Cash Is King: Dan Niles’ 2025 Investing Playbook
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Welcome to OK Computer. I'm Dan Nathan, joined by Dan Niles. He's the founder and portfolio manager at Niles Investment Management. Dan, welcome back to the pod. My pleasure, Dan. All right. You and I had a great pod. I think it was about a year ago. We were thinking about Q4 guidance. We were thinking about the MAC

grow. We were thinking about kind of what you expected and the largest secular shift that we have seen in technology in 25 years or so. You had a lot of great calls. The way you laid out the year kind of played out. We had some downward volatility in the

big gen AI trade in the summer, but it got back on its horse. We saw semi outperformance kind of wane a little bit as we got into the back half of the year. Software joined the party late in the year, but it's given a lot of it back. So we want to touch on a little bit of that. I want to obviously get your take on valuations. We've got some stuff to do here. Let's start out with that bullish outlook you had

for 2024, how some of the biggest themes played out for you as the way you're thinking about managing your portfolio, and maybe what's changed year over year, how you're thinking about coming into 2025. So coming into 2024, our forecast was we thought the S&P could be up 20% based on the Fed engineering the first soft landing since 1995.

And the S&P ended the year up 23%, and the Fed did, in fact, engineer the first soft landing since 1995. So that was good. However, going into this year, the preview that we gave was we could see the market up 10% if...

The economy doesn't re-spur inflation and multiples hold, but we could also see downside of 20% if inflation does in fact pick up. And our number one pick going into this year was cash, which sitting in a money market fund yields 4.5%. And we have no magnificent seven in our top five picks where last year we had Amazon and Meta.

And so that should give you an idea of how I'm thinking about this year, which is a lot more cautiously because inflation has been going up really since the middle of last year. Nobody cared right up until December 18th when Jerome Powell at his press conference said our inflation forecasts have, quote, kind of fallen apart.

At which point the market rolled over and went down 3%. I think that changes the environment looking forward where I thought the odds this year were close to 50% that the Fed wouldn't cut or raise. And after what we saw just recently for the inflation numbers, I'd say those are they're over 50% that they don't cut or

or race. Yeah. So by the time folks are listening to this on Wednesday, we're going to have that December CPI report. And if it is kind of a little hotter than expected, that would be the third month in a row. It would kind of line up with what the Fed had to say in mid-December. But let's be clear, that's a bit of a shock to a lot of investors or we wouldn't have had that downward volatility that we had right after the presser. So if inflation now is going to be the worry, a lot

of folks have kind of tried to make some similarities between, let's say, the dot-com bubble and what's going on with generative AI. I think, yeah, there's some similarities, but they're really, really different this time. And you mentioned that 95 was the last time the Fed had orchestrated a soft landing. And you and I recall very clearly that the secular shift that we saw

in the economy caused the S&P on average to return, I don't know, 20 plus percent between '95 and '99. So if your upside downside is up 10, down 20, your assumption is that we're back into late '21 where investors have to be focused on the pace

of rate hikes, if that is a potential. Now, granted, very different from a Fed funds at the four and a half upper band, but let's talk about how you think tech stocks, these long duration assets that got killed at the end of 21 into 22 because of the Fed's battle with inflation, how might they act if we have a Fed funds rate at four and a half percent for the better part of 25 with the Fed funds futures starting to price in

hikes, let's say, at some point this year. The other part of that is, and I've been talking about this really since mid last year, which is that I think there's going to be an AI digestion phase. And those are the highest multiples. And I'll give you just some data on that. So if you look at Microsoft, which by far is the biggest spender on AI infrastructure in the world, the president came out in a blog post on January 3rd and said, we're

we're going to spend $80 billion in CapEx. And, you know, people are on vacation on January 3rd. It's a Friday. Nobody's paying attention. And so the thought is, oh, my God, that's up a lot. That's terrific. It is on a fiscal year basis. It's up about 44%. But remember, Microsoft's year ends in June. So Microsoft had...

