Speaker 1: 0:00

On today's episode of the AI Investor Podcast from 24-7 Wall Street, we're checking in on earnings from tons of companies inside of the $500,000 AI portfolio and adding a new one to the mix. All of that and more is next Welcome back to the show. I am David Hanson, joined by Eric Bleeker. Eric, it's been two weeks since our last episode, which, in AI dog years, it feels like it's been about 13 years. There's so much we've missed. I'm happy to be back.

Speaker 1: 0:30

We did a couple of weeks where we had it weekly. Then we went to buy it weekly. We were traveling last week so we didn't have a chance to get the show up. So apologies if anyone was expecting a show last week, but we're here now, excited to jump in. We've had some time to digest the big DeepSeek story which we talked about last episode. We've had a few weeks to digest it. Hear from some other companies, so we're going to get into some earnings. But I wanted to start with just a couple other news stories. Deepseek obviously dominated the headlines a couple weeks ago and everyone was wondering well, does that mean all this capital spending is going to lighten up? We haven't necessarily seen that a lot, and one of the stories that caught my eye was you know, we had the big Stargate announcement, then DeepSeek and now Europe is getting. Remember Europe, that continent which at one point dominated the world, which had a rough run. So Europe is getting in the mix. So walk us through. What is the AI announcement coming out of Europe this week?

Speaker 2: 1:16

Yeah, you know you talk about how long it's been. I feel like that Titanic meme where it's like it's been 84 years. Uh, yeah, and, as you mentioned, we were traveling. I got this thing called the vegas flu. That's, that's not a flu. It doesn't show up on tests or covid tests. But you know, everyone out there be be be careful, there is something weird going around. It has laid laid me up. I'm glad I can even talk. So, yeah, you're up just about out of every single conversation in technology for about the past decade, aside from seems like passing some sort of new regulation with relatively sweeping consequences.

Speaker 2: 1:56

But, like you said, the US begins kind of the narrative in 2024 with the Stargate announcement and before that the CHIPS Act. In 2024 with the Stargate announcement and before that the CHIPS Act, we've got DeepSeek coming out of China and, as we noted in the last podcast, deepseek was paired with a very large funding bill. I believe it's like $137 billion worth of funding for AI from China. And now we have Europe announcing it's France, if we want to be specific a $113 billion plan. It was kind of funny. The prime minister, the president of France, macron, he had I'm sorry I'm saying that wrong as well. He had done his version of drill baby drill with plug baby plug, promoting their nuclear power.

Speaker 2: 2:46

So you know, david, I do think that this shows, you know, as we head into 2025 and we're going to be continuing to follow this kind of storyline and giving everyone this kind of front row seat to this storyline of the rise of AI, geopolitics go front and center.

Speaker 2: 3:07

We've seen Europe, which has been hesitant, now a major country on the continent, announcing a very sweeping and ambitious plan, and I'm sure this isn't going to be the last area. We see Areas like the Middle East, even if they're not getting the headlines, they're in the background, providing funding to areas like Stargate. We have, you know, japan doing a lot of funding for their semiconductor industry and trying to, you know, bring funding back there, and also we'll talk more about this later, I'm sure but we also now have Intel rising this week on kind of speculation that the next major push from the Trump administration is going to be giving them a lifeline. So this, this stuff really matters, and I think it shows that AI is going to move from a big investing story to the pre. You know, companies in the AI space. You're going to need to pay attention to developments because, as AI's impacts ramp, how to make sure that its benefits accrue across society becomes the number one issue facing the world, and it's going to be a mad scramble to figure out how to do that.

Speaker 1: 4:23

Now, this is a recently announced plan and, just like Stargate, we don't have all of the details of what exactly they're doing. But is it in the same realm of a Stargate, of building out larger data centers, the types of companies that would benefit from a Stargate type project? Is this the same type of investment that France is talking about here?

Speaker 2: 4:38

Yeah, I think people have called it Le Stargate, so it's smaller and absolute figures. But yeah, it's similar. It's trying to get companies to build large data centers, potentially using France's available nuclear power. You do look at how geopolitics has gone. A big export market of France's nuclear power is Germany, which turned off its nuclear power, and now France is offering this for AI. So you see some of the dominoes falling, but smart move for France, in my opinion, because they have a great asset in their amount of nuclear power and they're going to make it kind of the European hub for AI.

Speaker 1: 5:18

Well, as an investor who has unfortunately had maybe too much of his portfolio tied to Europe over the last couple of years I'm excited to at least have maybe some I don't know if it's good news, but just some excitement or growth prospects for some of our European friends over there. So that's exciting. Again, we talked about DeepSeek a lot last episode. We've had a few weeks to digest it and I wanted to get your take on some of the companies building models here in the US. So that's OpenAI, anthropic Grok what have we been hearing from those companies? Have they changed their tune at all? Again, the big discrepancy was okay, deepseek does this for less and OpenAI Sam Altman has been out there for over a year now saying I need trillions of dollars Podcast bro, if we recall of him going around trying to drum up all this enthusiasm for more spend. Stargate have they changed their tune at all since the in these last two weeks, or what have we? What have you heard from those companies?

