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2d ago on

On @WilfredFrost podcast on Tuesday, I said I was “terrified of what happens on the other side of mid-terms.” Post election, 40%+ of incremental datacenter capacity is now at risk. For the wk, SOX/SPX/Nas -12.1%/-2.7/-3.4%. The good news is oil prices should continue to come down. Comments by the AI industry that included: 1) AI could wipe out 50% of entry-level white-collar jobs within the next one to five years and 2) AI having a 10% probability of wiping out humanity, justifies the public backlash against datacenters. My belief remains that those AI related companies that have other lines of business supporting their investments in AI will be the ultimate winners. I see the neo-clouds and pure LLM labs like Anthropic and OpenAI being in an even worse position post mid-terms. But the existing capacity at the big hyperscalers has become more valuable and they are likely to face less competition from the neo-clouds. Due to the regulatory friction and moderation of semiconductor price increases, hyperscaler capex spend in 2027 is also likely to be less which should help their cash flows. The big 3 public cloud hyperscalers all gained last week: $AMZN +7.9% (they also benefit from lower oil prices), $GOOGL +1.8%, $MSFT +1.7%. But the coast is not all clear given growth rates at AWS, Azure and GCP are likely to be negatively impacted at the start of 2027 by this regulatory friction. $META lost only 0.8% last week. They do not have a public cloud but 1) social media is not likely to get disintermediated by AI, 2) Muse has been a hit in Agentic AI and 3) AI is helping the monetization of their ad business. As for semiconductors, the SOX was down 12.1% last week. Physical space in datacenters to put these chips was already an issue before the mid-terms. It is worse now. Even on Wednesday when the S&P was up 1.6%, the SOX was down 3.1% with an even bigger 12.2% decline on Thursday when the S&P fell 4.4%. This brings me to my point that good portfolio risk management is critical, especially around AI related stocks. This is true even if bullish due to the nascent nature of Agentic AI (my view) because one of these times, if not already on 6/22, will be THE TOP. That is why I warned of an AI “speed bump” on 6/20 and posted on 10/4 “Finally, the current bi-partisan (amazing they agree on anything) pushback on datacenters could get worse after November 3rd mid-terms if there is a blue wave which is what the current polling data leans towards.” This year, from its all-time peak on 6/22 to the Situational Awareness driven low on 7/29, the SOX declined 29%. It then rallied 27% before the recent 32% decline from 10/6-11/5. These recent declines are also close to the 8 average declines of 34% during the dotcom bust. The SOX is now down 36% from its all-time highs with 14 of its 30 constituents down 50%+. But even during the dotcom meltdown over 2 ½ years, the SOX had 7 rallies that averaged 28% while losing 83% from peak to trough. The good news is I think oil prices are likely to head much lower by year-end now that mid-terms are over. An excerpt of Iran’s response by the Speaker of their Parliament was “Conscience or the cost of living, Americans said NO TO WAR, and we endorse this message.” As a reminder, the Iran hostages after being held for 444 days were released just minutes after Ronald Reagan was inaugurated This followed his crushing defeat of President Jimmy Carter. I think a deal with Iran is coming soon. Given my view on oil, I believe we will see the usual seasonal strength in the non-AI side of the stock market through year-end. Five of the eleven sub-sectors of the S&P that are not as closely related to AI or energy were up over 1% last week: consumer staples, consumer discretionary, financials, real estate, and telecom services. In summary, I think those sectors that would benefit from lower oil prices should perform well through year-end. As for AI, related stocks reached their most oversold levels on Thursday since the tariff lows in April of 2025 before bouncing on Friday. But unfortunately, my S&P quant model had only 25% of my technical metrics indicating that Thursday was a short-term bottom vs the average of ~50%. The anemic 0.3% S&P advance on Friday following the 4.4% decline on Thursday also is not encouraging looking back at historical data. Therefore, stock selection, daily risk management and seeing how the market reacts to incoming data will remain key given these conflicting factors. Best of luck in what is likely to be a volatile environment through year-end.

