Those most startled by Telsa’s plunge from the $400 area in late 2021, to around $175 as I write this, are learning an important lesson about capitalism, and one that I hope sticks with them for the rest of their investing careers. The lesson that’s being taught is that competitive advantages that come from being an innovator won’t last forever. Regardless of your opinion of EVs, Tesla deserves a ton of credit for being the first to produce a modern, affordable electric car that is a legitimate alternative to traditional gas-powered vehicles. And profits ensued, both for Musk and for the many early Tesla shareholders.
But here’s the thing: those profits that are being generated? Competitors noticed, too. And not only did they notice how well Teslas were selling, but they also noticed all the digital whizbangery that Tesla customers got so excited about. Naturally, along came the Mustang Mach-Es, the Audi e-Trons, the Volkswagen ID.4s, the Rivians, Hummers…you get the idea. Within only a few short years, electric car buyers had choices and, unsurprisingly, Tesla began to cut prices, which hit them right in the profit margins. Ultimately, the big winner from all this are consumers, who now have many relatively affordable options to choose from.
We’ve seen this same game play out across virtually all products and services. Wherever there are rich profits, competitors will try to find a way to horn in on them by offering something better, or…better AND less expensive. Do you need more convincing? Have a look at knockoff products on Amazon. Consider Google targeting Apple’s dominance in cell phones. OpenAI spawned research and competition in artificial intelligence.
Nvidia has plenty of competition in the graphics processing unit (GPU) space, it enjoys an over 90% market share in accelerator chips, which break up AI and graphics jobs into chunks that can be processed in parallel instead of one at a time, a feature that makes machine learning a heck of a lot quicker.
Given the growth of AI and Nvidia’s dominance in a key component, it’s understandable that investors have bid up the shares to over $900 from just under $150 at the start of 2023. But that sort of growth is unlikely to persist forever. There are economic laws in play here.
Companies try to protect their innovations through patents, marketing, and otherwise trying to deny competitors access to the markets (think of Apple’s “walled garden” technology ecosystem). Amazon works its magic through sheer size, efficiency, and maybe some aggressive control on who is prominently featured on its platforms. The counter to companies protecting their interests are laws. Regulators and politicians are also looking for political capital, which they get from breaking up monopolies or at least threatening to do so.
Can abnormally high profits stay high indefinitely? I’d say no, but I’m hedging it by saying the timing of losing any sort of competitive lead is the toughest to predict, but that’s what keeps the game interesting. The important lesson is to not bet the ranch on one company staying dominant for too long. When one theme hits big, that’s when you should start looking for the next.
Source:
Yahoofinance.com
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 6260 Lake Osprey Dr. Lakewood Ranch, FL 34240. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries. Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. CDs are FDIC insured and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value. Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.