Nvidia and Micron Make Up 34% of America's Earnings Boom
wsj.com127 points by JumpCrisscross 2 days ago
127 points by JumpCrisscross 2 days ago
So someone correct me but I think this is sort of an accounting trick. When Microsoft buys an Nvidia GPU for $100, it will claim that it lasts 5 years, so writes down $20 in the expense column for this year. Meanwhile Nvidia takes all the profit at time of sale, $100. So for each GPU bought, SP500 logs $80 of profit, even though no money entered or left the SP500.
(Yes of course the GPU cost something to make, but the margins on these things are very high. The point is that revenue is immediate while capital expenses are amortized. And capital expenditure has gone way up lately.)
> When Microsoft buys an Nvidia GPU for $100, it will claim that it lasts 5 years, so writes down $20 in the expense column for this year. Meanwhile Nvidia takes all the profit at time of sale, $100
Nvidia would log $64 of profit against a $100 sale [1]. (The R&D cost to develop the chip have already been booked.)
> for each GPU bought, SP500 logs $80 of profit, even though no money entered or left the SP500
In your example the S&P would log ~$40 of earnings. (About because taxes.)
[1] https://www.macrotrends.net/stocks/charts/NVDA/nvidia/profit...
Ok great, thanks for clarification. But still, on year 3 of the AI buildout, assuming the pace doesn't accelerate (it's already pretty fast!) then each GPU bought logs $0 profit since it's offset by amortization of the last two years. Compared to $40 of today, profit dropped by $40, meaning earnings contraction is around the corner...? Unless of course Microsoft manages to actually earn $20 or more from each GPU each year.
I suppose the uncertainty here would be the reason for financial market volatility.
> Compared to $40 of today, profit dropped by $40, meaning earnings contraction is around the corner...? Unless of course Microsoft manages to actually earn $20 or more from each GPU each year
Correct. If Microsoft fails to earn more profit from a capital asset, over said asset's useful life, than was paid for it, Microsoft's earnings would be reduced. Put simply, it would have made a bad investment. Presumably, that would affect whether Nvidia gets another order.
If you've ever wondered why subscription mania took hold over the last decade, you've backed into the answer.
(Note that Microsoft depreciates "servers and network equipment" on a straight-line basis over "two to six years" [1].)
[1] https://www.sec.gov/Archives/edgar/data/789019/0001193125263... page 61
> why subscription mania took hold over the last decade,
I don't see business to business subscriptions as a bad thing. It it a way of sharing risks. The horrifying thing is that they do that to consumers.
Consumers don't have the legal teams to analize such contracts. Consumers do not have people dedicated to evaluate prices and change providers (Even for companies is costly, so individuals get stuck in products they do not use anymore). Subscriptions change prices and conditions at will, what makes it impossible for a normal consumer to follow up on everything that changes over time.
The fact that even when you theoretically buy, like a phone or even a TV, also becomes a subscription because the software it runs needs updates.
Subscription models that may make sense for corporations are killing the working class ability to own things or even choose which business they want to buy from. It is just about capturing customers and not letting them leave as prices are pushed up.
>Ok great, thanks for clarification. But still, on year 3 of the AI buildout, assuming the pace doesn't accelerate (it's already pretty fast!) then each GPU bought logs $0 profit since it's offset by amortization of the last two years.
Probably worth noting that Azure has had GPU resources for a while, I think it was already a profitable line for them, and since people have been chasing GPU compute on cloud platforms it can be difficult in some regions getting a reservation. Microsoft is probably looking at AI as Another profitable use case for our assets, let's expand it rather than a greenfields GPU buildout from zero. And where capacity doesn't get used by AI their customers can use it for other stuff across most not all SKUs
What's wrong with this though? Value was created (a physical GPU), so assets go up.
Different people/orgs get a different slice of that value.
There is a cost to produce something based on raw materials and then the possible price you can charge from the customer based on demand and supply.
The term Value is pretty vague here. Its more of a perceived value so its hard to put a number against it, there is no direct way to translate it to something more concrete.
May be bit orthogonal, one way I can think of it is to map to physical needs like clothing, housing, food and medicine?
The value of a physical GPU is yet to be determined, and is hard to reverse engineer from these figures.