CapEx for September quarter that they reported was $20 billion. That would be up in the December quarter, so obviously more than $20 billion. So that means in the back half of calendar 24, they will have spent over $40 billion, which means in the front half of calendar 25, they're going to spend less than $40 billion. So your year-over-year CapEx spend goes from 70% to 80%, which is what it was running for the last six quarters through...

this December quarter, it'll go down to basically zero by the time you get to June. So that's the other part of this, which is if you have inflation, which by the way, headline PCE bottomed in June and has been going up. Core CPI has been going up since Q3. And much like in 2021, when nobody cared,

when inflation went from 1.4 to 7%, right? Because the Fed said it was transitory. And it's like, oh, that's great. It's going to go way by itself. And the S&P was up 27%. That obviously changed

When the Fed finally admitted, no, it's not transitory and started hiking. So you put that together with the trailing PE at the end of 95, the last Fed soft landing was 17 times. The trailing PE today is 25 times. So you're at a much different starting point. The other thing is when CPI is between 2.5% to 3%, the 10-year treasury yield has been up at 5.8%. Today, it's about a percentage point lower than that.

And the market multiple is sitting at about 19 times trailing versus 25 times trailing today. So you don't have any kind of valuation support. And so you're going to have to thread the needle to have the market keep its multiple where it is and the earnings growing 10% because I'm not worried about the economy. That's

to some degree, part of the problem, which is GDP is already growing at 3%. Unemployment's sitting down at 4%. And the Fed has 100 basis points of cuts that they did since September. They're going to start flowing through the pipeline as you get into this year. And you have a new administration starting on January 20th, where a lot of the policies are

are pro-growth, but that also means they're inflationary by definition. And so you put all that together, and I think this is going to be a very volatile year, especially if you have rate pause or hikes combined with problems with AI CapEx.

Let's go back to that Microsoft because you're talking about Jan 3rd. I did that math too, Dan. I was looking at the fiscal number that they put out and I was looking at more the calendar year and I was trying to do apples to apples with some of their competitors and I was trying to kind of think about what percentage of that was going to be on chips, what percentage of it was going to be in the U.S., what percentage of it

in general, was what it looked like year over year. What did it look like sequentially? And I just didn't have too many positive things to take away, especially relative to investor expectations about CapEx spend. 40% of NVIDIA sales come from Google, Microsoft, Amazon, and Meta. One of the things, I'd love to get your take on this because you and I haven't talked about this, that Broadcom guidance towards 2027,

addressable market, right? And what percentages they might take on that. All four of those customers and other ones of NVIDIA who are looking to get a bit more specialized as it relates to their GPU purchasing. I say to myself, this Q4 result, less important than Q1 guidance or what you can extrapolate for 2025 CapEx, because that's the story for this. And I don't call it Mag7 anymore. Once Mag7

Broadcom got into that trillion dollar market cap. I'm calling them the fateful eight. The fate of the market is in the hands of these eight stocks, Dan. So let's talk about Microsoft's underperformance. And let's also talk about coming into this year, your top picks. None of them are in that mag seven. And I'm assuming maybe not Broadcom either. So let's just call it the fateful eight. Companies like Marvell or Broadcom

or Broadcom are helping the hyperscalers develop their own chips. And that's another headwind you have. But really, the big headwind is if you have the biggest companies in the world slowing down their CapEx because they're just not seeing the returns. Think about it this way. Microsoft, after they reported their June quarter, they guided below the street for revenues for the September quarter.

Then when they reported the September quarter, they guided below the street for the December quarter. So, and it's been mixed for all of the other hyperscalers as well, with the exception of Meta, which is not really a hyperscaler, but Meta,

You know, Meta has been getting a lot of great returns from their spending on AI. But for the rest of them, it's sort of been a mixed bag. And much like you saw during the internet infrastructure build-out, you went through these periods of strong growth, then pauses, then strong growth, then pauses. And I think you're going to go through a period of pause because if you step back and you say, okay, the world is led by consumer demand, right? GDP in the U.S. is 70 plus percent coming out of a consumer.

What consumer device has AI really spurred demand of? Hasn't been smartphones, hasn't been PCs, there's really nothing. So you've built out all this infrastructure, but the resulting revenues that you're hoping to drive just aren't there. There hasn't been a killer ad. And that's really the issue when you're spending this amount of money. And Microsoft stock was only up 12% last year.

