Ed opens the show by discussing Trump’s tariffs, xAI’s purchase of X, and OpenAI’s record-breaking funding round. Then Tim Higgins, Wall Street Journal columnist covering the automobile industry, joins the show to break down how the auto tariffs will impact the car industry and the broader economy. He shares his take on who stands to benefit from those tariffs, checks in on Tesla’s biggest challenges, and examines the competitive landscape of the self-driving and electric vehicle markets. Vote for Prof G Markets at the Webby Awards Subscribe to the Prof G Markets newsletter Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices
Chapter 1: What are the main topics discussed in this episode?
Welcome to Prof G Markets. So Scott is out this week. He's on his grand college tour with his son. I believe they are in Chicago right now. They just visited Northwestern and UChicago. Fun time to be in the Galloway family. So I'm flying solo today, which means we're not starting with a joke. We're not starting with a dick joke. Many of you will probably be sad to hear that.
Many of you will probably be relieved to hear that. We'll just be getting into the markets today. Later on, I'll be speaking with Tim Higgins, Wall Street Journal columnist covering the automobile industry. We'll cover his thoughts on the winners and losers of the auto tariffs. But before we do that, let's get into the headlines.
Now is the time to buy. I hope you have plenty of the wherewithal.
Chapter 2: How do Trump's tariffs affect international trade?
President Trump announced reciprocal tariffs on U.S. trade partners, marking the occasion as Liberation Day. He also imposed a 25% tariff on imported vehicles. Elon Musk's XAI has purchased his social media platform X. The all-stock deal values X at $33 billion or $45 billion when you include the debt.
And finally, OpenAI closed a $40 billion funding round led by SoftBank, which values the company at $300 billion. It is the largest private funding round in tech history. Okay, let's start with these reciprocal tariffs. Of course, everyone is talking about it. Liberation Day has come. You know, I think the idea of reciprocal tariffs, reciprocity, I actually think that's a nice idea in theory.
I don't see any issue with saying, you know, you guys charge us this amount and we're going to charge you the same amount right back. Reciprocity, that sounds fair to me. The thing is, if you're going off of what Trump says, you would get the idea that we are the benevolent nation when it comes to tariffs. You'd get the idea that everyone else is screwing us.
You know, they've been playing hardball. We've been playing softball. So let's play hardball right back. And I would agree with that notion if it were true. And the trouble is, it isn't. The reality is that we are in fact the stringent nation when it comes to tariffs. Most other nations are actually more lenient than we are. And I can give you countless examples of where that is the case.
You look at Japan, for example. We charge 25% on every Japanese truck that enters the U.S. Meanwhile, for American trucks that enter Japan, the tariff is 0%. You look at Brazil. We charge them 81% for their cane sugar. They charge us 14%. You look at New Zealand. We charge them 13% for their butter and 10% for their milk, and they charge us nothing. In fact...
Since 2009, we have implemented the highest number of domestically beneficial trade interventions, more than any other nation, three times more than Germany, three times more than Canada, five times more than France. So actually, when you look at the tariff situation, It's not that everyone's playing hardball and we're playing softball. We're actually going pretty hard on everyone.
And I'm fine with the idea of reciprocity. I think reciprocity makes sense. But let's be clear. True reciprocity would mean we're in for hundreds and hundreds of tariffs that are coming right back in our direction. We are not the benevolent nation we think we are. In fact, we are quite hawkish on trade. So we'll see where this goes. I think implementation is going to be a nightmare.
That's at least what many economists are saying. It's very difficult to do this as quickly as Trump is saying we can do it. I don't see those tariff revenues hitting our bottom line anytime soon. But I think the most important consequence of this action is we are going to see extreme retaliation from every other nation around the world when it comes to tariffs.
I don't see how this works in our favor. All this is to me, is a reflection of our delusion, our tendency and obsession with thinking that we are the victim in a world where both historically and presently, you look at the numbers, we are in fact, in most cases, the victim. Let's talk about XAI.
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Chapter 3: What implications does the XAI acquisition have?
And to the shareholders of XAI, the opposite. We're diluting your stake in XAI. In exchange, you're going to get these shares in X. So to assign any dollar amount to this transaction, to begin with, is a red herring, because... no dollars were exchanged. The only thing that matters here is the ratio in the value between the two companies because that's what determines the dilution.
And what the ratio tells us is that the shareholders in X will own 30% of the combined company and the shareholders in XAI will own 70% of the combined company. But no one got richer and no one got poorer because again, no cash was exchanged. So how did we arrive then at this gigantic valuation? Well, a lot of it has to do with the power of the word AI. XAI is an AI company.
