Why AI Startups Seek Exponential Growth?
AI Startups Face Market Concentration Risk, NTB Making Waves, Tai Chi Policy Methodology
Macbing Note by Bing Poh
This is a weekly edition of Macbing Note, a roundup of the most impactful stock market stories of AI revolution based on my research and news reviews. I follow a critical mindset and experience to synthesize and deduce market events at the intersection of AI and economics.
This Week’s Post Analysis
Dear Readers,
Already 5 weeks into writing on Substack by this 8th post, a general observation of my published AI articles, the view numbers reveal innocuous readership interest although I must admit the difficulty of implying anything beyond it. I write in a fashion of interpreting nuances of market movements as a would-be niche Substack opinion writer aspires to be. I presume, readers’ understanding of my analysis depends on “why this topic choice, how analysis is formed, and its relevancy”, all these questions collectively, I assure, fall within a self-imposed disciplinary rule of writing conscientiously backed by research. My research is to interpret market events with facts to highlight a point or an insight. To be precise, I write with the freest of imagination and ideas offering some insightful value of market events. As an example, my last post – “Investors favor 3-Core AI Stocks but unable to read China stocks swing” – portrays the Chinese policy-making in the context of a “tai chi” movement, and by analogy global investors misinterpreted the present stock swings which symbolized a perception clash between the passive and impatience investors. Any notion of an instantaneous monetary gains may be short-lived. The intentionality of purpose in Chinese policy making takes time to prove its efficacy. If you want to learn more of such analysis, I recommend reading and subscribing to my weekly post.
Continuing with this post, I explain why AI startups seek exponential growth, Why Nvidia share dropped, rebounded and sustained and why the tai chi theory of the Chinese policymaking forces a quant hedge fund to wind up.
Why AI Startups Seek Exponential Growth?
We marveled at revolutionary digital transformation, namely the present artificial intelligence (AI) and how startups introduce risky and expensive innovations for monetizing exponential growth. Originally, the entrepreneurs assume the early-staged risk but eventually, it mandates venture capitalists to participate whole-heartedly in the financing of the business strategy and visionary risk, all come under high capital cost despite having no definite market valuation of the startup. Though this shift suggests venture capitalists may be financing the startup but the pursuit of exponential growth strategy based on disruptive innovation remains primarily the entrepreneur’s risk call.
Take the case of Cohere, Aidan Gomez, CEO of $5.5 billion Canadian startup, specialized on natural language processing – the tech that invents generative AI – to developing generative AI models to serve companies in a similar way CHAGPT serves consumers. To achieve this objective, his business vision, not the faint-hearted approach but drove research development strategy with such “irrational conviction and scaling” to achieve exponential growth by out-competing rivals. He is backed some of the big tech companies like Nvidia, Salesforce, AMD and Fujitsu.
Perplexity AI is another AI startup in a hurry to achieve exponential growth by embarking on aggressive fundraising. Founded in August 2022, it develops an artificial intelligence-powered search engine aiming to take on Google, and seizing on the latest AI frenzy to raise funding which upped its valuation from $500 million in the beginning of 2024 to $3 billion in June and now proposes new funding talks to new startup valuation of $9 billion according to CNBC reporting.
AI startup is launched at warp speed with high-risk outcome, a survival trait underlined by “market concentration risk” of competition. The higher the concentration risk, the more intense the competition becomes. Visionary investors invest in AI startups purely on an idea of discovering new or niche market rather than just on financial merit. What comes to define AI startup’s growth risk given a high market concentration of competitors, is primarily the ability to attract venture capital funding while scaling exponential business growth that out-compete rivals. Unable to be assessed under normal P/L, an aggressive monetizing business model risk pursued by entrepreneurs will instinctively be a risk for investors to accept with full faith.
I am currently undertaking a research to define market concentration risk of AI startups.
Why caught my eye on Nvidia share dropped, rebounded and sustained?
