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All right, welcome to the Risk Reversal Podcast. I'm Dan Nathan. I am joined by a friend of mine named Dan Benton. He is a CEO at Benton Capital Management. You're so much more than that, Dan. Welcome back to the pod. Thank you, Dan. It's always a pleasure to be here. All right, I got to give a little backdrop here. So you were last on the pod in November of 2022. And we're going to talk a little bit about why that was such an interesting period of
and you and I were doing a lot of tech talk back then. But I just want to give the listener, if you weren't listening to the pod back then, and maybe you're a little younger than me, Dan was a legendary, I'm just going to use that name, you don't have to agree with it one way or another, technology analyst at Goldman Sachs. And in the early 90s, you left Goldman and you went to what was the predecessor of-
And then you spun out and you created Andor. And I read this recently. You're not one of those folks who would kind of tout your own returns. But from 93 until you started Andor in 01, is that correct? You basically had 50% annualized returns just trading technology, investing in technology, which you could say was pretty astounding. And, you know, it was a great time for the markets from 95 to 99. The S&P averaged 25% returns, but you doubled them up.
And we were long short. Yeah. No leverage. I mean, it was pretty astounding. And we're going to talk a little bit about what you saw back then, the kind of secular shift towards the Internet and what that meant from an investment standpoint and how things shook out and then how things went for the next 20 years or so.
And then the other thing, and we'll put it in the show notes. So Dan, when he was still at Goldman, and I'd love to get how this came to be and how your customers really kind of laid into this thing. And they kept it going for 35 years. So Dan came out with 20 investing rules for technology. And so this was something passed around. I got it.
as a printout, I want to say in late 90s, but then a partner of mine from a trading perspective, he was a PM, Rick Schuette, who might have took your job when you left. Does that make sense at Goldman Sachs? Did. Okay. And he's a great guy. And hopefully he listens to the pod. I'll say, Rick.
We miss you, buddy. We always have a mic for you. All right. Talk a little bit about what the mindset was back in the early 90s. Like, where were we as far as technology cycles? And when you kind of came up with those 20 rules, what were you most focused on back then?
On the sell side, you got all sorts of different kind of analysts. You got people that are bankers. You got people that are a font of information. I care about stocks. I want to know what made stocks go up and down. And there was another analyst I go over, a senior guy named Fred Greenberg, who did drug stocks. And he published, right?
Brad Greenberg's 10. So I stole the idea. But it's interesting because to a degree, these have stood the test of time. And to a degree, they look a little tired and they look obvious, I think is the real issue. But at the time, remember where we were, okay? I wrote these first probably in the late 80s, early 90s.
This is the transition, this is pre-internet. So this is the PC boom and this is the transition from mainframes and mini computers to PCs. This is the transition from IBM software to Oracle and Microsoft. I mean, we had new companies coming out then.
And tech traded at 10 times earnings. This was not a time where tech was valued the way it is today. IBM was the behemoth. IBM was the dinosaur. But we had, it was a lot of controversy about, "Oh, IBM's spending this on R&D. Oh, IBM's is much bigger than this. Compaq can't win. Dell can't win." So I really started focusing on product cycles. I focused on secular themes.
We had real secular themes and that's kind of what plays out in the rules. The other thing is things like seasonality, right? I mean, it was, you know, it was, it just, let me
We can talk about them. Kind of a logic of why people were doubting a major secular theme like PCs are growing because there was a crappy data point in August. Well, Europe goes away in August, whatever it is, right? People introduced new products in September back then. So product cycle transitions and that data point, oh my God, PCs are dead.
And so kind of fleshing those out was helpful. Well, it's interesting. So you were at Goldman and you guys brought Microsoft Public. I want to say in 85, 86. Does that sound right? Or 84? Was it a little earlier than that? So it's interesting because you think about the way that information was disseminated back then.
very different than it is right now. And you guys obviously had a really close relationship to Microsoft. So if you were really focused on hardware, you probably had a good sense of where the PC was going, right? And so it gave you kind of a front row seat for that a little bit. But
What was it really quickly on the margin front? Was it because R&D was a big expense and hardware is low margin and that's why they were trading at like value multiples below the market? Yes, absolutely right. And also the sense that products didn't last very long. So I had a friend from business school years and years ago around that time saying, all right.
Apple's really undervalued, let's take it private. And his first question to me was, "Well, okay, so how much revenue in 10 years are they going to get from today's product?"
It's like end of conversation. So nobody had a sense of sustainability. Everybody felt like everything was a commodity. And technology changes so quickly so that if you're Intel today, it may be AMD tomorrow. So nobody would pay up for stocks. Right. You know, it's interesting what you mentioned about the value multiple. And Apple is a great example. And so when I was partnered with Rick Schuette, I don't want to say this is probably back in 2003 or 4, Apple had just introduced the iPod.
And they probably sold, you know, I don't know, hundreds of thousands tops in the first year would be a guess. Does that make some sense? Because they certainly didn't sell millions right out of the gate. So it was an expensive piece of hardware at a time where people were still using StarTACs or something like that, right? As far as phones and everything like that. And Google it, kids, if you don't know what a StarTAC is. But Apple had this whole...
thing in front of them that no one could see. Steve Jobs could see it, you know what I mean? That sort of thing. And it was trading at like 10 times earnings or something like that. So it's really interesting. So I want to talk about a few of these. So the first two rules, sell technology stocks when estimates are being reduced. Buy technology stocks only for positive earnings surprises.
So how has that changed? You said some of these are kind of obvious, but like the last number 20 of this whole list was don't forget rule number one. So you're really focused, I think, to some degree on risk mitigation because this was a controversial sector when you started covering it in the late 80s? Right. Yeah. And I mean, the rules kind of were tweaked every year. So this is 1992. So the market was probably doing...
Tech was probably in a transit, I don't even remember, but things probably weren't doing well. So I made that rule number one as opposed to rule number two, trying to get people to sell stuff. I mean, it wasn't that hard and yet you had a lot of value investors still. So IBM missed numbers for how many years in a row between 1984 when I started and the mid 90s because they're
number one business was mainframes and they were declining rather slowly and then precipitously.
