Morgan Housel (3:43)

I want to talk a little bit about those early days. We now know Nvidia today as just a company that just has mega success. All the demand that they can possibly take in. Talk about some of the early stumbles though, when this was not the company that we know it is today.

Tay (3:57)

So the first two chips that Nvidia made were complete flops. The first one was called NV1 and they built a few hundred thousand and almost 99% of the chips were returned because gamers returned them. So if you think about that, most companies can't survive your first two products being total disasters. And Nvidia, because of Jensen Huang and his kind of resilience and his charisma, he was able to convince more people to give him more money at the time. But yeah, the first two chips were complete disasters. And the thing that Jensen Nvidia does time and time again is when they make mistakes. Like the NV1, which was a jack of all trades, it wasn't good at one thing. It was decent at like five different things. And Jensen realized that's not the way you succeed in the marketplace. You have to be really good at one thing and the thing that people want. But yeah, the first two chips were terrible. And somehow Nvidia was able to survive and be resilient.

Morgan Housel (4:55)

One of the things that I think about with Nvidia's success in recent years, as it pertains to AI two part question, I'm just going to start with the first one here. Did Jensen and the company see AI coming, or was it Right place at the right time and they happen to be making these chips that could be used for AI. I remember it wasn't just a couple of years ago that why Nvidia stock was surging was because you could use them in a crypto mining facility. And that was a big use case. And then AI just exploded, what seems like out of the middle of nowhere when ChatGPT launched about two years ago. So did Jensen see AI coming and prepare for it, or was it right place at the right time?

Tay (5:32)

I think it's actually both. They were at the right place at the right time because Jensen always believed in parallel computing, which is what their chips are good at. It's called graphics processing GPUs, and basically the way it works is that GPUs have thousands of thousands of cores and they split computing workloads into smaller jobs and they run on those cores at the same time. That compared to traditional processors, which are called CPUs, they might have four to eight cores and they do computational workload serially. So he always thought parallel computing and GPUs would be the future of computing. And he worked Nvidia to innovate and do the technical background for that. So they've been working on that with Cuda and all that from like 2007, 2008. But then when AI took off around 2012, 2013, when a couple teams figured out you could use GPUs and it really accelerated the workloads and made the image recognition software work, Jensen saw that and said, this is a game changer. I need to put resources behind it. So he put tons of employees to write software libraries to accelerate the AI stuff. And he invested for like 10 years before ChatGPT came in. So it's a combination of both. They were in the right position with the dominating the parallel computing processing technology. But then he saw deep learning and neural networks really take off that if you add more computation, if you add the algorithms and the libraries that using GPUs can make AI work 100 times faster than CPUs. So then he told Nvidia and all his employees, we need to invest in this. Even though some of executives told him, oh, this is a fad, this isn't going to work. Jensen was like, no, this is going to be real. But then again, this is 2012 and ChatGPT is 2022. So you're talking about a 10 year run where they kept investing. Even though the revenue wasn't really coming in, it wasn't really taking off. So that's the genius behind Jensen. I actually compare him a lot to Reed Hastings. Reed Hastings had this intuitive sense that someday we're going to stream video of the Internet and that was going to be the future. But consumers didn't have the broadband infrastructure. The technology wasn't ready. So Reed just basically kind of stuck around, positioned Netflix to be on top of the technology as it got as improved. But he did the DVD by rental business and used that as the revenue to come in. But when the technology got ready, Netflix was all over it and was ahead of everyone else. And Jensen and Nvidia have done this time and time again. Every big competing shift in graphics, from programmable GPUs to CUDA to data center full stack solutions, he was ahead of the game. He was there early and then when it took off, he was there. So the ChatGPT moment in late 2022, the key architecture there is the transform architecture. It came out in this famous paper that everyone knows that Google's engineers wrote. Jensen saw that paper and like, this is going to be a game changer. We need to accelerate that and create these tensor cores that make these workloads and transformer models work better. Right. So he was actually, he saw how important that was. So when the Hopper GPU came out a month before ChatGPT was launched in November of 2022, the Hopper GPU that Nvidia made had a thing called the transformer engine on it already, which is a combination of hardware and software. So they were Preparing for that ChatGPT moment like a year, two years beforehand, even before it happened. I remember this. Ian Buck, who's considered the father of cuda, he had this podcast which I recommend everyone listen to. Nvidia has AI podcast. I think it's just called AI podcast. While I was researching the book in 2019, he did this podcast interview for Nvidia's AI podcast. And he was talking about natural language processing, the need for AI models to look at into knowledge repositories, all that stuff that became ChatGPT three years later, he was talking about in 2019. So Nvidia was all over this technology. And we can talk about Mellanox, which is going to go down as one of the biggest successful acquisitions of all time. Jensen, when he bought Mellanox in 2019, he put in the press release, Someday AI workloads are going to be scaled across thousands and tens of thousands of AI GPUs made by us. And Mellnox is going to be the key technology behind how these AI server Clusters work, which is exactly what is happening right now. Like this year, you have 100,000 Nvidia GPUs and Elon Musk's XAI cluster. Mark Zuckerberg has talked about, they have a cluster that's even larger than that, over 100,000. And now Broadcom's talking about in two, three years, you can have one GPU clusters out there. So Jensen has been able to kind of see the future, know how the technology is going to develop beforehand, years beforehand. And he positions Nvidia to invest in the technology before it happens. So time and time again, like, it's unbelievable how he's been able to predict the future.

