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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business app. This roundy coming undone
Speaker 2: just to touch the massive run for Semi's taking a
Speaker 2: bit of a breather as potential cracks emerged. Broadcam leading
Speaker 2: the retreat, adding to losses after a raising over two
Speaker 2: hundred and eighty billion dollars in market venue. Gil Lurier
Speaker 2: of DA Davidson remaining neutral on the stargwall, raising his
Speaker 2: price target, He writes the following, We found out how
Speaker 2: on edge investors are a bad technology. If the beat
Speaker 2: isn't big enough, the consequences were severe. Value was shifting
Speaker 2: quickly as the bottlenecks merch. Gil join NAP for more.
Speaker 2: Gil Welcome Lisa Shannick called it a bit of a
Speaker 2: bit of a red flag for the semis trade. Do
Speaker 2: you consider it a red flag or just a small crack?
Speaker 3: A small crack.
Speaker 4: Let's not forget Budcom just grew revenue fifty percent. It
Speaker 4: grew its AI revenue one hundred and forty three percent,
Speaker 4: so it's a very good result.
Speaker 3: But investors had now been.
Speaker 4: Trained to expect a lot more than that because some
Speaker 4: of the upside results from companies like inte, La and
Speaker 4: d and Dell were so spectacular that investors just raised
Speaker 4: their expectations too much. You're talking about a cycle, and
Speaker 4: semis are always a cycle. This is not any different.
Speaker 4: None of us know how long the cycle is going
Speaker 4: to last. We all speculate and estimate, but it could
Speaker 4: last through next year, and it could last through twenty thirty,
Speaker 4: and those are very different outcomes.
Speaker 3: What we do know is.
Speaker 4: That different socks are trading differently on cycle. I would
Speaker 4: argue that companies like Intel or even AMD, and many
Speaker 4: of the optical stocks and the nuclear stocks are trading
Speaker 4: as if the peak of the cycle is until twenty thirty,
Speaker 4: where stocks like in Vidia and Micron are trading like
Speaker 4: the peak of the cycle is next year, So that's
Speaker 4: where we see the opportunity and betting on the ones
Speaker 4: that not a lot embedded in the valuation. And Vidia
Speaker 4: twenty two times, Micron at ten times look a lot
Speaker 4: safer than broad Coom at thirty five, a MD at forty,
Speaker 4: Intel at one hundred times, and that's where we see
Speaker 4: the opportunities because there is going to be a cycle.
Speaker 4: We just don't know how long it's going to last
Speaker 4: because the developments and AI are so rapid that it's
Speaker 4: very hard to predict when we get to peak functionality,
Speaker 4: when we get to a quicker adoption, So we have
Speaker 4: to play the cycle carefully by going to the less
Speaker 4: demanding valuations.
Speaker 1: There's also a degree of uncertainty kill about the addressable market,
Speaker 1: and that clearly was put on display with SpaceX and
Speaker 1: some of their projections, and maybe it's what's at stake
Speaker 1: with Nvidia as well. I mean, is this an issue
Speaker 1: of people saying that the peak might be next year
Speaker 1: or is it people saying that the run rates cannot
Speaker 1: continue at the pace that it has.
Speaker 3: Yeah, two sides of the same coin.
Speaker 4: We look at the hyperscalers, they're spending most of their
Speaker 4: operating cash flow. Google just went out and raised eighty
Speaker 4: billion dollars of capital. By the way, think of that
Speaker 4: as coming on top of the capital demand from SpaceX,
Speaker 4: Anthropic and then open Ay. You also have Google going
Speaker 4: out for that much. Next you'll have Amazon, Microsoft, and
Speaker 4: Meta going for more capital. So the capital demands on
Speaker 4: the market are impacting the stocks already, and if the
Speaker 4: hyperscalers raised that much money, they can continue to raise
Speaker 4: their capex rates. They do see this as a good
Speaker 4: return on invest and I know that's a controversy, it's
Speaker 4: not for them.
Speaker 3: They are growing revenue.