Speaker 2: 6:13

Yeah, it's interesting. You're seeing kind of a bifurcation of kind of companies talking their book, in a way, where out of China you've got Alibaba saying the American companies are doing all wrong and that's a great narrative for them because it works in their favor and they're up 40% in recent weeks as people kind of look to stocks that have frankly been stuck in the mud for years and now have kind of catalyst to get out of it. But you look on the American side and it's kind of business as usual. In fact I would say it's doubling down on kind of the storylines that we've had. You know, david, the key idea we've been following since December has been this breakthrough in these new types of AI models that use reasoning kind of a bull on AI and believe that we're going to see continuing acceleration this year, which I am A big reason is we are still so early onto this path of harnessing these reasoning models and seeing their capabilities skyrocket. So, from OpenAI, sam Altman, who's the CEO of the company he dropped a big blog post and he emphasized that intelligence of a model it's still CEO of the company. He dropped a big blog post and he emphasized that intelligence of a model it's still proportional to the resources used to train it. If that's true, it's great news for all the data center companies that we've talked about. And he emphasized which we talked about in our DeepSeek episode that the cost of AI dropping by phenomenal levels, which is what caused the DeepSe sea panic is nothing new. He had quoted their GPT models between 2023, mid 2024, 18 months, 150 fold drop in cost performance. And he noted Moore's law, which was the fundamental centerpiece of technology, being kind of the most transformative force on earth. That was 2x every 18 months. So 150x versus 2x is striking, and he also emphasized that they see no reason for investment to not continue growing at an exponential rate.

Speaker 2: 8:19

In interviews he was already talking about you know, hey, we just did Stargate with 500 billion, the next one's 5 trillion. Now again talking his book, right, talking his book. But you know nothing. Nothing has changed materially and in fact, with open AI, they released a product named deep research. David, have you played around with deep research? So it's on. It's still under $200 tier. They are going to move it to be free pretty soon. So they've said I got a chance to play around with it. Really impressive Did some industry reports in some areas that we were looking at for our business. It used novel ways of finding data, it put it into tables, making kind of unusual connections that if I had received this report and it was coming from some management consultant charging $50,000 for it, it wasn't far off from the quality that you would expect. So a lot of people have been calling deep research kind of a little bit of an iPhone moment for the capabilities of AI, and we're still near the front of it.

Speaker 2: 9:25

The other thing I would mention too, the other companies.

Speaker 2: 9:28

We're about to see a lot of leapfrogging because Anthropic. They are presumably readying their next model. They came out with a statement kind of directed towards politicians around the world, saying that by 2026 or 27, no later than 2030, we're going to have basically what they call a nation state of intelligent beings, which is AI agents. And Elon Musk spoke at a conference I believe it was in Dubai where he said Grok 3 will be released before the end of the month and that it, in their testing, outperforms all other models. So, david, we'll get to the hyperscalers the people actually spending the money later in this podcast, but from these companies building the models, there's been almost for the size of the deep seek reaction. You have expected, maybe some kind of change their tune, but in fact, if anything you know they are like I said earlier, they are doubling down and I think what we're going to see in the months ahead is kind of a furious pace of releases. That, of course, will be fun for us to follow on this podcast, right.

Speaker 1: 10:34

Yeah, unfortunately, you know, openai, anthropic, grok, those are. They're not public companies right now, so we can kind of only assume how the market would maybe be reacting. We do have, obviously, meta, who's not a direct competitor to those but is obviously building models as well. We're going to get to Meta in a little bit but, agreed, it does seem like the vibes for lack of a better term have got a little more positive over the last couple of weeks, kind of what we said in the DeepSeek episode, where there is something here, but the overall story is not really changing and in a way, as long as it opens up more use cases, more use of AI, it could be more bullish for these companies, despite spending billions and billions of dollars Before getting to hyperscalers and companies that have made tons of money.

Speaker 1: 11:18

I wanted to touch briefly on a company that loses money and that's Intel, a company we've talked a little bit about. You said I don't know what the future here is. Is this company to break up? Is it going to need a bailout? What's going to happen here? The stock is up around 20% the last couple of weeks. Are we getting some sort of outcome here or do you have any speculation on what might be going on with Intel. This isn't a company in the portfolio. I think you said you don't really have an interest in bringing a portfolio, but one that we've just talked a little bit about.