Morgan Housel (10:49)

There's a book that Bill Gates wrote in 1994, I think it's called the Road Ahead, where he talks about what the Internet would be like. And this is 1994, so most people don't even know what the Internet is yet. And I read it a couple years ago, I went back and scanned it, and I was expecting to find all the areas that he was wrong, all the false predictions he made. And it's astounding when you read it, because he got virtually everything right. So in this book, in 1994, he perfectly explains what would become Netflix, Facebook, Google Maps. He saw all of that coming. And it's astounding to watch someone who can truly see the next wave of where it is a decade before it happens and a decade before everyone else. And it sounds like that's what Jensen was as well. But how rare was it, how crazy crazy was it for Jensen to be talking about and focusing on and investing a ton of money in AI 10 or 15 years ago?

Tay (11:39)

So I agree Bill Gates was very pressing about that. But I think the difference with Jensen is he was able to predict the future and then commercialize that technology to win and actually do well. So when CUDA came out, which is the critical technology and the platform that enables the parallel computing on Nvidia's processors, when CUDA came out in 2006 and they're investing in the hardware circuitry, Wall street was like, what the hell is this? You know, it's not really generating revenue. You're putting. You're dedicating die space on, on the chip towards this CUDA thing, that it doesn't seem like people are accepting. And Jensen's like, this is the future. I believe in it and I'm going to do it. And gross margins plummeted from like 45% to 35%. And the stock got punished. Like, the Stock was down 80%. People inside Nvidia employees were grumbling as why are we doing this CUDA thing? It's killing our profits, it's not generating anything. But Jensen was so committed that this was going to be the future of computing. He was like, no, we're going to put CUDA on all our processors, all our gaming graphics cards and chips. And he did this for like 15 years. Like, who does that? Most executives look out the next quarter or the next year or maybe two, three years. Jensen is looking at five, 10, 15 years. And this isn't the only example of this. There's this thing called ray tracing which does better lighting effects. Jensen invested in this technology for 10 years before it was commercialized on gaming GPUs. Same thing with DLSS. He invented this in a meeting, which is like one of the scoops in my book. Literally one of his research scientists came to him with this DLA anti aliasing technology and he's like, how about you take some of that, transpose it this way and that will be something that's very interesting. And the research scientist like, maybe that will work. Let me look into it. And then a few weeks later, I think we can do this. So this DLSS technology which basically uses AI to upscale graphics into higher resolutions, they worked on that, the frame generation version of that, for seven years. No other company in my knowledge does that. Like they invest in stuff that becomes commercialized seven, 10 years later. I mean, Xeros PARC is legendary for creating the technology behind the GUI graphic user interface for operating systems and all this stuff. But they never commercialize it. Like Steve Jobs with the Macintosh. They were able to commercialize it and benefit and take that to market. Nvidia does the research, commercializes it and wins five, 10 years later. And I think that's a key differentiator for Nvidia. They have this long term thinking mentality. Jensen is so paranoid about getting disrupted because he's a student of history and sees how every major technology company in history gets disrupted by innovation and startups. He's willing to to disrupt himself and cannibalize himself at all times. He knows if you don't invest, you're dead in technology eventually. So that's why he's willing to invest longer term than anyone else.

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Morgan Housel (15:27)

I want to talk a little bit more about Jensen, who is obviously the now the public face, the founder CEO of Nvidia. So many of the biggest, dominant, very successful CEOs in history, whether it's Henry Ford or Bill Gates or Elon Musk or Steve Jobs, a lot of their business success comes at the expense of their personality and their friendliness. And a lot of reason they are so successful is because they are such demanding bosses. You've met Jensen. Just curious, what is he like in real life when you meet him? What's his personality like?