And despite the fact that it has generated almost no revenue yet, investors are willing to overlook that. And they're willing to assume that over the long term, the company is going to make a lot of money. Elon Musk knows this. And that's why he's combining these two companies.
He believes that if he can rebrand the social media platform as an AI company, he can inflate the perceived value, which will make it a lot easier for him to raise money in the future. And by the way, I'm sure he's right. But again, this doesn't have anything to do with actual dollars. It has no basis in revenue, no basis in earnings.
This is all a function of his ability to tell a compelling story. Now, everything I've described so far is pretty standard in the world of venture capital. An all stock deal, that's pretty common. Pumping AI, that's common too, we've seen it a lot. Here's where it gets a little dicey though.
You might remember a few weeks ago, we discussed a headline that X had been valued at $45 billion in the private markets. not with stock, but with cash, meaning someone had actually paid money at that valuation. And I asked the question to Josh Brown, who the hell is paying for this? You know, revenues are down at X 40%. EBITDA is shrinking. It's down to $1.2 billion.
And apparently, by the way, that's a highly adjusted number, which means the real number is even smaller. So how does the valuation add up? Well, I found my answer. According to Bloomberg, the buyer in that private transaction was Elon Musk. Elon invested $150 million of his own money at the ridiculous valuation of $45 billion.
So when you read that headline, when you read a headline that says X valued at $45 billion, including debt, you're not actually getting the real story here. The real story is that Elon Musk valued X at $45 billion. The whole thing is a charade to make you think the company is more valuable than it really is. So I'm just fascinated by this transaction.
because it shows you just how good Elon Musk is at gaming the system. You know, he's a master of branding, using the word AI, combining the company, turning this whole thing into an AI company.
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Chapter 4: Is OpenAI's valuation justified?
It would be a paywall that says, if you want to continue using ChatGPT, please insert your credit card details here. This is an absurdly strong position to be in. And it honestly reminds me of the early days of Amazon and of Facebook and of Google. The only difference though, is that the customers of OpenAI are already paying for the product. They're not reliant
on advertising to supplement the revenue. And by the way, they could take the ad model if they wanted to. That's certainly on the cards for OpenAI, but they have chosen not to. Instead, they're shooting for growth and it's paying off tremendously. So those are the numbers. Now let's just talk anecdotally about the success of this company.
I have never seen a product that has captured the imagination of the public like ChatGPT has. And it all started really with the launch, when they launched two years ago. The eureka moment for me was when my mom showed me that she was using ChatGPT to generate a personalized poem that she delivered to me and my family on New Year's Eve two years ago. And...
I really think this is a good rule of thumb in tech. I think if your parents start using a product, a frontier tech product, that means you have something extremely special. Even my grandparents are playing with this. That's just not normal. That doesn't really happen in tech. And since that point, it's only gotten better. It's only gotten more viral. Last week, OpenAI launched image generation.
On day one, they were clocking a million new signups every hour. I don't know about you, but my entire social media feed has been filled with these AI-generated images that people have been making on ChatGPT. Everyone's making these Studio Ghibli images. images. Some people are taking images and turning it into the Muppets characters.
Last week, my sister sent me a picture of her and her new dog, except it was an AI-generated image that rendered them as cartoon characters. She said she was playing with ChatGPT all day. This is the kind of creative inspiration that I don't think you can really capture or understand with just numbers. To me, it's so much bigger than that. To me, this is a once-in-a-generation product.
I think the only thing that stands in OpenAI's way, is the competition. You know, it's not a question anymore of whether AI is going to take over the world. Everyone knows that's going to happen. It's a question of which AI company takes over the world. And the only real competitors you have right now are DeepSeek, Anthropic, and Gemini.
And you look at the user numbers on those platforms, you look at what they're doing in revenue, they are tiny compared to OpenAI. OpenAI is totally running away with it. So I'm really bullish on this company. My prediction, I think OpenAI is the next trillion dollar company. I think the growth potential there is massive. I think the technology is out of this world. I love using it.
I use the product every day. I talk to my friends, they use it every day. People in all sorts of sectors, people in consulting, people in finance, people in creative industries. And so $300 billion valuation for this company, what I believe is the next big tech company, I think the investors are getting a good deal and I would have liked to be in the deal myself. Those are the headlines.
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Chapter 5: Who is Tim Higgins and what can he share about the auto industry?
As you look at Tesla today, what do you think are the biggest obstacles for the company right now? What's gone wrong? And what do you think the next four years look like for Tesla?
