Nvidia GPUs as financial products

Nvidia GPUs can be used as collateral to borrow. Financial Times reported that $11 billion of loan was created for these chips.

That’s something too creative for me.

I think it’s generally safe to borrow against assets with a growing value.

Chips, however, are like cars to me, depreciating… with new versions better than the previous one.

Well, it seems you can borrow against your car, but that’s still based on your ability to pay back the loan.

So how does it work?

Maybe it’s actually a loan borrowed against the “service contract” or rental agreement carried by the chips, which makes it more like an asset with “yield”.

But still, this market sounds a bit too arbitrary…

Hard to imagine that the rental income will be stable or rising, as Nvidia chips supply is up to Nvidia and TSMC. That capacity can increase over time.

US big tech maxed out on capex

Assuming buybacks & dividends are “required”, the unallocated cash flows are matching the capex figure already.

This means additional room to add capex is limited.

Put it in another way, free cash flows after shareholder returns are near 0.

For example, Alphabet got $125bn op. cash flow in 2024, paid $53bn in capex, $62bn in buyback and $7bn in dividend. FCF after shareholder returns is only $3bn, or 2.5% of its operating cash flow.

Meta, with 10% unallocated operating cash flow in 2024, will increase its capex by 50% in 2025. If Meta’s op. cash flow grows 10% in 2025, then FCF after shareholder returns in 2025 is only $3bn, or 3% of its operating cash flow.

Microsoft in calendar year 2024, has $10 billion of unallocated free cash flow. But that should be smaller if looking at its fiscal year 2024.

Big companies under Trump – invest in US, or rollback of DEI

Mar 3 – both Nvidia and Broadcom shall use Intel as a foundry to produce chips.

This should add additional pressure to gross profit margin to both companies.


Feb 25 – Apple shall invest $500bn in the US in the next 4 years, including a new advanced manufacturing facility in Houston to produce servers for Apple Intelligence and Private Cloud Compute.

Apple also supported billions of $$ for TSMC’s Fab 21 facility in Arizona.


Not to mention the rollback of those DEI policies across companies, e.g.

 

How amazing is (incremental) profitability at Meta?

For the past 8 quarters (2023 & 2024), incremental gross profit margin is well above 80%, more like 90%.

This is easy to understand, e.g. one more successful ads sale (click etc.) on Instagram won’t cost Meta more.

What’s even more amazing is the incremental operating profit conversion, which on average is like 100% for the past 6 quarters!

What does 100% mean? It means one dollar of additional gross profit earned by Meta was converted into one dollar of operating profit – how amazing is that!

The operating profit margin increased from 20% in 2022 Q4 to 48% in 2024 Q4, growing at 91% CAGR.

Although there were some one-off opex optimization efforts, thus incremental operating margin should definitely fall, it’s still a very very powerful business franchise, demonstrated by this amazing incremental earnings power.

Chinese businesses give more weight to culture

As the go-go period ended in China, it’s no longer the era of the fastest runner.

Surprisingly, good culture now matters in China.

1/ Culture matters to employees.

Trip.com founder & CEO James Liang advocates for “hybrid” work mode – employees can choose to have two days WFH during a week.

2/ Culture matters to customers.

PDL (Pangdonglai) is very popular and has a growing influence in China as a retailer – an industry that most people ignore nowadays. PDL is famous for its “customer service, quality and integrity“; the at PDL work 7-hour days, have weekends off, get a string of perks and are entitled to 30-40 days of annual leave.

Enron – not alone

Recently finished the book The Smartest Guy In The Room.

Shockingly, you could find many of Enron’s problems in other industries in China during the go-go era (property):

1/ focus on doing projects/deals with early monetization. less focus on the real economics over the entire horizon

2/ lots of off balance sheet financing

3/ weak audit; can’t put a check on mgmt

4/ mgmt takes more early profits out, with potential conflict of interests in the form of SPV, etc.

It’s also similar in WeWork!

The same playbook. Remember that Adam Neumann owns some buildings WeWork leases.

Enron…

Reading Enron’s story from The Smartest Guys In The Room

It seems that one particular problem from Enron’s business model can be found elsewhere easily – developers focus a lot on up-front calculations (present value of all the expected future cash flow from a project), getting deals done, and moving on the next one.

In the process, banks lend money based on the similar calculations before real projects finish and generating cash flows, employees of developers get paid based on the formula linked with similar calculations, etc…

Things are good when they are good. But when “unexpected” things happen, this business model can be troublesome.

Similar dilemmas can be found in property, solar, etc..

Xiaomi’s strength

Besides Xiaomi’s scale, supply chain capability, IoT strategy, etc., I think the most underestimated strength comes from its competitors.

For all those merchants or companies who are “bullying” consumers, they will find themselves outcompeted by Xiaomi’s products – simply better, cheaper.

Xiaomi is not copying. Xiaomi doesn’t enter a new category if it thinks the product is good enough. Xiaomi usually executes with better efficiency, offers more value, or adds some differentiation.


Another noticeable change for Xiaomi in recent years is its brand value. It used to be more associated with low to mid income consumers as its products offer value.

However, as its car business picking up, people find its brand attractiveness quickly expand into the premium segment. Those who won’t buy Xiaomi phone can buy SU7 or SU7 Ultra etc. – this greatly expanding Xiaomi’s consumer base.

It’s like Walmart + Sam’s Club in terms of capturing more consumers.


Xiaomi could be China’s Tesla.

When was Waymo approved?

In 2017, Texas passed a bill to allow driverless cars on the road.

Later that year, Waymo started to bring driverless cars to the road in Texas.

California introduced rules around driverless testing on public roads in Feb 2018.

Waymo won the first driverless permit to test in California in Oct 2018 for ~3 dozen cars.

In 2020, Waymo started to open its fully driverless service to the general public in Phoenix.

In 2024, Waymo offered the service to anyone in SF.


Lots of small steps.

Each state/city can be different. Requirements can be different & definition of “driverless” can be different.

Area can be limited.

Target passengers can be limited.

etc.


Where was Waymo’s technology at?

In 2018, Waymo’s miles per disengagement was 11,154 miles.

In 2023, Waymo’s miles per disengagement was 17,311 miles.

On average, people may drive 10k+ miles per year in the US.

So on average you will only experience one “Disengagement” in a year in 2018, which is a decent rate.


Where is Tesla FSD at?

The latest 12.5 seems to have 1 critical disengagement per 123 miles?

This needs to iterate & improve over time to be fully driverless.