Tay (16:00)

He's. I think this is a key characteristic of personality and key reason why he's successful. He's very blunt and direct. Like I was asking him questions about his culture and different questions here and there and he was like, tay, you're not doing a good job now. You're not getting Nvidia right now. And I'm just like taking it back. Most people are nice to each other. They're friendly. No, Jensen wants you to know what he's thinking at all times. And he's blunt and direct to me. He's blunt and direct to his employees and he doesn't believe in coddling. I think all of us have been in large organizations where the hr, you have to be professional. If you have a problem with someone, take them aside and gently tell them and be constructive. No, he says, why should Tay be the only one that gets to learning here? Everyone in the room, more employees across Nvidia should learn what the problem is so we could all improve together. There's this one story in the book where a manager of the Tegra 3 project, which is a chip, was late and he was having problems sticking to his schedule. He dressed him down in front of the entire company and he got like the cameraman to go into his face and says, rayfield, you need to get Tegra 3 back on schedule. This is not how you run a business. And like multiple Nvidia employees told me, like, this is like the most humiliating thing I've ever seen. But Jensen's thinking is, no, you need to know exactly what you're doing wrong, how you can learn from it. And I don't care about your feelings. Your feelings doesn't help the company move forward. So that, that blunt and directness they call intellectual honesty, you know, be willing to say the unpleasant truth. By doing that, he tells people, you know, you're not doing a good job. This is, this analysis, it's not good enough. You get embarrassed, your feelings are hurt, but next time, you know, those employees are going to work, you know, on a different level to make sure they don't get dressed down in front of everyone again. So it's a strategy that works, I'm sure, like Nvidia employees. It's a hard driving culture. It doesn't feel good in the moment, but it develops this winning culture. The track record speaks for itself. Steve Jobs was like this. I'm sure Bill Gates was like this. I don't think he does it to be mean. Like people say, you can't take it personally because that's just the way Jensen is. And I think it works like there's no question about it.

Morgan Housel (18:29)

And it's such a fine line for this between a hard driving motivational leader and just being a jerk. It's actually a very fine line. And I know a lot of people historically, of course, it was an honor and a privilege to work for Steve Jobs back in the day. But incredibly demanding and incredibly difficult and incredibly stressful. What is it about Jensen? So we've detailed the hard driving, blunt side of him. What is it about his characteristic and his personality that is so motivating to all these employees that are willing to put up with that?

Tay (19:01)

I think one reason why there's near universal praise when I talk to former Video employees is that they know that Jensen does this kind of a level of excellence expectation on himself. Right? He works more than anyone. Nvidia. Like in the early days, he was going from nine to midnight. He considers work relaxing. Like, there's probably. He says, I might not be the smartest person, but I know no one's going to outwork me. Like, he works all day Saturday, Sunday. I have a funny story in the book where he's drinking a scotch on Sunday evenings reading employee emails. People don't want to send him emails on a Friday afternoon because they know he's going to reply back and ask for more work to be done and it's going to ruin their weekend. So I think that expectation where they know Jensen is working just as hard as they are, kind of alleviates that thing where they might get annoyed or whatever. And the other thing is this is such a competitive Industry, like chip companies die all the time. Like they go bankrupt. And no one wants to spend three, four years of our lives working on a chip project that becomes nothing and the company goes bankrupt. Right? You want the work you do every day. You work like crazy hours. You want it to be successful in the market and have an impact on the world. Nvidia, you're going to do that. You're going to work with some of the best and smartest people. And, you know, the work you do is going to probably win in the marketplace and have impact on the world. So, I mean, winners want to stay on the winning team and winning begets winning. And that's why people say on video, I think the biggest evidence of that is the turnover rate. Nvidia is like 3%, which is unheard of. Most technology companies are 13 to 15%, probably 17% at some chip companies. And the reason is people want to stay at a winning culture and a winning company. And obviously financially this is an extraordinary outcome. Literally. Nvidia is the best performing stock in US history with any company with 20 year returns. If you put $10,000 on the first day of its IPO in 1999, that holding would be worth $40 million today. So, I mean, financial rewards, the meritocracy, are obvious attractors of employees to Nvidia.

Morgan Housel (21:37)

I think there are plenty of Motley fool investors who maybe didn't get on the IPO day, but got it more than a decade ago and have done quite well. I want to read to you a quote that I heard from Jensen in an interview that gets to his motivation and his drive and his work ethic. The quote is he was asked what companies keep him up at night. And his answer was, quote, that shouldn't keep me up at night because I should make sure that I am sufficiently exhausted from working that nobody can keep me up at night. That's really the only thing that I can control. It's one of those quotes that you read. And I just think, I would hate to compete against that guy who just has. There's nothing else in his life going on except his work and he's willing to work 24 hours a day to get there, especially now that he is personally worth over $100 billion. He's one of the top 10 richest people in the world. What motivates Jensen?

