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Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy, we're recording this Friday, November 13th. The Nvidia story is so fast-moving that we have to sort of be careful with the episodes we record because we don't know what's going to happen by the time it comes out. But one thing we at least do know is that Nvidia is scheduled to report earnings next week. And at least that is the next sort of thing that we know — it's the one known unknown, so to speak, that we can look forward to.
Right. It's the one thing we do know is that there's something on the calendar.
That's right. I feel like this is another one of those episodes where we have to say exactly when we're recording. So, this is 12:10 New York time. The stock is down about 4% as we're recording. And obviously, you know, in corporate analyst space, we hear people talk about key man risk all the time, which is a hard thing to actually measure and think about, but I think in the case of Jensen, this is kind of the ultimate key man risk, right? This is the guy that built the company. We know from various reports that he was intensely involved in the company itself. Something like 60 direct reports, no succession plan really. It seems like he was very involved in individual financing deals and things like that. And so you can imagine if you're an analyst covering Nvidia stock right now, it must be pretty challenging.
No, totally. I've met a few people in my life who have talked about their companies. They're like, 'My company got some investment from Nvidia. I got to meet Jensen Huang.' I was like, 'Oh, that's cool.' But now I go back and listen and remember hearing these stories and it's like, 'Wow, he was super involved.' Like that same story is sort of like that meme is like, 'Oh, that's great. We have a super involved CEO.' And then it's like, 'Oh, we have a super involved CEO. Is this good or bad?' Anyway, so if you're thinking about it from a stock perspective, you have the key man risk. You have all of the legal questions that the company is going to face and how, you know, just everything related to the sort of Mega Speed and what it knew when and all that stuff. And then there's just the fundamentals of the business and there's chip demand, but also its role in financing a big ecosystem of companies that either use and buy Nvidia chips.
Mhm. There's a lot to talk about, obviously.
All right, let's not waste more time. We really do have the perfect guest, someone we haven't had on in a while, but he's who we talk to frequently when we want to talk about Nvidia specifically. We're going to be speaking with Stacy Rasgon. He's a managing director and senior analyst at Bernstein Research. He covers this company. He covers semiconductor equipment. Knows the company very well. If you listen to earnings conference calls, you've probably heard his voice before. So, Stacy, thank you so much for coming back on Odd Lots. It's been too long. We've missed you.
It has been, and it's my pleasure, my great pleasure to be here. So, thanks for having me on again.
Absolutely. How weird is this moment as a stock analyst, just figuring it out just professionally, like your job is now to figure it out? How many dimensions and variables are you trying to work through?
This is a very weird moment as an analyst covering this company, and a sad moment, let's be honest. I mean, there's no good solutions or outcomes or anything else coming out of this entire mess. Like, it's just a disaster of the highest proportions, frankly, and it's been sort of surreal covering this as an analyst. It's not been fun. Clearly, you know, Jensen's having a worse time than we are, but it's been a long week for sure.
So you actually decided to downgrade Nvidia earlier this week. What was the catalyst for taking that move? Because that's a pretty big call when the headlines are still flying, you know.
Let me step back, actually. So the news flow around this started — I mean, it had been coming up in dribs and drabs, and it sort of crystallized on Friday evening when the articles started coming out that he had had a relationship with this individual, Alice Wang. It was coming out that the US intelligence community was concerned that she might be an asset for China. By the way, I will say I was not necessarily convinced at that point. I'm still not necessarily convinced that she was necessarily a spy, right? She may just be like a businesswoman who likes to be close to power. Like, we'll see. But that was the news that started coming out on Friday. We published something on Sunday evening sort of outlining those kind of risks. And at that point my view was that he could probably stick around. Again, I was less convinced. I still am not entirely convinced on the espionage aspect. And she was a customer, which is kind of a gray area, but maybe you can manage it. And to be clear, like, I'm not making any judgments on any of his personal activities. Like, that's not my job to judge that. But my view at the time on Sunday evening was nobody really wanted to see him leave. That was always the risk. And like we sort of outlined in that piece, the key man risk here was clearly the biggest piece of this. And I assume we'll talk a little more in detail on that. But yeah, my view on Sunday was that, look, shareholders didn't want to see him gone. The board at that point didn't want to see him gone, and it wasn't anybody's best interest to see him gone. So I thought he could hang around.