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1w ago on

Last wk, earnings had elements of all the AI issues I feared in my preview. $GOOGL – AI disintermediation fear for search and big FCF miss. $MSFT – neocloud partner pushing out capacity and 1st new fundraising bonds since 2017. $AMZN – AI growth miss in AWS and FCF miss. Tech took a beating last week with Nasdaq -2.0% and Mag7 -2.4% but with S&P down only 0.6%. However, the nine non-tech related sub sectors (out of the eleven total) were strong and up 1.0-3.1%. As a result, the equal weighted S&P was up 0.8%. The above three names all declined last week with Google down 12.6%, Amazon -3.1% and Microsoft -0.5%. The historic 28.6% stock decline by $INTC on Friday (-24.4% for the week) did not help. This helped drive the SOX Index down 7.2% on Friday though the weekly decline was only 0.8%. With all the hyperscalers now having reported, here are my current thoughts: 1) Microsoft has committed to staying FCF positive (with $18.6B in FCF in CQ3) and is the only name in this list that has committed to do so. M365 is likely to become the default option for enterprises that want AI in a safe environment through use of Co-Pilot. 2) Meta is using AI to improve the efficiency of their business as seen in their ad revenues compared to Google. Also Muse has been a hit with consumers for Agentic AI while they are appealing to enterprises with their strong open-weight models. An 18x CY27 PE for 28% revenue growth is appealing. Their major blemish is the future negative FCF expected with a $2.1B burn in Q3 driving them to raise ~$95B in equity financing following earnings results. S&P Global Ratings on cash flow concerns and AI spending revised their credit rating today from AA- stable to AA- negative. 3) Amazon despite missing buyside AWS expectations of ~42% y/y growth with 39% reported (official sellside consensus of 38%) expects 40% revenue growth for AWS in CY27 and CY28 despite being the largest public cloud vendor. Also their LTM FCF burn of $42.4B in Q3 vs $7.6B in June helped lead to a $80B supplier financing arrangement facility post-earnings. Also physical AI should benefit their e-commerce business. Both e-commerce and AWS were guided to be $1 trillion revenue businesses within the next 5-10 years. 4) Google’s new LLM model is back at the frontier with a low cost per token. However this miss in search revenues for the 2nd quarter in a row and first miss in both total revenues and EPS for the first time since late 2022 raises AI disintermediation fears. FCF burn of $9.1B was also more than expectations. But total search queries are at the highest levels in five years. As a result, as ad coverage and loads increase on their AI queries, these fears should pass much like in late 2025. Ultimately, I believe Google will be a winner in consumer AI through their distribution through Android phones. As for Intel, I did not see this coming. On October 20th, $SMCI (purely enterprise related revenues) pre-announced 27% revenue upside along with a raise to gross margins guidance to 12-12.5% from 10.4%-10.8% for their CQ3. I am not a fan of SuperMicro to be clear. For the processor vendors, I thought upside in server revenues due to Agentic AI would offset the downside in their PC business due to memory related price increases lowering demand. $AMD, which is gaining share, reports earnings on Tuesday. This will help investors understand whether this is an Intel specific issue or industry issue. I would note that Microsoft’s guidance for their Windows OEM & Devices business was down ~35% y/y for December vs -22% in September and -7% in June. Longer-term, I believe Intel will become a force in the foundry industry but in the near-term it may take some time for the valuation to reset lower due to their current microprocessor business. Looking forward, $AAPL reports on Monday after the close. The stock has been a beneficiary of investors looking to avoid AI companies with huge FCF burns. However, I would be wary into earnings that are likely to provide lower than expected guidance for the December quarter from a combination of higher currency impact, margin compression from semiconductor price increases, iPhone unit pressure from higher ASPs, a slowdown in services revenues and less than expected high margin TAC revenue from Google. Ultimately, I believe Apple will be a winner in consumer AI through their distribution through iPhones. I also believe their new foldable phone will drive a large upgrade cycle in 2027. But in the near-term I believe it is prudent to remove Apple (up 27% ytd) from my Top5 Picks that I put out when 2026 started. As a reminder this is meant to be a buy and hold list for the entire year for those that do not have time to be managing things daily which is what I do. I believe Apple is likely to be a Top 5 Pick at the start of 2027. We are now entering the seasonally strongest month of the year. Since 1957, which is the inception of the modern day S&P500, November is up +1.8% and tied for the best hit rate with April & December at up 71% of the time. This compares to an average return of 0.7% and hit rate of 61% for all months. Surprisingly, the returns for November in mid-term election years is even better with an average of 2.6% and hit rate of 82%. This might have to do with the ytd annual return being lower going into the elections at -1.8% through October with a hit rate of 53% so there is a relief rally on the other side. In summary, this earnings season has been more trick than treat for technology investors. Being more discerning and trading around positions has been the correct tactic. I think will continue to be the case. Let us hope November gives us something to be thankful for. All the best in the week ahead.