And yet people were buying the stock as a value play when estimates kept going down and the stock kept going down. So it was, you know, I mean, that was kind of the overstory because we're going around telling people to buy PC stocks and disk drive stocks and PC software stocks. Well, it's funny that you mentioned that, the disk drive. So when I started the business in 1997, I was at Hedge Fund Long Short and Iomega, remember Iomega, was a meme stock.
It became a meme stock. And people thought the meme stocks, you know, starting, I don't know, seven years ago, whatever it was, was like a new thing. And you know what? No, they've always been around in a way. So let me ask you this really quickly, because you have a lot of, you know, of these rules focused on valuation. And your point about IBM, when it was a value stock, was not a value. You said don't buy tech stocks based on valuation or at least cheap valuation relative to their peers or the markets. Is that something that you still believe?
I mean, there was no tech M&A. Yeah. Period. Full stop. There was no tech M&A back then. Like, you know, Burroughs bought Sperry or something and called it Unisys. And then, you know,
And these were pretty boring stories. These were boring stories. Talking about mainframe. Oh, no. I had an analyst who said, "Two bricks tied together don't make a raft." Yeah, yeah. And so there wasn't a lot of risk in shorting a company in secular decline because it wasn't going to get taken out. That is obviously, the last couple of years, I guess we haven't seen a lot of takeovers. But that was a risk for a lot of years that crappy companies got bought.
Companies had, you know, computer associates had a strategy essentially of buying. Right. Big roll up. Oracle was also a big roll up, you know. Right. Cisco has made hundreds, if not maybe thousands of acquisitions over the last 30 years. Yeah, exactly.
My good friend Michael Balog says there are no cheap stocks, only wrong estimates. And that really underscores this. This stock is cheap, this stock is cheap, this stock is cheap, I'm going to buy it. Yeah, but estimates are going down. And then when the estimates get cut in half, all of a sudden your PE was twice what you thought it was. That wasn't a good stock to buy.
So just really quickly for some of the listeners. So Reg FD came in and I wanted that was regulation. FD was something that disclosure. Yeah, it's fair disclosure. So basically material nonpublic information, you know, had to be disseminated across all platforms and that sort of thing to all investors.
Back in the 90s before Reg FD, were the estimates from analysts, were they more accurate because they were getting information straight from the companies for the most part? And then maybe it was not so hard to build a consensus that looked probably a bit closer to what the company was forecasting. Now, obviously, companies misforecast. I'm just curious, was there any sort of like big delta that you can remember relative to the way it works now?
I mean, so many things are different. Yeah. So many things are different. And, you know, I don't fully understand to this day the...
rationale for Reg FD and how it has been interpreted. We used to talk to companies. I would go to Silicon Valley and visit three disk drive companies, head manufacturer, platter manufacturer, PC company, and come back and buy more Western Digital who is down in Southern California.
Because they would say demand is good or I'm losing to this guy or whatever, right? They would have competitive conversations. You could talk to suppliers, you could talk to customers, you could talk to distributors. It wasn't the company telling you, right, we're going to make the quarter and miss the quarter. It was allowing us to put the story together. And the second really important thing is when you invest in a company, you're investing in the CEO. When you're running a hedge fund and you disagree with the CEO,
You can sell a short stock. That's gone. Companies do regular conference calls. They make forecast. Companies didn't make forecasts back then. So I would argue that estimates were probably a little bit more all over the place. Now they kind of hew to, and the company says this, and then they give a mid-quarter update, and they change the midpoint of the range, and the stocks go up and down.
Um, it was a, it was a, it was certainly a, a time where you worked hard and you did better. Um,
Because you could talk to everybody. The idea that somebody who works full time in the investment business should have the exact same information as somebody who is a dentist for eight hours a day and then invest a little bit on the side, I don't get it. Why is it that all dentists love investing? I've had the same dentist. By the way, this is really funny about my dentist, and maybe I'm going a little deep here. I have been with him since 1996.
When I started going to him, he had a picture on the wall, I think, of him at his wedding and then maybe another picture of him holding his first baby. He now has a picture on the wall with 10 kids. He has 10 kids. And he's got like, you know, probably, you know, a dozen grandkids and stuff like that. But I am his longest running, I don't know if you'd call a customer, you know what I mean? But every time...
Every time I'm sitting in the chair, he wants to know what's going on in the markets. Yeah. What's up with Dennis? Right. Exactly. No. All right. So you just mentioned managements and you have a whole section in your 20 rules about managements. Talk a little bit about that because you basically, I heard what you said about the 90s and the way it worked and how you talk to companies and the like here. Are investing in companies that have great managements as important now as it was back then? Yeah. Yeah.
We have the cult of CEO now, which maybe came in with maybe Steve Jobs was maybe one of the first ones you can think of. Bill Gates had a little bit of that. Yeah, I think more Gates than Jobs. Larry Ellison. Jobs is pretty controversial. Michael Dell. Yeah, Michael Dell, yeah. But, you know.
the Google team, Sergey Lari and Eric. Yeah, it's about the CEO. Every once in a while you find a great CEO and say, "Why are you with that company? You could be doing something better someplace else." But it is all about the CEO. And again, it's the same frustrating thing. You don't get to talk to him anymore.
You go to conferences and they speak and then you have a one-on-one with 62 other funds and they're asking questions. They stay on script. They are coached by their councils. I mean, look, I mean, what's legal is legal and I get it. I don't want to know how your quarter's going. I want to know what you think about this. Mm-hmm.