The catalyst for me was the secondary disclosures about the relationships that he apparently had with his subordinates. And unfortunately, that's just kind of the kiss of death. Like, you just can't sleep with your subordinates and then lie to the board about it. That just — I've had other CEOs in my coverage over the years fired for exactly that. And frankly, even for things that were less egregious along those lines than what we saw here. And so when that came out, we sort of had to make a decision. You know, do we think that it's much more likely now that he gets dismissed? And my conclusion at that point was yes. And the next day we actually got confirmation that they did in fact dismiss him. And so then I had to decide, like, what do you do with the stock? And this is where the discussion is. And I was joking that we spent more time, me and my team, discussing what to do versus writing the actual downgrade. And to be clear, we downgraded the stock from outperform to market perform. We cut our target price in half. And it didn't take long to write it. There's not a whole lot of analysis to do, right? But you have to decide what to do. And so it was probably the most difficult downgrade from that standard that I've ever had to write, because, you know, you never want to do it. And like I said, I love Jensen and I love Nvidia and I love the story and I've been a very big data center bull and I still am. But you sort of have to weigh this stuff. Like, the argument to keep the call, and I have some sympathy for it, is the stock is incredibly cheap. It was already cheap. It's gotten cheaper clearly at this point. We didn't cut our numbers. I actually don't think near-term, you know, trajectory for their business is really at a ton of risk. I don't think customers at this point are buying less data center stuff from them next year because of this. And you can argue that this valuation, that you're pricing in a lot of bad news. So that's one argument.
On the other hand, I think you're going to see more and more like news flow and tape bombs coming up both from inside the company as well as externally. It's very clear that there seem to be elements in the US government that want them gone. And frankly, the China hawks that I think are probably the ones that kicked this off are probably not going to get the scenario that they were hoping for. This is not a good scenario even if you're a China hawk. But you're going to see more and more calls for investigation. And the problem is, I think the board and Nvidia will find that it was a mistake to let him go, but unfortunately he made it impossible for him to stay. It may have been even a bigger mistake to keep him, right? And given the news we're likely to find, I think they had to sever that tie as quickly as possible. And now anything that comes out of these investigations, at least you can argue it's not Nvidia, it was Jensen. I'm waiting to see what happens. You know, when they — I don't know, they subpoena his, you know, his texts and his emails, and you dig hard enough into anybody's history, you're going to find something. And whatever they find, my guess is going to be spun in the absolute worst possible light. Yeah, we've already seen that with some of the headlines now. And I just find it very difficult to advocate to my clients to own the stock in front of all of that. And now I fold on top of that the uncertainty around the CEO and what kind of a perspective is any new CEO going to have, whether it's internal or external. And they've made lots of decisions in the supply chain, and you know that many of them are based on Jensen's handshake and his personal relationships, and how do you maintain that? I don't know. So I came down on the side: if I can't sit in front of a client and advocate, I think absolutely you should be buying this dip. It's hard for me to maintain the buy on it. So that's why we downgraded. But we discussed this for hours among the team before writing it. Writing it took 20 minutes, right? It's not a long thing to have to go through on that standpoint.
Let's just take a few of these questions from the stock perspective. Sort of break it down. You're confident in the numbers. You don't think there's going to be some big cancellation of orders, but let's just talk about how important are sales into Asia or Southeast Asia. Yeah. When we talk about valuations, we talk about the 2027 outlook or the backwards-looking 2026, and let's say there are meaningful curbs here, or let's say, you know, there was some blind eye towards smuggling or any questions around this, and something has to happen, and there are meaningful changes in how Nvidia can sell into — I should say the Asian market rather than the Chinese market per se. How important is that to the sort of lagging numbers, and how important is this market to the forward numbers, and how much of that is actually at material risk either because some change in policy or internal controls clamping down?
Yeah, you bet. So it's a tough question to answer, unfortunately. So the company does report revenues by geography, and they do this now. They made a switch a little while ago to report by the location of the headquarters of the companies. So, for example, if you look prior, they had like very high sales going into Singapore and Malaysia, and these were like the location of the shipments, but the companies that were doing that ordering were located elsewhere. So they've actually made a shift, and actually many semiconductor companies recently have made this shift to report geographical breakdown by the location of the headquarters of the customer. So on that basis, like Malaysia and Singapore, basically any — they report US, Taiwan, China including Hong Kong, and other — and other would be Singapore and Malaysia and all these other ones.
So an Oracle data center in Malaysia, and there was — I don't know if like that would, under the current reporting regime, that would actually show up as a sale to the US, which from a geopolitical standpoint is arguably very misleading.
Well, maybe or maybe not. I mean, I could argue that whoever is actually owning and running the data center is actually really the most important thing, because I'm assuming Oracle's, you know, I'm assuming Larry Ellison's not sneaking into Shenzhen, you know, with a Vera Rubin shoved up his behind it, right.
I don't necessarily object to this. And again, they're not the only ones that are reporting revenues like this. Many — as an aside, I should step back. The geographical split by shipments in many cases can be misleading for semis. So, for example, I'm going to — I'll make it up. Take a company like Qualcomm, they will show very high sales into China. Why? Because where are the smartphones assembled? They're assembled in China. So where are they actually shipping the parts? They're shipping — so even a shipment to Apple from Qualcomm that's going into an iPhone, in many cases under a strict geographical — so it would show up as Chinese revenue even though really it's not. So interesting. I actually think the ownership and who's running these things is important. Okay. And so I don't object to the split. But on the current split, the Malaysian and say basically the other block, it's like 1% of the revenue. It's very small.