Speaker 4: At an accelerating rate at the same margins. That indicates
Speaker 4: a good return to the economy. You can see the
Speaker 4: return from the run rate of open Ai, Anthropic and
Speaker 4: Google's products. Those are products that are being bought by
Speaker 4: consumers and businesses. That's real economic value. And right now
Speaker 4: we're at more of one than one hundred billion dollar run.
Speaker 3: Rate, so there is return.
Speaker 4: We do expect these hyperskillers to continue to spend, but again,
Speaker 4: part of that's going to come with more capital demand,
Speaker 4: which is going to have even more of an impact
Speaker 4: on stocks as they sock up the demand combined with
Speaker 4: those IPOs doing the same thing. So that's a lot
Speaker 4: of volatility ahead from all these directions.
Speaker 1: At what point do the semiconductors lose pricing power? At
Speaker 1: what point do you have some of these companies and frankly,
Speaker 1: their creditor is pushing back and saying, I'm going to
Speaker 1: lend you ten dollars, and then they're going to charge
Speaker 1: you twenty dollars, and then you're going to ask for
Speaker 1: ten more dollars, and you're going to ask for thirty dollars,
Speaker 1: and it's going to keep going up. I mean, this
Speaker 1: is what it feels like an auction house. At what
Speaker 1: point do a lot of the hyperscalers say enough stop
Speaker 1: it already with the price increases, at what point does
Speaker 1: that leave them potentially with some capped margins.
Speaker 4: The hyperscalers don't have that many options. They are still
Speaker 4: buy and large relying on in Nvidia chicks almost entirely.
Speaker 4: That makes a videos growth smart around mid seventies relatively safe.
Speaker 4: Now they're going for alternatives. They're trying to make their
Speaker 4: own chips with Broadcom, and they're trying to ramp up
Speaker 4: production at AMD, but those are still at very early stages.
Speaker 4: And those are coming in the mid seventies, so right
Speaker 4: now those are the only options, So the hyperscalers are
Speaker 4: not necessarily in a great negotiating position in that regard,
Speaker 4: So that makes those semi margins relatively stable even in
Speaker 4: memory the supply is just not there, so those companies
Speaker 4: can be in the high seven in the high seventies.
Speaker 4: Even how long that lasts again is a matter of
Speaker 4: how long the cycle lasts, but right now it looks
Speaker 4: like it could last through twenty eight, twenty nine, twenty thirty,
Speaker 4: which for most of our investors is their investment time horizon,
Speaker 4: and they can be comfortable with that. But again that's
Speaker 4: only if AI continues to progress, if diffusion of AI
Speaker 4: happens into companies that generate productivity from that, if consumers
Speaker 4: are willing to subscribe, are willing to accept ads in
Speaker 4: their chat. Only if those things persist will the hyper
Speaker 4: scalers continue to invest and keep the margins high at
Speaker 4: those semi companies.
Speaker 2: Stay with us more Blindberg surveillance coming up after this
Speaker 2: would begin this as investors pulled back from the time
Speaker 2: trade headinggainst the latest jobs report, NAT the level of
Speaker 2: UBS writing stay positive, but diversified. We will like the
Speaker 2: AI value chain, but we think leadership broadens from a
Speaker 2: narrow set of megacaps. Natia joined us for more. Nattie,
Speaker 2: good morning. What drives the improvement in breadth?
Speaker 5: I think you continue to see. You know, as you've
Speaker 5: been talking about the AI trade, I wouldn't say that
Speaker 5: it's broken or any sort of cracks.
Speaker 2: It's more of a scratch, right.
Speaker 5: Particularly given what's happened this week, But in terms of
Speaker 5: how we're thinking about it, we continue to think that
Speaker 5: diversification across AI value chain is quite important. We've been
Speaker 5: squarely focused on where the bottlenecks are and investing in
Speaker 5: those areas. Who think about memory, think about compute, think
Speaker 5: about networking, think about platform, software, platform, and so despite
Speaker 5: the fact that you're seeing some weakness today, we do
Speaker 5: think that ultimately what's going to drive this market higher
Speaker 5: is going to be continue to be the AI trade.
