NVDA GTC, M&A Wiz / Goog $32 B Deal, April 2 Tariff Uncertainty; Huawei Belt & Road; ChatGPT | BG2

This episode explores the complex interplay of global trade tensions, AI advancements, and market uncertainties, highlighting critical implications for investors navigating the evolving landscape of technology and finance.

Structured and Narrative Organization

Global Madness and Market Uncertainty

• Brad opens by acknowledging the rapid pace of global events, from political developments in Washington to advancements in AI at Nvidia's GTC event. He emphasizes the simultaneous existence of acceleration and caution, noting that while the "golden age" of AI is approaching, short-term uncertainties warrant careful consideration.
• Brad expresses excitement about "Invest America" initiatives.
• He highlights the unsettling impact of rapid AI advancements and policy changes on the markets.
• "I'm super bullish on where all of this is headed... [but] some of this caution is warranted in the short run."

Market Correction and Economic Concerns

• Brad reflects on his earlier prediction of market disruption, noting the subsequent correction in tech stocks, particularly the "MAG7." He discusses the shift from uncertainty-driven concerns to fears of recession and slowing growth, citing worsening consumer and business confidence.
• NASDAQ is down approximately 10% since Brad's previous cautionary remarks.
• Airline data, particularly TSA passenger growth, indicates a downturn in consumer spending.
• The Atlanta Fed's GDP tracker has turned down significantly.
• The Fed lowered its GDP estimate and raised its unemployment and inflation expectations.

Administration's Stance on Globalism

• Brad delves into the administration's perspective on restructuring globalism, referencing J.D. Vance's speech on the "two conceits of globalism." He explains the administration's belief that unfettered free trade has harmed the American middle class and that tariffs are necessary to re-industrialize the country.
• Vance argued that cheap labor is a crutch to innovation.
• Treasury Secretary Scott Bessant calls it the "American detox period," suggesting short-term pain for long-term gain.
• Reciprocal and sectoral tariffs are expected to be announced on April 2nd.

Positive Economic Indicators and Market Sentiment

• Despite the negative indicators, Brad points to positive signs, including strong consumer spending data from credit card companies and banks. He notes that many fund managers have reduced their market exposure but anticipate a strong back half of the year, creating a potential buying opportunity.
• Bank of America's Brian Moynihan reported a 6% year-over-year increase in consumer credit growth and bank expenditures.
• Many fund managers are in their bottom quartile of exposures but expect a strong rebound.
• CEOs are on hold, awaiting the April 2nd tariff announcements before making major decisions.

Tariffs and Trade Negotiations

• Brad emphasizes that the upcoming tariffs are not merely a negotiating tactic but a principled approach to restructuring globalism. He anticipates a detailed outline of trade and non-trade barriers with specific countries, expecting negotiations to follow.
• The administration believes the middle class was hollowed out by offshoring labor.
• Around 15 countries will be outlined, with expectations of preemptive or post-facto negotiations.
• The impact on the semiconductor industry is uncertain, with arguments for and against tariffs.

Brad's Perspective on Comparative Advantage

• Brad expresses his belief in comparative advantage, arguing that restricting trade with countries that have lower labor costs will ultimately weaken the U.S. He cites China's growing dominance in the auto market as an example of the challenges of reorienting domestic industries.
• "I remain... a big believer in comparative advantage."
• He questions whether GM and Ford can compete with Chinese automakers in the short term.
• He notes Morris Chang's comments about the challenges of manufacturing in the U.S.

Debate on Tariffs and Global Competition

• Brad acknowledges the administration's concerns about the hollowing out of the middle class but suggests a middle ground of fair trade with appropriate incentives for strategically important industries. He questions the scale of the proposed tariffs, suggesting that a moderate increase might be manageable, while a drastic increase could trigger a recession.
• Last year, the U.S. generated $65 billion in tariff revenues.
• Brad suggests that increasing tariff revenue to $120 billion might be manageable, but $1 trillion could be detrimental.
• He believes the administration's goal is a fairer playing field, not protectionism.

Communication and Market Uncertainty

• Brad criticizes the administration's combative communication style, arguing that a calmer, data-driven approach would be more effective in achieving its goals. He notes that market uncertainty, particularly regarding tariffs, is a major factor driving down the Fed's median forecast.
• "If reciprocity is the goal, I really think that the communication could be done better."
• He believes the market reset is primarily driven by fear over tariffs.
• He anticipates more clarity in the next 60 days.

