…we sent this note to clients
Just 2 full trading days later the price is 14% lower – the only thing falling faster right now is SpaceX stock…
In the fast-moving world of AI, yesterday’s close is already out of date with SpaceX falling almost -5% and Marvell falling over -7% in today’s pre-market. Even if they bunce back quickly, this highlights the sheer fragility of the pricing of these in-securities…
Rays of Despair (extract from our April report this year)
Marvell is a market leader in the fantasy world of data centres where everyone is furiously building and committing to build but everything is done on credit or circular financing or asset swapping because nobody actually has any hard cash. Around ¾ of Marvell’s supposed revenues are generated in this space which is why it is so dependent on its suppliers and lenders and broader sources of funding, that its debt levels exceed its fantasy EBITDA. If/When the AI bubble bursts, we’d quickly expect this to balloon above the 4-5 x EBITDA level that is indicative of often terminal distress.
Blinking is actually a human trait, Matt………….[1]
As Warren Buffett’s late partner, Charlie Munger, often said “the liabilities are always real”.
Reducing that to our level, the MBMG dictum is that “When the revenue stream is nonsense and the liabilities are real, you’re headed towards a major problem.” Or as hedge fund supremo Ray Dalio has pointed out – the wealth versus money mismatch will ultimately burst fantasy bubbles (like the AI circular financing game).[2]
Private credit seems to have started to fall off a cliff.
Equities are suffering fall out.
Yet high yield credit is still holding up……
one of these things ain’t like the others
Marvell’s double counted, fictitious deal was quicky overshadowed at the very end of March by a record-breaking phony transaction which Open AI’s CFO, Sarah Friar claimed “blows out of the water even the largest IPO that’s ever been done.” [3]
However, the largest IPO that’s ever been done was funded by real money.
whilst Open AI (the provider of ChatGPT) has taken $3 billion from retail investors, alongside the hapless Cathie Wood who has committed to burn more of her long-suffering investors’ hard-earned cash[4], the biggest chunk of the $122 billion that seems to have so excited Sarah Friar is AI-money (just as unreal as Monopoly money but much more dangerous).
$50 billion is being provided by Amazon (except in the small print it’s actually $15 billion which in itself no doubt involves a high degree of circular financial engineering).
$30 billion of dizzyingly circus-ular financing is coming from Nvidia, thereby enabling Nvidia to claim that it sold another $30 billion of AI chips and picked up a free investment in Open AI.
Serial scammers financial engineers Softbank have also dropped in a fake $30 billion
Softbank wannabees including Andreessen Horowitz, Abu Dhabi’s MGX and D.E. Shaw Ventures have made up the rest of the OPM (Other People’s Money).[5]
The bigger the fantasy transaction, the harder the landing when reality kicks in and the greater the certainty that it will kick in, especially as back in the real world, Carmaker Stellantis (Jeep, Ram, Dodge, Chrysler, Fiat, Maserati, Peugeot, Vauxhall, Opel etc) which fell 27% in one day in February ended that month by announcing its first annual loss since the company was formed, while Warren Buffett bowed out of Berkshire Hathaway with a -30% fall in operating earnings in his final quarter and US unemployment surprised most analysts by rising quite sharply (we were shocked – not that unemployment rose but that people hadn’t seen this coming).
Meanwhile the oil price skyrocketed, peaking around 50% higher than before President Don K Trump decided to bring about the opening of the Straits of Hormuz by bringing about the closure of the Straits of Hormuz.[6]
[1] Marvell CEO Matt Murphy’s prominence/notoriety is largely founded on claims in a recent earnings call (edited transcript) “As a result, we expect data center revenue in fiscal 2028 to grow close to 50% year-over-year. Achievement of our forecast would result in 3 straight years of data center revenue growth compounding at well over 40%…..we’ve seen this in a lot of our emerging product areas when we get into them. Once they start doubling, they kinda keep doubling…let’s say, like, this last year doubling this year, you know, maybe over doubling again the year after…We’re in good shape…We’ve grown (custom) business from 0 to $1.5 billion. It’s gonna grow again this year. It’s gonna double the year after….I’m in the AI market…Look at our results that we’re guiding. Look at our outlook for this year. Look at our outlook for next year. Do you see me blinking? You don’t. Yes, we’re in the business. We’re gonna be in the business. Our customers want me to be in this business, and we’re gonna drive a major significant revenue company at Marvell. I’m very fired up on this topic…….if I go back four years, five years, 10 years, this business has been growing at like 35%, 40%, 45% for a very, very long time, and it’s gonna continue to do that. For next year, we’re looking at that growth accelerating, you know, closer to 50% next year.” I guess there are people who want CEOs to talk and think like that but it’s not exactly Warren Buffett is it?
[2] https://www.facebook.com/reel/1454618869604482
[3] The largest IPO ever done was a partial listing of Saudi Aramco for $25.6 billion
[4] The share price of Wood’s ARKK scheme has more than doubled in the past 3 ¼ years, meaning that it is now only around -60% below its peak at the end of 2020. We actually think that it’s good that Wood is committing to invest in Open AI – the final implosion of ARKK will make the capital markets a safer place to be. We just hope that as many victims as possible are able to get out in time. (https://mbmg.substack.com/p/ark-still-sinking )
[5] We’ve previously explained how VC’s ‘Ramp & whomp’ works (or rather doesn’t) – https://mbmg-group.com/everything-ventured-the-inevitable-fall-of-silicon-valley-bank-others/
[6] Maybe the Donald should have learned at least the basics about 1970s oil shock stagflation and how it cost one of the least bad President’s his job – https://www.thoughtco.com/stagflation-in-a-historical-context-1148155
Sign up for MBMG newsletter from Co-founder & Managing Partner Paul Gambles
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.