He was up 23 and dramatically underperformed the rest of the Magnificent Seven because their cash flow was getting just crushed as their CapEx as a percentage of revenues is

has gone from 12%, let's say, for AI to over 25% with the spending they've been doing on AI. And that's the biggest ramp you've seen out of any of the big three with Google and Amazon more like going from 10% of CapEx as a percent of revenues to more like mid-teens.

over that same period of time. And I think all of them are looking at each other, trying to figure out how much are they gonna spend, because when one guy blinks, I think you're gonna see the rest of them blink as well. So the CapEx guidance for all of these companies, with the exception of Meta, which is seeing the returns to justify their spending, 'cause their numbers have gone up a lot last year, which is why the stock did so well. I think that's one of the big things I'm going to watch. And so if you go through the rest of my top five picks, besides cash,

What I'm focused on is more fiber to the home because you can think about a very big picture as last year, 2024, you spent generating all this AI data. This year, 2025, I think you're going to try to figure out how to network that for corporations, which is where Cisco comes in. And fiber to the home, which is where AdTran comes in, driven by the telcos, both abroad, Deutsche Telekom, British Telecom.

as well as in the U.S., where you're going to have bead funding, which is about $42.5 billion going to underserved communities to try to get broadband there. I think you're going to see that start to roll out middle of this year. I like the bank stocks, KBWB. Their deregulation tax cuts should really help that sector, which really got hurt two years ago when you had all those bank failures, Silicon Valley Bank, Signature Bank.

First Republic. S&P has been up 23%. That has been down 4% actually over the last three years. And the final one is really the mid-cap value index, which has held up incredibly well during the tech bubble break, as well as when rates were getting hiked in 2022. That sector has been pretty much forgotten as all the money over the last five years has moved to the Magnificent Seven, first driven by COVID, which you had all this internet infrastructure spending as a

growing online. And then for the last two years, it's been all about AI infrastructure spending. So if you look at the mid-cap space, they're trading at a 17 PE versus the S&P at 25 times. And the S&P over the last five years is up about 82%. And the mid-cap index has underperformed that by 35. So 35%. So I think you're going to see some catch up this year as these policies by the Trump administration really

focuses on things that should help this mid-cap space with deregulation and cuts, which is more meaningful to them. You know, it's funny. I mean, the small caps act so poorly. The small cap banks act poorly. They've given back everything since November 6th, that huge gap that they've had. And, you know, when you think about, obviously, they don't have the dollar exposure or whatever. They have exposure when it relates to

tariffs and they have exposure as it relates to kind of pricing power, right? If we see some sort of inflationary sort of things. And I get that. So maybe the mid-caps are better positioned than the small caps. It's mid-cap value. If you have rates going up, to your point, small cap actually suffers. Value does better in both small and mid.

Cap names tend to handle a rising rate environment better just because the companies are bigger, more profitable. And so a drop in revenues or profits, you don't have more overhead coverage. So the fixed costs you can cover better. And we've written this up. But if you go back and you look at even when the tech bubble broke,

or during 2022 mid cap value massively outperformed both small cap value as well as the overall market during that period of time so obviously in our five picks we've got some defense and cash

And mid cap value. But we've got some offense and Cisco and AdTran and the bank ETF KBWB. And so that's kind of how we're thinking about it. And the last time, by the way, I had cash as a top five pick was 2022. This kind of brings me to meta for a second. This was one of your top picks coming into 2024. You talked about that outperforming. And 2023, actually.

Yeah. You know, since the lows in November of 22, the stock's up, you know, nearly 600%. But I want to go back to one thing. And so from the moment that company renamed to Meta, this was in late November 21, I mean, the stock sold off nearly 80% to its lows in 22. That's almost unbelievable.

unfathomable if you think about it right now in the way the stock or this company is positioned. And a lot of the spending that went into Meta was repositioned, right, into the kind of generative AI focus, this Lama, this open source model. They're getting the benefit, like you just said, the way they're placing ads. And there's going to be a whole host of things across all of these different platforms

meta, they have billions of monthly active users, whether it's on Instagram or the blue page or WhatsApp, and I'm probably missing one or so. But I think to myself, why have investors just kind of disregarded the fact that this is a company that lost three quarters of its value right at a digestion phase?