Speaker 2: 11:45

Yeah, you know, the thing with Intel is it's it's all speculation right now. So you know, this is this is a at the moment, it's a gambler stock Right and the the speculation of what's happening right now. Donald Trump he has floated out tariffs and you know, it depends how you want to look at Trump, but the kind of, I'll say, industry consensus is these tariff ideas for Taiwan. It is largely the beginning of a negotiating tactic to get some concessions from Taiwan semiconductor. So the reports are that there's three options on the table. Number one build more facilities in the US. They built one in Arizona. They have issued statements saying that they are happy with its performance.

Speaker 2: 12:34

Taiwan Semiconductor I've said in the past, David, they are one of the most relentless negotiators in the world. You're going to have them against Trump. It might make our heads explode in two sides that just want to negotiate, but you saw, with Taiwan Semiconductor, when they were building their fab in Arizona, everything was US workers are lazy. This is not great. Well, they're, you know, again looking for more subsidies, more concessions in the moment. And it's done, it's oh yep, we're performing great here and the PR shifts. So you know there is a question of whether or not, we could get more facilities, and ones that produce kind of the most leading edge technologies, which they have said they're open to. So it's building more facilities in the US.

Speaker 2: 13:17

There's another plan on the table them forming a joint venture with Intel, and this would effectively force some technology transfer to the company. And then there's a third option that I've seen reported on, where they could take orders from companies like Apple, send them back to the US for packaging by Intel. As we've talked about a lot of the value kind of add with where semiconductors are going. It's moving from actually the steps like ASML's lithography to how you can package these chips up, so that would give US more expertise in the area that Taiwan Semiconductor leads in.

Speaker 2: 13:55

So, David, I don't know where this is going to end up, but again it kind of just circles what we talked at the beginning, that chips and the AI race. It's moving from something that's probably a niche interest for investors into the front of geopolitics, and for a lot of these companies it's going to be inescapable that the short-term movements are really going to be controlled by what's in the headlines around, what world leaders are looking to do. I think at the end of the day, though, that will mostly be positive, as we're going to see a lot more countries wanting to put their investment and secure this kind of as a strategic area. So overall bullish. But for any specific news, this specific news is slightly negative for Taiwan Semiconductor, slightly or potentially very positive for Intel.

Speaker 1: 14:47

Okay, all right, let's move on to the hyperscalers. We've had some earnings, so that means we've got some commentary from some of these companies. In particular, let's jump into Meta and Amazon. These are two companies that you recently added to the portfolio in a big way, putting $100,000 behind each. These are the largest positions in our portfolio that weren't there before. Last episode, you talked about some of the rationale behind adding a company like Meta and Amazon, again benefiting from if they have to spend a lot, they can win, or if the cost profile comes down, they have enormous distribution, so you felt comfortable using them as a hedge to the rest of the portfolio. So what did you hear from these companies? Are you more excited? Are you regretting putting $100,000 on any of these companies based on what you heard? So what are your thoughts?

Speaker 2: 15:35

post earnings David, I know it's been 84 years since we last talked, but coming out of DeepSeek, the big question was on everyone's mind are we going to see hyperscalers adjust what their planned spend level is for 2025? We're heading into the year and that means they're issuing, basically, growth projections. They're giving guidance for 2025. So this was a very pivotal earning season for seeing what this AI story looks like. Now, if you go back to the November 8th podcast for the aficionados that have cataloged all the different AI investor podcasts, we did walk through expectations for every single hyperscaler and what their spend per Wall Street expectations was expected to be this year, and that was Amazon $85 billion. Microsoft $84 billion. Google $57 billion. Meta $48 billion. So we've gotten reports from most of those companies now. From Amazon, they gave a number that isn't implied about $105 billion, so that's 24% above expectations from just about three months ago. We'll call it Google $75 billion in planned capital expenditures this year. That's 32% above expectations a quarter ago. Meta $60 to $65 billion that's 30%. So, david, here's the big picture. As a group, this collection of companies is now expected to spend more than $320 billion this year. That's above what the 2026 expectations were just months ago. So we'll talk later on how maybe some of this bullishness that you would expect to really have risen in a lot of the data center stocks hasn't materialized and maybe some of the potential reasons for that of the data center stocks hasn't materialized and maybe some of the potential reasons for that. But as far as what this looks like for the continuing investment across AI data centers, this is pretty bullish stuff.

Speaker 2: 17:38

Now you mentioned I'm adding $100,000 in Meta and Amazon and we don't really get to dive into the details on that last episode. So I want to take just a moment to say why these two companies in particular are the ones I would pick from this larger group. If you're picking from kind of the magnificent seven, which ones do you want to allocate more into? For Meta, number one, the valuation is becoming less favorable. We were talking earlier. I believe they are now slated today, friday February 14th, to be up for the 20th consecutive day, which is a new S&P 500 record.