This competitor, what do you think about what this competitor is doing? Or, you know, talking about your relationship with your CEO. Or, you know, where's the weakest person? Who's the weakest person in your management team? What's your new, don't tell me about your new product. Tell me about your new product strategy. Those questions are gone. Those questions are gone. Well, you know, it's funny. I had a conversation the other day. It might have been on the podcast. I don't know. I do too many podcasts, Bill, maybe. And we were talking about, you know, like a company like Apple, for instance. Like, I saw Eddie Q.
in a video on CNBC the other day and he's aged before my eyes. I mean, like this does not look like the guy that I remember. I met him in 2007. Yeah. But, you know, walking out on stage, I used to do those things with Steve Jobs or whatever. These guys, like, and again, I'm not an ageist, okay, but they're all looking. And this is, you know, meant to be one of the most, you know, innovative companies on the planet. They have a
billion and a half iOS devices all over the planet, that sort of thing. And, you know, listening to Eddie Q at this, he was subpoenaed, obviously, or speaking under oath at this, you know, the Google, you know, FTC, DOJ, whatever the hell it is, trial. And they said he had to say things that are really on Apple. You know what I mean? Like, which I thought was fascinating when I saw that. And years ago, we might not have iPhones. Right.
I mean, it's just kind of fascinating to me. But then I was thinking about, okay, so he actually mentioned Anthropic and he mentioned Perplexity. Now he's taken over AI. Apple Intelligence was a dead bang loser. And I was with Gene Munster. And Gene said this, I got this wrong because I was going after, or I was, basically, I was looking at the old Apple playbook.
When they said they were going to do something, they did it. And they did it on time, that sort of thing. So when I think about this company now, like they could use some new blood. Can't you see that across some of these major platforms? You know, I mean, I've seen this my whole career. I hate to keep going back to IBM because your listeners don't even remember the company. Well, by the way, IBM was outperforming most other tech stocks over the last few years, right? Companies need to reinvent themselves in tech more than just about any other industry.
And it is ironic that the government went after IBM as a monopoly, just as many computers and PCs destroyed it for them anyway. They went after AT&T just as there were all these alternate ways to communicate. They're going after Google now as Google faces existential challenges from tech
New companies, OpenAI is a behemoth I suppose, but they're a brand new company. Anthropic is a new company. Flux is a new company.
Tech grinds down monopolies. And when you are in a position of thinking the way you always have, you are protecting your installed base. You're protecting your main business. You just don't innovate as fast. I mean, it's Elon with electric cars. We can have a long conversation about the job he's doing. Yeah.
But Elon only had electric cars. So he went all in on electric cars. GM, well, geez, I don't know. The dealers don't want them. So they dragged their feet. Defended their moat, basically. Yeah. I mean, you get somebody like BMW, they're going to sell a 7 Series.
and make a $30,000 gross margin on it. They sell an electric one, they may as well staple a $30,000 check on it with it, right? But that's right now. I mean, the same thing was true for Tesla 12 years ago. You know what I mean? So once you get to a certain scale- But they were able to-
- Do it, 'cause it wasn't hurting their, it wasn't hurting their business. - Investors didn't care they were losing tons of money. - Exactly. - But it's funny, like 15 years later now, they care that Rivian is losing a lot of money per car, but you can make the argument that Rivian right now looks like Tesla in 2011, for all intents and purposes. - What's its market cap? - Market cap is nearly $16 billion. They actually have nearly half of that in cash, but they're burning basically $3.5 billion a year, and that's how you can attach some stupid number per car that they sell.
But we'll get to that in a second. I want to go back to what you said about reinventing yourself, defending your moat a little bit. Let's go back to when you started Andor. Let's call it 25 years ago, okay? And you might have had positions in Yahoo and AOL and some of these incumbents. And maybe Excite was still around and Lycos, I don't remember. So these are something called internet portals back in the day, which is search engine and internet portals, right? So all of a sudden, you probably start hearing about
Google. These two kids from Stanford, real nerdy guys, you know, they're trying to disrupt these massive incumbents, that sort of thing. People forget Yahoo was one of the largest market cap companies in the world in 1999, right? And AOL did a massive deal, Time Warner, AOL. You would think that these companies are never going away.
Well, Verizon sold the two of them, what was left of them, to Apollo three years ago for a combined $4 billion, which is crazy. What were you thinking back then? Because you're always looking for new stories, that sort of thing. When Google was out there, obviously it didn't go public, I don't think, until 2005. Did you see that this could be a company that could reinvent the way people use the internet? No. No. But we did see that there were 16 search engines and...
15 too many? Yeah. Yeah. And, you know, I mean, the beauty, I mean, we shouldn't be spending this much time talking about the 90s. I feel old. It's like Biden talking about his early days in the Senate. But it is interesting in a way because, like, for instance, if a lot of listeners don't know a lot about this history, like, I wish I was more steeped in market history than I am. I have some friends who are awesome at it. You know what I mean? But I wish I knew more. But that is. How many competitors did Cisco have back then? Bay Networks and Wellfleet and 3Com.
Yeah. I just mentioned Bay Networks to somebody the other day. Didn't Nortel buy Bay Networks in 1997 or '98? I don't remember. See? Yeah. So you had these very fragmented industries that were kind of like electric cars when all the electric car companies came public. Well, they all got massive market caps because somebody was going to be good. But they shook out pretty darn fast and one company emerged. It feels to me like tech
gravitates to natural monopolies. The finance industry could not be more fragmented. Number one market share company's probably got 10%. Car industry actually is kind of like that as well. Tech gravitates towards winner takes all. And I think it's helpful to remember that.
Is that usually something that in your history, has it been global? Because it's probably more so now than ever, because I think you could have had a monopoly here in North America, but it might not have translated the same way in other parts of the world. Because like, for instance, did we have a ton of access to China? You know, China, you know, a lot of our digital companies have never been in China.
for the most part. And Microsoft used to complain like crazy for good reason, for forced technology transfer and that sort of thing. So it just feels like these companies have gotten so big, the DOJ, the FTC, they can have a field day over this. These companies are not getting smaller. Is that fair? - That's very fair. - Yeah. - But, you know, I mean, IBM dominated the mainframe industry. AT&T dominated communications, probably mostly domestically. I don't remember what was going on internationally back then.
