Has Nvidia Become Too Big To Fail?

Ed Elson is joined by Liz Hoffman to break down Nvidia’s AI holding company strategy and why she thinks it has become too essential to fail. Then, James Taylor joins to unpack why he thinks this will be the most important earnings season of the year. Finally, Ed shares his take on President Trump’s deal with Putin. Liz Hoffman is the Business editor at Semafor. James Taylor is the Managing Director of Investments at The Taylor Group from Wells Fargo Advisors. Vote for Prof G Markets at the Signal Awards here Subscribe to the Prof G Markets Youtube Channel Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 0:00Scott Galloway?

  Support for the show comes from Alumni Ventures. We've said it before, diversification is our Kevlar vest. But do you know how concentrated your public stock fund actually is? A handful of mega cap stocks with an AI story are doing most of the work. That's not the diversification you think, especially when so much value creation is happening before companies ever go public. Alumni Ventures ranked a top 20 US venture firm by both Time and CB Insights, gives accredited investors a smart, simple way to assemble a blue chip venture portfolio and participate in the value creation that is occurring in private markets. You can sign up for free, see the weekly deal flow and decide for yourself. Or write one check into the Alumni Ventures Foundation Fund for a diversified portfolio of about 25 private venture deals.

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• 0:47Speaker 01

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• 0:57Speaker 02

  I'm Ina Garten, and each week on Happy Hour, I invite new and old friends for a drink and a fun conversation at my kitchen table in New York City. On this week's episode, I'm joined by Nathan Lane. We talk about his critically acclaimed run in Death of a Salesman, Taking His Dog to Therapy, and Winning an Emmy for Only Murders in the Building. New episodes of Happy Hour are available every Wednesday. You can watch on YouTube or listen wherever you get your podcasts. Cheers.

• 1:33Speaker 03

  Megan Rapinoe here. This week on Why Are You Like This? I am talking with Shrinkings and Ugly Betties, Michael Urie. We dig into his Plano, Texas upbringing and how Vanessa Williams had a huge impact on his career. I'm also weighing in on the Indiana Fever GM Amber Cox's comments on their fan base. Check out the latest episode of Why Are You Like This? Wherever you get your podcasts and on YouTube.

• 2:05Speaker 04

  Money markets mad. If money is evil, then that building is hell.

• 2:15Ed Elson?

  Welcome to Prof G Markets. I'm Ed Elson. It is October 13th. Let's check in on yesterday's market vitals. The S and 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 finally, Treasury futures were stable with the US bond market closed for the holiday. 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.

• 3:00Ed Elson?

  Every vote counts. We will leave a link in the description to make it easier for you. Thank you so much.

• 3:07Ed Elson?

  Okay. What else is happening? Nvidia isn't just the AI boom 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, D-Matrix. 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?

• 3:49Ed Elson?

  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.

• 4:24Liz Hoffman?

  I'm not just asking it. I am answering it. I think the answer is clearly yes. 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.

• 5:06Ed Elson?

  Do you think that that is part of the strategy to become entrenched, 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.

• 5:22Liz Hoffman?

  There is a lot of that going around, particularly with the way that the AI companies were talking about, please slow us down, right? That there is, the dark underbelly of that is, we need some implicit government backstop. And the way to do that is to kind of pull the mode up behind us. And I've always said the thing about the big banks post 2008 was you actually, you 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. And clearly that is kind of where the AI oligopoly is right now. 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.

• 6:07Liz Hoffman?

  His view is that this is software and like 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, 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.

• 6:33Ed Elson?

  Yeah, you described the company as an AI roll up 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. But you know, they, it is pretty remarkable how they've become something of an investment firm. They're almost becoming like an AI holding company. What does that mean for investors? Because now when you, when you invest in Nvidia, not just investing in a chip company, you're investing in a lot of ways and almost like a, an investment firm, an asset management firm. What do you make of that strategy?

• 7:10Liz Hoffman?

  Yeah, it's a pretty handy package if you're an investor saying, I kind of want all of it. Pretty, pretty easy way to do it, which is perhaps why eight cents of every dollar that's in the S and P 500 right now is, is in Nvidia. You're talking about, that's by the way, 20 to 25 trillion dollars of invested money between the straight index funds and, 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. Customer finance, right? The vendors 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

• 7:54Liz Hoffman?