Speaker 2: The AI trade and the earnings that it's created. We
Speaker 2: mentioned it earlier a bit of snack, but I'd love
Speaker 2: your reaction to it. Whether we're just seeing a massive
Speaker 2: wealth transfer from hyperscalis to the chip players, and that's
Speaker 2: all the earning story has been so far is it
Speaker 2: more than that.
Speaker 5: It is more than that, right, because the demand is
Speaker 5: there that's also driving the pickup in the hyper scale
Speaker 5: or spent in. I mean, we know that this year
Speaker 5: that the four largest hyperscalers have already airmarked over seven
Speaker 5: hundred billion dollars in capex. We think that global AI
Speaker 5: capex is going to be over eight hundred billion dollars,
Speaker 5: and then we think that that gets too close to
Speaker 5: a trillion dollars. And even those estimates might prove to
Speaker 5: be conservative just given the capital raises that we're seeing
Speaker 5: this week and the announcements around Alphabet and so forth,
Speaker 5: and so we could potentially see even more of those
Speaker 5: kind of announcement coming from the rest of the hyperscalers,
Speaker 5: and that's going to push off the capex numbers even more. Again,
Speaker 5: there's an increase in demand from the enterprise. You're seeing
Speaker 5: AI move from sort of an experiment so phase and
Speaker 5: more to deployment. You're seeing more bad race wide enterprise
Speaker 5: phase deployment across the adoptions, adoptions are going up. Depending
Speaker 5: on numbers that you look at, you could see already
Speaker 5: sixty percent adoption rate. Some numbers even put it close
Speaker 5: to eighty percent adoption rates. So the fact is that
Speaker 5: the monetization cycle has started. We're still early in the
Speaker 5: phase of it. So it's not just what transfer. You know,
Speaker 5: one capex is another person's revenue. Eventually, there is monetization
Speaker 5: that's already underway.
Speaker 1: What's paying for it right now? Is it the labor market?
Speaker 5: I would say, you know, it's a combination, right, A
Speaker 5: little bit on the margin in terms of that. We're
Speaker 5: seeing already pull back in terms of hiring and headcount
Speaker 5: reduction attack. It hasn't hit the broad based economy yet,
Speaker 5: and so I think what's paying for it right now?
Speaker 5: Of course, a lot of this is being financed upon operations,
Speaker 5: from cash flows from operations. Also, now, capital markets are
Speaker 5: quite open, and you know, the constraint is not capital
Speaker 5: right we're seeing that. We're seeing that very even in
Speaker 5: the debt race this year by the hyperscale over subscribed
Speaker 5: ten times over subscribe. The constraint continues to be these
Speaker 5: model necks that I talked about earlier.
Speaker 1: Is the excess and the ample liquidity for some of
Speaker 1: these tech companies. The potential constraint for other companies not
Speaker 1: related to this trend. In other words, do you see
Speaker 1: clients that are you recommending to them to sell other assets,
Speaker 1: other loans, other debt instruments, other stocks of companies not
Speaker 1: participating in this to finance the purchases and investments in
Speaker 1: the SpaceX IS and anthropics and opening eyes of the world.
Speaker 5: What we have been really focused is really advised in
Speaker 5: our clients to manage concentration risks so where they have. Yes,
Speaker 5: you know, over the last several years, we see like
Speaker 5: the MAC seven has driven a good portion in the
Speaker 5: appreciation in a stock market, and now you're seeing a
Speaker 5: diversification again as I talked about earlier, across the value chain.
