handling AI’s massive loads. And its GeForce, Quadro, and Tesla (which is extremely confusing) processors are harder to score than Taylor Swift tickets at the moment. Spoiler: chip shortages.

In case you were wondering why GPUs dominate the AI game, it’s because they’re the Usain Bolt of semiconductors. They’re scary fast. They’re better at math than your quant. They can complete multiple processes at the same time. And they’re more energy efficient than your aunt who drives a Prius. It’s honestly not fair…

Plus, Nvidia has built an entire ecosystem of AI hardware and software that makes it a one-stop-shop. In 2019 CEO Jensen Huang went out and acquired Mellanox which specializes in AI networking, and made Nvidia’s moat even bigger.

Given that it’s playing chess while everyone else is playing checkers, it's not exactly surprising that it just announced a massive earnings beat. Its numbers were staggering: it smashed lofty earnings projections and tripled revenue.

You know, I’m something of an AI chip expert myself…

Everybody is trying to get in on the internet AI money… obviously.

Arguably the 3 closest competitors to Nvidia are AMD, Intel, and Google in terms of processor development. But it’s kind of like Barry Bonds vs. everyone else in 2001 when it comes to commercial success. It’s not really that close…

AMD has made significant gains in the CPU and GPU markets, but it’s been more of a thorn in Intel’s side than a true threat to Nvidia.

Intel is really, really good at building CPUs but has shot itself in the foot by falling behind in development… by years. Plus, it’s split its focus, by manufacturing in addition to designing.

Meanwhile, Google is over here perfecting its TPUs (Tensor Processing Units). But there’s much more of a focus on in-house tech and funneling business to its cloud product.

**“Sup, b*tches.” - Microsoft**

I can’t believe I am going to say this but poaching Sam Altman might not even be the biggest power move MSFT has made in the AI space recently. Satya Nadella had an idea so crazy it might just work… build their own chips.

The company introduced a new chip called Maia, designed to speed up AI computing and power its Azure cloud service.

Ok, it’s a gold rush… but is it a bubble?

Source: Giphy

Well, if you ask the AI bears they’d say something along the line of “tHE ParAleLLs to 1999 aRe UnCannY.”

Now, if you chat with the people who remember GPT-1.5, they’ll convince you that trillion-dollar AI companies will become the norm and the hype is totally justified.

To be fair, there are quite a few signs that point towards this all ending very poorly. Like, you know, the wild valuations. Shares of Nvidia, Intel, and AMD are up 230%, 64%, and 91% respectively this year. Meanwhile, sales and profitability have had a hard time keeping up.

And the hype machine has been in overdrive. Do you know how many Motley Fool emails I have in my spam folder telling me that “This Stock is the Amazon of the AI Space”? Then there’s the ultimate indicator that speculation is rampant: Nvidia and C3.ai are consistently the most discussed stonks on Wall Street Bets and StockTwits.

Of course, it isn’t just Average Joes with Robinhood accounts fueling the dumpster fire. The smartest guys in the room are piling real capital into AI startups. Like Google mainlining 100’s of millions into Character.ai, which literally makes Chatbots that allow you to talk to your favorite anime characters.

Then there’s the headwinds. Like chips becoming a political pawn. The US has banned the export of certain chips to China (and other countries) citing security concerns. Nvidia and other chipmakers have been playing a game of chicken with Uncle Sam in an attempt to circumvent the restrictions. Nvidia warned about the potential sh*tshow in its most recent earnings call.

Of course…

The AI bulls would say there’s no bubble and you’d be so lucky to be born during the artificial intelligence revolution…

The hockey stick growth of AI demand is exponential they’d say. So, yeah, perhaps Nvidia’s absolutely batsh*t projections are conservative. And maybe, just maybe, NVDA is actually cheap (on a forward-looking basis)…

Source: Motley Fool/YCharts

FFS, a few weeks ago Microsoft (yes, the same Microsoft started by Jeffrey Epstein’s BFF Bill Gates, which invested billions in OpenAI) banned its employees from using ChatGPT for a few hours before reversing course. Translation? “We’re still early.”