Speaker 2: 18:17

Clearly the story is out. They're up now. I believe it's 22 or 23% year to date. So you know it's becoming less and less attractive. But there's a reason for this story coming out and the bottom line is no one's made more money from AI, as meta AI has made their products and advertising significantly better. The estimates I read it contributed close to two thirds of the revenue growth last year, and that's from content recommendations, more time on apps. It's from ad targeting. It's also from AI optimized ads. One thing generative AI and kind of transformer models is really good at is understanding the context of why a specific ad works, which in the past, with old recommendation engines, you didn't have, and it's a real game changer for efficiency.

Speaker 2: 19:12

Moving on to the next generation of AI, meta, as you mentioned earlier, they've got a leading open source model. They are in the game, at the cutting edge. They are able to kind of determine their own future. They have a natural entry point for agents and the rise of agents via messenger and David. They've got a sea of proprietary data.

Speaker 2: 19:33

What are the most powerful assets in the world Once AI rises, if it reaches the potential? We think? Well, it's unique data and it's distribution. What company has both better than AI? What? What company has both better than ai? Um, if you know, if ai enables limitless content, you, you want to be the central distribution point that people are going to share their creations, and that's exactly what meta is. So you know, david, I mentioned this is a portfolio hedge in part two that if spending goes down, um, it only it, meta. The reason that they would probably drop the rest of the year is because they get too aggressive in their spending. That would be the number one threat to the stock. So I am keeping it as a bit of a hedge and, as I know, I'll invest 100,000, but I will decrease these positions as well, as we're probably making investments, because we are getting pretty close, after making these large investments, to being fully allocated on the $500,000. I don't know if you've got any more follow-ups on Meta or if you just want to move on to Amazon.

Speaker 1: 20:38

Let's jump into Amazon real quick, and then we can kind of put a bow on both of them.

Speaker 2: 20:42

Yeah, and Amazon. You look at their upcoming earnings expectations and it's just very smooth growth. It's $68 billion this year, $82 the next, $104, the year after that, $128 after. And the reason is their operating efficiency has been outstanding. David, I pulled the numbers. They basically have two profit engines right now their advertising business and AWS. So if you take out ads and you take out their operating profits from AWS in 2021, they made negative 18 billion. In 2022, negative 48 billion. That's when the stock hit its nadir.

Speaker 2: 21:23

Since then they've kind of turned the course around 2023, negative 34.7, 2024. This past year, about negative 30. So they're getting a lot more efficient. So I think one thing too is I've talked I'd like to add more robotic stocks to the portfolio. It's just when that market's gone. You can't force it and invest too early if there's not investable ideas. I think Amazon has more to gain than any big tech company from robotics and the efficiency that that's going to lead to. It already has led to efficiency, but the kind of inflection point they're going to see is going to be incredible in terms of driving profitability and making e-commerce as big a profit engine in some ways as there are other business units.

Speaker 1: 22:09

So you're saying that 30 billion loss. You're basically taking out AWS, taking out advertisers, You're looking mostly at the retail business. So you're saying you can take that 30 down to 15. That's essentially like adding a $15 billion profit business.

Speaker 2: 22:24

Yeah, yeah, I mean, and it is just Amazon there they have. You know, it's when you look at these companies and you go, how do you get bigger? You're a $2.4 trillion company, which is what Amazon is, and it's like, yeah, but if you actually have a really good path to grow, sales maybe only eight to 10%, but profits 20% plus, you can continue, uh, you can continue being a great investment from a PE in the 30s, which is what Amazon is going to be capable of. And, david, the other thing is AWS. We think the biggest and most intelligent models they're going to live in the cloud. We think AWS was behind. They're catching up. They've got a pretty aggressive growth map. And the other side of this is post-DeepSeek. If AI models become commodities, the number one winner from that is probably Amazon Because, again, they haven't been involved. Aside from some investments in companies like Anthropic, they haven't been involved in the increasing spend to build their own models. So if everything becomes a commodity, that just makes AWS even more valuable. So you know, david, that's kind of the pitch on these two companies Outside the AI portfolio.

Speaker 2: 23:40

I've said this many times since we talked about them. I hadn't originally added them because I thought a lot of people already own them. We're looking for smaller opportunities, but I do in my own personal investing. These have been two of my largest stocks for years and I like the way that they balance out the portfolio, so these position sizes will probably get smaller, but that's why we're starting at a larger position and, as I noted, we'll sell this down to get them. It wouldn't surprise me if, in six months, we had something closer to 50K of each of these stocks.

Speaker 1: 24:11

Okay, so let's move on to those are the hyperscalers. Again, it feels like the consensus has been very positive. You talk about 20 straight days of positive gains. I don't know what Amazon is, but I know Amazon over the past month. You know it's still. It's positive. It traded up.