Tay (22:27)

I don't think the money. I mean, money is nice, but the whole executive team, a lot of them have been there for 20, 25, 30 years and there really isn't much turnover. So all of them kind of buy in into thinking that we are changing the world. And more so than ever, this AI revolution is going to change the world and drug discovery. I mean, I've had multiple executives tell me they're so excited about what the AI GPUs are going to mean for healthcare and the capacity and ability to do all the simulations for drug permutations and possibly cure cancer. I mean, these are like life changing, humanity changing possibilities. And that motivates people beyond the money. I think with Jensen, from the beginning, I actually compare him to Michael Jordan. Like Michael Jordan has this thing where he would create chips on his shoulder and take things personally because he had this extreme competitive desire to win at all costs. And one, one story that shows a similar kind of extreme competitiveness is Jensen had this early cfo, and the CFO was a grandmaster at chess. He was like one of the top 50 chess players in the country. And Jensen knew this, but he had to beat him. So he would learn all the chess openings and ask Jeff rebar to play chess. And invariably Jensen will lose every time because Jeff is a chess master and he knows how to beat a novice. And then after he lost, Jensen would knock all the chess pieces off the board and then force Jeff to play him in table tennis, where Jensen used to be a table tennis champion when he was a teenager. And he would beat him at table tennis so it would fulfill his desire to win after he lost. So that, that's the mentality that Jensen is like he needs to win, like he's extremely competitive. And if you have that kind of mentality where you need to win, you have a work ethic that's better than anyone else. Exactly what you said. Multiple Nvidia employees told me they would never want to join AMD or Intel because they would have to compete against Jensen. And they know that kind of work ethic, that kind of competitiveness, it'll be almost impossible to beat them. And it's not just the work ethic, it's the business genius, which time and time again he creates this amazing business strategies, but he combines that with a deep technical understanding, which I think separates him. One chapter in the book, I go off on all these technology CEOs that have backgrounds in marketing or business management, MBAs. Those people can't compete with someone like Jensen, who reads AI papers as soon as they're published, he trades the latest trends and articles with all his top AI engineers. The combination of that deep technical expertise and the business genius is what makes gentsis special and successful.

Morgan Housel (25:25)

I want to follow up on that point that you just said, because I think historically there are a lot of good technology minds, there are a lot of very talented MBAs. It's pretty rare that you get a technological genius and a business titan in the same mind. Jeff Bezos was that. I think Elon Musk is that. I think Jensen is that. Talk about some of the business moves that Nvidia has made. We've been talking about their technology and seeing AI 10 years ahead, but talk about some of the business moves they've made that have made the company so successful.

Tay (25:55)

So the biggest one that I actually think is happening right now in AI too. In the late 90s, he kind of had a meeting with his top executives and was like, how come all these 3D graphics companies, like these graphics chips, companies in PC market, how come they always lose their leadership? Every two years there's a new 3D graphics company on top of the heap and doing well. And he basically figured out that PC makers decided to pick their graphics vendor every six months, two seasons of the year, back to school and in the spring. And then he thought, most graphics companies, when they created a new graphics chip, it took 18 months to create a new graphics chip. And then they start again, and it takes another 18 months, basically around two years. So the problem was you would be inside a Gateway or Compaq or whatever, but then in the next two years, another graphics chip company would come out with a better product that was faster. So he was like, how do I fix this? How do I keep Nvidia on top? So instead of 18 month cycle, he decided, why don't we just do a graphics chip every six months? Like, who does that, right? Like, everyone's like, no, it takes two years, it takes 18 months. He's like, we're going to make three graphics chips. In the times it makes one graphics chip, I mean, it wasn't that easy. They made one 18 month architecture and then created two faster derivatives every six months. But he had the genius to be like, we're just going to accelerate the product cycle. And if you do that, competitors can't compete. And all these other graphics chip companies went bankrupt after Nvidia decided to make a new graphics chip every six months. He's doing the exact same thing with AI GPUs. Now, typically, it took two years to create an AI GPU architecture. And then last October, he's like, no, two years. Forget two years. We're going to do this video game playbook we did in the 1990s. We're going to make a new AI GPU every 12 months. Think about if you're AMD, like, how do you keep up with that? Nvidia already makes a GPU that's five to 30 times faster every two years. And now they're going to do every year. If you're a competitor, it's nearly impossible to keep up with that. And that's just Jensen's mentality, they call it there. It's one of their key philosophies. It's called speed of light. We don't compare ourselves to other competitors. We don't compare ourselves to what we did last time. If you do that as an employee and tell your intelligence, oh, I did 10% better than last time, I did 10% better than other competitor, he will yell at you and dress you down and say, we don't do that. We do it. Compared to what's physically possible by the law of physics, if you broke down the task by each component with no lag, no queue, what's physically possible? What's the best time you can do based on the law of physics? And if you do that, if Nvidia does that, that's literally the most maximum speed you can do in reality. And if you're a competitor, you can't beat that.

Mary Long (29:04)

As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening. We'll be back on.