Intel-dominated semiconductors, Microsoft-dominated operating systems, and that was worldwide. And that's a long time ago. So I do think that-- and, you know, I mean, the thing that is truly remarkable is, you know, name me three successful tech companies in Europe. -Right. -I mean, there's just nothing there. -SAP. That's the only one I can think of. Maybe ASML or something like that. All right, we're gonna go-- we're gonna do this a little bit. We're gonna go back and forth, okay, in time, and I know you don't want to do it so much, but...
Regulatory. We just talked about that, right? So the FTC or the DOJ, they have Meta, they have Google, they have Apple, they have Amazon. I don't think they have Microsoft, and that's what I want to know. Microsoft back in the late 90s, okay, so the FTC was all over them. They had the proper monopoly, you know what I mean? And it was their browser being attached to their operating system, and that's the thing. And they basically, and interestingly enough, I mean, I don't know, no one uses Internet Explorer anymore.
right? Like for the most part. I don't even know the name of the thing. But the thing is, I don't have any, but they missed, they were distracted. There was remedies and they missed the internet. Yeah. Yes.
Well, they miss mobile. They miss mobile. They miss mobile. Right. But they try to do search engine-y sort of stuff or whatever. And they miss mobile in the 2000s. Okay. So what do you think the risk is right now? You just used the term existential as it relates to Google. And I've heard this for 20 years. It's the best business model the world has ever seen. And that was global search and ad
ad related revenues and that sort of thing. What do you think, define that existential risk about Google right now, the way you see it and the frameworks that you've always thought about tech over the last 30 years. The simplest issue is search and they will have AI driven search, but
I don't know how much you use Google anymore. Not a lot. Every single one of my information related searches is ChatGPT now. And I actually use DuckDuckGo because of privacy and searches. So that's a browser, DuckDuckGo. Yeah. That's search engine. So the basic search is the issue, but ads are what drives Google.
Advertising is going to be fascinating in the next five years as we get more agents, as AI, essentially robots, do your thing for you. They find things, they book your flight, they make the restaurant reservation. How the hell do you advertise to a bot?
But it could be very similar, like pay for placement, right? Like when you think about it. I would think there will be new people who figure out how to, you know, it's kind of like when people would put, you know, keywords or whatever into a website, hidden into a website so that it would bubble up in natural search. Yeah, people are going to do that, right? It's going to be the same thing though. But there's no reason to think that it's Google. Yeah.
There's no reason to think that Google will have the same position in ad tech
But they should, if you think the way they're positioned right now, because they have all these relationships, if you think about it. And the thing that's funny about Google with this investigation or with this, they're talking about acquisitions they made 20 years ago, DoubleClick and AdWords, all these things that actually created the behemoth that it is. So that's what they're trying to undo in some way, shape, or form. Yeah. Which is kind of ironic because those companies weren't those companies until they were acquired by Google. It's like saying that-
Instagram, which had 17 people and like a million dollars in revenues or something very small, that somehow they bought a competitor. I mean, I suppose, but Meta turned that into a phenomenal property. It was not...
So Google on the existential. So when you think about this, there's like agentic AI is going to change a lot of things. Are you taking the over the under? If I said that, you know, in five years it will be take it to the bank. You'll have some agent go and book your trip one week out to Jackson Hole and it's going to find the place and it's going to do the activities, whether it's rafting or horseback riding, it's going to set up the dinners and all that sort of stuff. Yeah. I'm taking the over.
Taking more than five years? Yeah. So when they try to do it now, they realize that it's not so easy. You have to log into websites. It's not totally easy to let an agent actually use a credit card and do run into captchas.
And they're talking about having to do basic reengineering of websites so that agents can work. So yeah, I mean all the promises of two years ago and the magic and how quickly all this was going to happen. It takes time. In my experience, things happen fast.
The long-term stuff tends to happen a little faster than we expect and the short-term stuff tends to be disappointing. But who knows in five years? I don't know. So I'm a guy who has been doing tech for a long time. The Turing test was in 1950. That was Eliza. Can I recognize whether it's an AI or a person?
Roll forward, IBM with Watson. IBM was going to change the world with Watson in the '80s and the '90s. So when we were sitting here in November of '22 talking about Tesla, Jack GPT made its debut.
To me, that was one more boy who cried wolf, right? And change in tech happens slowly and then all at once. And it went vertical. And this is a moment. This is a moment. Yeah. So-
I want to go back to something. I know you hate going back, but you just said something that's really important. And this is one of the reasons why I think that word existential can be used with Google for a whole host of things. You said...
CAPTCHA. Okay. So this is, no, but think about this. So we have been relying on those sorts of like things when you're trying to log into something and it wants to know if you are a bot. Right. So the whole agentic AI theme is built on breaking that apart. You know what I mean? We have these major companies that do all this great stuff, like securing your identity and all this sort of stuff.
Agentic AI, like I'm going to say 10 years, you know what I mean, before this actually works in a way where humans have to trust it.
Right. And so that's the thing to me. I just think that there's OK, so maybe that's an existential threat to like a Google. And you say to yourself, holy shit, these guys have built businesses for 20 years built on machine learning. They were one of the earliest, you know what I mean, to kind of develop what we would call generative AI. And they just keep tripping over themselves.
Does that not present an opportunity the way you think about a company like this that is basically- That they have an opportunity? That there's a huge opportunity relative to expectations right now. Perhaps. But they're in the- I mean, so when we would talk about AI is going to be important one day, what company should we look at?
Well, the problem is if you want to own AI, you have to own... The people working on this are Facebook and Google and Baidu. So there's no pure play, how do you make money on this? Well, okay.
Open AI did it. Not those guys. Not those guys with their giant R&D budget. Then we find out that Google's got the DeMind team. They have a different team. They're competing with each other. They don't like each other. I mean, it's all the internal stuff. And then it was a brain drain. Right. It's all this internal stuff. It's all the challenges of a really big company versus a small entrepreneurial one. And I'm not sure that...
If you were to look at their market position five years ago, you'd say, yes, they're going to win. All right. Now it's five years later and it's like there's six other players. Right. And you could say that same thing for Microsoft. So what did Satya Nadella see? I want to say probably four years ago when they made their first investment in open AI. And I have to suspect you and I are here. I know you have a lot of deep contacts in Silicon Valley and the VC spaces and some of the smartest people were investing in that company. Right.