Speaker 1: 24:28

Even after DeepSeek it didn't seem as affected as obviously NVIDIA had the massive sell-off and a lot of our other kind of data center plays. We've also gotten earnings from some of those smaller companies in the data center where, again, it's been a wild couple of weeks for them. They had massive, massive sell-offs after that news. Then we saw some jump back. I can't recall the company you talked about last episode that was down 40% and then immediately made it all back in two weeks. We've had some of that, but we've had some of these companies that have sold off and have certainly not recovered to where they were pre the deep seek story. So what have we heard from those companies? It does seem like the consensus is not as cheery in that corner of the market, but also not as the world is ending and these companies all growth prospects are dead. So what have you heard from these smaller companies in the portfolio that had been rocket ships but have hit a little bit of a stumbling ground now.

Speaker 2: 25:22

Yeah, in the short term, most of its stocks, whether or not it does good or bad, isn't going to be driven by results per se. It's what you call narrative and it's whether or not it's multiples on earnings or sales or contracting or expanding. So I think what we have right now is, with DeepSeek, you had a very risky an event that showed, maybe you know, these stocks are very risky and you've had a lot of people want to kind of branch out to different areas. Now the question is, is that a short-term bump or is that a longer-term concern? So let's drill in on. You know, if I was talking about our data center stocks, you know, in optical we've got Coherent. You know, in optical we've got Coherent, lumentum, fabrinet, we've got companies like Sienna, then we've got, you know, other plays Credo, vertiv, schneider Electric. So we have a good collection of these stocks and, as you noted, they are probably the aspect weighing down the portfolio the most right now because they are trading about where they were after deep seek. So let's zero in on coherence a little bit more of a bellwether, especially in the optical space.

Speaker 2: 26:36

They report earnings. The earnings were up 252 percent from last year. I I trust you agree, david, that's pretty good. Um, well, just just just, uh beat expectations by a tad. I think it was something like 93 cents a share of earnings versus 69 cents. Wall Street was expected. They were up 14% the next morning, which is kind of expected reaction when you have those kinds of earnings and you're beating outlook for next quarter. They got to about $100 per share. But, david, what we've seen since then is shares have kind of just every day just kind of dropped 2% or 3% to where it's trading almost exactly kind of mid-80s back where it was post-Deep Seek.

Speaker 2: 27:21

So the question is what's going on? There's a lot of factors here, but I think one issue is right now NVIDIA is just such a large percentage of the spend around these kind of AI data centers and what was expected was that NVIDIA was going to see a very massive ramp of a specific product called GB200. And this is the one that's been in our production. Now, david, if you wanted to follow every single bit of speculation and people saying that there's engineering problems or this and that with GB200, you'd go insane scuttlebutt coming out of the supply chain. But it does seem like what's going on right now. Is that the size of the ramp for this specific product is being curtailed, expectations are coming down and a lot of the demand is moving to the back half of the year because NVIDIA was very aggressive about creating a successor product, the 300 series. That is a vast improvement and isn't a significant weight. So I think what's going on is that's causing a lot of chop and it's causing a belief that there's going to be kind of an air pocket for a lot of these companies and I think investors are kind of trying to get out of looking stupid in front of some near-term disappointment, for lack of a better word. So my bottom line, david, I still think that these are good companies. I still like their kind of potential, especially across the entire year. I think they're just going through some chop right now, especially related to the speculation One area that's doing great we've talked about in the past.

Speaker 2: 29:07

We're going to have all these big data centers. You're going to need to get them to do kind of coherent training together. You're going to need to network them all. Sienna is a big winner from that, but also Coherent itself and Fabrinet are winners. That's how the business is doing great.

Speaker 2: 29:23

It's just a lot of the business that's kind of blowing through from Nvidia is seeing a bit of a pause, so I did add Fabrinet. Right now it's trading for about 20 times earnings ex cash. It's taking a blow from maybe losing a little content in Nvidia, but it's got some new customers, including Sienna, that are going to be great for the long-term story. So, again, these stocks are down right now, but if this was a part of the portfolio you hadn't added to, I would say it's a good entry point for a lot of these stocks, taking a bit of a breather from how hot they had gone. We added Fabrinet. That one continues to be one of the cheaper options in terms of PE, but I haven't seen anything that changes my long-term opinion. I think we're just kind of working our way through a bad narrative. Now there are some sectors of the AI space with good narratives, which is what we can get to next right.

Speaker 1: 30:18

Yeah for sure. Yeah, I was just going to note 30 minutes into the podcast, I don't think we've really talked about NVIDIA, which must have been a record. And you're talking about all the spend from Meta, amazon, again, everyone, all the spend, not all of it, but a huge chunk going to NVIDIA. We should note NVIDIA stock obviously had the huge sell-off. It's back to flat year to date. It's recovered a little bit from the deep seek story. It's performing a little bit better than some of these coherence or some of these smaller plays. So again, what we've talked about since we've started the show is that there might be these moments of air pockets and shop and it seems like the market reaction is appropriate. If NVIDIA is flat, it makes sense that a coherent is maybe down 15%. It's not the same size of stocks, same size of company. So I don't want to get into NVIDIA. We'll talk about it. We've talked about NVIDIA enough and I think we have their earnings coming in a couple of weeks, is that?