they went into this period of rationalization. They started cutting a lot of employees. I think it was 10,000 in 22, 10,000 in 23. And today they just announced a 5% cut. Now they keep saying that this is kind of low performers. That doesn't matter. That's what happens during rifts. And I just wonder about the

timing of that? Are they going back into a period of rationalizing costs? If the uptake of these products slows down, right, they're not finding the return on some of those investments, maybe as they get into 25, I wonder if this stock is vulnerable

because you have 11% expected earnings and sales growth. It's not trading that expensive at 23.5 times this coming year, but it is relative to growth. And we start seeing gross margins are expected to come down maybe 1% from 83.5 to 81.5. So I'm just trying to get my arms around this meta because the outperformance off of the highs where many of the fateful eight are not acting as well. So I'm curious how you're thinking about meta right here, right now.

Matter of right here, right now has nothing to do with any of that. It all comes down to TikTok, right? If TikTok gets banned, the stock will work at least for a short period of time. If it doesn't get banned, then the stock's going to have downward pressure. From a fundamental basis, when you think about when they report the quarter and guide, the thing you need to think about, and this applies to Google as well. The first thing is you've got no presidential election. You have the most expensive election.

election in the history of the planet, Q4. So all of those ad dollars go away in Q1. You also don't have the Olympics in 2025, which you also had in 2024. And then finally, most of these companies only guide out one quarter in advance. And Easter is an important period for these companies as well in terms of holidays. This year,

on April 20th. So you're going to have that spending also shift out of Q1. And then if you want to get really granular, you don't have leap year either this year where you had it last year, which added an extra day. So you put all of that together. And then the fact that they're the only one of the big MediCap names

that really saw a massive return on their AI spend. Their estimates went up a lot last year because they were spending a lot, but the numbers kept on getting revised higher on both revenues and EPS because they were using all this AI spend to figure out, okay, what videos will Dan Nathan watch? And then what ads will he engage with? And so they use that AI really, really well to drive their business.

where the other companies were spending a lot, but it didn't necessarily show up in revisions to revenues or EPS.

So with Meta, those are the things, and for Google as well, right? The calendar shifts, you know, of Easter, no leap year, no election, no Olympics. All of that obviously affects Google as well. And Amazon's advertising business, obviously. And Meta always guides conservatively when they start a new year. And it gives them the ability to beat. And they guide conservatively only on CapEx and expenses. They never give you any idea what they think the revenues are going to do.

And so, you know, we'll see. I looked at the RIF. I didn't think too much about it because I said, well, you know, maybe that confirms my fears that with no election spend, business falls off. But there's a reason why Meta isn't a top five pick for me this year when it was in 2023, right after the stock had gotten murdered in 2022.

as well as in coming into this year. And that's why I don't have it. That is interesting because you saw it, like you said, this huge step up in earnings year over year from 23 to 24, 50% or so sales were up 20%. And again, you see a step

down in that growth to 11, 12% or so. And like I said earlier, there is a margin degradation, 81 and a half down to 80 and a half. So maybe if they guide conservatively, it's something that you want to take somewhat seriously, especially if they start cutting CapEx. There's two ways you could think about that.

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I wanted to ask you about Apple because this is one you just mentioned. What are the use cases, right? And this is a company that has not spent tens of billions of dollars to kind of create that generative AI infrastructure to train models. We know very clearly what they did with OpenAI. Apple intelligence is a bust.

And they shouldn't have come out so aggressive on it. It was just disingenuous, if you will. You're not seeing this upgrade super cycle. I know this is stuff that you track pretty closely. And then the last part about it is like, when is this going to be in China? What will be the reason why Chinese upgrade their 300 million iPhones that are probably three years old within there? And so I say to myself, Apple's losing market share, which they are globally. It's not

growing versus the global handset market that I think grew like 4% this year. They're down 2%. Why did this stock break out the way it did in November and December? It grinded higher. It was obviously only multiple expansion. It's given a bunch of that back now. Thoughts on Apple because...

right now I say to myself, if you own an iPhone and it's getting old and based on some of the reporting we've seen about the hardware changes that's going to happen, and then hopefully they get this Apple intelligence a bit better, you will not upgrade your iPhone unless it breaks. Yeah, I think all that's fair. And this kind of goes back to my discussion on 2022. People don't care about inflation anymore.

until they care. And it's the same thing with Apple. Apple's a retail darling. There's massive retail ownership. You know, 70% or something of the U.S. population has an iPhone in their pocket. And when the stock is doing as well as it is, portfolio managers have to own it because they're judged, especially if you're a long-only manager, you're judged on relative performance and Apple...

about 7% of the S&P 500. And I think what happened as you rolled into this year is people put off selling their big winners until you got to this year because you're thinking, well, maybe Trump, I get lower taxes under him. And so why would I want to take the tax hit in 2024 when I can put it off into 2025? Because none of the data has been good. From a three-year perspective, Apple's revenues on a cumulative basis over three years is up 5%.