European Relations and Potential Trade War

• Brad highlights concerns about Europe's reaction to U.S. policies, citing comments from the editor of The Economist suggesting that European leaders might trust China more than the U.S. He warns that this could lead to unintended consequences, such as ASML defying U.S. restrictions on sales to China.
• Xenia Wickett, editor of The Economist, noted that European leaders are "angry and chafed."
• Brad suggests that Europe might side with China, potentially leading ASML to ignore U.S. restrictions.

Re-onshoring and Conditional Tariffs

• Brad supports the strategic objective of re-onshoring fabs but suggests a conditional approach to tariffs, delaying their implementation to incentivize domestic manufacturing without hindering the AI race.
• He agrees with the goal of re-onshoring fabs.
• He proposes conditional tariffs, delayed for two years, to incentivize domestic manufacturing.
• He believes this would be a reasonable middle ground.

Google's Acquisition of Wiz and the M&A Market

• Brad discusses Google's acquisition of Wiz, a cloud security company, for $32 billion, highlighting it as a potential litmus test for the administration's stance on M&A. He notes the slow pace of M&A and IPOs under the Biden administration and sees this deal as a potential positive signal.
• Google announced a $32 billion all-cash deal to acquire Wiz.
• Wiz is expected to generate $1 billion in ARR this year.
• The deal values Wiz at over 30 times forward revenue.
• The M&A market is showing signs of revival, with corp dev teams returning to activity.

Google's Strategic Rationale

• Brad analyzes Google's strategic rationale for the acquisition, suggesting that it may be driven by limitations on acquisitions in other areas due to regulatory concerns. He believes that security is a logical area for Google to differentiate itself in the cloud market.
• Google may be limited in acquiring companies related to search, AI, or YouTube.
• Enterprise is a less dominant area for Google, allowing for potential acquisitions.
• Security is a potential differentiator for Google in the cloud market.
• A $3.2 billion breakup fee indicates the deal's complexity and potential regulatory hurdles.

Wiz's Success and the Power Law

• Brad highlights Wiz's rapid growth, achieving a $32 billion valuation in just five years. He contrasts this with Altimeter's investment in Lace Work, a competitor that failed to achieve the same level of success, emphasizing the razor's edge between success and failure in the tech industry.
• Wiz was founded in 2020 and is being sold for $32 billion.
• Index Ventures and Doug Leone were key investors in Wiz.
• Altimeter invested in Lace Work, a competitor that did not achieve the same success.
• "It is a razor's edge between... the promised land and... not making anything."

Repeat Entrepreneurs and Enterprise Success

• Brad emphasizes the importance of repeat entrepreneurs in the enterprise space, citing their learned experiences and go-to-market expertise as key factors in increasing the probability of success.
• "Repeat entrepreneurs in the enterprise space are a golden ticket."
• He cites Workday as an example of a successful repeat venture.
• He highlights Doug Leone's late-career success with Wiz.

FTC's Stance on M&A and Regulatory Environment

• Brad discusses the FTC's stance on M&A under Chair Matthew Ferguson, clarifying that Ferguson's approach differs from his predecessor, Lena Khan. He emphasizes Ferguson's commitment to swift action, either going to court or getting out of the way, and his focus on fraud, monopoly, and collusion rather than regulation.
• Ferguson has stated, "We're not going to be differential to the C-suite; we are going to be the cop on the beat for big tech."
• Ferguson differs from Khan in his commitment to swift action and focus on fraud, monopoly, and collusion.
• He believes this could unleash significant economic growth and M&A activity.

IPO Market and European Concerns

• Brad notes increased activity in the IPO market, with several companies rumored to be preparing for public offerings. He raises concerns about the European response to the Google-Wiz deal, suggesting that it could become a point of contention in trade negotiations.
• Companies like CoreWeave, Cerebras, and Clari are rumored to be preparing for IPOs.
• Brad's firm is receiving calls from investment banks, indicating increased IPO activity.
• European regulators could pose a challenge to the Google-Wiz deal.
• This could become a non-tariff trade barrier issue in trade negotiations.

Nvidia's GTC Event and Market Sentiment

• Brad discusses Nvidia's GTC event, highlighting Jensen Huang's leadership and the company's central role in AI. He notes that the stock is trading at a relatively low multiple compared to the S&P 500, reflecting concerns about demand and competition.
• Jensen Huang is in "full founder mode," and Nvidia is executing brilliantly.
• Nvidia is trading at about 20 times next year's consensus earnings estimates.
• The market is concerned about AI hype, demand sustainability, and competition.

Nvidia's TAM Expansion and Demand Projections

• Brad highlights Huang's comments on the expanding total addressable market (TAM) for AI data centers, with projections increasing from $250 billion per year to $1 trillion per year by 2028. He explains that this growth is driven by the shift to accelerated compute for coding agents and other AI workloads.
• Huang initially projected $2 trillion in TAM over four years.
• He now projects $1 trillion per year by 2028.
• This growth is driven by the shift to accelerated compute for coding agents and other AI workloads.
• Coding agents are expected to displace a significant amount of handwritten code.

