Nvidia looking like Atlas - Market Update Feb 19-23 2024
Forget the Magnificent 7, It is all about the Chosen ONE!
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Welcome back to the Rambling Mind Newsletter. This is your Market Update.
Summary of Topics:
Capital One adds Discover to its wallet
High Likelihood of Government Shutdown
Nvidia can’t stop making money
Stats of the Week
$35/bag - gonna cost you more to check your bags
$1.2 Billion in Student Loans Forgiven last week
Looking Ahead
Sports I Love
Man U reverts to usual selves (bound to happen)
JP Morgan Loves Messi
Extras
We back on the moon
PE Firms Buying All the Farmland
Markets
Nvidia put the entire Stock Market on its back last week and single-handedly dragged the Market to a new All-Time High on Friday. The Markets started very shaky last week, but everything changed once Nvidia reported earnings (more on this below) on Wednesday. Seems the AI Hype is not just hyperbole, there is a massive demand for these products. The good news is if you are invested in the total market, you are doing fabulously right now.
Tale of the Tape
Economy
Capital One Wants A Discover Card
In a surprise announcement, Capital One revealed that it is in the process of acquiring Discover Financial Services.
🔍Details: Capital One says it has agreed to pay $35 Billion to add the Discover It Card to its wallet. It is the largest banking deal since 2008. A merger of the two companies would create the largest credit card company by loan volume.
Discover shareholders will receive 1.0192 Capital One shares for every Discover share they own.
Capital One shareholders would own 60% of the new company and Discover shareholders would own the remaining 40%.
Capital One plans to keep the Discover brand in the merger.
🤔Why?: There are three possible reasons Capital One is trying to buy Discover:
Discover owns a payment network that competes against Visa and MasterCard. Although not nearly as large as either of those networks. Capital One wants its hand on this network so it does not have to keep paying those companies a toll.
Discover has done a great job of attracting deposits to the bank. Through its savings accounts and 1% cash back debit card. Something Capital One needs to provide more loans.
Capital One wants to attract higher credit score customers. Historically, Capital One has attracted low credit score holders. Discover has been using college as an entryway into the pockets of high earners has high credit score customers.
🤝🏾Takeaway: In a podcast with Scott Galloway, Aswath Damodaran known as the Dean of Valuation, said to expect more consolidation in all markets. He used the example of the oil and gas industry announcing new mergers and acquisitions almost every other day for the last two years. Because of the current business climate, bigger leads to better network effects which leads to better profits. So rather than compete companies are getting just big enough to buy out their competitors.
The deal has not been approved by the Consumer Financial Protection Bureau, whose current director, Rohit Chopra, is not a fan of mergers. He has been sounding the alarm of little to no competition in the credit card sector for a while. Expect a ton of pushback on this deal.
Or it may work out for Capital One who can great competition against the duopoly of Visa and MasterCard. Depends on which part of the merger the CFPB cares more about.
🍕🥧My Takeaway: People do not like to use this term, but we are back in the age of monopolies. There is so little competition between companies. In a lot of industries, there are two or three big players then a ton of little players that eventually get swallowed by the big players. Companies are being created today not to be profitable on their own but rather in the hopes of being acquired by a bigger player. If you have ever wondered why you no longer see price wars. It is simply because every company is more than comfortable with the slice of pie they own. Which allows each to charge more for their products. A perfect example is Credit Cards where 10 banks issue 80% of the credit cards. They charge almost 10% more in interest per the CFPB.
Government Incompetence Part Infinity
Axios reported on Wednesday that there's a high likelihood that there will be a government shutdown. Not because we can't find a way to fund the things the government does but because we are so effing divided that no one wants to come to a compromise.
🔍Details: According to Axios, newly elected House Speaker Mike Johnson is stuck between a rock and a hard place.
Compromise with the Democrats and get a deal to fund the government but get impeached by Republicans.
Fight Democrats and shut down the government.
On March 1 (Friday), the government will begin a partial shutdown if a deal isn't done. If a budget isn't agreed upon after that, a full shutdown will be in effect on March 8. If a deal cannot be reached after this, then spending cuts begin on April 30.
🤬Takeaway: This is ridiculous. How can we be this divided? That we are willing to put people’s lives on the line. As we have discussed before, the government shutting down affects millions of people who either work for the government or depend on various government aid programs like food aid or social security.
Earnings
The Stock That Keeps On Giving
I have to say I am shocked! My brain refuses to accept what my eyes keep witnessing with Nvidia.
