Gavin Baker - AI Market Jitters - [Invest Like the Best, EP.485]
Gavin Baker - AI Market Jitters - [Invest Like the Best, EP.485]
1 hour ago•Invest Like the Best with Patrick O'Shaughnessy•Colossus | Investing & Business Podcasts
Podcast1 hr 5 min
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Note: AI-generated summary based on third-party content. Not financial advice. Read more.
Quick Insights

Investors should treat current market pullbacks in NVIDIA ($NVDA**)** as a prime buying opportunity, as AI demand shows zero fundamental deceleration. NVIDIA ($NVDA**)** currently trades at its lowest forward P/E ratio in a decade, creating a compelling asymmetry if market fears of over-earning prove incorrect. Capitalize on major hyperscalers like Microsoft ($MSFT**), Meta ($META), and Amazon ($AMZN)** whose accelerating operating cash flows easily fund their massive AI infrastructure build-outs internally. As these tech giants transition away from older, lower-priced contracts to higher spot prices, their underlying earnings potential will expand significantly. Maintain confidence in these infrastructure leaders, as the existential risk of losing chip allocations ensures their supply chain agreements remain rock-solid.

Detailed Analysis

NVIDIA (NVDA)

  • Operating in an acute compute shortage with GPU availability, rental pricing, token growth, and spot prices of DRAM all accelerating.
  • The installed base of compute is trading at a massive discount to the current spot market, and as contracts roll off, compute is getting repriced higher.
  • Despite the growth, NVIDIA is currently trading at its lowest forward P/E ratio of the last 10 years, which suggests the market believes the company is significantly over-earning.
  • The company is utilizing a clever business model acting as a credit wrapper with a revenue share if GPU prices are above a floor, bypassing direct vendor financing while boosting revenue per gigawatt and strengthening its competitive position.
  • Mentioned as the dominant player with nothing more financeable than an NVIDIA GPU when attempting to secure debt financing for infrastructure.

Takeaways

  • Consider viewing current market pullbacks as potential buying opportunities given that fundamental quantitative metrics show zero deceleration in AI demand.
  • Recognize that NVIDIA's low forward P/E combined with accelerating operating cash flows from major hyperscalers presents an asymmetry if the market's fears of over-earning prove unfounded.

Microsoft, Meta, and Amazon (Hyperscalers)

  • Operating cash flows for Microsoft, Meta, and Amazon have accelerated significantly, moving from 28 to 32 (and up to 35 when adjusted for one-time unusual items like EU fines).
  • Major hyperscalers are currently under-earning because their installed base of compute is locked into older, lower-priced long-term contracts (LTAs) while spot prices for compute have gone vertical.
  • As these older contracts roll off and compute is repriced higher, operating cash flows are expected to grow further, allowing companies to fund a vast majority of their infrastructure build-out internally rather than relying on debt.

Takeaways

  • Monitor the continued acceleration of hyperscaler operating cash flows as the primary indicator of whether the AI infrastructure build-out can be sustainably funded without risky debt expansion.
  • Understand that the game theory surrounding long-term agreements (LTAs) creates massive stickiness; hyperscalers and major tech companies are highly unlikely to break their supply chain agreements due to the existential risk of losing future memory and chip allocations.

Krispy Kreme, Inc. (DNUT)

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Episode Description
My guest today is Gavin Baker, founding partner and CIO of Atreides Management. This is our seventh conversation, and just two months after Gavin's last appearance. It's about the gap between what the market is doing and what companies are seeing. It's been a tough month or so for public AI names, but there's no sign of a slowdown on the ground in Silicon Valley. We discuss the latest moves, contracted vs. spot GPU prices, the game theory of memory supply agreements, and why Claude has become the Walter Cronkite of the stock market. We close on SpaceX, orbital compute, and what Gavin sees as the single biggest risk to all of it. Please enjoy this conversation, from the famous table at Benchmark, with my friend Gavin Baker. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- Become a Colossus member to get our quarterly print magazine and private audio experience, including exclusive profiles and early access to select episodes. Subscribe at colossus.com/subscribe. ----- Ramp's mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to ramp.com/invest to sign up for free and get a $250 welcome bonus. ----- Trusted by thousands of businesses, Vanta continuously monitors your security posture and streamlines audits so you can win enterprise deals and build customer trust without the traditional overhead. Invest Like the Best listeners get a special offer of $1,000 off Vanta when you go to vanta.com/invest.  ----- WorkOS is the infrastructure B2B and AI-native companies use to sell to enterprise. It covers everything enterprise security requires: SSO, SCIM, RBAC, Audit Logs, AI governance, and more. Trusted by 2,000+ fast-growing companies, including OpenAI, Anthropic, Cursor, and Vercel. ----- Rogo is the AI platform for finance. They're building agents for Wall Street that are trained to understand how bankers and investors actually do work: from diligence and modeling, to turning analysis into deliverables. To learn more, visit rogo.ai/invest. ----- Ridgeline has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. Visit ridgeline.ai. ----- Editing and post-production work for this episode was provided by The Podcast Consultant. Timestamps: (00:00:00) Welcome to Invest Like The Best (00:02:35) First Question: July Was 2022 in a Month (00:04:08) The Private Companies Public Markets Can't See (00:05:06) Old GPUs Repricing Higher (00:06:53) Walking Through the Month (00:08:22) Kimi, GLM 5.2 & the Open Source Freak-Out (00:10:51) Real Yields, Spreads & CDS (00:11:54) Does the Build-Out Need Credit? (00:15:22) A Sell-Off With No Clear Villain (00:17:35) Open Source as Dark Matter (00:18:39) Nvidia's Lowest Forward PE in 10 Years (00:21:35) Claude as Walter Cronkite for the Stock Market (00:23:55) Continual Learning & Sample Efficiency (00:25:19) What Would Actually Scare Him (00:26:38) Routers & the Multi-Model Future (00:30:51) Tokens as a Percent of Comp Spend (00:33:37) The Game Theory of Breaking an LTA (00:36:41) Nvidia's Credit Wrapper & Revenue Share (00:37:45) What He'd Do If He Ran Hynix (00:41:46) Who's More Bullish than Him (00:43:28) China's DUV Machine (00:46:10) Bull Case for Software (00:48:16) The RSI Maximalist View (00:49:31) Inference Clouds Growing Without Burning Cash (00:50:35) The Biggest Risk Is Regulation (00:53:44) Telling the Story Better (00:57:15) Dark Horses (00:58:02) SpaceX in the Public Markets
About Invest Like the Best with Patrick O'Shaughnessy
Invest Like the Best with Patrick O'Shaughnessy

Invest Like the Best with Patrick O'Shaughnessy

By Colossus | Investing & Business Podcasts

Conversations with the best investors and business leaders in the world. We explore their ideas, methods, and stories to help you better invest your time and money. Hear stock market and boardroom insights you can't find anywhere else. If you're a professional investor, CEO, entrepreneur, or business strategist, this is for you. Explore all our episodes and learn more at https://www.joincolossus.com