Speaker 5: So what we've been advised in clients is to do
Speaker 5: making sure that they have exposure, diversified exposure to these
Speaker 5: transformation and innovation opportunities and not includes AI, that also
Speaker 5: includes the electrification and also includes the longevity that you
Speaker 5: talked about earlier. So it is not it's not it's
Speaker 5: not limited. So my point is, it's like the air
Speaker 5: trade has and is and continues to broaden out. I
Speaker 5: think that's an important message that it's just not one
Speaker 5: or two stocks anymore. I mean, look at the strong
Speaker 5: performance this year. It's it's not the Mac seven. It's
Speaker 5: the memory, memory stocks, it's a packaging stocks, it's a
Speaker 5: network in stocks and so fortunate. And that's how key
Speaker 5: message to clients diversification. But exposure to these secular growth
Speaker 5: trends are importance. They cannot be missed out. These are
Speaker 5: not cyclical bursts, right. The spending that has happened is
Speaker 5: not cyclical. It's really structural, and it's an infrastructure story
Speaker 5: that clients must have exposure to.
Speaker 2: Job Fridays have changed so much, haven't they. They already have.
Speaker 2: We just don't talk about jobs on payros Fridays. You
Speaker 2: join us every payros Friday, and the conversation has shifted
Speaker 2: so much. We spend so much more time talking about
Speaker 2: tech and.
Speaker 5: We will start to talk about jobs mentions when it
Speaker 5: starts to impact in the labor market in a more
Speaker 5: meaningful way. I'm sure that would be the topic of comp.
Speaker 2: In the meantime, How relevant is the number to this market?
Speaker 5: And you're cool look in terms of, of course the
Speaker 5: outlook of the FED. It is important to us number well,
Speaker 5: of course we're watching the unemployment rate. It seems to
Speaker 5: be stabilized in around four point three serpents we're also
Speaker 5: watching wage growth just given the implications for inflation. I mean,
Speaker 5: right now we know that the market is pricing in hikes.
Speaker 5: The FED we still think that there's a possibility for
Speaker 5: cut this year, but of course inflation has proven to
Speaker 5: be more sticky. The labor markets is important to the
Speaker 5: FED call. If we see any weakness in the labor market,
Speaker 5: then that could cause effect to move later this year.
Speaker 5: But we think that that, you know, even though December
Speaker 5: is sort of our official call for the next cut,
Speaker 5: that could get pushed out into twenty twenty seven.
Speaker 1: I'm actually fascinated for this labor market report. I'm excited
Speaker 1: to look at the details, and the details have been
Speaker 1: really interesting. I'm not just talking about wage growth. I'm
Speaker 1: not just talking about the unemployment rate. But if you
Speaker 1: take a look at where the gains and losses have
Speaker 1: come from, the tech sector said last month the planned
Speaker 1: to eliminate thirty eight thousand positions. That was the greatest
Speaker 1: going back two years to August twenty twenty four. You're
Speaker 1: seeing them say it's because of artificial intelligens Do you
Speaker 1: expect this to be a leading indicator of what we
Speaker 1: can look for in other sectors? Particularly the white collar
Speaker 1: areas that have been seeing some job reductions on the
Speaker 1: margin as a whole.
Speaker 5: Maybe not the magnitude that you're seeing it intact, but
Speaker 5: historically that has been the case. That's where you know,
Speaker 5: technology gets adopted first, right. But you could argue, like
Speaker 5: you know, post pandemic, like some of these tech headcounts
Speaker 5: got bloated, right. So I don't think it's all AI
Speaker 5: are related. Some of it is just normalization and right
Speaker 5: size and business. Yes, like AI is impact in tech,
Speaker 5: but if you look at the data so far, you're
Speaker 5: not seeing any sort of wide based impact to the
Speaker 5: labor market. Is that the future to come on the margin? Yes,
Speaker 5: I do think that to some extent you will start
Speaker 5: to see impact in the labor markets in the ARSCO,
Speaker 5: but it's more gradual. It's not going to be because
Speaker 5: at the end of the day, we are still a
Speaker 5: consumer driven economy. Someone has to pay for spent in
Speaker 5: and that's the consumers. So it's a balance and out
Speaker 5: for these companies as well of how much do you
Speaker 5: reduce headcount and what impact does that have of overall
Speaker 5: consumer spending, which ultimately drives.
Speaker 2: Apparently the person doing the spending, right, now is people's parents.