NTB Weekly Highlights - Nvidia & TSMC Surge
When a stock is fully priced coming from past quarters of beating estimates and market assumption of similar stellar performance in the coming quarters, the price then lays exposed exogenous to any slightest torrent of news in the chip industry. That best described the sudden 7% share plunge of Nvidia on Oct 15th when ASML, a Dutch chip equipment maker, reported 3rd quarter earnings forecasting a lower 2025 sales than previously provided. The reason is due to its China’s share of export dropping from 49% to 20% of total sales because of the testy US-China trade restrictions over technology sales. ASML’s share demise wiped off $420 billions of AI stock valuations. But, given that Nvidia’s CEO had described its buyers as “anxious” over near-term chip supply while maintaining the next-generation AI GPU Blackwell orders for 2025 as “insane”, instinctively value buying took the share to near $140 and sustaining primarily because of opportunistic buying by FOMO investors (fear of missing out). It proves the point of Nvidia’s enviable chip leadership role which allows monetizing the unlimited opportunities of artificial intelligence. Incidentally, ASML’s share demise was not the result of a deteriorating AI environment. Market expects Nvidia’s next quarterly earnings report due on Nov 19 to better expectations.
Another great news in our lineup of 3-core AI stocks is captioned TSMC, the world’s leading chip manufacturer, whose 3rd quarter earnings topped estimates. Revenue estimates for 2024 rose by 30% from previous level of mid-20% range. The rise of TSMC share by 70% this year reflects largely the high demand of Nvidia AI chips underlined by AI momentum gaining more industrial adoption. Last week (Oct 14-18) its share rose by 4.5% and trading at $203 (at the point of writing).
As I have written numerously, the top tier AI universe represented by NTB (Nvidia, TSMC & Broadcom) is riding on a generative AI boom cycle that extends globally to South Korea, Taiwan, Japan and Holland. According to Eric Schmidt, former Google CEO from 2001 to 2011, in a talk at Stanford, to be competitive in AI, estimated large firms would need to invest as much as $300 billions to build AI chip-based data centers, CNBC reported. These gigantic data centers will require not only Nvidia chips but Broadcom customized chips for building an AI infrastructure. However, after a small rally from the previous week, last week saw a 1.3% drop in Broadcom.
Tai Chi Policy Forces a Hedge Fund to change course
Though stock swings remain unsettled, last week the CSI 300 index fluctuated within a narrower range of 3.6% implying an emerging sign of a gradual optimism in the economic recovery. The methodology of commencing tai chi starts with the upper body hand swing inducing a flow of the cardio system – referring to the central bank – to generate a blood circulation by way of transporting new energy, here, referencing policy-making in the transmission of approved monetary and fiscal stimuli to rejuvenate the full economy. Only when the new policy measures able to activate the housing sector – located at the mid-body under our tai chi referenced economy—it is assumed some form of restored balance with the economy’s feet firmly on the ground.
Investors too are adjusting trades to the market volatility. Bloomberg reported a top Chinese quantitative hedge fund is closing down a market-neutral trading strategy which involves simultaneously holding long equities and short index positions. In a market rally, when gains from short index trades are less than the price rise in long equities, brokerages will close out trades due to unsettled margin calls. Such closing pushes up the index even higher exacerbating the short positions. Even an algorithm-trading model is unable to cope with the fast-changing volatility, forces this Chinese quantitative hedge funds to abandon shorting the market. Conversely, it reverts to become market-friendly.
FINANCIAL DISCLAIMER. Macbing Note is not engaged in rendering legal, tax or financial advice via Substack. Macbing Note is not a financial planner, broker or tax advisor. The information provided is intended only to assist you in your market understanding and is broad in scope. Your personal financial situation is unique, and any information and views expressed herein may not be appropriate for your situation. Accordingly, before making any final decision or implementing any financial strategy, you should consider obtaining additional information and advice from your accountant or other financial advisors who are fully aware of your individual circumstances.