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2w ago on

The @elonmusk reply that “200+ neoclouds are going to see guppy-level death and consolidation” (I agree) caused neo-clouds to get hit again this morning for 5-6%. Now $CRWV $NBIS $IREN all up 4-7%. This clearing event might mark at least a short-term bottom in the AI selloff. Short-term bottoms can never be known except in hindsight. But after a large decline already that has occurred over some time (this recent 19% decline in the SOX Index as a proxy for the AI names started back on 10/6 to 10/22), an event that is unambiguously negative like the post above, that initially leads to a large sell-off in the worst names in the sector (neo-clouds in my opinion) and that then reverses during the day is generally a good sign in my experience. To be clear, I do not like the neo-clouds longer-term though they they may bounce the hardest short-term given they were some of the most oversold. But this gives me more conviction that this is a potentially good time to put capital to work in the best positioned companies such as in the hyper-scalers, semis, power, construction, EPC, platforms etc. Obviously poor earnings results from one of the big hyperscalers $MSFT $GOOGL $AMZN later this week could derail this but there is a lot of negativity priced in already.

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2w ago on

Thoughts around AI 1) Given AI is the largest technology revolution in history at roughly 3.5% of GPD (larger than electrification, highways & internet combined); there is overinvestment due to the potential rewards for the eventual winners. 2) But much like during the Internet buildout, which had several large drawdowns including in 1997 (Asian currency crisis) and 1998 (Russian bond default), and then ripped higher, the question is whether this is THE TOP. 3) AI had 3 separate investment waves: training, inference and now Agentic a. Agentic demands 10-100x more tokens than inference and started with OpenClaw in January for the tech savvy followed by Muse in late September for the rest of us. 4) Currently, the market is repricing two things a. Financing costs are higher in both debt & equity mkts i. Debt- $CRWV unsecured debt trading at 15% ii. Equity- expected timing for AI related IPOs like OpenAI, Anthropic delayed earlier this year while filed IPOs of Firmus, AirTrunk, NScale, SB Energy delayed/ pulled iii. Meta 8K “timing is important to secure capital before competitors saturate various funding options… in an increasingly challenging environment for raising capital.” b. AI native growth rates slowing i. Anthropic revs 145% q/q in Q2 to 45% in Q3 ii. Openweight driving ASPs down ~50% since May 5) Datacenter moratoriums seem to be the only thing both parties agree on a. This could get worse after the mid-terms with a less AI-friendly political climate In summary, because of the advent of Agentic, I do not believe this is THE TOP. But having higher cash levels and being circumspect as the market reprices has been important. This has been my advice for the past several weeks. Unfortunately, my belief that it was time to start putting money to work for at least a short-term rally this past week due to oversold conditions in areas like semiconductors has been early so far. The SOX was down 3.2% last week vs the S&P down 0.5% but time will tell. $MSFT $AMZN $GOOGL earnings this upcoming wk 1) I think much like with $Meta earnings this past week where I previewed concerns, the stock reactions for the above three will have a lot more to do with their comments around future capex investments, expenses, cash flow and financing needs. 2) I worry whether a datacenter moratorium causes an issue with cloud growth guidance for the December quarter despite very strong growth in the September quarter. NextDC in Australia cut their rev guide by 22% for CY27 due to local community pushback and the stock was hit for 39% last week. Microsoft seems committed to being cash flow positive and I see them being an ultimate winner in enterprise AI. 1. They provide a safe environment to run Co-Pilot AI applications given almost all S&P companies run M365 already. Co-Pilot seats were 30M+ in the June quarter up from 20M+ in March and 15M in December. 2. One potential risk is their high margin PC business being impacted by the large declines being caused by surging memory prices. 3. Azure expectations vs their guidance of 45% y/y for September vs 43% in June have also picked up given the share gains being seen by OpenAI against Anthropic recently in enterprise. Google should see accelerating cloud growth & be an ultimate winner in consumer AI through their Android distribution on smartphones. My short-term concerns are the following: 1. Cash flow was negative for the first time since being a public company in the June quarter. 2. A slight miss in search revs in the June quarter raise concerns around AI Agents not looking at ads. 3. More aggressive analysts expect GCP growth of ~100% y/y for CQ3 y/y (but this includes TPU sales) up from 82% in CQ2 and 63% in Q1. This is more than double the growth rate expected for AWS and Azure so I worry that these datacenter moratoriums may on the margin impact the revenue growth possible at GCP. 4. Google needs to get out their consumer Agentic AI product. This should be a catalyst for their stock given it should integrate with the 14 Google products that have over 1B users each. Amazon should benefit from physical AI improving efficiency in their heavy asset e-commerce business. 1. I also think their e-commerce demand is solid as shown by them hiring more seasonal workers (+20% y/y) for the first time since 2023. 2. But as the biggest public cloud vendor and the one with the most capex, could they be too big to escape the data-center moratorium impact on their December quarter? As an example, Amazon last week abandoned its plans for a large 4 building datacenter in Loudoun County Virginia which has been dubbed "Data Center Alley." AWS grew 28% in Q1 an accelerated to 37% in Q2 with no formal guidance but hopes for a slight acceleration in Q3. 3. However, Amazon reports on Thursday so their AWS expectations will be reset by whatever results are from Microsoft Azure and Google GCP on Wednesday. Best of luck in the week ahead.