Speaker 2: Do you see this stat yesterday? It's amazing. Almost half
Speaker 2: of Americans rely on their parents for financial support, including
Speaker 2: thirty three percent of gen X thirty three percent of
Speaker 2: gen X. This came from Northwestern Mutual. Forty two percent
Speaker 2: of all Americans say they're financially dependent on their parents.
Speaker 2: Twenty percent of Americans believe they will never be independent.
Speaker 2: Stay with us more Bloomberg Surveillance coming up after this
Speaker 2: we begin this hour. We're still struggling to extend a
Speaker 2: night week Winn's streak. Lisa Shant of More Can Stanley writing,
Speaker 2: now is the time to evaluate where true secular growth
Speaker 2: may be on relative sale. Continue to reduce overboard semiconductors,
Speaker 2: favoring AI build out diffusion over the most scarcity priced epicenters.
Speaker 2: Lisa joins us now for more. Lisa, good morning, Good morning.
Speaker 2: That first line is really interesting true secular growth. Just
Speaker 2: how cyclical do you think parts of this market?
Speaker 6: I think that the entire market is one trade, and
Speaker 6: I think right now we are in the boom part
Speaker 6: of the trade, which means the entire thing is cyclical.
Speaker 6: And I would go further than that that one of
Speaker 6: the things we're pointing out to folks is, particularly in
Speaker 6: the semiconductor trade, what portion of it is price? So
Speaker 6: not only do you have to think about what are
Speaker 6: normalized earnings here? What is the fundamental underlying secular growth
Speaker 6: right here? So how much volume goes away and how
Speaker 6: much pricing power goes away? Because there's a lot of
Speaker 6: pricing power that folks are mistaking for productivity, you know,
Speaker 6: because pricing right now for the semis are flowing right
Speaker 6: to the bottom line, and folks are looking at those
Speaker 6: margins as in, oh my god, you know, increase the
Speaker 6: long run forecasts and our view as so much as
Speaker 6: is not sustainable.
Speaker 2: Did you think Broadcom then was just a crack or
Speaker 2: a red flag?
Speaker 6: Probably a red flag.
Speaker 2: It is. It is.
Speaker 6: It's just a reminder that these businesses are really, really hard.
Speaker 6: They're capital intensive, and you know, you can't you know,
Speaker 6: you may be able to see your order book, but
Speaker 6: you know, we're seeing you know, all kinds of pressure
Speaker 6: on the inputs right commodity inputs. We're seeing global commodity inflation.
Speaker 6: So I think I think it's a warning flag.
Speaker 1: I love this idea that pricing power people are mistaking
Speaker 1: for productivity gains. How much are we seeing that with
Speaker 1: stock prices as well, in the sense that there has
Speaker 1: been a scarcity of paper for so long that there
Speaker 1: was a power of equity valuations that's getting now diluted
Speaker 1: to some degree by some of the massive IPOs that
Speaker 1: are coming to market.
Speaker 6: Yeah, so you know, I mean, this is one of
Speaker 6: the things we've been talking about for a long time,
Speaker 6: and this is where we talk about pe valuations, right,
Speaker 6: and we've said to folks, look, multiples have peaked and
Speaker 6: you're probably going to get compression. So that's why earnings
Speaker 6: power is so important. You're not going to get scarcity premium, right, So, uh,
Speaker 6: you know, and in addition, you know, you guys talked
Speaker 6: at the top at the top of this hour about
Speaker 6: you know, the movement of capital. We're we're seeing you know,
Speaker 6: share repurchase, which used to be a huge source of
Speaker 6: demand in this market, and it was coming from the hyperscalers, uh,
Speaker 6: you know, begin to go away. So all of these things,
Speaker 6: you know, kind of put together, are are saying, you know,
Speaker 6: we are now uh seeing an erosion of the scarcity premium.
Speaker 6: We're seeing capital that is you know, much more ample.
Speaker 2: It is not precious.
Speaker 1: There is an issue right now that we keep asking
Speaker 1: people about how much they're selling to try to buy
Speaker 1: into some of these IPOs, like what are they selling?
Speaker 4: Is it?
Speaker 3: Is it bitcoin?