Well, there are two really big issues for Tesla. The one that's obvious, at least to people who are kind of paying attention to the brand and protesting outside of the stores or the showrooms in recent weeks, is the political one. Elon Musk and Tesla are intertwined. It's hard to talk about Tesla as a brand without thinking about Elon Musk, and Elon Musk has clearly become— very political.
I can't think of a modern equivalent of a CEO essentially operating out of the White House grounds on a day-to-day basis. I mean, it's unprecedented in the modern time. And by that kind of very position, there's a large percentage of the U.S. who's against it because they're Democrats, perhaps, and he's on the Republican side, right? So you've got the politicalization of the brand.
You've got Musk taking some contentious positions. And so that's a challenge for Tesla, the brand. But then Tesla, the company also has a challenge in that it does not have new product. to speak of in the mainstream sense. Of course, we all know the Cybertruck, but that is not a mainstream vehicle. The last mainstream vehicle they brought out was the Model Y, a compact sport utility vehicle.
As Musk likes to point out, the best-selling vehicle in the world really helped build the modern Tesla, what we think of as this powerhouse, most valuable automaker in the world company. because of this vehicle, but it's old and it's long in the tooth. In the car business, fresh sheet metal is key to keep those sales growing, and investors are getting jittery about that.
What Musk is doing, he's been kind of vocal about that, is that he's betting that the future of Tesla is not about pumping out you know, new sheet metal per se, but it's about software and it's about autonomous vehicles. It is about robots. The Model Y and whatever the future cars that he makes, the Cybertruck or Cybercab, these will be delivery vehicles, if you will, for that software that
The potential, the value is in autonomy, and that's the gamble. The interim, however, is all about selling that sheet metal, and he's still playing in the game of selling cars. And so it's not surprising, given the age of his fleet. that sales have been the way they are.
They're trying to kind of juice them or get some excitement in the lineup this year with a refreshed version of the Model Y. It's not yet clear if that will bring the excitement back to the brand. Supporters, fans of the company say that sales in the first quarter were probably affected because people are waiting to buy this new vehicle in the coming days and whatnot. But we will see.
What do you think? Do you think that's true? Well, I think that there always is a segment of the Tesla kind of fan community who wants the newest thing. And, you know, clearly they're going to be out there. Now, how much wind behind that sail is there? I'm not quite sure.
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Chapter 6: What impact will Trump's auto tariffs have on the industry?
If you look at other car companies over the years, refreshes help, but they don't kind of overcome the fact that they aren't new vehicles. Time will tell. There's also efforts to bring out cheaper vehicles this year, basically variations of what's already out there. So that could help. At one point, Elon, at one point, Musk was talking about deliveries rising 23 percent this year.
I don't think a lot of people think that's going to happen.
Yeah, it seems that the valuation, which is still actually quite high, I mean, yes, the stock's down 36%, but on a price-to-earnings multiple, still trading at 130 times earnings, and then you've got GM trading at 5, 6, 7, Ford at 5, 6, 7, Stellantis in the same ballpark. I mean, it's a totally different situation. It's a totally different valuation.
And it certainly appears that the real story here for Tesla, or at least the growth story, is, you know, the robotaxis and the energy business and the AI and the robots, etc. As you look at all of those other businesses... which I often write off because I say, well, show me when they ship. But when you look at those businesses, which of them is most compelling to you?
If you had to sort of fashion a bull case on Tesla, which of those businesses do you think is going to really drive the value for the company?
The biggest bet is the idea of the robots, the humanoid robots. Now, when you talk about how real that is, I mean, there's a lot of steps. When I talk to robotic experts, professors, people in the space, there's a lot of things that need to occur. You can do demos, you can do concepts, but many steps ahead. There are others out there who are still, you know, kind of showing the same thing.
And that's a big leap. When you talk about driverless taxis, now this is a technology that some have figured out. I'm in San Francisco. I have been in the Waymo robo-taxi. People are using it for their daily commutes here. It's a business. It is expanding to places like it's in Los Angeles. It's going other places. Next on the horizon here in San Francisco is Amazon.com's own gamble with Zoox.
I have been in their robo-taxi as well. It's not yet been opened up to the general public, but is on a path. We've seen those. With Tesla, we have not seen those. the company demonstrate an ability to operate vehicles without people behind the wheel on public roads. That's a big leap forward.
Now, supporters and Tesla enthusiasts will say that FSD, their full self-driving technology, which is not fully self-driving just yet. It is a driver-assisted system, which still requires somebody behind the wheel. Supporters would say that's getting very far along and they can see it happening. Thank you. Thank you.
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