Speaker 2: 31:15

right, yeah, they'll get some coverage.

Speaker 1: 31:17

We'll get some coverage then. So any more earnings you want to hit on? We had Cloudflare, which is a new company that we added to the portfolio. Reported earnings Positive reaction there. Is there anything you want to hit on Cloudflare there?

Speaker 2: 31:29

Yeah, and it just kind of shows how much in the near-term narrative drives share price. We had Cloudflare before its earnings report. You know there's another podcast I'm sure people out there listen to it Bill Simmons. They do the guess the line where you say a football game and you try and guess who's going to be favored. I was doing a guess the line. When I saw Nets earnings kind of the numbers break I said ah, it's down 10%. I believe they are now up 20% and it is just partially. This company has just such a phenomenal story right now. It's. You know, david, if you know.

Speaker 2: 32:05

Once again we'll kind of archive past episodes of the podcast. But in one of the earlier ones you would ask me what's a stock that you love but it's just a little too pricey right now to add to the portfolio. I said Palantir because we had started last year publishing a report on AI. We had picked out Palantir as one of our favorite opportunities and just kept going up and up and around the time that we had recorded that episode it was trading closer to I believe it was about 40 times sales. I said it's just a bit too up there for me to touch at this point. It's tripled since then. So I wish we would have added. I still personally hold it.

Speaker 2: 32:45

I haven't made any changes to my personal holdings, but the next best story in terms of how cleanly you can take a company's business and kind of draw it to trends in AI after Palantir is probably Cloudflare. So this is an expensive stock. I think when we added it it was when we were before earnings. When we were looking to add it, it was trained closer to about 20, 25. It was trained closer to 25 times this year's sales. It's even more expensive now. And the reason, dave, is Cloudflare is what you call an edge network. I think it's not like a great business. You probably remember Fastly, which was doing content delivery. Unfortunately, I do. Yes, everyone loved it in 2020, but you know again, it just it wasn't a great business because if you start, you know what you're doing is kind of building servers that are located closer to people. If you're not able to build more value-add services on top of that and you know, do the classic land and expand, it's just not going to be a great business. But that's exactly what Cloudflare has done. They have tremendous execution. They've moved from content delivery and what you'd call denial of service attacks to build a much bigger security business. And what they did was they built a developer platform which you can run services closer to the consumer, which was a pretty niche concept until AI took off and, all of a sudden, training you can go do a training run anywhere. It's not that big of a deal of needing locations closer to consumer With inference latency matters a ton. So all of a sudden, these developer services that are offering a network that's extremely close to users has incredible value. They call it workers AI and that's the service, once again, for running inference through Cloud Flare.

Speaker 2: 34:44

The other thing that you have is security. People have asked us to talk about security. Security is really taking off. You look at the charts of all these security stocks. It is up and to the right right now and that's because of a realization that security is an area where being a leader maybe gets its next advantage. Because, again, we've talked about unique data being the biggest key to AI and the more attacks that you're seeing by being the leading vendor, the more data you have to be able to build a better product. So it's kind of a self-reinforcing cycle people are now buying into.

Speaker 2: 35:18

And finally, with Cloudflare you know, david, again with our business. When AI first started, when AI was really taking off after NVIDIA's famous earnings report in early 2023, when I was building out my initial AI portfolio, one of the first stocks I went to was Cloudflare, because I was like, if there's all this traffic from all these AI agents and also at a certain point you're going to need to protect your data against basically being trained for free by these models, the number one company to fill that gap is actually Cloudflare and that's what they're moving into right now. They're just starting it where, essentially, you can protect your content, you can charge a rate to be able to be ingested into models, and that's what Cloudflare's next big business opportunity is going to be. So, david, it's an extremely expensive stock but, again, this is probably the cleanest story I would call it in terms of how their products really lead into the growth of AI right now. You saw Palantir the past year. Them seeing I don't know what it is it's probably like 600% growth from when they were at $20 near the beginning of 2024 to today. They didn't require going from 50% growth to 150% growth rates. They grew their top line about 20% to 36%.

Speaker 2: 36:39

I think Cloudflare as we see a lot of growth in inference from the emergence of these reasoning models. We'll see a similar expansion on top line and I think it's going to be a stock that people most closely associate to the growth of AI. So I don't think we want a portfolio full of these companies, right, let's? Let's call a spade a spade, a stock selling for a sales multiple. This high is risky. For a sales multiple. This high is risky. But I also think, if you are wanting to take some chances on having stocks that kind of define this generation, I think Cloudflare has a space in your portfolio, which is why we added 15,000. And I think there's another huge narrative in AI that we're about to add software stock today that I think will also be a leader in one of the spaces that's going to attract significant media attention this year.

