While no one is ever broke taking profits, hindsight doesn't always paint the prettiest picture on Wall Street.
On Wall Street, there's always the next big innovation, technology, or trend for the attention of both professional and everyday investors. Since the advent of the Internet in the mid-1990s, investors have eagerly awaited the next game-changing innovation that would change the arc of growth for corporate America. After a number of fad trends have come and gone, artificial intelligence (AI) aims to give the internet boom a run for its money.
With AI, tasks that are normally supervised or performed by humans are instead handled by AI-powered software and systems. The catalyst that gives AI nearly unlimited potential is the ability of software and systems to learn and evolve over time. without human intervention. By 2030, PwC analysts estimate that AI could add $15.7 trillion to the global economy.
While AI stocks may be making billionaire money managers and investment funds significantly richer through 2023 and the first half of 2024, not everyone is along for the ride.
Image source: Getty Images.
SoftBank's $160 Billion “Boo-Boo” With Nvidia
In May 2017, Softbank The group (SFTB.Y 1.75%) (SFTBF 1.52%) unveiled a major investment — a 4.9% stake — in the graphics processing unit (GPU) supplier Nvidia (NVDA 1.44%) through his then newly launched Vision Fund.
SoftBank's Vision Fund had about $90 billion in available capital after its launch and aimed to invest money into AI technology ecosystem work. Keep in mind that this “ecosystem” extends beyond the hardware Nvidia builds now, and may include infrastructure and software supporting next-generation AI developments.
Between SoftBank's Vision Fund making its initial investment in Nvidia and the October 2018 launch, Nvidia's stock value effectively tripled. The booming interest in cryptocurrencies has made Nvidia's GPUs a hot commodity for crypto miners looking to turn a profit.
But when cryptocurrency hit the market, cryptocurrency miners quickly lost interest in Nvidia's GPUs. By early 2019, SoftBank's Vision Fund had sold its position in Nvidia and made a healthy profit of more than $3 billion.
While no one has ever failed to turn a profit, hindsight on Wall Street isn't always pretty.
As most readers are probably aware, in 2023 Nvidia's H100 GPU quickly became the de facto choice for businesses looking to run generative AI solutions and train large language models in their high-compute data centers. According to TechInsights, last year, Nvidia was responsible for about 98% of the 3.85 million AI GPUs.
In addition to its first-mover advantage in AI-accelerated data centers, Nvidia also benefited from demand for its hardware handily outpacing supply. The beauty of this scenario is that it allowed the company. Quite a bit Add in the cost of its GPUs, which ultimately pushed its adjusted gross margin to 78.4% during the fiscal first quarter (ended April 28).
In just 18 months, Nvidia has gained close to $3 trillion in market value. If SoftBank's Vision Fund had the resources (and stomach) to keep its original investment in Nvidia, it would be worth about $163 billion as of the closing bell on July 10.
Although SoftBank “banked” about $3 billion in profits on its previous stake in Nvidia, it ultimately lost $160 billion in additional capital gains.
Image source: Getty Images.
SoftBank's Nvidia overhang is likely to be short-lived.
While SoftBank's management team and investment gurus may dream of what could have been with Nvidia, there are two reasons why the company will seize this missed opportunity sooner rather than later.
The first remedy for SoftBank is that history suggests Nvidia is in one. Worthwhile The Bubble Since the Internet became relevant in the mid-1990s, there hasn't been a next-big-thing investment trend that avoided the early-stage bubble.
Put another way, investors have, without fail, consistently predicted how quickly businesses or consumers will adopt a new technology or trend. If artificial intelligence follows the same trajectory and takes time to mature as a technology, surely no company will face more potential downside than Nvidia.
To add to this point, most businesses really have no clue how they are going to deploy AI solutions to improve their sales and profitability. While many industry leaders are investing in the hardware necessary to run high-compute data centers, most do not have a well-defined blueprint for how it will improve their operations. will make
Additionally, Nvidia has competition coming from all angles. On top of competing with external competitors entering the scene, all four of Nvidia's top customers in terms of net sales are developing AI GPUs for their data centers. Even if Nvidia's chips maintain their compute advantage, the decline in AI GPUs, along with less space in data centers for Nvidia's hardware, will reduce its pricing power and, ultimately, its adjusted gross margins. will go
Three years from now, SoftBank's Nvidia boo-boo a Very small.
Another reason SoftBank is less likely to consider an initial sale of Nvidia stock is the intellectual property (IP)-driven semiconductor company's better performance. Arm Holdings (ARM 4.61%) Since going public last year.
Bazoo is not responsible for manufacturing the hardware used in enterprise data centers. Rather, semiconductor goliaths pay arm royalties and/or licensing fees to use their central processing units, GPUs, and various IP system designs. It's a high-margin operating model that puts the arm at the heart of the AI ​​revolution.
In August 2023, just one month before Arm's initial public offering (IPO) at $51 per share, SoftBank Group acquired the last 25% of Arm it did not already own. Arm Holdings was valued at $64 billion at the time.
After Arm's IPO, SoftBank retained 90% of the company's outstanding shares. With AI GPUs rapidly rising into the stratosphere of demand, Arm's growth forecasts have impressed Wall Street and investors. As of the closing bell on July 10, SoftBank's roughly 90% stake was valued at about $176 billion. In just 10 months, SoftBank has seen its investments grow by $112 billion!
So while SoftBank has undoubtedly missed out with Nvidia, it has knocked its investment in Arm Holdings out of the park.