No one has ever gone bankrupt making profits, but in retrospect, things on Wall Street haven’t always been the most beautiful.
On Wall Street, the next big innovation, technology, and trend are constantly vying for the attention of professional and retail investors. Ever since the advent of the Internet in the mid-1990s, investors have been eagerly waiting for the next breakthrough innovation that will change the trajectory of American business growth. Many hot trends have come and gone, but now artificial intelligence (AI) is poised to rival the rise of the Internet.
With AI, tasks that are typically overseen or performed by humans are handled by AI-driven software and systems. The catalyst that gives AI its nearly limitless potential is the ability of the software and systems to learn and evolve over time. Without it Human intervention: PwC analysts predict that AI will add $15.7 trillion to the global economy by 2030.
AI stocks have significantly enriched most billionaire asset managers and investment funds in 2023 and the first half of 2024, but not everyone is riding the wave.
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SoftBank’s $160 billion ‘blunder’ with NVIDIA
May 2017, SoftBank group (SFTB.Y 1.75%) (SFTBF 1.52%) It announced a major investment to acquire a 4.9% stake in the graphics processing unit (GPU) provider. NVIDIA (NVDA 1.44%) Through the then-newly launched Vision Fund.
SoftBank’s Vision Fund, which has had roughly $90 billion in capital since its inception, was looking to invest in the AI technology ecosystem, and it’s important to note that this “ecosystem” goes far beyond the hardware Nvidia currently produces and could also include the infrastructure and software that will underpin next-generation AI advancements.
Nvidia’s stock price essentially tripled between SoftBank’s Vision Fund’s initial investment in the company and early October 2018. The rapid rise in interest in cryptocurrencies made Nvidia’s GPUs a hot commodity for crypto miners looking to make a profit.
But interest in Nvidia GPUs among crypto miners waned quickly as the crypto bear market hit, and by early 2019, SoftBank’s Vision Fund had sold its Nvidia shares for a profit of more than $3 billion.
No one has ever gone bankrupt making profits, but hindsight doesn’t always pay off on Wall Street.
As most readers know, Nvidia’s 2023 H100 GPU has quickly become the de facto choice for companies looking to run generative AI solutions and train large-scale language models in high-computing data centers, with Nvidia accounting for an estimated 98% of the 3.85 million AI GPUs shipped last year, according to TechInsights.
In addition to its first-mover advantage in AI-accelerated data centers, NVIDIA also benefited from hardware demand far outstripping supply. Drastically The company raised prices for its GPUs, which ultimately helped its adjusted gross margin rise to 78.4% in the first quarter (ended April 28).
In just over 18 months, Nvidia’s market capitalization has risen to nearly $3 trillion. If SoftBank’s Vision Fund had had the money (and guts) to hold onto its original investment in Nvidia, it would have been worth nearly $163 billion as of the company’s closing price on July 10.
While SoftBank “locked in” roughly $3 billion in profits from its previous Nvidia stake, it ultimately missed out on $160 billion in additional capital gains.
Image source: Getty Images.
SoftBank’s Nvidia concerns likely to be short-lived
While SoftBank executives and investment experts can dream of what could have been had it teamed up with Nvidia, there are two reasons why the company is more likely to move past this missed opportunity sooner rather than later.
SoftBank’s first panacea is that history shows Nvidia is in danger. Quite large Bubbles. Since the advent of the internet in the mid-1990s, not a single next big investment trend has avoided an early stage bubble.
In other words, investors have consistently overestimated how quickly businesses and consumers will adopt new technologies and trends. If artificial intelligence follows this same trajectory and takes time to mature as a technology, perhaps no company faces a greater potential downside than Nvidia.
To add to this point, most businesses have no clue as to how to deploy AI solutions to improve their top line and profits. Many industry leaders are investing in the hardware required to run high-computing data centers, but most of them have no clear blueprint on how it will improve their operations.
Moreover, competition is closing in on Nvidia from all angles: In addition to battling the entry of outside competitors, Nvidia’s top four customers by net revenue are all developing AI GPUs for their own data centers. Even if Nvidia’s chips maintain their computing dominance, as the shortage of AI GPUs eases and there’s less data center space for Nvidia’s hardware, it will lose pricing power and ultimately its adjusted gross margins.
Three years later, Softbank’s NVIDIA failure Much smaller.
The second reason why SoftBank (in hindsight) is not keen on selling its Nvidia shares early is that the intellectual property (IP)-driven semiconductor company is performing well. Arm Holdings (arm 4.61%) Since going public last year.
Arm is not responsible for manufacturing the hardware used in enterprise data centers: rather, semiconductor giants pay Arm royalties and license fees to use Arm’s central processing units, GPUs, and various IP system designs – a lucrative operating model that places Arm at the heart of the AI revolution.
In August 2023, just one month before Arm’s initial public offering (IPO) at $51 a share, SoftBank Group acquired the remaining 25% of Arm that it didn’t already own, valuing Arm Holdings at $64 billion at the time.
After Arm’s IPO, SoftBank held 90% of the company’s outstanding shares. With demand for AI GPUs soaring, Arm’s growth projections impressed Wall Street and investors. As of the close of trading on July 10, SoftBank’s roughly 90% stake was worth nearly $176 billion. In just 10 months, SoftBank’s investment had risen by $112 billion.
So while SoftBank clearly failed with Nvidia, its investment in Arm Holdings was a huge success.