Speaker 1: 37:35

Yeah, I want to get to the new company. But just to your point on high valuation multiples, high price to sales, high PE. If there's any lesson learned over the last couple of years with some of these companies in the AI space, it's be careful. Judging only by those valuation metrics is right before an inflection point on the top line or even on earnings. I don't know what they're going to get to. In today's show we had Applovin, everyone's favorite named company report earnings Again a company that, when you look at just the amount of cash they're bringing to the bottom line because of AI, it's just staggering the growth that some of these companies can see. I think Applovin was up 700% last year and it was up 33% in a day this week. So very risky. Just to say it's expensive, I'll never buy it. You can often get paired with explosive growth on the business side, which very quickly doesn't make it quite as expensive.

Speaker 2: 38:25

So I do want to talk about Applo, and so let's come back to it, but let's do the stock we're actually buying first.

Speaker 1: 38:31

Sure, let's get into the purchase. We are adding a new company to the portfolio. Let's kick it off.

Speaker 2: 38:35

Yeah, the company I'd like to add today is GitLab. I think we'll follow a $15,000 purchase In terms of some of the leaders in companies at the forefront of software trends. That will give us a cloud player and you know security and inferencing. It will also give us Snowflake and we'll have GitLab beyond also other software opportunities like Synopsys and Cadence. So we are starting to build out kind of the software side in addition to, you know, many of the data center plays we had.

Speaker 2: 39:07

Now the storyline here is, david I'm sure you've seen it right there is a chart making the rounds on social media right now that shows developer job openings from 2022 to today, and it's absolutely fallen off a cliff, right, and you know the the reason many will attribute to this. There's several reasons, but right now there are coding tools utilizing AI that make people phenomenally more efficient, do some stuff. That is honestly kind of shocking. You know, david, we met in Las Vegas, as we talked about earlier, and, talking with the developers on our team, their embrace of AI has completely changed the way that they do their jobs. Not only that, but another one of our co-workers he was showing me yesterday that what he calls vibe coding. You know if you get in too much, you'll see a lot of people talk about this vibe coding now, where you're working more with ideas than the code itself.

Speaker 2: 40:07

He had taken some that we might previously had to pay someone on Upwork maybe six figures, maybe $100,000, to build some concepts, and he had just done it all in a spare time with a week knowing almost no, having almost no ability to code. Let's just call it is what it is. So the preeminent product that's getting most of the attention in Silicon Valley is something called Cursor. It's a code editor that set the new record, as the PR would go and going from 1 million to 100 million annual run rate in 12 months. I've seen people say that, uh, when they're talking with classes at in Stanford, uh, computer sciences, if they ask how many are using cursor, it's a hundred percent people.

Speaker 1: 40:49

Wow.

Speaker 2: 40:50

Um, if you look at Y common air one of the best incubators for new startups a hundred percent usage uh, cursor right now. So if you're at the bleeding edge right now, the adoption for Cursor is maybe at the highest levels of any tech product ever. So, being able to code with AI, it's a big deal, and these reasoning models where they perform best is areas like coding, because that chain of thought gives them objective, true or not true statements and it's really going to turn coding into a superpower extremely fast via AI. So I think the growth rate in these areas is going to be absolutely incredible growth-raising capabilities. So there's a space named DevOps and that's for code management. It's a great first place to look in terms of where you could see, you know, some gains from this trend.

Speaker 2: 41:47

There's a company named GitHub. It's very strong, but it's owned by Microsoft and you know Microsoft's very big. It's just a small piece of its business. So we're looking at their top competitor, which is GitLab. They have a lineup named Duo. It's not just coding assistants, but it's agents that monitor across the entire workflow of all company code. It can not only function areas like security, but also code optimization. So Cursor it's going to be used heavily by startups, first movers.

Speaker 2: 42:18

But if you're in a heavily regulated space and you're looking for a lot of these efficiencies, a company like GitLab is exactly where you're going to look, and they have a ton of differentiation here. So you think about Bank of America. Gitlab actually specializes in being self-hosted, so you don't need to go to an LLM out in the cloud or untrusted spaces. You can actually keep things local and use GitLab. So, again, you think about all the industries you could think about healthcare, finance, energy, national security. This is exactly the kind of product they're looking for. And when it comes to actually having relationships in the cloud, well, I mentioned their main competitor, github, owned by Microsoft. Well, that's an opportunity because it means GitLab can partner more strongly with Amazon and Google.

Speaker 2: 43:08

So, David, this is a company that's been growing among the higher growth rates in the SaaS space. It was 31% last quarter. It's expected to decelerate to 25% this next year. If there's a big push to look for solutions in being able to find agentic coding assistance across your code base, they're going to be the first company that a lot of people look to. If they bump up that rate from 25 expected back to 30, it's very likely going to be a winning investment.