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3w ago on

Post all the negative AI related news recently, $SPCX revs beat by 14% w/ AI beating by 19%. Q4 capex guide almost 90% above consensus while Q1 revs guided 57% above. Also $SMCI +pre w/ revs 27% above consensus. My conviction of a near-term AI rally continues to grow. As I posted on 10/15 on the overall AI trade following the bludgeoning in the Kospi, “The bottom line is even if we have seen THE TOP, the odds based on history are high for at least a short-term rally.” As opposed to repeating the stats from my 10/15 post on the Kospi (Korean stock market dominated by memory) or this past Sunday on the SOX (semiconductor index), I think the following is worthwhile. Assume I am wrong about Agentic AI driving infrastructure growth into at least 2027. The funding issues for the neo-clouds, slowing revenue growth at OAI/Anthropic and bi-partisan pushback against datacenters has to be considered. Assume THE TOP in the AI trade was on 6/22 which was the peak in the SOX. Looking at the performance from the peak of internet bubble on 3/24/00 to its bottom on 10/9/22, the S&P decline was 49% with the SOX down a staggering 83%! But even during that punishing decline during the bursting of the internet bubble, the S&P saw 7 rallies that averaged 14% each while the SOX using those same dates saw rallies of 28%! During each of those advances most investors wanted to believe we had seen the bottom. The problem was the 8 declines averaged 17% for the S&P and 34% for the SOX. If I use the more recent decline during the GFC from 10/9/07-3/9/09, the S&P fell 57% while the SOX dropped 66%. But this also had 11 rallies that averaged 10% each for the S&P and 11% for the SOX. The problem was the twelve declines averaged 15% for the S&P and 19% for the SOX using the same dates. In summary whether you are an AI bull or bear, I do not believe it makes a difference for positioning in the near-term. The AI infrastructure trade by the metrics discussed on 10/15 or 10/18 around the semis looks oversold. In addition, a good bearish investor is open to the idea that they may be early, just wrong or about to have a bear market rally. Maybe the SpaceX earnings and Super Micro positive pre-announcement today are the trigger to start the next AI related rally regardless of whether we have seen THE TOP or not.