  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. And 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, for their customers that are not. And then you could say, okay, well, maybe that's fine. But there's a reason that we like to have credit worthy counterparts and that kind of wrapping that up in some cloak almost certainly is going to have some springs fly loose at some point.

• 8:25Ed Elson?

  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 in, somewhere in AI land, potentially among the data centers. Of course, one of their investments, Fermus, 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.

• 9:08Ed Elson?

  Broadcom 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 build out and the extent to which Nvidia is either exposed or protected?

• 9:27Liz Hoffman?

  I think this is incredible technology and is clearly going to rewire the economy in lots of interesting and mostly positive ways. It'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, big stake in Intel. Fine investment.

• 10:12Liz Hoffman?

  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 or spook everybody. So you have to sort of think about the second order effects of these things. As you said, they have a very strong balance sheet. They don't carry a lot of debt relative to the, the other big players in the space. They actually just announced an $150 billion buyback, 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 they don't need to buy back their stock. Their stock price is very high. This is not a signal to investor. 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.

• 10:56Liz Hoffman?

  So you know, you got to look at the messaging here, too.

• 10:58Ed Elson?

  The 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.

• 11:15Ed Elson?

  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?

• 11:27Liz Hoffman?

  The caveat 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. 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. Obviously be incredibly emotionally like scarring and would almost certainly freak everyone out and the market would go down. And then you start, might start to see some things unravel. I wouldn't put them in that bucket, though.

• 12:10Liz Hoffman?

  They're just not, they're not entwined in the ecosystem in as many ways as Nvidia is. Nobody is.

• 12:17Ed Elson?

  Liz Hoffman is business editor at Semaphore. Liz, we always appreciate your time. Thank you.

• 12:22Liz Hoffman?

  Thanks, Ed.

• 12:24Ed Elson?

  After the break, a look ahead at earnings season and a reminder to please vote for us at Signal Awards. Go to vote.signalaward.com. We really appreciate it.

• 12:40Ed Elson?

  Support for the show comes from Zbiotics. After a night out on the town, your body just can't bounce back like it used to. It seems like you're forced to choose between a great night or a great next day. Well, that can change with pre-alcohol. Zbiotics pre-alcohol probiotic drink is the world's first genetically engineered probiotic. It was invented by PhD scientists to tackle rough mornings after drinking. Here's how it works. When you drink, alcohol gets converted into a toxic byproduct in the gut. It's a buildup of this byproduct, not dehydration is to blame for rough days after drinking. Pre-alcohol produces an enzyme to break this byproduct down.

• 13:23Ed Elson?

  Just remember to make pre-alcohol your first drink of the night. Drink responsibly and you'll feel your best tomorrow. With pre-alcohol, you don't need to choose between a fun evening and a great next day, especially when July is packed with barbecues, fireworks, lake weekends and late nights with friends. Keep the good times rolling into the next day. Drink pre-alcohol before you go out and wake up ready for whatever Sunday brings. Remember to head to zbiotics.com/profg and use the code profg at checkout for 15% off.

• 14:03Speaker 07

  Everyone's talking about the prospect of a democratic wave in the midterm elections. But here's something that matters just as much, the battle to control state legislatures.

• 14:13Speaker 08

  That's the most important thing we should be focusing on right now.

• 14:16Speaker 07

  The GOP has a trifecta in 23 states, which means they control the governor seat, plus the state house and the state senate. For Democrats, it's 16 states.

• 14:27Speaker 08

  Meaning that the opportunity to pass the policies that the majority of our state supports, things like increasing minimum wage, legalizing marijuana, codifying abortion.

• 14:38Speaker 07

  If Democrats flip just a handful of state legislatures, the majority of Americans will now live in the state under full democratic control, which could have big policy implications.

• 14:49Speaker 08

  That's all on the table with the democratic trifecta.

• 14:52Speaker 07

  This week on America Actually, we're in Wisconsin and we talked to Francesca Hong.

• 14:57Speaker 08

  We have an opportunity through Wisconsin to actually start improving the brand for Democrats.

• 15:03Speaker 07

  Catch us every Saturday on YouTube or wherever you get your podcasts.