That's what some of these other mega cap names do in a quarter. Like it's absolutely pitiful. But the multiple has gone from a teens multiple to 31 times, which is where you've gotten the performance. Apple's up 41. It's just relative to the S&P it's outperformed. But relative to the other mega cap names, it's underperformed. And so I think with Apple at a certain point, like I always love listening to the bulls on Apple. Every year it's an upgrade cycle.

And every year it gets pushed back. And then the multiple expands because the Fed either is pausing in 2023 or cutting in 2024. It's a massive portion of people's benchmarks in the mutual fund community. And so guys are sort of stuck with this. And retail loves the name because everybody owns an iPhone.

And so one of those weird things, much like when did people care about inflation? I think if they have another bad guide, which I think they will, because of losing market share in China, and this has nothing to do with the Chinese market, is a totally different problem. I think people are going to care. And the way the stock's acting to start this year tells me that maybe people's mindsets have actually flipped on this as well in terms of how they're thinking about why am I paying 30-something times with the S&P at 25 times?

for a company that's barely growing. Unless there's some killer app that comes out, I don't know how they're going to hit that because in Europe, you don't even have the AI capabilities. China, God only knows if you'll ever get them and the government will allow it. And so you're really left with the US where demand still isn't all that great. And so for me, app,

We'll see. But I think people are starting to care, much like they started to care about inflation kind of in mid-December. Yeah. And the one thing I'll say that the bulls point to, and it makes sense to me to some degree, you think about that market share here in the U.S., you think about the hope for

killer app, like you're saying, on top of hardware that has been very iterative. The mix shift from hardware to services has been a bright spot. In 2019, this is a company that had 38% gross margins. Next year, expected to have 47%. So you could see if they nailed Apple intelligence, how the mix shift could get

better and you can revalue. But it's already been revalued. Yeah, but here's the other side of that. What happens if, okay, they nail Apple Intelligence. That's great. But Google can't pay them to over $20 billion a year in pure profit to be able to fault search.

Right. Your margins are going to get absolutely destroyed. So that's the other side of this. A market multiple of 25 times, that's fine. But when you're sitting at a market multiple, by the way, their market multiple right now is the same as NVIDIA's. Revenue's at 100% last year, over 100% the year before that, and is expected to grow 50%-ish.

Who knows? Maybe the multiple continues to go up. Anything is possible. I lived through 2000. We all saw what happened with GameStop. If you want to go back further, Volkswagen and that short squeeze back in 08. All kinds of crazy things can happen. But at a certain point, fundamentals matter. Maybe you've gotten there.

Here's a name that you mentioned before, and I think it's one that folks don't talk a lot about relative to the other mega cap stocks is Amazon. You mentioned the advertising business, which is actually one of the big bright spots here. I think one of the reasons why the stock has worked this back half of 24, obviously it's come in a little bit, is that this price

promise of a re-acceleration of North American retail that AWS bottomed. This company hasn't done the spending they've been investing in the company like Anthropic, but they haven't done the sort of spending that let's say Google Cloud or Microsoft Azure has done. Does that all make sense to you? Because I think about expected growth here and I think about the multiple

And it seems about as reasonable as I can remember. Does that make some sense on a PE to growth? This is the second biggest spender behind...

The thing is with them, when I recommended that stock for last year, a year ago, I said, that's not because of AWS. It's because of margins in their retail business and things like advertising and prime video. That's really what's driven this company. Because as much as we all spent talking about AWS, if you can get the margins on your razor thin retail business, that's where you get the massive leverage in EPS.

