But I think it's helpful to say, okay, well, like how could this go sideways, right? And it's worth remembering, we were comparing Nvidia to the big banks, but they actually look in some ways a lot more like AIG in the role that AIG was playing. They had their tentacles into everything. And ultimately, AIG's problem was that the stuff that it was holding was not as good as it thought it was.
Welcome to Prof G Markets. I'm Ed Elson. It is October 13th. Let's check in on yesterday's market vitals. The S&P and the Nasdaq declined, weighed down by semiconductor stocks. Meanwhile, the Dow rose. Brent crude climbed above $106 per barrel after President Trump announced an energy ceasefire between Russia and Ukraine. More on that later. And by the way, we've been nominated for three Signal Awards. So, if you like the show, please head to vote.signalaward.com. Cast your ballots for us in each of these three categories: best video podcast, best daily podcast, and best money and finance podcast. Every vote counts. We will leave a link in the description to make it easier for you. Thank you so much. Okay, what else has happened?
Nvidia isn't just the AI boom's supplier anymore. It is also its investor, buyer, and guarantor. Reports emerged over the weekend that Nvidia is in talks to buy its customer Reflection AI and its competitor Dematrix. At this point, Nvidia has equity stakes in 13 public companies and 229 private companies across the AI ecosystem. It's also guaranteed more than $108 billion worth of data center leases. As Nvidia inches closer to a $6 trillion market cap and the AI boom hits a fever pitch, the question becomes, is Nvidia too big to fail? Joining us to discuss this question, we are speaking with Liz Hoffman, business editor at Semaphore. Liz, welcome back to the show. This was prompted, this question that we are asking was prompted by your newsletter. You brought this up. You pointed out just how much, how many private companies Nvidia owns and the $50 billion worth of those private companies that it owns, as well as all of its stock in public companies. And you brought up this question, is it too big to fail at this point? Talk a little bit more about why you're asking that question and why it's relevant to the AI boom.
Yeah, I'm not just asking it. I am answering it. I think the answer is clearly yes. You know, you went through all the numbers there and we can poke at each of them and why they are both enormous and probably bigger sort of emotionally than they even look on paper. But to me, the simplest way to decide if a company is too big to fail is to ask, would the government step in to save it if it were in trouble? And I do not think the government would step in to save Meta or Google. I do think they would step in to save Nvidia and with some pretty good reasons. So look, I covered banks after the 2008 crisis when they were going through that reckoning and it looks a lot like the big banks to me. It is just too important and it's in too many places doing too many things to be allowed to fail.
Do you think that that is part of the strategy, to become so entrenched in the system, to invest in so many companies, become so systemic that you become almost impenetrable? I mean, it seems like that might have been part of the banking strategy themselves.
There is a lot of that going around, particularly with the way that the AI companies were talking about, 'please slow us down,' right? The dark underbelly of that is we need some implicit government backstop, and the way to do that is to kind of pull the moat up behind us. And I've always said the thing about the big banks post-2008 was you actually could at that time get all of the risk in a room. The Fed could say, 'we want your CEOs down here, we're going to tell you exactly how this is going to go.' Clearly that is kind of where the AI oligopoly is right now. I don't know that that's, I'm not really sure that's what Jensen Huang at Nvidia is up to. I mean, he clearly believes in this stuff. He's been a pretty thoughtful critic of the closed models and the frontier labs, and he's been very dismissive of the idea that they need the government to stop them. His view is that this is software and run it like a product, like you would anything else, and consumer protection is important and all of that. But the upshot is that he has made his company too central to the entire ecosystem to be allowed to go under. Not that I think we're anywhere near that. This is not a commentary on Nvidia's financial health. They actually have a very strong balance sheet relative to all the other players. It's just sort of a theoretical exercise, and it's just obvious to me that they are too big to fail.
Yeah. You describe the company as an AI rollup machine, just pointing out how many investments they have made. What do you make of that strategy? I mean, they are of course producing the GPUs, designing the GPUs. It is pretty remarkable how they've become something of an investment firm. They've almost become like an AI holding company. What does that mean for investors? Because now when you invest in Nvidia, you're not just investing in a chip company. You're investing in, in a lot of ways, almost like an investment firm, an asset management firm. What do you make of that strategy?