Tyler’s take…

We’ve seen this movie before, you guys… stonks don’t only go up. Especially stocks in an industry that’s cyclical af like microchips.

Remember during COVID when chips were harder to score than cold brew at BYU? Welp, supply has caught up in some sectors (think: cars)… but we immediately ran into another demand spike (see: AI being sexy). Hence, our little tiny pea brains forget that sh*t hits the fan in the chip market every few years (see: lots of supply, falling profits, all hell breaks loose).

And to be honest, I’m less excited about AI chips and more excited about use cases for AI. Think: who is going to use AI to do the kinda stuff Zuck was hoping to accomplish with the metaverse?

Which probably means the real winners will be the players that are already winning at pretty much everything else (see: Microsoft, Apple, Amazon, and Google). You know, the companies that are going to develop the thing that changes the human experience as we know it (that, or they’ll buy the company that’s going to). They’ve got the war chest and they’re already showing their willingness to invest in their own custom chips.

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Analyst takes….

Don’t take my word for it. Here’s what some of the smartest guys in the room have to say…

Srini Pajjuri and Jacob Silverman (Raymond James) on Nvidia’s dominance: “GPU demand continues to outpace supply as Gen AI adoption broadens across industry verticals. We are not overly concerned about competition and expect NVDA to maintain >85% share in Gen AI accelerators even in 2024."
Bernstein analysts on AMD’s current growth projections: "Unless numbers get really material, soon, we fear estimates remain too high and the stock (AMD) looks a little stretched to us."
Vijay Rakesh (Mizuho) on Intel’s prospects: "We believe (Intel) is lining up significant new server product launches and foundry customer announcements in the next six months" Read: don’t get too excited about their actual chips…

The watch list…

Stocks you might want to keep an eye on…

Chip makers

Nvidia (+233.75% YTD): Duh.
Intel (+64.46% YTD): They’ve got a lot to prove.
AMD (+91.05% YTD): The hottest prospect in the game.

Big tech

Google (+53.38% YTD), Apple (+51.89% YTD), Amazon (+70.99% YTD), Microsoft (+57.54% YTD): Imagine betting against any of these guys to be winners in the AI wars.

Foundries

Taiwan Semiconductor (+32.15% YTD): They own nearly 60% of the chip manufacturing market globally. Need I say more?
Samsung (+29.19% YTD): Turns out Samsung makes more than Android phones.
Global Foundries (+8.24% YTD): The little chip maker that could.
ASML Holding (+25.77% YTD): The company that makes the machines… that make chips.

Components and applications

Micron Technology (+52.61% YTD): Its memory chips are becoming increasingly important for optimizing AI servers. Oh, and it’s got a close relationship with Nvidia.
Dell (+81.93% YTD): Analysts are bullish af on Dell’s AI server biz.

The catalysts…

Here’s what’s driving the market…

Technological breakthroughs (or setbacks): Every new major breakthrough is going to feed the beast and send the hype machine into overdrive.
Increased demand for AI: Don’t think for a second that AI isn’t going to permeate every single aspect of our lives over the next few years.
Government policies: Think: US vs. China.
Supply chain developments: Supply chain disruptions be like “remember me, mf’er?” Let’s not forget we’re only one big ship blocking a major canal away from a worldwide logistical nightmare.
Interest rates/the economy: Consider how much money is being invested in AI at the moment. Ok… now let’s pretend it’s 2021, interest rates are zero and money is free.
Competitive landscape: Tech advances could shift the balance of power quickly. And don’t sleep on M&A in this space. Big players are going to be looking for the hottest new startups to Hoover up.
IP: There’s a reason Mr. Wonderful goes from six to midnight when a founder on Shark Tank has a patent.