Gerstner nearly invested in Zoom pre-IPO at $5 billion valuation, emphasizing need for disciplined frameworks.
“We were within probably a 100 or $200,000,000 of doing a meaningful pre IPO round in Zoom. The company was valued at around $5,000,000,000 compared to where it is two years later.”
Gerstner calculates that 150 bps lower discount rates should add two to three turns to software multiples.
“If I reduce my discount rate on any growth software company by 150 bps over the next ten years, the multiple will go up by two to three turns, right?”
Gerstner argues AWS, GCP and Azure enable software companies to scale faster than previous generations like Salesforce.
“But the fact of the matter is because of AWS, GCP and Azure, software companies are scaling faster”
Gerstner dismisses valuation concerns for Snowflake at 100x forward sales given 100%+ growth in strategic software category.
“No growth investor would listen to that and think that there's anything unusual about a company growing well over a 100% in the most strategic location of all of software.”
Gerstner notes internet multiples expanded from 23x to 33x in 2020, mirroring 2018 Q4 contraction without COVID.
“If you look at the multiple expansion that's occurred, it's almost the identical mirror image of the multiple contraction that occurred in the fall of twenty eighteen. In Q4 twenty eighteen, we didn't have COVID.”
Gerstner reports Altimeter's software index expanded from 11x to 14.5x and internet index from 23x to 33x.
“I feel obliged to do that. We started the year in our gross software index at 11 times. Now we're at about 14 and a half times two year forward.”
Gerstner reports software multiples expanded from 11x to 14.5x and internet from 23x to 33x in 2020.
“We started the year in our gross software index at 11 times. Now we're at about 14 and a half times two year forward.”
Gerstner argues 2020 multiple expansion mirrors 2018 contraction when Nasdaq fell 25% without earnings misses.
“If you look at the multiple expansion that's occurred, it's almost the identical mirror image of the multiple contraction that occurred in the fall of twenty eighteen.”
Gerstner argues markets correctly priced digital transformation arc despite initial concerns after 50% bounce in May.
“What it has been slow in pricing in is how dramatically different the arc will be for many of these digital businesses. I remember having conversations with Rich and many others in May.”
Gerstner expects more multiple compression in public markets over next three months despite Tiger's activity.
“You can believe the next three months that we're likely to have more multiple compression in the public markets. Right?”
Gerstner predicted every one percent move in ten-year treasury causes 10 to 20 percent drawdown in growth multiples.
“Right? And for every 1% move in the ten year, you've got a 10 to a 20% drawdown in growth multiples.”
Gerstner predicts most IPOs in the next twelve months will price below their last private round.
“majority of companies that come public in the next twelve months are going out below their last”
Gerstner says only 21 public software companies exceed $2B revenue, yet dog walking software got 100x multiples.
“There are only 21 that are worth more than $25,000,000,000 in all the public markets of all the millions of software companies that have been started.”
Gerstner found only 21 public software companies exceed $2B revenue and $25B value.
“Public software companies over 2,000,000,000 in revenue, we got to 21. Okay? There are only 21 that are worth more than $25,000,000,000”
Gerstner states a 1% change in interest rates causes 15-20% change in valuation multiples.
“the iron law of investing is interest rates. A 1% change in rates leads to a 15 or 20% change in a multiple.”
Gerstner says he would refuse Tiger deals at 75x ARR, emphasizing differentiated underwriting over following herd.
“You're you have an obligation to play a differentiated game. And what I would say today is if somebody calls me up tomorrow and says, hey, Tiger's doing this deal at seventy five times ARR.”
Gerstner questions why OpenAI took a dilutive $10B round at roughly $30B valuation.
“what was their motivation to take such a dilutive round, know, the 10,000,000,000 at what was the valuation at 30?”
Gerstner says IPO investors today demand significantly higher returns than 2021 deals as margin of safety.
“anybody who does an IPO today, okay, is going to demand a, you know, a rate of return into that offering that is a significant margin of safety relative to all deals that were done in 2021.”