But that's what they do. They throw money around to a lot of different things. I don't think any of them thought this would be a $300 billion market cap. Not market cap, but you know what I mean? Value a company in the private markets. And they can raise unlimited amount of money right now. And so I think that's something that is really like different this time. I know people don't like that expression. And the-
Right. And the investment required is staggering. So it's not like two kids in a garage are going to come up with the next thing because these things are massive. Software is not capital intensive. You and I can write an app. AI is really, really, really expensive. It's the infrastructure that it takes to kind of build the models, train them and all that stuff. And then run them basically with inference and that sort of thing. Let's go back to Microsoft for a second here. So Satya saw something.
you know, they invest a billion, then they invest another billion, you know, and then I'm sure they're tracking GPT-2, 3, and then all of a sudden 3.5 comes out, okay? And this is to your point, maybe folks like you and me were not paying attention. Wall Street was not paying attention, by the way. But they started paying attention when Microsoft announced
wrote a $10 billion check, right? And so talk to me a little bit about that because you could make the argument as an early beneficiary of their adjacency to OpenAI, they accrued a lot of market cap value based on what investors were thinking that they were in the cap bird seat. But that hasn't really been the case and that relationship's coming undone and they built out data centers, but they don't have models. They don't, you know what I mean? So I'm just curious how you think about that
Because that's two and a half years and things have changed pretty dramatically. - Right. Yeah, look, I mean, this is the old, you know, picks and shovels things. This is incredibly capital intensive. So the winners have been people that sell stuff into data centers.
Was Microsoft prescient with open AI or they didn't have anything internally when Google's trapped looking at its own thing medicine its own thing I don't know. I don't know if it was luck or or Design you but you're right. I mean you're working with this company. You don't control. It's got all sorts of you know We I don't know what's going on inside that boardroom It's obviously very complicated not-for-profit status, you know a controversial CEO and
It comes back to management, it comes back to people, that line. - But it is interesting though, when you talk about management, so I think Satya took over in maybe 2014, right? Tim Cook took over Apple in 2011. I'm probably missing a couple here. Oh, Jazzy took over a few years ago. I mean, these companies have seen their best days. - Sundar. - Sundar, okay, that's a great, Google.
these, maybe it's the power of the platform. Maybe it's just a steward for something that was built, you know, 15 years ago or something like that. But these companies have seen, you know, I would say 80% of their market caps right now since they took over for a founder. Yes. Which is really interesting. Is that something that you've seen in the past or, you know what I mean? Because it's not the founder vision here, you know what I mean? And now they've just become stewards of these monopolies. I just put it that way. When you think about the...
that Bill Gates built. And Bill Gates and Steve Ballmer, who wasn't a very good CEO. So they owned a PC operating system. They owned Windows. They owned the Office Suite. And then they, we were talking before, right? They stumbled through the internet. They lost during search. They completely lost during... I mean, there was a...
a telephone, a mobile phone system. I don't remember the name of it anymore. Windows Mobile, that's what it was called. That didn't work. And... I had a Windows mobile phone on a Compaq. You ready for this? It was on a Compaq. No, it was an HP something, iPack. Because remember, Compaq obviously sold to HP and it ran on Windows Mobile and it did nothing. And I'll also tell you,
I had this Sony Ericsson, which is, again, amazing. That was a combo of two brands that were probably going to go the way of the Dodo, especially in electronics, you know, to some degree. They had a touchscreen that I had, the P900. I had the P800, and then I had the P900. So all those things existed, but it wasn't until someone like Steve Jobs was able to put it all together in one package. Right. So Microsoft did...
did cloud. Microsoft's next leg, and that was Satya. Microsoft became... Amazon is the public cloud and Amazon is all the startup companies. They were the corporate cloud. Great job. Steve Jobs...
He was a very controversial CEO of Apple, right? He got thrown out. He came back in. The first thing he did was come out with Macs in different colors that didn't strike me as a major. 97, right? Yeah. I think it was. The E-Macs, I think. Yeah. You know, the company wasn't bankrupt in the late 90s. Almost came back, went bankrupt again in early 2000s.
And then the iPod, which completely, you know, adjacency, no idea if they would do very well. And they iterated on it. And then the phone, 2007, the phone came out. And the app store in between that. Well, wait a second. We got to get to that, right? So when the phone came out, Steve Ballmer, president of Microsoft, said, no one's going to buy a phone that doesn't have a keyboard. Right. That was Prussian. I remember that. Yeah.
But it didn't, to your point, the iPhone when it came out was an iPod where you can make phone calls, you get emails that didn't work. You know, little teeny camera. No App Store.
- Yeah, I meant to say music store. - That was the predecessor. So that came out. - The iTunes store. - Yes, the iTunes store. That was a big one and that's what the app store model was built on. - But there was no app store with a phone. And he didn't want one. And then a year later, there's an app store and Apple thought there'd be a hundred apps.
So how much of Apple's success was planned versus right place, right time, app store. They created this magnificent platform. And if you look at your phone today and you look at Instagram and Uber and even your normal apps like Facebook or Google, they're all mobile apps now. That's the entire internet is mobile. If we didn't have the app store, that wouldn't have happened. Was Steve brilliant or did Tim...
open that up, roll that up. You know, he's in charge of the of the of the of the execution. How hard is it?
to build 250,000 phones in a year, sorry, 250 million phones in a year. You need to sell 80 million in the very first quarter. I think we're reading about how many hundreds of components are in one iPhone because we're worried about the tariffs. I mean, that's an execution, that's a manufacturing masterpiece. Clearly Foxconn's helping on the execution side. - But Tim Cook, that was his baby, right? - Right, he was the operations guy.
