To The Moon

Over the course of the past week, NVIDIA Inc ( $NVIDIA Corp(NVDA)$ ) has seen significant performance. Over the course of the week, however, NVIDIA was not the only one raising market momentum in the tech-heavy Nasdaq-100 ( $NASDAQ 100(NDX)$ ).

Advanced Micro Devices, Inc ( $Advanced Micro Devices(AMD)$ ) followed closely behind NVIDIA while diminutive Marvell Technology ( $Marvell Technology(MRVL)$ ) showed the greatest rise. In fact, its 41% return in the past week ensured that its shareholders accrued a staggering 208% gain over a five-year window.

Interestingly, these same names – along with a few other “AI-adjacent” tickers – rounded out the net effect to generate a nearly identical momentum in the broad-market S&P 500 ( $SPDR S&P 500 ETF Trust(SPY)$ ).

Even the Russell 2000 – comprising of small cap stocks – shows the same effect, albeit at a vastly attenuated net momentum contribution. Diminutive C3.ai Inc ( $C3.ai, Inc.(AI)$ ) and Super Micro Computer Inc (NASDAQ: SMCI) showed a vast rally to close the hemorrhaging small-cap segment with a minute net positive momentum of 0.19% among its Top 25 momentum contributors.

What is telling, however, is that the rest of the market – both broad and tech-heavy – has been showing a growing cumulative slump in the Year Till Date (YTD). As per Bank of America late last week, all of seven Big Tech stocks were up 70% in equal-weighted terms as compared to the other 493 stocks in S&P 500, which was up only 0.1%.

The bank also makes an interesting distinction: cumulative inflows over the last 15 years indicate no large-scale sustained deviations between being invested in specific names over the broad market until around 2019. From this point forward, inflows began to diverge largely in favour of specific names.

The bearishness in the market does have some macroeconomic backing: contrary to proclamations of relief every other month in relaxations of CPI year-on-year increases across many financial media publications, there has been no sustained pivot in core inflation trends for almost 13 years now across the Western Hemisphere (and Japan).

In fact, since 2021, there has been a 14% increase in the US’ core CPI alone.

This somewhat explicates why, in net terms, lower unit sales translates to higher dollar revenues: as goods and services get more and more expensive, one can sell fewer goods/services to make the same amount in unadjusted dollar terms. Even when the market beats already-depressed earnings estimates, this continues to signify fewer sales in unit terms.

There’s a hint of this effect even in exports from China to the U.S. and the rest of the world.

While there is a slight uptick in the rest of the world (predominantly in the Western Hemisphere (and even Latin America), exports to the world’s largest consumer – the U.S. – show a declining trend. This trend remains sustained despite the Chinese renminbi effectively being pegged lower in recent times to make it cheaper relative to the U.S. dollar.

This brings up the question: why has Big Tech in general (and AI in particular more recently) been receiving so much capital commitment in the market lately? This is due to a phenomenon that could broadly be classified as the “Treasury Stock Effect”. Essentially, certain companies are being assumed to irreplaceable over the mid- to long-term (i.e. “at least for now”), which has led to a concentration of convictions in Big Tech. The outsized recent attention to “AI” stocks is essentially being driven by the notion that AI would be the impetus for companies being able to reduce “costly” human-driven activities by substituting them with blocks of “smart code”.

It isn’t the first time such a perception has manifested. Over the last one thousand years, every point of inflection (or “technological disruption”) – from the printing press to the polio vaccine – had created a bubble in the world of commerce.

The result of every bubble has been the same: inevitably, most bubbles collapse and many of the companies with the loftily-valued stocks chug on in the new normal.

The closest parallel to a world-changing paradigm that most in the present day can relate to would be the dot-com era in the late nineties to the early noughties, which laid the groundwork for the importance of Big Tech to American commerce. Scott McNealy, CEO of Sun Microsystems – a darling of the dot-com bubble era – had this to say in an interview with Bloomberg in 2002 over the implications of the lofty Price-to-Sales Ratio of 10X that his company’s stock had once risen to:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

Mr. McNealy’s exclamation was in response to the lofty valuations bestowed on his company. 10.7 was the highest Price-to-Sales (PS) Ratio it ever had. After that, the company’s stock waned away until Oracle acquired Sun Microsystems in 2009-10.

Incidentally, Oracle is currently trading around the 6-7X PS Ratio range. AMD’s is almost 9 while NVIDIA’s is almost 38.

Much like many buzzwords before, “AI” is turning into a shibboleth that many investors are implying would mean dizzying results when the empirical reality is that, all too often, the transformation would neither be contained to nor remain with a few names. Furthermore, the rate of transformation would by no means be comprehensive or total: the printing press didn’t entirely supplant the written word, the polio vaccine didn’t mean freedom from all disease, the telegraph didn’t become the “be-all, end-all” to communications until its eventual demise, and the Man on the Moon didn’t translate to giant space cities (at least, not yet!)

So, what becomes of the bubble? In realistic terms, the first to exit tend to be the largest net winner while the last to remain holding tend to be the net loser. Such is the market; it seldom remains irrational (or, for that matter, rational) for too long. Overall, most market indicators are heading steadily into the “Bearish” range.

Caveat emptor.

However, for sophisticated investors looking to make tactical plays on either side of the market’s latest trajectory, there are a host of Exchange Traded Products (ETPs) available. For instance:

• NVIDIA has $NVD3 for a 3X exposure to the upside while $NV3S does the same for the downside.

• AMD too has a 3X ETP for the upside ($AMD3) and a -1X ETP - which is equivalent to a short without requiring margin maintenance - for the downside ($AMDS).

• For investors looking to stay invested in Big Tech, the newly-launched FAANG+ ETP ($FAN1) provides an equally-weighted exposure to the 10 biggest names in tech.