And that's what you've seen. And so with Amazon, I think this year you can still get some of that help on the retail side. But again, as I said earlier, right, shift of Easter from Q1 to Q2, no election spend, no Olympic spend, which helped them on the Prime video. All of that is going to play in. And don't forget the satellite keeper project that they had, which is to compete against Elon Musk's Starlink.

that thing absorbs a ton of capital and it's going to be a hit to your margin structure. And so that's something that people kind of talked about was a problem when they reported June quarter, kind of went away in September. But Amazon has pretty much told you they're going to try to compete against Starlink and that's going to cost a lot of money in that ramp up phase. And that's why we're not

recommending Amazon coming this year, though of the magnificent seven, it's probably the one if I had to pick one to go with, that's probably the one I would pick because of the retail side of their business actually potentially having some more margin of

Yeah. I guess you could also make the case on the flip side of all of that. If you had a consumer weakening, unemployment going higher, that retail business could flatten out a little bit. And then you have a scenario where the pricing power that a lot of these companies had with COVID savings and the like, you know, they don't have that three years on.

on if you think about this digestion phase, which you just laid out, right? AWS, that growth or that rebound could flatten a little bit and then advertising, which has been great for margins, but pretty cyclical. So you could make a pretty easy case where a lot of these things start going south at the same time too. I just brought it up because it's not a name that I hear people talking about as much as Nvidia and Microsoft and Google and Meta, if that's fair to say.

Yeah, and that's probably fair to say. The one thing we haven't talked about, which affects all of these names quite a bit, is the U.S. dollar. Because don't forget, the dollar at the end of Q3 was at 101. The dollar right now is at about 109.

So that is in 7% to 8% hit to all your international revenues when these companies guide for the March quarter. And most of these names have a much higher exposure to international markets than the S&P, which is somewhere in that 30% to 40% range. You've got Apple closer to 60%. And so that's one thing that's a headwind for all of these names you're going to have to deal with. And well,

We'll see how that works its way through. Because in an environment like this one, where you've seen NVIDIA reverse very hard off of the highs it got to, and you've seen Apple go down. When stocks aren't going up, regardless of what's happening, then people start to look at things like estimate cuts, and they're not willing to be as magnanimous about forgiving. And so if the dollar also causes issues on top of everything else we've talked about, that's a headwind.

regardless of who you are. Yeah, but you know, it's interesting. And I know that you've kind of listened to hundreds, if not thousands of conference calls over your career, specifically in technology next to, let's say AI and agents. I think the most common term we might hear on Q4

earnings in the next few weeks is constant currency, right? Like that's something that I think we're going to get a whole heck of a lot. All right. I want to finish with this. I think you gave us a great rundown of the mag seven, the faithful eight heading into this earnings period. But when you say your top pick is cash, that's not your top pick from January 1st to December 31st, 2025. You are being nimble. You want to have dry powder, right? Heading into this kind of Q1 guidance period,

period, what are the sorts of things that would cause you to start deploying some of that cash in Q1? I got to get more comfort around inflation because as I said earlier, if you've got the Fed potentially having to raise, you're looking at a 2021 kind of scenario and the multiple of

the market's a lot higher. And if you've got AI CapEx digestion, which quite honestly, it's funny how many notes I read from semiconductor analysts that tout Microsoft's CapEx as a positive. And I go, that's because they haven't actually done the math. It's actually a pretty big negative. And not to mention, obviously, the recent judgments, and we'll see if it holds around where NVIDIA and everybody else can ship AI chips to, right? Right now, I think it's

what, it's 18 countries that you can ship to freely and over 120 that have restrictions. So all of this stuff's going to matter. And so that's why I kind of put at the end of my write-up, it's a Charles Darwin market, right? What I mean by that is it's not the strongest or the most intelligent of the species to survive.

the one most adaptable to change and i think right now the tenor of the market's changing where it cares about inflation and it's thinking about an ei spending soda yeah you know it's interesting that you mentioned jensen wang and the keynote that he gave at ces on that monday night and the stock made it a new all-time high there it's since reversed 15 it's probably one of the heavier names within the fateful eight a little bit and you know i think this stock

and I said this a year ago, but I think we have a lot more evidence this year, is kind of an accident waiting to happen. You know, when we mentioned Meta and how much it sold off from its highs in 21 to its lows in 22, this stock also sold off 75%. Now, I know it's a very different company and it's a very different story and might have a very different sort of

of valuation. It's the same exact situation because remember during COVID, the same hyperscaler customers were investing a lot because we're all online. NVIDIA's revenues at one point in beginning of 2021 were up 84% year over year.