🤯Details: Nvidia reported revenue growth of wait for it, 265% for the fourth quarter of 2023. Bringing in $22 Billion.
Profits were $12.3 Billion in the quarter. In the same quarter in 2022, profits were "only" $1.4 Billion. 😮😯🤯
Nvidia has a gross profit margin of 70%. Apple who we praise for being a money printer has a profit margin of 45%.
💬In His Words: Nvidia Founder/CEO Leather Clad Jensen Huang said on the call, “Accelerated computing and GenAI have hit their tipping points. Demand is surging worldwide across companies, industries and nations. Fundamentally, the conditions are excellent for continued growth in calendar '24 to calendar '25 and beyond.”
📈Stock Move After Earnings: The stock continued what it has been doing for the last two years, going 🚀🚀. It rose 10% after the earnings were released on Wednesday saving the entire stock market.
👀What to Watch: Nvidia has joined the realms of Tesla. Where it seemingly flipped a switch and turned the entire world upside down. The bigger excitement is that Nvidia does not see a slowdown in the demand for their product. It is expecting growth to remain at this astronomical rate for the foreseeable future. Nvidia added a nice cherry on this beautiful ice cream Sunday by increasing 10% above analysts' estimates for the next quarter.
I only see three possible challenges to slow down this gravy chain:
US-China trade war: Nvidia has historically brought in 25% of its revenue from China which continues to shrink. It may not even matter anymore but something to take note of.
Competition: Capitalism is undefeated at destroying high-flying companies. If there is money to be made and you are flaunting your never-ending money printer, competitors will enter the space.
OpenAI is already discussing building its own AI chip to rival.
Google, Amazon, and Microsoft are already working on their versions of chips.
These all happen to be the largest customers of Nvidia.
Overbuilt: Companies are currently over-investing in AI infrastructure but will cut their spending in the future. We saw this with a lot of companies during the pandemic.
One thing is for sure, if Nvidia falls so will the market.
Explaining Obscure Financial Terms
Guidance: Forecasting a company's best estimate of how much money it expects to make in the future, typically the next quarter and year ahead. This gives investors a better idea of what to expect from the business.
Expectations are everything in investing. A company can help control either investors' excitement or (in Nvidia's case) feed into it more.
It is also a company's opportunity to tell a narrative to investors and keep them.
It is very important to remember guidance is typically designed to serve the company, not the investor.
Take them with a grain of salt.
Stats of the Week
American Airlines just increased the price for checking your first bag from $30 to $35 if you do it online. While if you decide to check a bag at the airport it'll cost you $40. They aren't the only airline raising baggage fees. Jet Blue, United Airlines, and Alaska Airlines made similar announcements recently as well.
In 2023, airlines made $33 Billion from baggage fees, an 18% increase from the year before.
Biden Administration followed through on one of its campaign promises on Wednesday and canceled the student loans of 153,000 people. It is in line with the new SAVE repayment plan that automatically forgives anyone with a student loan of $12,000 or less and has been paying off their loans for 10 years.
Biden Administration has forgiven over $130 Billion in federal student loans.
Looking Ahead
Sports I Love
I KNEW IT
This is exactly why I never truly believed in this team. They once again displayed just how terrible they are. All the usual bad habits were on full display except this time they did not get bailed out. You have players who have never scored in their entire football career, marking out their games against Man U as the team they believe they will finally get their first goal against. It's just so sad. I can't wait for the season to be over. This team has no backbone to it at all.
At least it was the Naija boy who scored both goals for Fulham. So that was worth celebrating.
JP Morgan Chase announced on Tuesday a two-year naming rights deal with Inter Miami. It is JP Morgan Chase's first stadium deal in the MLS. It is another sign of the power of Lionel Messi. His draw has brought in so much more eyeballs and money to soccer in the US.
Inter Miami's valuation has shut up 74% since Messi joined, looking like a tech stock. The club is now worth $1.02 Billion.
Extras
For the first time since 1972, a US spacecraft landed on the moon. But unlike the previous times, this mission was completed by a privately owned company called Intuitive Machines. The NASA budget is not what it was back in 1972 (it is about 1/10th the same). NASA has been relying heavily on private partners that can get investment capital from elsewhere to fund continued space travel.
Private Equity Buying All the Farmland
I found this story very interesting but I couldn't find a good way to include it in the newsletter without just raging the whole time because Private Equity pisses me off. They tend to show up and ruin good things (yes I know there are good ones).
But it's an important story that will play out over the next decade or so. It'll be interesting to see what happens when no one owns anything anymore especially where we get our food from.
*I am a tiny shareholder in this company.