Do you think Apple, we had an analyst on Fast Money the other night and we were talking about Google and this news that came out and, you know, he said there's got an existential threat to it. Okay. And I think that's something, I'm sorry, Google. Everyone's worried about Google. Maybe we should, maybe we should look the other side. Right. Well, so, so I, you know, he was talking about innovators dilemma and, you know,
And I was like, I get that. I said, couldn't you make the argument that Apple is facing a similar sort of headwind when you think about it? If they are so reliant, if a big part of their profit of services comes from this payment from Google, and now they're starting to step back and rethink that whole search, you know, like...
ideology, if you will, that's been kind of, you know, that's been take it to the bank. That was the only game in town. Okay. So now they're thinking about AI in a way that they had not been able to think about it for three years prior. You say to yourself, if you don't need to upgrade your phone because you're not going to have AI on the edge on the device, then, you know, there's going to be these super apps that you can just download. And maybe you have a piece of shit like Android sort of
you know, phone that doesn't cost you a thousand dollars, but it's $300. And this is the way it works in China for the most part, right? So iPhones are very aspirational, but I'm sure 90 some percent of the people have phones, smartphones, they're Android.
Yeah. It's hard to handicap that. What percentage of the profits in the mobile phone industry does Apple have? 80. Right. They have 20% of the 20, 25% of the units. Yeah. And they have all the profits. Continuing to innovate this thing, we can get thinner, we can fold them. Yeah.
Everything is incremental now, to your point about not needing to upgrade. We thought that Apple intelligence was going to require new hardware. Well, Apple intelligence doesn't require anything because it doesn't really work and do anything. So we'll see what they do this summer when they announced new iOS. It's possible that the industry itself is in a giant transition and we need the next device. And Apple's
goggles weren't the answer. You know, Meta's glasses sell well. I don't know. I have, by the way, we all have them, don't we, Bill? We, Risk Virtual Media, every one of us do. And you know what? I'll tell you this. I was at, this sounds so nerdy. I was at the Celtics game the other night and I was sitting low and I had these things on. I was running out of the basket and man, the camera is awesome. And you just click like this. You're not sitting there like this. You're
Long story. I was up in Boston. But I was also at a concert and the lead singer came down into the floor where we were and everyone's got their phone up there. You know, I put them on and I just clicked it like that. I think we're onto something, by the way. And I think that a lot of folks who think about AR and VR, this is why Apple totally muffed on this Vision Pro. You can't be immersive in your own head. You have to be out in the world, right? And, you know, and I give Google credit because in 2012 they came up
with Glass. They were just way ahead. You know what I mean? Like that sort of thing. So I think AR, VR is going to be really interesting for whatever reason. We're not getting mass adoption unless you're sitting in your living room playing a game or something like that. But going back to Apple for a second. So this is a company you've known so well. You talked about this ability to kind of create this infrastructure, like the supply chain infrastructure and make 250 million phones a year that the first quarter they sell 80 or something like that.
But maybe there is a risk to the lack of innovation. And I think this Apple intelligence thing puts it in. If you are not reconsidering everything you think about Apple when you're owning this stock right now, you're probably making a huge mistake in my opinion. Yeah. I mean, you know, when you think about the two companies that had a tool that you spoke into before OpenAI came out.
Lost Chachi PT3. It's Siri and Alexa. Yeah. And.
And here we are, and Siri and Alexa are not much different than they were two and a half years ago, but the industry is changing. And both companies are essentially saying, "We have to buy this, not make this." I mean, I don't know what Amazon's going to end up doing with Alexa. They're probably going to buy Anthropic. I mean, who knows what they'll be allowed to do. But yes, they've made investments in all these companies.
So, the innovators here are, right, you got a hardware company. You basically have two hardware companies. I'm not sure what you consider Microsoft, I mean, what you consider Amazon. Infrastructure company and a retailer that missed the boat internally trying to develop AI. So, I think we're kind of, the theme is the same, incumbents
At some point in an incumbent, in a leader, in any industry, but technology is the one that we're talking about right now, the leader does hit a wall. Right. And whether it's, you know,
Interferential Love is an interesting book and I talk to people about it a lot. The difference between now in the 1980s and '90s is that the book came out and everybody reads it. So if I'm an establishment company, I have a lot to lose. I've read a lot of... Oh God, I don't want to be Xerox. So what do I do?
the things they do tend to be pretty defensive. I mean, rolling up all these conventional media companies. Again, too brick-sided. - They're gonna bundle them. - Right, I mean, it's not, and oh, we need to compete against Netflix. We're gonna launch streaming. Oh shit, we're all losing money in streaming. We can't afford to do this. Our shareholders hate this. They're all trapped. They're all trapped by their business models. New companies will do this.
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All right, that was a rich, interesting segue to NVIDIA really quickly. So you mentioned picks and shovels, and this was one of the ones that aside from Microsoft, you know, I mean, went from a $300 billion market cap company at one point, it was bigger than app at three and a half trillion. And, you know, all of a sudden, you know, late last year, investors were really trying to broaden out this theme. They're saying custom silicon, Broadcom, RL, you know, this sort of, and those, you know,
They all gave up. I mean, they gave up the ghost. I mean, from a stock standpoint or whatever. There's so little competition here. How do you think about that when you have a runaway winner like NVIDIA, but some of the things that were pillars of the bull case are starting to fall by the wayside a little bit? So I'm just curious how you're thinking about NVIDIA right here.
Look, I mean, go back to those rules. One of them is you want revenues that are accelerating, not decelerating. You want margins that are expanding, not contracting. They have a hit right now because of the Blackwell product cycle and the ramp. I'm going to guess that margins go back up. I'm not sure what the China impact will be long term. It's a product cycle company.
It's going to de-sell. The stock is, you could argue, reset. It peaked back in... It peaked early this year again, but it basically peaked in July. It matched high earlier this year. Yeah, it basically peaked in July. And yeah, everybody wants to talk about the bear case. We have not had a negative revision on CapEx, right? They've got these giant, lumpy...
customers, you know, and they're giant companies, the Metas and the Googles and whatever, spending a fortune. I mean, it's an incredible amount of money and they're and they're and they're hundreds of billions of dollars competing to to to to spend more. What's happening in India and in Saudi Arabia and in Europe? I mean,
We've just begun to build this out. Countries are going to feel like it's a national security issue not to have our own. I think there's a lot of runway for NVIDIA. This is like hating on Intel when PCs were first coming out. And they had product cycle transitions, and they had a competitor who gained and lost market share. I think this is going to go for a while.