Gerstner says companies going public now must offer bigger discounts than pre-correction 2021 levels to attract investors.
“in order to get into the public markets, they have to, you know, step in with a bigger discount than they would have, you know, pre this correction.”
Gerstner predicts private market valuations will normalize to match public market declines of 50%, not just 5-10%.
“There was some you know, there's a report out this week that lots of people comment on Twitter where public markets were down 50% and private marks were down, I don't know, five to 10%.”
Gerstner cites Wiz raising at $10B valuation with $200M ARR as evidence of late-stage market activity.
“I just read Wiz raised more money. It's got $200,000,000 ARR raised at 10,000,000,000. So those markets are definitely”
Gerstner argues NVIDIA at $400 from $100 looks expensive but trades only 20x next year's earnings.
“But the fact of the matter is on consensus forecast for next year, it's trading just over $20 or 20 times earnings.”
Gerstner says OpenAI at $90 billion valuation may be overinflated like 2021 stocks, but AI remains profound.
“OpenAI at $90,000,000,000 may be ahead of itself just like we saw stocks get ahead of themselves in 2021, but it doesn't mean that AI itself is is not gonna be profound.”
Gerstner argues AI follows the 1998-99 internet pattern: overpriced short-term but underestimated long-term impact.
“But much like the Internet in 9899, where there was overpricing in the short run, we dramatically underestimated the impact it was going to have over the preceding decade.”
Gerstner argues NVIDIA at $400 trades at 20x earnings, lower multiple than many cyclical stocks.
“But the fact of the matter is on consensus forecast for next year, it's trading just over $20 or 20 times earnings. It's trading at a lower multiple than many cyclicals in the public market.”
Gerstner says OpenAI at $85 billion with capped upside on common stock creates unfavorable risk-reward distribution.
“if you're asking me to invest at $85,000,000,000 to buy common stock that's capped on the upside, right? Now we have a deal.”
Gerstner views OpenAI's $85B valuation with capped upside as poor risk-reward given few companies exceed $100B durably.
“I can then plot a distribution of likely outcomes. How many companies have ever in the history of Silicon Valley been worth durably more than $100,000,000,000”
Gerstner advises startups to reprice businesses honestly or shut down rather than extend convertible debt.
“reprice the business, get the price right, and if that is not satisfying to you, if you don't own enough of the business at that point in time or whatever, call it quits and restart, right? Because you've got to have the foundation right in these businesses.”
Gerstner argues high valuations force you to double that number, so $100B becomes $200B, distorting strategy.
“it forces the business strategy to fit that outcome. And worse yet, Dara, not only do you have to get to that number, you have to double that number.”
Gerstner describes negative reflexivity of overpriced rounds forcing companies to spend money foolishly to match valuation.
“I wouldn't have had to spend money like a fool. They nail it yet again. The negative reflexivity that occurs when you have a headline valuation,”
Gerstner argues normalized valuations mean 2024 won't match easy returns of early 2023.
“So that's the big thing. The world is normalized. Multiples have normalized. It's not gonna be as easy as it was at the start of '23.”
Gerstner says portfolio return targets normalized from 80% in early 2023 to 20-30% now.
“I think the return to target in our portfolio is 20 to 30%, whereas the start of last year, Bill, it was like 80%.”
Gerstner argues MANG participation is distorting market prices compared to arm's length transactions with financial investors.
“I do think that it is a really important thing that you're pointing out, which is at a very minimum, I think we can say that the participation of MANG, Microsoft, Amazon, Nvidia, and Google, is distorting the price in the market in a way that wouldn't occur if it was all arm's length transaction with financial investors.”
Gerstner says NVIDIA holds 90% plus market share and trades at historical average multiples.
“So if you wanna express that bet, right, which is AI leadership at 25 to 30 times earnings, which is consistent with historical averages for NVIDIA.”
Gerstner notes NVIDIA traded at 20x earnings last year, its lowest multiple ever.