The direct sales to Chinese customers, so China including Hong Kong, I think last quarter was roughly 8% of their sales. And by that will include a big chunk of their gaming and auto revenues as well. In terms of data center stuff, they're basically shipping effectively nothing directly into China. They actually do have some license from the US government to ship older parts, but in fact the Chinese government is not really allowing them to ship. And this gets into a whole broader discussion we can have around China policy that I think we'll get to, but right now they're not really shipping much data center stuff directly into China. And it's mostly because of China. China won't allow them even where Nvidia has the permission to do it from the US. So the vast majority — I'm going to make up the numbers, but I think these are roughly correct — US customers are over 60%. And then the remainder, which I believe is low 20s, I could look it up, but I think it's in the low 20s, is Taiwanese customers. So my assumption would be that if there's like stuff that is actually getting smuggled into China, it's probably not from the US customers, right? It's probably not from the Chinese customers. You're not selling the stuff to them anyway. It's not very much. And the Malaysian and Singaporean customers is very small. So it's got to be the Taiwanese customers. Right. I've seen a lot of numbers floating around. Some people would suggest, oh, it's like up to 20% of the revenue. I don't know how big it is. I doubt it's that big, but like the Taiwanese block is in that ballpark in terms of a percentage of the revenue. So maybe you could argue they're not really Taiwanese customers. They're, you know, China fronts, right? I don't know. My guess is it's probably not 20%. It's probably not zero. I mean, you can never stop smuggling entirely, but it's some amount. I don't think it's 20%, but it's some amount.
There's another piece of this though, which is — and this is now getting some traction, I think, with the government — is they want to crack down on China users within China using capacity remotely, right? This is the rental issue. So right now it is legal for a company in China to access, you know, cloud services from outside of China, and they want to put a stop to that. I don't know how big that is. I don't know. I don't.
What's your impression of Jensen's overall involvement in the company? And again, we hear these stories that like a lot of the deals are sort of personal handshake deals between him and, you know, customers. What was his day-to-day like at Nvidia?
Well, I guess we know a little more about his day-to-day now, unfortunately, than I wanted to. He's always running around. I mean, he is the — he's the face. I mean, his job, it's kind of, you know, he's sort of the chief technologist and the chief strategist, and he's also like almost like the chief sales guy and the chief storyteller, right? In some sense, right? And he's kind of been an evangelist like for AI internally. I mean, look, as you've said, he's got a very flat organization. Most of the key folks report to him directly. He makes all of the key decisions, and by that, that's a positive sense that they can move very, very quickly. We're seeing all these folks come out of the woodwork now about, you know, oh, they had some huge problem and they were in dire straits, and they emailed Jensen, and Jensen, you know, fixed the problem in seven minutes or whatever it was. They could move at a pace that most companies could not because he had that degree of direct control. I think a lot of these deals out there are handshakes, or if they're not, I mean, you've got customers and suppliers that are presumably adding capacity because they trust Jensen, and Jensen's convinced them to take that leap of faith and build it. And I think those are going to be very difficult things for a new CEO to come in and fulfill. Like, I'm not really worried about the operations. I mean, they've got very smart people there and they've got great technologists, and I'm not really worried about that at this point. That said, like, the degree of direct control that Jensen had, it worked very, very well while he was there. It's going to cause problems, I think, once he's gone, for sure.
On technology, like, okay, there's who knows how smooth the sort of operations will continue. As a technologist over the years, you have to make some big calls, right? And so when you think like, okay, maybe with the AI or the tech roadmap for the next year or two is understood, but like presumably there are going to be big calls that have to be made in future, and he clearly has a good — had an amazing track record of, you know, knowing where the puck was going and making — getting some big calls right. How do you think about that sort of medium-term risk and the capacity of Nvidia?
That's exactly what I'm worried about. So again, I'm not worried about so much the revenue next year, maybe even '28, but I mean, you think about the roadmap. They're shipping Rubin now. Rubin is baked. Rubin Ultra sounds like it's baked. Like Feynman, I guess, will be next. I don't know how fully baked that is. And then what comes after Feynman, and what are the kind of calls they — what's the architecture look like? What kind of memory architecture are they using? How much HBM is going to be there? Are they going to use something like — who knows? These are big major inflections that will have to be called. And to your point, he's had a very good track record. And so that's my issue, like, he's the one that sits there and thinks out like five years, ten years. He's the one that's seeing around those corners. The reason they are so dominant today is because of decisions that he made, you know, ten years ago.