Nvidia's Product Roadmap and Competitive Landscape

• Brad discusses Nvidia's product roadmap, including the Blackwell supercomputer, which is 40 times more capable than Hopper. He notes that despite the company's strong performance, the market remains cautious, awaiting confirmation of sustained demand.
• Blackwell is 40 times more capable than Hopper.
• Demand for Blackwell is "off the charts."
• The market is taking a "wait-and-see" approach.
• Nvidia is likely to grow at the rate of its earnings growth.

Debate on Scaling and Token Count

• Brad and the other speaker engage in a nuanced discussion about scaling in AI, acknowledging that pre-training scaling may have slowed, while inference scaling continues. They debate the relevance of token count as a metric, comparing it to CPU clock cycles in the past.
• Pre-training scaling may have slowed, while inference scaling continues.
• The discussion of token count is seen as "ultra-promotional."
• Nvidia's Reuben architecture suggests a shift towards inference.

Nvidia's "Chief Revenue Destroyer" Comment

• Brad and the other speaker discuss Huang's comment about being the "chief revenue destroyer," suggesting that it may have created anxiety among customers concerned about the rapid obsolescence of their investments. They clarify that the comment refers to the superior TCO of Blackwell compared to Hopper, not the invalidation of existing investments.
• Huang's comment may have created anxiety among customers.
• The comment refers to the superior TCO of Blackwell compared to Hopper.
• Hopper continues to improve through software upgrades.
• Nvidia's rapid innovation puts pressure on competitors.

Nvidia's Competitive Advantage and Tariffs

• Brad highlights Nvidia's competitive advantage, noting its rapid execution, strong supply chain, and planned product roadmap. He discusses Huang's comments on tariffs and the Biden AI diffusion rule, expressing concerns about the potential negative impact on U.S. competitiveness.
• Nvidia has a significant lead over competitors like AMD and Intel.
• Huang believes tariffs will not have a near-term impact on Nvidia's business.
• The Biden AI diffusion rule could hinder U.S. exports and benefit Huawei.

Export Controls and the Risk to Nvidia

• The other speaker emphasizes that government action, particularly export controls, is the number one risk to Nvidia's stock. He expresses concerns about misplaced anger towards China and the potential for unintended consequences, such as the rise of Huawei as a competitor.
• Government action is the number one risk to Nvidia's stock.
• Concerns about China are seen as "overly angry" and potentially misplaced.
• The Biden AI diffusion rule could lead to a "Huawei belt and road."
• U.S. policies have forced China to build a vertically integrated domestic supply chain.

ASML and European Relations

• The other speaker raises concerns about the U.S. government's restrictions on ASML, a Dutch company, suggesting that it could provoke Europe and lead to ASML defying U.S. restrictions on sales to China.
• ASML is a Dutch company with dominant market share in lithography equipment.
• U.S. restrictions on ASML could provoke Europe.
• ASML might defy U.S. restrictions and sell to China.

Conditional Tariffs and Re-onshoring

• Brad reiterates his support for re-onshoring fabs but suggests a conditional approach to tariffs, delaying their implementation to incentivize domestic manufacturing without hindering the AI race.
• He supports re-onshoring fabs.
• He proposes conditional tariffs, delayed for two years, to incentivize domestic manufacturing.
• He believes this would be a reasonable middle ground.

Consumer AI Demand and Contribution Margins

• Brad and the other speaker discuss the state of consumer AI demand, noting that Chat GPT remains the dominant player, with competitors struggling to gain traction. They delve into the issue of contribution margins, questioning whether AI companies are selling dollars for 50 cents and losing money on each incremental unit of business.
• Chat GPT remains the number one app in the app store.
• Competitors like Deepseek, Grock, and Gemini have struggled to gain significant traction.
• OpenAI is believed to be massively supply-constrained.
• Contribution margins are a key concern, particularly for companies with indirect sales channels.

The "Girly Negative Gross Margin AI Theory"

• The other speaker introduces the "Girly Negative Gross Margin AI Theory," suggesting that the combination of messy unit economics, VC funding, winner-take-all mindset, and steep price declines could lead to unsustainable business models and potential resets.
• Unit economics are messy due to variable costs, capex, and depreciation.
• VC funding and a winner-take-all mindset can lead to unsustainable pricing.
• Stacking of negative gross margins could lead to triple-counting of revenues.
• Steep price declines on models could encourage unsustainable pricing.