Yeah, it's a pretty handy package if you're an investor saying, 'I kind of want all of it.' Pretty easy way to do it, which is perhaps why eight cents of every dollar that's in the S&P 500 right now is in Nvidia. You're talking about, that's by the way, $22 trillion of invested money between the straight index funds and the shadow indexers. So that's an awful lot of money. I mean, look, they've done kind of two things that have always existed. One is called vendor finance, which is, we got a lot of customers, or customer finance, right? The vendor is providing the financing for a customer. Ford does this all the time. Ford Motor Credit will give you a loan to buy a Ford car because they want you to buy a Ford car. That's one. And the other is what's called credit enhancement, but you have all of these money-losing AI startups that need to buy compute, need to buy chips, and they can't quite, you can think about it like your parents co-signing on your first apartment. They have done both of those, but they've done it at a massive, massive scale. So they've interjected, they've basically stood in as the counterparty because they are, I think they're investment grade, very blue-chip company, and have stood in for their customers that are not. And then you can say, okay, well, maybe that's fine, but there's a reason that we like to have creditworthy counterparts. And that kind of wrapping that up in some cloak almost certainly is going to have some springs fly loose at some point.
Yeah. You mentioned that their balance sheet is especially strong, or at least it is strong. I mean, if we're looking at something breaking in the AI trade, Nvidia probably looks more secure than a lot of other companies. But I guess the question is now becoming, you know, how likely is it that something might break? And we are seeing a lot of talk, a lot of reporting about a bubble somewhere in AI land, potentially among the data centers. Of course, one of their investments, which is a data center company, they were supposed to go public, that IPO is pulled. We're seeing a lot of these other companies that are in AI that are pulling their IPOs or at least pausing them or delaying them. Broadcom's CEO just made an equivalency between the AI trade and casinos, saying that it's become kind of like a casino. I mean, what are your thoughts on the sustainability of this AI buildout and the extent to which Nvidia is either exposed or protected?
I don't have a point of view on when. I think this is incredible technology and it's clearly going to rewire the economy in lots of interesting and mostly positive ways. That's my view. I have no idea when that's going to happen, but you got to think there's investment horizons that are shorter than eternity. And so, I mean, I think it's helpful to say, okay, well, like, how could this go sideways, right? And it's worth remembering, we were comparing Nvidia to the big banks, but they actually look in some ways a lot more like AIG in the role that AIG was playing. They were not a bank, but they were providing insurance for all of these things. They had their tentacles into everything. And ultimately, AIG's problem was that the stuff that it was holding was not as good as it thought it was. And so you saw these things get marked down. They had to start selling. Like, you know, Nvidia owns a big stake in Intel. Fine investment, but if something goes wrong in their other businesses and they say, 'Oh, like, we need some cash,' they're going to sell the thing that they can sell. And a really bad headline would be 'Nvidia sells its stake in Intel' — that would spook everybody. So you have to sort of think about the second-order effects of these things. You said they have a very strong balance sheet. They don't carry a lot of debt relative to the other big players in the space. They actually just announced a $150 billion stock buyback last week, I think, which I took as more of a flex than anything else. 'We can afford to do this,' rather than, I mean, they don't need to buy back their stock. Their stock price is very high. This is not a signal to investors. It's actually a flex to the entire market, saying other big companies are having to choose between buying back their stock and participating in the AI trade. We don't have to. We're just that strong. So, you know, you got to look at the messaging here, too.
The other company that we have been wondering if they will eventually become too big to fail is OpenAI. And we were especially asking that question after it seemed like they were in talks with the government, or there were rumors that they might be talking to the government about some sort of relationship that didn't seem to materialize, but that's something that has been on the table. Do you think that OpenAI is one of those companies that also might be too big to fail? Or if something goes wrong, would the government let them collapse?
The caveat is that this is not a normal government. They don't behave the way normal governments do when deciding how to interact with private enterprise. So I don't know. I think that, you know, what I wrote was that Nvidia has become both a bank, a financial supporter, and a security blanket for the entire industry. There's an emotional piece to this, too.
Yeah. From like a product standpoint, if OpenAI went away tomorrow, like, we would all use a different thing, and I'm sure that the, you know, the access to compute that they have been contracting and tied up, someone else would say, 'Yeah, we'd love to have that.' So I don't think that's the issue. It would obviously be incredibly emotionally, like, scarring and would almost certainly freak everyone out and the market would go down and then you might start to see some things unravel. I wouldn't put them in that bucket, though. They're just not, they're not entwined in the ecosystem in as many ways as Nvidia is. Nobody is.
Liz Hoffman is business editor at Semaphore. Liz, we always appreciate your time. Thank you.
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We're back with Prof G Markets. Earnings season is kicking off this week and expectations are high. Analysts are expecting S&P 500 profits to grow almost 30% this quarter. Meanwhile, the S&P itself is coming off of a fresh record high which was set last week. But the market also has some things to be concerned about. Bank stocks are down about 7.5% over the past month. The Fed is expected to cut rates again before the end of the year and consumer sentiment is nearing a record low. So here to discuss earnings ahead of them, we're speaking with James Taylor, managing director of investments at the Taylor Group from Wells Fargo Advisors. So James, thank you for joining us. Earnings season starts on Tuesday. Analysts are expecting S&P profits to grow almost 30%, which is a pretty massive number. Your reactions, your thoughts heading into this earnings season.