Almost, the depreciation is 2 years, but for some reason they wrote it up like 5 for now. But anyone buy nvdia chips is already maxxed out on debt for the next 5 years and the new chips are here shortly. What happens to those 100's of billions in chips?? They get written off. We're already seeing them in cars. There is no shortage except on the scrutiny of the whole securities thing.
In theory if people are giving all of the money to Nvidia, then it's because they find it valuable (in this case companies purchasing GPUs) so even if the GPUs weren't so expensive in theory there would still be economic value derived from the transactions.
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Nvidia wasn't the thing to bet on in the run up, Samsung, SK, TSMC, 'DRAM' and construction stocks were far more lucrative.
Be sure to still dismiss any legitimate complaints or concerns as envy or fomo though.
Aka, inflation.
More like a temporary market fluctuation or maybe bubble.
> More like a temporary market fluctuation or maybe bubble.
A bubble that is obscuring that most of the economy is pretty weak.
It increasingly looks like everything is getting K-shaped. Not just the income of labor, but the earnings of corporations.
I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors, such as healthcare, construction). Basically, when software or AI is super lucrative,
1. students go into new lucrative thing
2. supply of doctors goes down
3. doctor wages go up
4. hospital margins go down
5. Hospitals raise their prices to stay in business
6. Wealthy engineers are able to afford higher prices
7. Services that are transitively consumed by the high-productivity sector stabilize at a higher price. Services not transitively consumed by the high-productivity sector go out of business.
- I remember visiting a developing country about 15 years ago and seeing people getting paid to stand there and hold a rope, because I guess their time was cheaper than cones, which I think is the inverse of this.
- I also think that, in the limit, society consists of a handful of economically viable occupations and infinite cheap stuff. Nothing else is worth the prices that a seller would have to charge to afford employees.
- I also think that we’re entering a stabilization phase.
>I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors,
This is a clear and accurate description, but your explanation of the underlying reasons isn't really as clear.
>1. students go into new lucrative thing
Part of the Baumol effect is that the share of total employment in the sectors with high productivity growth decreases, while that of low productivity sector increases. This is sort of the opposite of what you are saying.
>2. supply of doctors goes down
The Baumol effect by itself has no effect on the number of Doctors. There are always more qualified people who want to be Doctors than are allowed to be Doctors for a great number of reasons. It isn't because not enough people want to be Doctors.
3, 4, 5
Yes those look like the Baumol effect.
6, 7
Not really what the Baumol effect is talking about.
Baumol illustrated his point in a simple manner. In the 1700's a string quartet required four musicians, and today a string quartet still requires four musicians (no productivity gain). However, those musicians today expect 21st-century salaries to match the rest of the economy, making the cost of hiring a quartet vastly more expensive relative to goods like mass-produced items.
The wikipedia entry looks pretty well done:
TIL! I’m entirely inexpert in the topic and posted as a curious layperson.
That said, some of what’s in the article only makes sense to me in the context of a system that’s at least somewhat like what I tried to describe. Maybe you can enlighten me?
> This effect is an example of cross elasticity of demand.
Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor? Eg land, healthcare, unskilled labor (as an input, in the case of skilled labor as the output—doctors and engineers in my comment)?
In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs.
So people are either leaving the profession or raising their prices, and either firms pay, high-wage-earners pay, or they get no customers and again get other jobs (like the rope-holders). Is that not the effect?
Yeah, and it's similar reasoning as to why gentrification tends to happen when the wealthy move into an area, and why prices for things typically decrease when the wealthy leave.
When people leave, the prices of things they were buying goes down due to the Law of Supply and Demand.
> I also think that we’re entering a stabilization phase.
Why do you think that? Everything you wrote prior to that seemed to indicate further destabilization.
Hospitals and health insurers aren’t really operating in a free market.
The argument works with any service business that is shared by high income and low income earners: restaurants, transportation, clothing, housing, groceries, etc.
If it was inflation it be all stocks.
Inflation isn't uniform across an economy.
It also preferentially benefits as a function of margin. If Nvidia's prices double, it logs two thirds of that as earnings. For Kroger it turns into like a penny of extra profit for every dollar of price rises.