• 15:09Speaker 09

  I'm Seth Matlinson on this week's episode of Creator Destroy: Reimagining Marketing. I'm talking with streetwear legend Jeff Staple, who in 2005 designed a Nike collab, which was the pigeon dunk that caused a riot, resells for thousands of dollars 21 years later and gets the credit or blame for bringing sneaker culture to the masses. In our conversation, we talk about why you can't buy your way into culture, no matter how big your check, why 40 hours of meetings a week with none of them talking about what the customer actually wants is the most common way he sees businesses destroy value. And why, when I asked him what he'd destroy with all the power in the world, Jeff said likes and comments, because if likes and comments existed when he started, he never would have made the next thing.

• 15:52Speaker 09

  Creator Destroy, it's a business show, a marketing show, and the show that argues they've always been the same thing. From the Wisdom is Company and the Vox Media Podcast Network.

• 16:09Ed Elson?

  We're back with Prof G Markets. Earnings season is kicking off this week and expectations are high. Analysts are expecting S and P 500 profits to grow almost 30% this quarter. Meanwhile, the S and 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 seven and a half percent 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.

• 16:52Ed Elson?

  So James, thank you for joining us. Earnings season starts on Tuesday. Analysts are expecting S and P profits to grow almost 30%, which is a pretty massive number. Your reactions, your thoughts heading into this earnings season?

• 17:10Speaker 10

  I'm not really worried about bad earnings. I think the earnings are going to be very good. I just don't know if they're going to be good enough to support current valuations. I hope that's going to be the case. I think the bank stocks are going to really give us a good preview into the consumer as well as how they are doing overall. They've definitely struggled, as you mentioned, you know, XLF essentially is flat for the year. So I think it's probably, I'd make the argument, it's probably the most important quarter from an earnings perspective, given that we had a rate hike. They're predicting another rate hike going into the end of the year. So I'm really curious to see how the banks report and then go from there.

• 17:48Ed Elson?

  Yeah, this brings us to the breadth of this market. And it seemed like we had a pretty broad and diversified market up until basically halfway through the year. And then suddenly, basically after the summer, you have tech really leading all of the gains. Four stocks accounting for half of the S and P's gains this year, Apple, Nvidia, Micron and AMD. How concerned are you about the fact that AI is, that this market has become so heavily dependent on AI, that it is so concentrated in fewer and fewer names?

• 18:22Speaker 10

  I am concerned. I think that, you know, a few years back, if you invested in any company that was spending in AI, you were fine. That worked out really well, kind of across the board. Now I think you have to be a lot pickier. I think investors are looking at these different companies and they want to see that there's actually a return on that spend and that's going to show up in earnings. So it's definitely something that I'm looking at. I'd feel a lot more comfortable if that breadth got increased pretty significantly across the board. And I said, I think this is probably the most important earnings season going into the end of the year.

• 18:55Ed Elson?

  Just looking at yields here, the 10-year yield is at 5.24%. It's come down a little bit, but still pretty high. The 30-year yield is at 5.6. What are your expectations for bonds over the next several months?

• 19:10Speaker 10

  If you told me coming into this year that we would be at a 24-year high with bond yields and the market would still be up, you know, in the teens, I would call you crazy. I think that's just a testament to, one, the consumer being really good, two, earnings being really good. And it's been an unbelievable year for these companies from an earnings perspective. We knocked the cover off the ball last quarter. I do think it's going to be similar. For bonds, I do think that, you know, you saw the re-hike, you know, a few weeks ago or last month, they kind of shrugged it off, the market did for that matter. I do think that bonds are starting to look a lot more attractive now on the municipal side, on the treasury side.

• 19:52Speaker 10

  So I really base everything off of, you know, for us personally, our clients' financial plans. So if I'm a conservative investor, I'm licking my chops. I'm going out and buying these individual bonds across the board. But if I'm more aggressive investor, I like equities. I think that there's a lot of good opportunities out there that we can take advantage of. And if there's a sell-off in the market, you know, we could buy names even cheaper.

• 20:14Ed Elson?

  So do you think this is really the buying opportunity in bonds right now? Because, I mean, This isn't something that has been a particularly sexy investment over the past few years, but it feels like maybe now is the moment for bonds once again.