“So NVIDIA ended last year at 20 times earnings. Its lowest multiple of earnings it's ever traded at, despite the fact that it's the the the purest play AI name in in the space.”
Gerstner reveals Meta was trading at 6x fully taxed earnings at the start of 2023.
“Meta was trading at six times fully taxed earnings, right? And so unless you were doing the work”
Gerstner calculates the market assigns negative $120 per share valuation to Reality Labs.
“The market's assigning a 20 times multiple to the company. So that's effectively an implied valuation of negative $120 per share for Reality Labs.”
Gerstner says NVIDIA traded at 20x earnings, its lowest multiple ever, and is now up 25-30 percent.
“It was overvalued despite the fact it was trading at 20 times earnings, its lowest multiple in history. Now it's up 25 or 30% after opening, the year down.”
Gerstner notes that growth historically commands a 2-3x valuation premium over margin in the rule of 40.
“What this chart shows is that, you know, again during dessert period, right growth was a huge multiplier like that's all people cared about.”
Gerstner explains that rule of 40 and revenue multiples are shortcuts for determining free cash flow multiples.
“Whether your rule of 40 or a multiple of revenue, those are shorthands for getting at the multiple of free cash flow.”
Gerstner argues consensus Nvidia forecast assumes market share drops from 55% to 26% by 2028.
“Okay, so the consensus forecast that has the stock at $700 a share assumes, if you believe this TAM to be accurate, assumes that their share will go from 55% today to 26% in 2028.”
Gerstner coined ERR (experimental run rate revenues) to replace ARR for AI company revenues.
“one of the things we call them ERR, experimental run rate revenues, And so when I look at these, you know, one of the things that in inflection and these other models”
Gerstner explains that ARR (annual recurring revenue) gets high multiples because it's predictable like cable subscriptions.
“ARR stands for annual recurring revenue. And recurring revenue, like a monopoly cable subscription, gets a really high multiple. That's why softwares have gotten high multiples. They're very predictable.”
Gerstner says Instacart needed board courage to ignore prior high valuations and go public at lower valuation.
“I think one of the obstacles. Right? So it's performed incredibly well. Off of the bottom, it's performed really well since the IPO, but it took a board that had the courage to say, you know, we're going to ignore what the prior valuations were, and we're gonna focus on getting the the company public.”
“He said to me, the IPO market is slow in volume terms for lack of supply, not lack of demand. And I've been making this case that the IPO window is wide open.”
Gerstner notes buy-side estimates reach $5 per share for NVIDIA, implying $150 price target at 30x.
“There are numbers on the buy side that are as high as $5 a share. So if you if you go to $5 and you place a 30 times earnings multiple on that,”
Gerstner says Philippe implied companies need $10 billion market cap to go public, calling this threshold problematic.
“He implied that in the modern era, you need to be $10,000,000,000 to go public. Yeah. Market cap. Yes. Which if it's 10,000,000,000 or bust, that's a bitch, man.”
Gerstner calculates OpenAI's rumored $150 billion valuation represents 15 times forward revenue of roughly $10 billion.
“If that trajectory were to continue, right, that'd give you like roughly $10,000,000,000 next year. And the round's rumored to be at $150,000,000,000 so that's about 15 times forward revenue.”
Gerstner says OpenAI has twice Google's IPO user count and trades at 15x forward revenue.
“average users, which we estimate is twice the amount Google had at the time of its And if you look at the multiple of the business, if you believe 10,000,000,000 next year it's about 15 times the forward revenue, which is about the multiple of Google and Meta at the time of their IPO.”
Gerstner argues NVIDIA at 30 PE versus Cisco's 120 PE means comparison to 2000 bubble is uninformed.
“So you would have to think that there would be 70% PE compression from here or that their revenue was going to fall by 70% or that their earnings were going to fall by 70%.”
Gerstner explains last four weeks of market decline through rising uncertainty driving up discount rates and risk premiums.
“So think about what we just talked about. It's all uncertainty. Yeah. When uncertainty goes up, discount rates go up, risk premiums go up, multiples come down, markets come down.”
