From Yahoo Finance, April 15:
It pays to be big.
That's one early takeaway from the tariff drama. Investors momentarily poured back into Big Tech after the administration initiated a temporary levy exemption that covers consumer electronics, networking equipment, GPUs, and servers.
It's essentially another way of saying that Big Tech will probably be OK, as investors also look to the sector as a defensive play. Meanwhile, other sectors and companies still stare down a massive tariff upheaval.
It's a feature of American politics to want to avoid the appearance of picking winners and losers in the market. That phrase is often used as a rhetorical cudgel to attack opponents as bad for the economy.
But one person's favoritism is another's industrial policy.
If the market is consumed by the repercussions of tariffs, exemptions to those taxes can mean everything. The potential special carve-outs for tech, however, initially sparked a rally on Monday, fizzled, then rebounded. Part of this confused response from investors was the White House seemingly sending mixed signals.
After the exclusions from reciprocal tariffs were first unveiled, the president said in a social media post "there was no Tariff 'exception' announced." He later told reporters that his goal was encouraging production to move to the US but added that the administration has to show flexibility.
The tech titans hoping to receive assistance from the White House are showing flexibility too, or rather a willingness to support the president's agenda of bolstering domestic manufacturing and investment.
Nvidia (NVDA) on Monday said it will produce up to $500 billion of AI infrastructure in the US within the next four years. That announcement follows other Big Tech commitments from Apple (AAPL), Microsoft (MSFT), and Meta (META) to spend in the US....
....MUCH MORE
This is a corollary of the basic framework for understanding businesses and investing that we've been pitching for the last six or seven years.
If interested see:
Why Do the Biggest Companies Keep Getting Bigger? It’s How They Spend on Tech"
...Much more important than the direct monetization of big data is the strategic advantage it can bestow over time.
In a winner-take-all economy, as in a horse race, small differences in superiority are rewarded all out of proportion to the actual advantage. A top thoroughbred may only be a couple fifths of a second faster than the field but those two lengths over the course of a season can mean triple the earnings for #1 vs. #2.
In commerce the results can be even more dramatic because rather than the 60%/20%/10% purse structure of the racetrack the winning vendor will often get 100% of a customer's business.....
Competitive Advantage and Feedback Loops
How to Think About Companies: 'Advantage Flywheels'
A very handy conceptual framework first posted after the start of the U.S. lockdowns, April 2020. Schools were closed so it seemed natural to link to a superb mini-MBA module.
Eat your heat out HBR....****....As artificial intelligence comes more and more to the fore, the advantages accruing to those companies that can afford to make use of their data and custom train the machines will act as advantage flywheels that shift the distribution of profits from the normal Pareto: 80% of the loot goes to the top 20% of businesses to perhaps as much as 95% of all the profits going to the top 5% of businesses.I didn't really mean the "eat your heart out HBR" line.
Here's the Harvard Business Review on this very point:
HBR—From Pareto To Hyper-Pareto: "AI Is Going to Change the 80/20 Rule"Flywheel Effect: Why Positive Feedback Loops are a Meta-Competitive Advantage
"America's Biggest Firms' Moat Is Becoming Impregnable" (TSLA; NVDA; GOOG)
The announcement at the end of August that Tesla was going live with their supercomputer — Elon Got Himself A Supercomputer: "Tesla's $300 Million AI Cluster Is Going Live Today" (TSLA)—reminded me of this piece at ZeroHedge, last month. We'll be back with more on Morgan Stanley's Tesla note later today but for now the TL;dr is "To the victor go the spoils" or "The rich get richer" or "Those who can afford a supercomputer will get closer to discovering the profitability (if any) of AI than those who can't afford a supercomputer."
In Nvidia's World, If You (and your company) Don't Have Money You Will Not Be Able To Compete (NVDA)
The advantage flywheels keep spinning and reinforcing each other to the point that the Pareto distribution of profits - 20% of companies reap 80% of the profits - is becoming Super-Pareto where 5% of the companies reap 95% of the profits and is approaching Hyper-Pareto at maybe 2% of companies reaping 98% of profits.
It all comes down to having the resources to keep up.
I watched Mr. Huang give the keynote and it's all a bit much to digest before firing out comments that would make any sense at all so here are some of today's headlines to give a taste of what the intro paragraph is based on.
These are Nvidia's press releases via GlobeNewswire....
"Elon Musk says any company that isn’t spending $10 billion on AI this year like Tesla won’t be able to compete" (TSLA)
This.
This is such an important concept to grasp. It's the advantage flywheels, the rich get richer, winner-take-all reality of business in 2024....
"Jensen Huang’s extraordinary interview" (NVDA)
And many more, we are playing for keeps.
The Hyper-Pareto Distribution Of Profits Is Happening Right Now (plus an anniversary)
It's not some cutesy management* fad or pop insight like "Business secrets of Genghis Khan."
To the rich go the profits and internalizing that fact makes the rest of this portfolio construction/fund management/investing stuff easier to conceptualize and execute.
And AI is accelerating the already extant dynamic....
