Unleashing the Fourth Industrial Revolution: Investing in NVIDIA, AI, and Data Giants
Abraham George Market Musings
I have been immersed in the realm of Web 3 and the fourth industrial revolution for an extensive period, observing its transformative power. This industrial revolution stands apart from its predecessors, dwarfing them in scale and influence. Developed nations, as well as those in the process of development, will unite to bolster productivity, an undertaking inherently deflationary in nature. Consequently, the anxieties and struggles surrounding inflation may take an unexpected turn in the years to come.
Allow me to delve briefly into the fourth industrial revolution, acquainting you with its foundational pillars. This revolutionary wave rests upon four key elements: Data, Blockchain, Semiconductor chips, and Artificial intelligence. In October and December of 2021, I authored two series titled "Gutenberg to Blockchain" and "Why Data Is the New Oil," respectively, which shed light on these topics. While certain aspects of those series may now appear redundant, those with an ardent interest can access the past articles.
Among the quartet of pillars, generative AI holds the greatest potential, its significance interwoven with the other three. Jensen Huang, the esteemed CEO of NVIDIA, eloquently highlighted the advent of ChatGPT as a turning point in this industrial revolution. Thus, we find ourselves in the early stages of this momentous journey. When NVIDIA's remarkable achievements were announced a few months ago, Huang likened the impending changes to the transformative impact of the iPhone 7—an emblematic representation of the past 16 years, in which our lives were reshaped.
It is one matter to identify a burgeoning trend; it is another to invest in the right company that harnesses the full benefits of that trend. Let me illustrate this with an example: since Apple unleashed its inaugural iPhone in June 2007, the company's shares have yielded an astonishing return of 4,570%. In stark contrast, Samsung's returns pale in comparison, amounting to less than 400%. Such a disparity, exceeding tenfold over the course of 16 years, proves to be a grievous missed opportunity for those invested in the wrong stock.
Now, let us shift our attention to NVIDIA. Since its inception in 1999, NVIDIA has delivered an astronomical return of 46,800%, meaning an investment of $1,000 in the company's early days would now amount to an impressive $468,000. However, a lesser-known fact is that, during the company's 24-year history, the stock traded below $5 for 16 of those years. It was only after 2016 that NVIDIA truly soared to unprecedented heights.
Of the various prominent figures who have invested in NVIDIA at different stages, we find former US Congress House Speaker Nancy Pelosi and renowned hedge fund manager Stan Druckenmiller. Druckenmiller envisions holding onto NVIDIA for an additional two or three years, while one might ponder whether Pelosi's prescience surpassed common knowledge or if her investment acumen was simply unmatched. Regardless, blindly following Pelosi's quarterly equity filing would have paved a path to prosperity.
In October 2022, the Nasdaq experienced a 33% downturn, only to rebound and finish the year with a 34% increase. Consequently, the Nasdaq has soared by a staggering 67% from its lowest point, with NVIDIA spearheading this ascent. Since the October lows, the company's market value has swelled by a staggering $650 billion, depending on which day's valuation one considers. As I look ahead, I predict that in the coming years, NVIDIA's price may surpass that of both Apple and Microsoft. However, caution is warranted in the present moment. The shares have already tripled in value this year and currently trade at approximately 49 times the company's earnings, while the S&P 500 hovers at a mere 18 times earnings. Over the past five years, NVIDIA's price-to-sales ratio has remained at 17.5%, even surpassing its peers, whose ratios hovered around 8%.
As is customary, Wall Street finds itself fashionably late to the party, excessively optimistic about NVIDIA's prospects. While I hold great admiration for the company and its trajectory, I would advocate for patiently awaiting a significant correction before considering a position. However, I would caution against shorting the stock, given Jensen Huang's visionary leadership and his commitment to steering the company as long as his health permits.
Considering the present valuation and technical setup of NVIDIA, it fails to entice new long positions. Thus, it would be prudent to await a substantial market correction. Presently, NVIDIA dominates approximately 90% of the AI chip market, with projections indicating a staggering 50% sales growth in the upcoming quarter. The AI industry itself is set to expand from $30 billion this year to a monumental $150 billion by 2027. At present, NVIDIA undeniably reigns as the dominant player, but one must remain vigilant regarding AMD. While they may trail behind slightly, AMD poses a formidable competitor to NVIDIA. In fact, investing in AMD would not be an unwise decision. Therefore, diversifying investments between the two would be advantageous. Additionally, other companies operating within the same sphere, such as RISC-V, Micron, Broadcom, and TSMC, stand to benefit from these monumental advancements in AI.
The advent of large language models like ChatGPT has the potential to empower individuals, effectively transforming anyone into a computer programmer. By employing straightforward and unadorned language as input, these models can execute the workload that would have required hundreds of coders and months of labor in a matter of seconds. However, the quality of their output hinges on the quality of the prompt they receive and the data upon which they are trained.
Consequently, companies endowed with abundant and diverse datasets occupy positions of power. It all comes down to the customer experience. These data-rich enterprises possess the means to train their own models and leverage their rich and unique datasets as a new source of revenue.
Therefore, it comes as no surprise that the giants of the data realm remain the same as before: Google, Amazon, Meta, Apple, and Microsoft. These industry titans continue to reign supreme, equipped with their reservoirs of data and poised to shape the future.
Once again, the story of NVIDIA serves as a testament to the potential of long-term investments. Similar opportunities abound in the realm of cryptocurrencies, as we have previously discussed. The enterprises that lead the charge in generative AI will possess cutting-edge technologies, innovative business models, and visionary leadership. They will not only transform existing industries but also foster the emergence of countless new businesses centered around AI.
I wish to emphasize that we currently stand at the dawn of a revolutionary transformation in the way we conduct business, and the investment prospects that lie ahead are monumental. However, it is crucial to approach this landscape with pragmatism and a research-driven mindset.
Amidst this "industrial revolution," there will undoubtedly be long-standing victors and fleeting entities that dissipate into oblivion. Our focus should center on acquiring shares in companies akin to Amazon rather than those akin to pet.com. The velocity of change witnessed in this revolution may surpass that of the past, ultimately eclipsing even the impact of the internet itself.
Above all, we must recognize the immense productivity gains awaiting us. As a final recommendation, I urge you to take the time to watch the attached 30-minute video. While Emad Mostaque may possess a penchant for exaggeration, the video undeniably expands one's horizons, offering a glimpse into a world none of us could have envisioned in such a remarkably short period of time. Prepare to have your mind blown.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.