Gerstner explains recent market decline as rising uncertainty increasing discount rates and compressing multiples.
“When uncertainty goes up, discount rates go up, risk premiums go up, multiples come down, markets come down. That's that's the explanation for the last four weeks in the market.”
“So we're three years into this recovery. We've got this incredible group of companies that are still private, you know, think of the Stripes and Databricks and SpaceX, etcetera.”
Gerstner recounts Amazon peaked at $243 in 1998, fell to $26 after Blodgett's $400 call.
“Amazon, if you recall, Bill, and I know you do, it peaked at $243 a share in 1998. But at the start of 2000, it's at $150 a share.”
Gerstner says Amazon is up 200x from 2000 peak and 1000x from 2000 low on split-adjusted basis.
“On a split adjusted basis, where is Amazon today relative to that $150? It's up 200x. Where is it relative to where it was in December 2020? Up 1000x.”
Gerstner references Henry Blodgett's $400 Amazon call in 2000 as historical precedent for AI investments.
“I talked about Henry Blodgett's 400 call on Amazon back in 2000. Right? What do you think Amazon is today relative to the $400 call that Henry Blodgett made in 2000?”
Gerstner says Amazon is up 87 times from Henry Blodget's ridiculed $400 call in 2000.
“He got ridiculed and laughed off of Wall Street for it. But Amazon is up 87 times today from where it was when he made that call.”
“we're like Bitcoin at two. And I'm like, god, so Bitcoin represents two out of 500 of the net worth of the world or 400, whatever. It moves a little bit. Could it be four?”
Gerstner calculates Microsoft could reach $7 trillion market cap in ten years growing at just 7% annually.
“the largest company, Microsoft, today is like 3 and onetwo trillion. Let's say that Microsoft, I don't know, doubles in ten years. It would only be growing at 7% per year.”
Gerstner compares Bitcoin at $2 trillion to gold at $15-20 trillion and global net worth of $500 trillion.
“And then we're like Bitcoin at two. And I'm like, god, so Bitcoin represents two out of 500 of the net worth of the world”
Gerstner suggests OpenAI at $100 billion revenue could become the most valuable company in the world.
“What's your level of confidence that you guys will reach a 100,000,000,000 of revenue in the future and kind of be that you know AI defining company because at a 100,000,000,000 in revenue it seems to me that this company could be on a path to being the most valuable company in the world,”
Gerstner forecasts OpenAI could reach $5-10 trillion valuation as the AI winner in consumer and enterprise.
“right, 5 to $10,000,000,000,000 business in the fullness of time, which frankly would not surprise me for the winner in the age of AI, right? The winner in consumer and a big company and enterprise,”
Gerstner recounts Kevin Weil saying a trillion-dollar valuation would underwhelm him when joining OpenAI.
“I remember when you joined OpenAI and I asked you the question, can OpenAI get to a trillion dollars, right in total value?”
Gerstner says Anthropic raising $5B at $170B valuation on $5B revenue, unprecedented venture scale.
“I think that Iconic is going to lead a $5,000,000,000 round into Anthropic at $170,000,000,000 In the case of Anthropic, it's, you know, 170,000,000,000 on rumored $5,000,000,000 in revenue.”
Gerstner calculates 50% growth would bring NVIDIA to $300 billion datacenter revenue, about $8 per share.
“So the consensus for next year is 250,000,000,000 of data center revenue. If they grow up 50%, that's gonna be closer to 300,000,000,000 or closer to $8 a share.”
Gerstner says over a thousand billion-dollar-plus companies in Silicon Valley are trying to raise capital and will face significant washout.
“There are over a thousand of those in Silicon Valley, over a billion dollars that are trying to raise capital right now.”
Gerstner says NVIDIA is cheaper now than at $200 despite being up 35% this year.
“does it make sense that NVIDIA is up 35% given that their top line has grown way faster than 50? The answer is yes. It's cheaper today than when the stock was $200 a share.”
