Okay, Computer. Podcast

From 7/10-7/16, $IWM +10.4%, $QQQ -1.3%, Mag7 -3.9% following the favorable CPI print and increased chances for Fed rate cuts. $ASML (AI semiconductor tool provider) was down 13% yesterday. Was this due to them just reiterating yearly guidance despite beating expectations for the quarter or due to comments from both President Biden (on foreign technology sales to China) & former President Trump (on defending Taiwan)? Therefore, the stock action in $TSM today (the Taiwanese AI driven foundry for $NVDA $AMD $AAPL) is important. Right now TSMC’s stock is down ~3% after being down 8% yesterday despite beating expectations for the quarter and raising their yearly guidance. Other hardware centric AI names such as $NVDA, $ARM, $SMCI, $MU and $DELL are also acting poorly after being down 4-8% from 7/10-7/16. Given my continued concerns over a short-term AI spending digestion phase given the small amount of revenue being generated, I continue to look outside of big tech for ideas through year-end. In addition, rhetoric on greater tariffs broadly, and in on China in particular, is only likely to increase leading up to the US presidential election. Therefore, areas outside of big tech & small caps in particular remain my preferred area on a pullback. A greater percentage of Russell 2K revenue is domestic versus the larger names in the S&P500. And even with the most recent rally, the Russell 2K is up ~10% year-to-date as I write this intra-day versus the S&P up ~16%, Nasdaq up ~19% and Magnificent7 up ~36%. Among the larger technology names, $AAPL remains my favorite. Revenues should be able to accelerate and grow double digits year-over-year on an AI driven iPhone upgrade cycle after being up only 1% from March of 2021 to March of 2024. While Apple’s revenue exposure to China (19% of FY23) is certainly a risk for political retaliation, the importance of the Apple supply chain to Chinese employment (~1.5 million people) given the growth issues China is having, mitigates some of that risk. I would also note that Apple had a solid relationship with the prior Trump administration even during prior China tariffs during which they received favorable treatment.

On podcast w/ Dan Nathan @riskreversal on @mrktcall about the setup through year end. Positives of 1) election & Olympics internet ad spend, 2) potential Fed cut, 3) peace pre-election in M.E. or Ukraine balanced by negative of potential AI digestion phase of historical spend.

With $NVDA becoming the second most valuable company in the world yesterday, I thought it worthwhile to lay out my thoughts both near-term and longer-term depending on your time horizon. My belief is that over the next 3-4 years, Nvidia revenues are likely to roughly triple from current levels with the stock roughly doubling. However, before year-end we may be near a digestion phase for the amounts spent on AI over the past 1 ½ years since the launch of ChatGPT in late 2022. In this regard, Sequoia, which is a prominent VC investor in the AI space including a lead investor in the seed round for $NVDA in 1993, did a presentation recently in March. Sequoia estimated that the AI industry spent $50B on the NVidia chips used to train advanced AI models in 2023 but brought in only $3B in revenue. I believe a slowdown in AI spending from the torrid rates seen over the past year will be healthy as companies figure out where this spend gets the return on investment necessary. Large software vendors that just reported the April quarter such as $CRM, $MDB, $SNOW, $WDAY were optimistic on the benefits of AI to their businesses. However, future expectations were cut despite AI benefits as the economy slows, companies cut back on employees due to greater efficiency and the increased spend on AI is coming out of other budgets. Even during the buildout of the internet, $CSCO, which became the most valuable company in the world in 2000, went through periods of severe stock declines as concerns rose about internet spend digestion. Cisco’s stock saw declines of 26% in late 1995, 38% in early 1997 and 37% in late 1998 as revenue growth rates while still hugely positive either declined or plateaued. Despite these intra-year declines, the stock was up during each of those years in total and increased ~4000% to its peak in 2000 from the end of 1994. For perspective, Cisco, the leading enabler of the internet infrastructure buildout, since the end of 1994 (the launch of internet web browser Netscape Navigator) saw its revenues increase over 15x from $434M (Oct qtr of 1994) to $6.7B (Jan qtr of 2001) without ever having a sequentially down quarter. Nvidia by comparison since the end of 2022 (the launch of ChatGPT) has seen revenues increase by “only” over 4x over 1 ½ years from $5.9B (Oct qtr of 2022) to $26.0B (April qtr of 2024). AI spending driven by the biggest companies in the world is healthier today than the early spend on the internet when internet advertising models were unproven. Obviously at some point an actual contraction in AI spend and stock prices is likely as was the case with the internet spend from its peak in 2000. Cisco’s revenues declined 36% in six months to $4.3B (July qtr of 2001) before starting to grow again while the Nasdaq declined 78% from peak to trough over 2 ½ years (and Cisco’s stock declined 89%.) However, I believe we are years away from that ultimate AI peak build out occurring but we will not know that until time passes much like back during the internet buildout.