• 20:27Speaker 10

  I mean, a 24-year high, right? You know, we have been, we have been seeing this for such a long period of time. So I think if you are a, you know, not an aggressive investor and you're, you know, between conservative and moderately aggressive, why not be adding bonds? It's going to lower the overall risk of the portfolio. Your principal is guaranteed by the US government or the municipality that you're investing in. And on the municipal bond side, you're getting tax-free income and tax-equivalent yield is looking pretty attractive. So I'm not against it. I think this is the first time in a long time that I've said, hey, like, maybe we should be taking a look at these because I do think they're very attractive. And I don't know how long it's going to stay here. You know, I do think if yields stay elevated for a longer period of time, equities will probably

• 21:12Speaker 10

  suffer as a result of that. So I don't think this is going to be like a, you know, a one or two-year thing. I could be completely wrong about that. But I would strike when the iron's hot, if it makes sense for your individual portfolio.

• 21:23Ed Elson?

  Midterms are three weeks from tomorrow. To what extent do you think the midterms will impact the markets? Will they have positive impact, negative impact, or will it not really influence things at all?

• 21:36Speaker 10

  Honestly, I think that certainty is a good thing, right? I think that right now everyone's going into midterm elections. We don't know who's going to win. Is there going to be a sweep on the Republican side? Is there going to be a sweep on the Democratic side? I don't know. I really don't. And I think that if you start and look at all these polls, you know, the polls have been wrong in the past. We have seen that. I think that that it could be a positive catalyst going into the end of the year, just because the market likes certainty. So once we kind of get that off our backs, I think it could be like a positive, you know, catalyst, like I said, going into the end of the year, once we figure that out.

• 22:09Ed Elson?

  Just to wrap here, do you have any thoughts on where the S and P will finish this year? I mean, we're in double digits. It's been pretty good. Do you think that it'll, it'll, it'll stay that way?

• 22:21Speaker 10

  I said, I've stuck to my guns, you know, even when the market was selling off, you know, at the end of July, everyone thought it was Armageddon. I thought it was a really good buying opportunity. You know, we were right about that. I do think we can get to the S and P 8,000 before the end of the year. Again, that's my opinion. I don't want to speak for my company as a whole, but I do think it's absolutely possible, especially on the back of strong earnings.

• 22:44Ed Elson?

  Okay. James Taylor is Managing Director at the Taylor Group from Wells Fargo Advisors. James, we really appreciate your time. Thank you.

• 22:51Speaker 10

  Thank you for having me. Have a good one.

• 22:57Ed Elson?

  President Trump has decided to make a deal with the devil. On Friday, he announced that he and Vladimir Putin had agreed for Russia to sell up to 300,000 tons of diesel. The deal was designed to help get diesel prices down, which had risen to $6.28 per gallon, and it worked a little bit. Futures fell about 5%. However, they still remain incredibly high. The price of diesel in the US is still up about 70% since the US launched its war on Iran. The move was heavily criticized by President Zelensky of Ukraine, who called it a, quote, "weak" decision. He also added that making concessions for President Putin

• 23:40Ed Elson?

  would, quote, "not bring peace or any benefit to the civilized world." In sum, he and Ukraine see this as a betrayal. And let's be very clear, it is. And we know that because right after Trump announced this deal and this energy ceasefire, Russia then launched another round of missile strikes onto Ukraine. In other words, Russia has essentially received America's blessing to keep doing what they're doing, which means that we will likely see thousands more Ukrainian deaths, as well as a continuation of the territorial expansion campaign that has turned millions of Ukrainians into refugees. Now, this isn't really a hot take. This is simply a recognition of what happens when you normalize a violent dictatorship.

• 24:25Ed Elson?

  We used to treat Putin as a pariah. He didn't change at all, and now suddenly we don't. Now I guess it's all okay. So why are we now allowing this? Well, it's because we are now desperate. The self-inflicted injuries of the tariffs and the war have resulted in some of the steepest price increases in years. Inflation has outpaced wage growth for five straight months, meaning that Americans are now, on average, getting poorer, and they are increasingly blaming this all on Trump. The president's approval rating has fallen to 30%, which is the lowest reading of this term so far. And with the midterms coming up, President Trump now has to scramble. So this deal with Russia is his hail mary

• 25:07Ed Elson?

  attempt to get gas prices down. And in doing it, he is both betraying our ally and endorsing our enemy. It is the perfect gift for one of the most evil dictators in the world. And while America might reap the short-term reward of marginally lower diesel costs, you can be sure that over in Eastern Europe, millions will be paying the price.

• 25:32Ed Elson?

  Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalane, Kristin O'Donoghue, and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.