Speaker 1: Is it some of the non tech related names.
Speaker 3: What do you see?
Speaker 6: Yeah, so it's so interesting, you know that you brought
Speaker 6: up the crypto trade. You know, one of the hypotheses
Speaker 6: we've had for a really long time. I mean, you know,
Speaker 6: we've tried to illustrate this analytically. Is the extent to
Speaker 6: which bitcoin has been a liquidity oriented asset, meaning when
Speaker 6: liquidity and financial conditions are ample, it rallies, and when
Speaker 6: you know financial conditions are beginning to tighten, it pulls back.
Speaker 6: And I think that what you're seeing is all the
Speaker 6: folks who were in at crypto simply for the speculative
Speaker 6: price appreciation are coming out and they're chasing other things
Speaker 6: in the equity market, in semis in, you know, potentially
Speaker 6: accessing new deals.
Speaker 2: You think it might be a sign of capital constraints
Speaker 2: emerging that was seeing that move in crypto.
Speaker 6: Yes, potentially, I think, And to your point, I think
Speaker 6: we're over the next twelve to eighteen months. I think
Speaker 6: as everyone is issuing debt as everyone is issuing stock,
Speaker 6: we're going to start to tighten up here. I also
Speaker 6: think you know this idea you know that you raised
Speaker 6: Jonathan about, you know, is it the risk free rate
Speaker 6: versus you know, the credit premium. I'm not so sure
Speaker 6: here that that that the overall scarcity of capital here
Speaker 6: doesn't cause that risk free rate to go up, right,
Speaker 6: And you know, folks need to kind of care about
Speaker 6: that because they could say, Hey, I don't care, I'm
Speaker 6: just playing for the corporate But hey, at the end
Speaker 6: of the day, everyone's cost to capital is based off
Speaker 6: of that, right.
Speaker 3: So.
Speaker 2: You know, so you could have build on that because
Speaker 2: you're saying worried about the equity pace and on the
Speaker 2: selfri and pace as well. Yes, that's a difficult moments
Speaker 2: to be in.
Speaker 6: It is unbelievably difficult. So another theme that we're talking
Speaker 6: about with clients is not only you know, to have
Speaker 6: more realistic forward expectations about both stocks and bonds vs. V. History,
Speaker 6: but the need because both of those asset classes are
Speaker 6: now tied to these same exact themes and they are
Speaker 6: very positively coral related, that you need other things in
Speaker 6: your portfolio to be diversifiers.
Speaker 2: So It's why we've.
Speaker 6: Been so avid about adding real estate, about adding other
Speaker 6: real assets like commodities, energy, infrastructure. It's why we've had
Speaker 6: some appetite for alternatives, not all alternatives, but we've had
Speaker 6: an appetite for alts because you need that ballast in
Speaker 6: your portfolio because stocks and bonds now are being driven
Speaker 6: so much by the same exact trade.
Speaker 1: We've talked a lot about financial market dynamics. What does
Speaker 1: a real economy matter? I mean, how much do you
Speaker 1: actually if you look at the jobless numbers, that the
Speaker 1: jobs numbers that come out in about an hour and
Speaker 1: twenty minutes.
Speaker 6: So look, I think the real economy has absolutely mattered.
Speaker 2: Right.
Speaker 6: We are in this unbelievably interesting moment where this technology
Speaker 6: revolution is different than the prior to We are transforming
Speaker 6: the infrastructure, and we're transforming manufacturing. Data centers are the
Speaker 6: manufacturing factories of our future. That's a great thing in
Speaker 6: terms of overall economic productivity, but it is a cautionary
Speaker 6: thing because we manufacturing and infrastructure are cyclical businesses. And
Speaker 6: this brings us back to my very first point about
Speaker 6: look for true secular growth. A lot of what we're
Speaker 6: seeing in the market is not sustainable secular growth. Things
Speaker 6: that are growing fifteen and twenty percent are not sustainable
Speaker 6: in a world where global GDP is growing five and
Speaker 6: maybe seven nominal. It's just not right.
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Speaker 5: Mm hmm