Gerstner calculates OpenAI could IPO at a trillion dollar valuation at 10x $100 billion revenue, below Facebook's IPO multiple.
“if you guys went public at 10 times 100,000,000,000 in revenue, right, which would be I think a lower multiple than Facebook went public at, a lower multiple than a lot of other big consumer companies went public at, That would put you at a trillion dollars.”
Gerstner argues that $100-200 billion in revenue by 2028-29 makes the capex spend responsible.
“Now if they're doing a 100 to 200,000,000,000 in revenue in 2829, then now we're in the zone of responsible.”
Gerstner views recent selloff as healthy, notes NVIDIA now trades below 20x his 2027 estimates.
“I think it's healthy. We're taking some of the air out of the bubble. There's a wall of worry that stands in front of us. NVIDIA now is trading below 20 times our 27 numbers.”
Gerstner argues NVIDIA at 23-24x next year's earnings and 18x 2027 earnings isn't bubble territory.
“I think it's trading at 23, 24 times fully taxed earnings on next year's numbers, 18 times on 27 numbers. That is not the stuff that bubbles are made of.”
Gerstner argues NVIDIA at 23-24x forward earnings and Mag Seven at 25-30x are not bubble valuations.
“That is not the stuff that bubbles are made of. Right? I think the rest of the mag seven all trades somewhere between twenty five and thirty times, maybe met is at 21 times earnings.”
Gerstner notes entire software industry earns $400B revenue, calling AI revenue requirement a physics problem.
“This and just to put this in context, the entirety of the software industry earns about $400,000,000,000 of revenue. This seems like a physics problem at this point.”
Gerstner argues AI must generate $1 trillion revenue to justify current CapEx versus $400 billion for all software.
“then you've gotta earn about a trillion dollars of AI revenue for all of this CapEx to be worth it.”
Gerstner states software trading at 4.2 times forward revenue, a generational low versus 17x peak in 2021.
“Today, we're at at about 4.2 times. So we're at a generational low in terms of the the multiple for software.”
Gerstner notes NVIDIA consensus is 65% earnings growth in 2025 and 30% in 2027 at 25x multiple.
“The consensus estimate this year, I think, is that they're gonna grow earnings about 65%, maybe 30% in 2027. You said it's an earnings driven market, so they don't need to expand multiple.”
Gerstner notes AI infrastructure stocks trade at mid-twenties multiples while CoreWeave trades at five times EBITDA.
“All of these stocks are trading in mid twenties in terms of their multiples in the case of something like CoreWeave, which has fallen out of favor, trading at five times EBITDA.”
Gerstner says software multiples fell from 17x forward revenue in 2021 to 4.2x today, a generational low.
“We're almost 17 times forward revenue. Today, we're at at about 4.2 times. So we're at a generational low in terms of the the multiple for software.”
Gerstner says software multiples fell from 17x forward revenue in 2021 to 4.2x today, a generational low.
“Look at that peak in 2021. Right? We're almost 17 times forward revenue. Today, we're at at about 4.2 times. So we're at a generational low in terms of the the multiple for software.”
Gerstner explains investors aren't penalizing software companies for missing current numbers but reducing terminal value due to AI uncertainty.
“I'm gonna pay less for those future free cash flows. I'm not penalizing them because they're missing their numbers today.”
Gerstner explains software stocks previously traded at 35x free cash flow due to bond-like predictability.
“Give them 35 times free cash flow because I had that level of predictability. It was like a government bond.”
Gerstner says AI uncertainty has rationally caused investors to discount future cash flows and terminal values.
“I can't see as far into the future, so I'm gonna pay less for the terminal value. I'm gonna pay less for those future free cash flows.”
Gerstner describes exponential AI change creating fog of war where investors cannot predict 35 years of cash flows.
“Fog of war. I can't predict thirty five years into the future of those free cash flows, so I have to pull it in a little bit.”
Gerstner explains software stocks fall before earnings miss due to higher discount rates and lower terminal values.