All right, so let's just play this out for a second because it goes back to one of your valuation things. You don't buy value stocks. Now, a lot of folks would say one pillar of the story right now is valuation. It's cheap. Right. So here's a company this year expected to, let's just kind of say, fall.
50-ish percent earnings and revenue growth is trading about 26 and a half times earnings, 14 and a half times sales. And then next year, you're seeing that de-sell to mid-20s. Now, I know some analysts who think that's probably going to be 30%, and we're not going to see much of a de-sell this year. And it trades at 21 times next year.
Like, is this one of the stories that you just say you got to back up the truck here right now because there is no competition? Yeah, China could be a problem, but maybe there's opportunities in India and Saudi Arabia and sovereign is going to be a big thing to your point. So I'm just like, how are you thinking about NVIDIA right here?
Like you just said, you think there's a lot of runway. I think there's a lot of runway. I mean, it's helpful when margins get reset because then you can have a de-sell with beats, I guess we used to call that. Revenue growth will decelerate, but they're going to beat earnings. And they're going to beat earnings because gross margin is going to go back up.
By the way, it's a hardware company with 73% gross margins. It's a software company. Right? Yeah, and CUDA is a big part of that. Well, thank goodness for Taiwan Semiconductor, right? Yeah, they're in a product transition. At some point...
Companies that grow 50% a year, in two years they're growing the entire company from two years ago. Just think about the incremental growth, the number of people that requires, the number of the execution, the incremental challenges, the unit volumes that have to happen. That's the miracle of Apple, that they can produce all these devices.
Their units have plateaued. Apple's not increasing their units. Their devices are flat the last two years. Could you imagine if Apple was going to sell $300 million, then $450 million, then Tesla thought it would be- It'd be a $5 trillion stock. No, it would be. Right? And at some point, NVIDIA will-
Screw up a product cycle. I mean, they are, you know, at some point they're going to say our product cycles are two years, not one year. And is that the end? No, but that's a digestion period. That's the time when we sit back and say, okay. You can make the argument that between Hopper, Blackwell, and Rubin, it's too tight.
So this could be the product cycle that they've kind of screwed up in a way, especially if you go into a digestion period. The day that a lot of people were surprised when Meta reiterated, actually raised the midpoint of their CapEx, Amazon, Google, and Microsoft, they all reiterated. Everybody thought they were going to cut. Yeah, they did.
But there's going to come a quarter, let's just say if we kind of have this recessionary environment or whatever, where they're all going to start talking it down a little bit. They're not going to want their investors to think that they're scaling back too hard. But going back to when you and I had our last podcast in November of 2022, all those stocks started working again because the companies, the management started talking about rationalizing costs. And they started cutting, they started firing people. Yeah.
And that was it. And so what the equivalent to me will be is when these companies start cutting CapEx at some point, especially if you start seeing a decel in sales. Yeah. Does that make some sense? Yeah, I will make two points with respect to that. Number one, I missed the entire 2023 rally because I didn't want to buy companies that were
Right. Saving their way to prosperity. Right. Right. Cutting their way to prosperity. That's explicitly in the rules. But a tech company, you don't buy a tech stock because they're firing people usually. Well, that was not true in 2023. The thing that we don't understand yet about NVIDIA...
is how big is the opportunity. If you're going to believe that agentic AI is in 2030, that's different than if agentic AI is in 2026. The use cases are just starting to unfold. And I'll go back to that Apple analogy. When the iPhone came out,
Nobody anticipated the app store. It's really easy to look at AI and say, "Oh God, I wouldn't want my kid to be a software engineer. Oh God, I wouldn't want my daughter to study radiology." These are image based and AI can do them. It's really easy to come up with lots of ideas that AI is going to hurt or take the place of and make better, frankly, but employment not so good.
it's really hard to come up with the new things it's going to do. We're just not imaginative enough. Some people are. If you and I were, we'd stop doing podcasts, right? We would go do it because the opportunity is staggering. Well, we don't have the skill sets to do it either. We don't have the skill set. And we don't have the imagination. Well, you know what I tell young kids today, and you and I both have young kids or, you know, like college age, that sort of thing. I say, and I'm trying to find some courses where my kids can kind of learn. They don't have to code.
You just have to learn how to use these things. And then when they're, the kids are coming out of college, they're like, oh, I'm interested in finance, or I'm interested in this. Figure out how to use these tools and think about how that industry that you're really interested in will be embracing these tools. And if you're one of the people who knows how to do that, you're going to have, you know what I mean, a nice long runway.
And I think the most important thing of what I'm taking away from the Apple example that you gave that no one could kind of foresee what was going to happen, it was the app store that unlocked it because it also gave all these folks, these creative people, all these ways in which they could build something, put it on a brand new platform and see how it would go. And then companies who locked into that saw all these opportunities, no different than e-commerce, you know what I mean, 20 some years ago, right? Giving them a whole new opportunity to sell their goods. Right.
One of the things that I think a lot of folks are saying is the application layer. This is where the money is going to be made. The investments have been put in place, that sort of thing. But again, I think it's hard for like lay people, and I'll throw myself in there, to really understand how agents are going to work. Because it sounds sci-fi-ish in a way, doesn't it? Absolutely. Yeah, absolutely.
- Well, all right, last thing before we get out of here, I know I've kind of gotten, we went back, we went forward, this sort of thing. And now, Tesla really quickly, because I just want to be clear, this is a company that you've known for an awful long time, you were invested in for a long time, you were an entrepreneur Elon fan, okay? Like we don't have to get into all the other bullshit.