Comparison to the Internet Revolution and Unit Economics

• Brad and the other speaker agree that unit economics are messy and that current AI business models are not yet proven to be as profitable as those of internet giants like Google. They emphasize the importance of direct customer acquisition and low marginal costs for sustainable success.
• Unit economics are messy and difficult to compare across companies.
• Current AI business models are not yet proven to be as profitable as Google's.
• Direct customer acquisition and low marginal costs are crucial for sustainable success.
• OpenAI is seen as the best-positioned independent player.

Final Thoughts and Future Outlook

• The market is in a period of consolidation and uncertainty.
• Nvidia is trading at a relatively low multiple, reflecting concerns.
• Significant product releases and regulatory changes are expected in the coming months.
• The next 90 days will be critical in determining the future trajectory.

Actionable Insights and Strategic Implications

• Monitor Tariff Developments: Closely track the April 2nd tariff announcements and subsequent negotiations, as they could significantly impact the tech sector and broader economy.
• Assess M&A and IPO Activity: Watch for signals of increased M&A and IPO activity, as they could indicate a more favorable regulatory environment and boost investor sentiment.
• Scrutinize AI Unit Economics: Carefully analyze the unit economics of AI companies, paying close attention to contribution margins, customer acquisition costs, and variable expenses.
• Track Nvidia's Performance: Monitor Nvidia's performance and market sentiment, considering both its strong fundamentals and potential risks from government action and competition.
• Evaluate AI Business Models: Assess the sustainability of AI business models, focusing on companies with direct customer acquisition, low marginal costs, and clear paths to profitability.
• Consider Geopolitical Risks: Factor in geopolitical risks, particularly regarding U.S.-China relations and potential trade wars, when making investment decisions.

Speaker Attribution and Analysis

• Brad (Host): Brad is the primary speaker, driving the conversation and providing in-depth analysis of market trends, economic indicators, and policy developments. He demonstrates a strong understanding of the tech industry, finance, and geopolitics, offering a balanced perspective on both opportunities and risks.
• Bill (Guest): Bill provides a valuable counterpoint to Brad's views, particularly on topics such as comparative advantage, tariffs, and the sustainability of AI business models. He offers a more skeptical perspective on government intervention and emphasizes the importance of market forces.

Technical Terms and Contextual Enrichment

• MAG7: Refers to the seven largest tech companies: Microsoft, Apple, Nvidia, Amazon, Alphabet (Google), Meta (Facebook), and Tesla.
• GDP Now: A real-time tracker of GDP growth maintained by the Atlanta Fed.
• Dot Plot: A chart summarizing the Federal Reserve's projections for interest rates, GDP, unemployment, and inflation.
• Globalism: The interconnectedness of countries through trade, investment, and cultural exchange.
• Tariffs: Taxes imposed on imported goods.
• Non-Tariff Barriers: Regulations, standards, or other measures that restrict trade without imposing direct taxes.
• Comparative Advantage: The ability of a country or company to produce a good or service at a lower opportunity cost than its competitors.
• Re-onshoring: The process of bringing manufacturing or other business operations back to a company's home country.
• ARR (Annual Recurring Revenue): A metric used to measure the predictable revenue generated by subscription-based businesses.
• Corp Dev: Corporate development, the department within a company responsible for mergers, acquisitions, and other strategic investments.
• FTC (Federal Trade Commission): A U.S. government agency responsible for enforcing antitrust laws and protecting consumers.
• GTC (GPU Technology Conference): An annual event hosted by Nvidia showcasing advancements in GPU technology and AI.
• TAM (Total Addressable Market): The total market demand for a product or service.
• CSP (Cloud Service Provider): A company that provides cloud computing services, such as AWS, Azure, and GCP.
• TCO (Total Cost of Ownership): The total cost of acquiring, operating, and maintaining an asset over its lifetime.
• ASIC (Application-Specific Integrated Circuit): A custom-designed chip optimized for a specific task.
• AI Diffusion Rule: A U.S. government regulation restricting the export of advanced AI chips to certain countries.
• Contribution Margin: The revenue remaining after deducting variable costs, representing the amount available to cover fixed costs and generate profit.
• TAC (Traffic Acquisition Cost): The cost of acquiring website traffic or customers through advertising or other marketing channels.

The show notes prioritize precise, direct, and insightful language, avoiding filler words and vague phrases. Each section focuses on conveying key information and actionable insights concisely and effectively.

Reflective and Strategic Conclusion

The discussion underscores AI's transformative potential amidst significant geopolitical and economic uncertainties. Crypto AI investors and researchers must actively monitor policy shifts, scrutinize business models, and adapt to a rapidly evolving landscape to capitalize on emerging opportunities and mitigate risks.