“We can't forecast as well. Therefore, the terminal value must be lower. The discount rate is higher and the multiple comes down. So the stocks come down well before they start missing.”
Gerstner says software stocks are down 30-40% not from missing numbers but from investors seeing cloudier futures.
“They're all hitting the numbers. But what has happened is their stocks are down 30 or 40% because investors are saying the future is cloudier than it was just a few years ago.”
Gerstner notes memory companies trade at 5x fully taxed earnings and Samsung will profit more than Google this year.
“They're they're trading at five x fully taxed earnings. Samsung's gonna do more in profits this year than Google.”
Gerstner asserts Nvidia is terribly under-owned and undervalued, and Altimeter is happy to hold it.
“I think NVIDIA is terribly, under owned. I think it's terribly, undervalued today, and so we're happy to sit in that and to own it.”
Gerstner notes Nvidia at $195 trades lower than six months ago at 13-14 times fully taxed earnings.
“At a $195, Nvidia is trading lower than it was six months ago. So it's hard to say at 13 or 14 times fully taxed earnings”
Gerstner notes Nvidia at $195 trades lower than six months ago at 13-14x earnings.
“At a $195, Nvidia is trading lower than it was six months ago. So it's hard to say at 13 or 14 times”
Gerstner notes memory and logic stocks trade at five times fully taxed earnings with flat to down multiples.
“if you look at the multiples, the fully taxed gap earnings of those businesses, the multiples are actually flat to down, Scott. They're they're trading at five x fully taxed earnings.”
Gerstner predicts NVIDIA will be the first $10 trillion company and still believes this in May 2026.
“I've said before, I think NVIDIA will be the first $10,000,000,000,000 company. I you know, as I sit here, you know, in in May '26, I believe that to be true.”
Gerstner says memory trades at 5x earnings and NVIDIA at 13-14x fully taxed GAAP earnings.
“Think about memory as an industry is only trading at five times earning. In the case of NVIDIA, trading at 13 or 14, fully taxed gap earnings.”
Gerstner says Cerebras is opening at over $100 billion valuation within minutes of speaking.
“We had the risk capital that stepped in, and now it's gonna go public today. I'm hearing in less than two minutes at over a 100 over a $100,000,000,000.”
Gerstner argues software stocks have reverted from premium valuations to market multiples when adjusted for stock-based compensation.
“Software stocks have reverted from a decade long superior multiple to the market to a market multiple.”
Gerstner says Altimeter considered Cursor the next best lab after Frontier Labs, expecting $10 billion revenue this year.
“I think it was probably the next best lab in the country beyond the Frontier Labs. We thought this company could get to 10,000,000,000 in revenue on its own this year.”
Gerstner identifies SK Hynix at 7x 2027 earnings as the single greatest bottleneck in token production.
“SK Hynix. Back to your point, seven times twenty twenty seven numbers, the single greatest bottleneck in the production of tokens.”
Gerstner notes AI company reached trillion-dollar valuation just three years after product launch.
“We're talking about delaying an IPO for a company that launched its product three years ago and is already at a trillion dollars in valuation.”
Gerstner celebrates K2 Space $500M Series D at $6.8B valuation with new investors joining
“Killer mission for America. Relentless founders & team. Stoked to add Kleiner, Iconiq ARK & Trowe to the K2 spaceship! Go big & deep in space to keep America safe & win the race. LFG! 🇺🇸🚀🇺🇸 https://t.co/Q5xoyufyhW”
Gerstner predicts Anthropic could exit in 2025 at an eighty to one hundred billion dollar valuation.
“I would not be shocked if you see Anthropic exiting this year at $80 billion or $100 billion in revenue.”
Gerstner expresses interest in owning a company but questions whether current timing is right for purchase.
“I would want to own this company but I’m not sure today is the day I would buy the company.”
Gerstner says many Anthropic VCs plan to buy more shares in the IPO rather than sell
“@litcapital You might be surprised how many of those VCs are looking to buy big additional stakes in the IPO rather than sell. 🧐📈”