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Market Pulse
Friday, February 23, 2024

A credit card mega-merger, what could $7 trillion buy you and… rogue chatbots

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our stories this week are:

  1. Credit card mega-merger
  2. What could $7 trillion buy you
  3. Rogue chatbots

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Credit card mega-merger

Followers of our Market Pulse are well aware of our strong affinity for payment companies, with Flagship holding a prominent position in PayPal and a smaller one in Visa Inc. It’s not hard to see where the excitement comes from: global payments volume (~$255tr in 2021) is 2.5x bigger than global GDP (~$96tr in 2021) as multiple payments are made for the same level of output or production [1].

Although it sure feels like cards are everywhere, a surprising amount of cash/check exists globally: $11-12T, according to Bernstein, a broker. It’s not all about emerging markets either. In the U.S., cash is 8% of consumer payments by value ( around $1T) and 15% by transactions. In the E.U., cash at point-of-sale is around 40% of transaction value and 60% of transaction number [2].

The bold step aims to establish the largest consumer credit card entity in the U.S., displacing JP Morgan from its leading position on the one hand and “building a global payments technology company“ on the other [4].

In a nutshell, the sector is fertile ground for cash-generative secular compounders impacted less by the economic cycle and more by the balance of power within the industry.

On Monday, that power balance came into focus again in the U.S. Capital One, the 3rd largest credit card lender, made a surprising move by proposing to acquire its smaller rival, 4th placed Discover Financial, in a stock deal valued at $35 billion [3].

The implications for the industry are immense, not only because Capital One has announced $1.2 billion of synergies by 2027 [4] but also because merging one of the largest banks with one of the largest payment networks will open up opportunities for exciting products currently only available to American Express customers.

As for the networks (Visa and Mastercard are not lenders), the impact will be limited. We estimate around 1% impact for Visa and 2-3% for Mastercard if all Capital One volumes move to the Discover network in due course, which is not a given considering consumers’ affinity for these brands and their international reach.

Capital One’s plan to create “a global payments platform at scale” and “compete with the largest payments companies” is ambitious. Still, closed-loop networks don’t tend to scale historically. For example, American Express has been around longer than Visa or Mastercard but had less than 10% of the two combined volumes in 2023. Discover has a market share of around 1% of global purchase volumes.

Lastly, the Discover network has often been seen as a valuable strategic asset that could be attractive to a tech giant. Capital One, prioritising cost synergies, has effectively minimised this potential risk for the industry.

Note: We hold both PayPal and Visa in Flagship.

2) What could $7 trillion buy you

If you've dipped into social media or checked any news source lately, you've likely caught wind of Sam Altman's bold move to secure a staggering $7 trillion, all in the name of reshaping the landscape of chips and artificial intelligence [5].

As the news sparked a frenzy, giving rise to memes and references to Zimbabwean dollars, it sparked our curiosity: How much could $7 trillion (USD) get you in the semiconductor industry? The answer: A LOT.

It's not merely about the components; with $7 trillion, you could acquire over 170 million Nvidia H100 GPUs [6], more than 18,000 cutting-edge EUV machines from ASML [7], and many state-of-the-art fabs. With a leading-edge fab costing around $40 billion [8], that's about 175 of them, to be more precise.

But to truly grasp the enormity of $7 trillion, consider that over the entire history of the semiconductor industry, spending on wafer fabrication equipment has totalled just a bit over a trillion dollars. This means that $7 trillion could buy seven times more than the entire world has ever spent on semiconductor manufacturing equipment.

Alternatively, examining listed semiconductor giants, from Nvidia to ARM Holdings, the collective market capitalisation of the global semiconductor industry stands at $6.5 trillion today. That's enough to acquire all these companies and still have some change left over.

Of course, diving into these numbers may be far-fetched. Nobody envisions someone pulling together enough funds to acquire every semiconductor company in the world. Yet, what makes these figures truly captivating is their audacity. It prompts a discussion about what steps can and should be taken to ensure that the future of AI aligns with the current dreams and expectations. To that extent, Mr. Altman has achieved his goal.

Note: We hold both Nvidia and Intel in Flagship.

3) Rogue chatbots

A court ruling forced Air Canada to partially refund a grieving passenger misled by the airline's chatbot about its bereavement travel policy [9].

Jake Moffatt had a heartbreaking reason to fly [10]. After his grandmother passed away, he needed to book a flight from Vancouver to Toronto quickly. Unsure how Air Canada handled flights for grieving families, he turned to their online chatbot for help.

The chatbot told Moffatt he could book a regular flight and apply for a special "bereavement" discount later.  Air Canada's actual policy wouldn't allow this. Trusting the chatbot, Moffatt booked his ticket only to find out he wouldn't get a refund later.

Moffatt took Air Canada to court over the chatbot's misinformation and won his case. The judge found Air Canada's defence peculiar: they argued they weren't responsible for what their own chatbot said.

The strangest part of the story is that the chatbot was more compassionate than the airline itself. Air Canada is a corporation; sometimes, corporations act in ways that individuals wouldn't. The chatbot, designed to mimic human conversation, gave the kind of understanding response anyone would expect in that situation.

While the narrative may appear trivial, it holds profound implications for the role of AI. We previously discussed AI companies' fiduciary responsibilities [11], emphasising OpenAI's commitment to safeguarding "humanity." In the Air Canada incident, the chatbot prioritised "humanity" but found itself in conflict with corporate interests.


[1] https://www.jpmorgan.com/content/dam/jpm/treasury-services/documents/jpm-payments-are-eating-the-world.pdf

[2] https://www.association-secure-transactions.eu/cash-is-still-used-for-most-consumer-payments-in-the-eurozone-but-its-share-is-declining/

[3] https://www.ft.com/content/cf009c4d-e893-410f-b8c8-a893e73061ed

[4] https://investor.capitalone.com/news-releases/news-release-details/capital-one-acquire-discover

[5] https://www.wsj.com/tech/ai/sam-altman-seeks-trillions-of-dollars-to-reshape-business-of-chips-and-ai-89ab3db0

[6] https://nvidia.bsi.uk.com/products/nvidia-h100-pcie-gpu

[7] https://www.tomshardware.com/tech-industry/manufacturing/asmls-high-na-chipmaking-tool-will-cost-dollar380-million-the-company-already-has-orders-for-10-to-20-machines-and-is-ramping-up-production#:~:text=In%20contrast%2C%20existing%20Low%2DNA,20%20per%20year%20by%202028.

[8] https://www.bcg.com/publications/2023/navigating-the-semiconductor-manufacturing-costs

[9] https://www.canlii.org/en/bc/bccrt/doc/2024/2024bccrt149/2024bccrt149.html

[10] https://www.wired.com/story/air-canada-chatbot-refund-policy/

[11] https://www.sidekickmoney.com/market-pulse/openai-and-fiduciary-duties-agi-timing-and-investment-accounts-for-all-the-children


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