And then we all got to go outside when COVID restrictions were taken off and their revenues went from being up over 80% year over year at the beginning of 2021, down over 20% at the end of 2022 on a year over year basis. And the stock went down over 60% from peak to trough. It's the exact same thing with AI.

Where if you go through some form of digestion that you need to do, and don't forget, every company up until very recently has not been able to get all the chips they want. And if you listen to what Microsoft's CEO said in the middle of September when he was asked, hey, do you have any supply constraints? He goes, no, I don't have any chip constraints. I have a power. That's a very different statement of saying I have no chip constraints.

Compared to what NVIDIA said, which is, oh, we see demand exceeding supply for the next several quarters. And given Microsoft's NVIDIA's biggest customer, and they haven't been able to get the chips they wanted up until now, that tells me something has changed. So what I would tell you is that you go through this all the time. You went through this with the internet infrastructure companies like Cisco, which, by the way, was the most valuable company in the world in 2000.

at one point off of the internet infrastructure build, and it's never seen those levels again. So to think that somehow it's different this time, do I believe that NVIDIA's revenues will continue to grow over time? Yes, because I don't think two years is enough to finish the AI build-out.

Back during the internet build out over two years, Cisco's revenues were up about 3x over two years from the end of 94 when the chat GPT moment back then for some of your viewers may remember was Netscape Navigator to some degree where you have to navigate this new thing called the internet. Like what is that? And Cisco's revenues went up 3x over two years because of that. NVIDIA's revenues have gone up about 6x over two years.

So, build out has been that much faster this time, which is why I worry more that this digestion phase could be a lot more problematic than those that Cisco went through as they grew pretty dramatically over a five, six year period on their revenue.

We'll find out what happened. And by the way, just to put in perspective, Cisco's revenues ultimately went up about 15 and a half times from the end of 94 to its ultimate peak six years later. NVIDIA's revenues are up only, quote, six times. So over the next several years, I think it can double again. But it doesn't mean that in the short term, you couldn't have a big miss because the consensus is for their revenues to grow 50%.

I don't think we're going to be anywhere close to that, but we'll see. Yeah, I said accident waiting to happen. I think a lot of it has to do with the fact it's one thing, you know, to put it on investors who are willing to pay a certain multiple. But Jensen Wang has been out there every opportunity to talk up when it was Hopper, it was Blackwell. When it's Blackwell, now it's Rubin. Now they're kind of broadening out the kind of use cases. And so, again, I think he's a big part

of this excitement or unusual enthusiasm around this one name. You have to step back. I mean, Jensen's, in my opinion, his job is to talk about the future. And by that, I mean three, five, 10 years out. And I don't think his view of the future is wrong. It doesn't mean that in the short term, investors shouldn't. So when you listen to Jensen speak, and I've known him for a long time, a lot of this stuff happening today is stuff he was investing in a decade ago. So that's

should be doing. That's why NVIDIA is the most valuable company in the world. But you have to remember that when you're listening to him speak. This is not about what's happening in the short term because he can't run the company based on that. He's going to run the company based on what he thinks is going to happen five, 10 years from now. And that's how you become dominant. If you're managing for every quarter, you've got an issue. And so I think for investors to kind of say, well, if something goes wrong with the stock, it's on him. That's not fair because if

in my opinion, he's been very upfront about talking about the long term. And so it's more up to the investors to go, well, you know what? If Microsoft's digesting, then yeah, I'm going to have to go through a pause, much like I went through arguably three different pause phases during the internet infrastructure build out with Cisco.

on its way to becoming the most valuable company. Yeah, well, that's a great reminder. I always love your ability to kind of look at the here and now, you know, just like you explained about Jensen. It's for you. You have a long term view and you have views that, you know, what happens between then. And you also have a great sense of history. So Dan Niles, the founder and portfolio manager at Niles Investment Management. We appreciate you coming back to the pod and giving us all that insight. I hope we'll see you again real soon. I look forward to it, Dan.