But, and SpaceX is something that you've been involved in. My bumper sticker should say, I knew Elon. I bought this car when Elon was the underdog. Yeah. He's always been crazy. Yeah, yeah. Those are throwaway bumper stickers. I love that. I bought it when he was the underdog. I love that. He's not the underdog anymore. No. And so-
Can we just agree that Tesla's EV business is going to take a lot of work to turn that around? Okay. And as far as I'm concerned, if he's the genius that everyone thinks he is, I don't mean to say it like that. You're like, who the hell are you for saying, okay, then he should be only focused on SpaceX. And you know what I mean? The rest of the, like, like, you know, like to me,
XAI might be really, forget X, forget his addiction to X, focus on XAI and SpaceX. And that's how he could change the world. Because to date, in my opinion, EVs haven't changed the world. You know what I mean? Like BYD now has a bigger opportunity to sell like gazillions more cars than Tesla ever. I have made the argument Tesla's best days and EVs are behind them.
And if they screw up RoboTaxi, which they could because the RoboCab had two seats, okay? Like two seats. That's not going to work as is. And I think it's going to become commoditized, all of it. So to me, how do you feel about SpaceX, that investment? Is this going to be a trillion-dollar company in two years? Is it going to be the first $5 trillion company in five years? So what Elon did with SpaceX was...
He cut the cost of space launch by a factor of 10 or more. And it's not a trivial thing to be able to launch your rocket and then land it and reuse it because what we've been doing for the last, since we've had rockets is we basically crashed them into the ocean. And-
So that was the innovation. And Nolan, by the way, is doing it now when he started doing that in 2008. I didn't foresee Starlink.
Just like Starlink to SpaceX is what the App Store was to Apple. I didn't know he was going to do that. I don't know if he knew he was going to do that, right? He wanted to go to Mars. He wanted to, you know, and he still does. He should go to Mars. He revolutionized the cost of launch. Yeah.
And then when I do this, there'll be a lot of demand. You know, over half their launches are Starlink launches. So they're doing it for themselves. And they have built out an internet service that, you know, low Earth orbit, latency, how's that ever going to work? And it's not gigabit, but it's...
200 megs, 300 megs. It gets better, which shocks me because the distance isn't getting any shorter. And you can roll it out anywhere. And that is... But they still, at this point, they have four or five million users. I mean, it's tiny when you think about it. It's tiny relative to the number of subscribers that could be. Yeah.
And even then when he launched it, I was thinking, yeah, he doesn't really expect this to be commercially successful. He needs a communications technology for when he goes to Mars. Because there won't be landlines on Mars, right? I mean, it's kind of that simple. He's got the next generation rocket where people are still trying to figure out how to land. You've got the next generation rocket, which I guess it's number eight or something that's about to be launched. Still hasn't worked.
It has to work. If Starship doesn't work, the company is in trouble. My guess is that it will work, just like everything Elon does, it takes longer. Right. Which when it comes to building rockets and putting people, I think that that would be the one, like, let's get this right. You know what I mean? You know, it's interesting because I just went to Perplexity for 2024, and
What had more revenue, Starlink, or it's a private company, but there's a lot of data on it because they've been raising a lot of money, or their spaceflight. And it looks like Starlink was almost 2x that. Now, you can see how space, this could be a $500 billion business in the not-so-distant future. I mean, this is the one where, you know, well, whatever. But we're still at the point where...
We don't know what we're going to be asteroid farming and, you know, and bringing things back from the moon. And I mean, we don't know yet what the use case will be. We invent these things. And, you know, I mean, there have been some harebrained things that have come out of SpaceX. We're going to do point to point, um, uh,
on Earth. We're going to launch a rocket from Texas and land it in Tokyo in 25 minutes. Wow, that's going to revolutionize everything. Yeah, I think it's going to be a while before we get on that flight. And I think it's going to be a while before it is...
you know, even in the realm of affordable. And yeah, if you have this flight that's supposed to save you, you know, 20 hours of flight time, wonderful. But if it gets delayed three days for weather, I mean, it's, yeah. And look, there are analysts out there who are putting that in their models.
All right. One last question. So if Apple, Microsoft, Nvidia, they're all $3 trillion-ish market cap companies. Amazon, Google, and Meta are all, let's call them one and a half trillion. And they always say the leadership, you know what I mean, changes a lot. The next generation. Yeah, the next generation. Right. Of those six companies,
companies. Okay, I'm leaving Tesla out of that. Of those, so it's Apple, Microsoft, Nvidia, Amazon, Google, and Meta. Do you think any one of those in three years will be sub $1 trillion market cap? Like, which is the first that you think
falls by the wayside because there's some innovator, you know what I mean? Some company, and there always is, that we're not thinking about. Think Google, you know, circa 2000, that sort of thing. And I hate to put you on the spot. How many years from now? Let's say three years from now. Let's say we're back.
in a raging bull market. Let's say the S&P 500, which is right now 5,800 and it's, let's call it, it's 7,200 or something like that. You know what I mean? Like, I don't think, I can't think of another company in the public markets that will be a $3 trillion market cap company. Now, you could have said that
Two years ago and there's Nvidia. So I'm just curious, which one of those six- I think of those companies, I think Google is the most challenged. Perhaps Apple is the second most challenged. Will they be obsoleted essentially in that timeframe? I don't think so.
They will hang on by doing defensive things and attempted offensive things, but I don't think will necessarily work. But three years is too short a time frame. Okay. Which one of those do you think will be a $5 trillion market cap company? I don't know.
I love it. It's one of the, it's, it's, you know, look, I mean, if I say NVIDIA, I'm going to, I'm going to, no, get, get all this, get all this, I'm going to finish with this because I love, I don't know. And I love the fact that you said in 2023, I missed this because of that. And most folks who have a mic in front of their face or, no, they just don't do that. And so I,
listen, I hope our listener, our viewer appreciates this conversation as much as I did. We are not going to wait two and a half years to have another conversation like this. I loved it. I hope you guys know that I love it. I could do this all day long. We don't do Joe Rogan size podcast over here, but Dan Benton, I really, really appreciate you coming here and appreciate the conversation. My pleasure. Thanks, Dan. Thanks, man.