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Remember every time you opened your favourite bag of chips, only to find there is more air than those fried snacks in it? There was a mini outrage over the chip packs of popular brand Lays where customers alleged that the company cheated on quantity. Aside from the scientific explanation of keeping chips crispy for long through air, that disappointment of half the flavour wafting off into oblivion remains.
Nvidia investors and everyone owning even a token share in AI should get comfortable with a similar feeling now. It is not the same chip, but the principle sticks. Let us explain.
The world’s most valued company and the epicentre of the current ‘its-a-bubble-it’s-not-a-bubble’ town square crescendo, Nvidia, buried Wall Street’s fear over an AI bubble with its stronger-than-expected revenue growth and a fantastical outlook for its future. At $200 billion of annual revenue, and a monopoly lording over 90 percent of the chip market, Nvidia is a giant. That a giant is growing its revenue at 60 percent should be unbelievable, but it is real. A blitz of past performance aside, founder Huang expects its future to be nothing short of dramatic.
But as this FT article, free to read for Moneycontrol Pro subscribers, points out, the chipmaker’s revenues do not offer proof that there is no bubble. After all, Nvidia’s market valuation rests on the firm’s story about the future demand for chips. “When Google’s top line was last increasing at the pace Nvidia’s is now, the search engine operator had a $150 bn market capitalisation, whereas Nvidia’s is $4.5 tn. Such momentum at such scale is unprecedented,” says the FT article.
In short, Nvidia’s bag of chips does have air. How much is where the whole gamut of bubble realisation rests. Will investors find more and more air every time they open Nvidia’s bag of chips? It is possible because for Nvidia to deliver the revenue outlook, its customers must meet theirs. That means data centres must be built speedily and continue to grow. Estimates of investments into AI vary and therefore, are subject to big changes.
Simply put, for Lays to keep selling more chips, we must increase our consumption of more chips. What if tomorrow people grow health conscious and cut chip consumption? That means Lays would have to fill its bag of chips with more air just to keep the façade of future earnings.
That could be Nvidia.
Then there is another scare, the nature of circular financial deals that Nvidia is enmeshed in. The company has invested money in OpenAI which depends on Nvidia chips. There are many such deals that entwine big tech firms including Meta, Amazon, and Alphabet.
Nvidia may have turned the AI bubble into a Schrodinger’s one, but it’s a shallow grave where fears of investors are buried. They will resurface at some point, which necessitates discretion. Since what happens to Wall Street has a bearing on other markets (including us), it pays to buy armour or at the very least position oneself in a place with least vulnerability.
Global investors are relooking at Indian markets as a sort of anti-AI investment. Shyam Sekhar offers some pointers in his piece for investors to navigate the potential changes in Indian equities. While October was a good month for foreign investment flows into Indian markets, this month has reverted back to outflows so far.
It is this outflow that the Reserve Bank of India (RBI) battles in the forex market, keeping it in a doom loop of forex intervention resulting in tight rupee liquidity, which in turn results in more intervention elsewhere. The bond market wants the central bank to take some of the bond supply off its hands because there is less liquidity around to motivate purchases. It is a fair ask, considering the decline in liquidity is the RBI’s doing. We explain whether market participants can draw in the RBI as a buyer in our piece here.
The trend in bond yields is critical for monetary policy to be effective and that makes the RBI more inclined to give in to the market’s demands. Indeed, whether it is India or anywhere else, bonds have been the finest mirrors of exuberance. One hopes this is the case with AI as well. Much of AI spending by big tech firms has been through debt. FT's Unhedged newsletter on November 14 explains that companies that are borrowing in debt and burning cash stand to lose a lot of investor faith soon. The credit spreads of all the tech companies have begun to rise fast, which means that a mindless rush to AI stocks must be avoided.
Perhaps, it is still time to grab that bag of chips. Be mindful of the disappointment that awaits.
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Aparna Iyer
Moneycontrol Pro
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