Speaker 2: 43:41

They're trading at 12 times their expected sales this year. That's high, but it's also not outside a band of SaaS companies. That one with one of the best opportunities is a problem. So there's some risk here, david. It is a little more expensive. It does have good competition, but in terms of getting a company that's aligned with what I see as one of the most exciting trends and something that gets a big push from the recent breakthroughs and reasoning that maybe the market has internalized, I really like this play and I think there's a good chance that we look back in a year or two and GitLab is one of the stronger portfolio companies, right.

Speaker 1: 44:21

Yeah, when you talk about Microsoft and GitHub, you have a little bit of PTSD from hearing Microsoft as a competitor if you were a Zoom shareholder, or just the ability for Microsoft to come in and just kind of dominate a competitor. So is that the biggest outside of valuation? Is that the biggest risk? Is that they just get squeezed on pricing, or is that what I should be most worried about if I'm thinking about this company?

Speaker 2: 44:48

I think so. If I needed to say what was the single biggest risk that concerns me when I look at their customer acquisition, it's been a little weaker in recent quarters. And if you want to, you know you're fundamentally in SaaS to land and expand and if you're not landing you can't get people on these tools that we think could be the growth sweetener for the company. Hard time landing in this competition with Microsoft, which doesn't allow kind of this product suite to give that incremental growth we think makes this a winning investment.

Speaker 1: 45:23

Okay, so that was GitLab. You said 15,000 routing earlier there.

Speaker 2: 45:28

Yeah, and one note, just a minor programming note, because I have been battling the feared Las Vegas flu and traveling. We haven't been able to do the SK Hynix purchase. Everything else that we've talked about has been purchased. We haven't been able to do that. Next week should have an update. I will make sure that the spreadsheet we track all this I need to get updated Again. That's just been a recent casualty of not coming out of bed for several days in a row. But we will make sure to get that update. And you know again, we'll publish more portfolio review pieces, I believe in the coming weeks, since you know we're trying to catch up with a lot right now.

Speaker 1: 46:10

We fully realize that, yeah, that sounds good. Yeah, and we actually we have a few listener questions. I think we're going to bump those. Maybe we'll do special YouTube videos on answering these listener questions because they're running a little bit long on time. And I did want to circle back to Applovin, again a company that is probably more on people's radar than it was, I'm guessing, 18 months ago. It was on no one's radar and now this is a $200 billion company. So I did want to get your quick thoughts on Applovin. What should we make of it? Again, this is a company that has been utilizing AI in a different way. It's not a data center stock, it's not NVIDIA, but it's been the most successful kind of tech company over the last 14 months now. So what were your thoughts coming out of just monster earnings from this company this week?

Speaker 2: 46:49

Yeah, and just quickly on the listener questions, there's one from SaltyCuddy707. He left in a five-star review. That's amazing. Anyone leave a five-star review? We'll answer your question, salty. We will put that on our YouTube question. You wanted our thoughts on Photronics, which is a photo mask manufacturer. We also had one from John McGuire on our YouTube channel Asked about SteraLabs. He asked on YouTube. We'll put it there Nowlovin. I think this is just fun. So I want to talk about this because it kind of shows how kind of emerging ideas function.

Speaker 2: 47:26

Applovin, you had noted this is one of the story stocks of the past year, when we were talking about companies with unique data and sometimes the pivots that they're able to make and how the market rewards that. Apple 11 was a company I had owned. To be honest, I had sold, in November, I think, around $330 because I thought they were kind of reaching the end of their opportunity in the video game space. They just reported earnings are up 30%. They're close to $500 per share, because now they're trumping an e-commerce kind of push. So you know, I don't know if that will be persistent, but the point is, the market really likes what they're doing. Now. There might be another opportunity here. David, though, and I kind of want to walk through it. You know, I just I was just looking at this on Thursday, so this is like real time thinking out loud for the audience. I know people out here probably love trade ideas, so, again, applovin up 30%.

Speaker 2: 48:31

What I've said about Applovin in the past is they're kind of like Google if they didn't give every employee free dry cleaning and filet mignon dinners every single night. You know, this is just a company that takes dollars on the top line. They convert to profits on the bottom line at an incredible pace and they have unique kind of mobile gaming data. They've utilized an aggressive push into AI ad tech, and they've done that to get phenomenal growth. And you might say how the market missed this, that the company is up more than a thousand bolts since the start of 2024. And the reality is the market might not have fully missed it. Their greatest competitor is a company named Unity that was worth close to $100 billion in 2021. But, david, the opposite is Unity. They gave away a lot of free dry cleaning, a lot of filet mignons. This is just a company that had incredible expense levels, so they weren't able to kind of achieve the same areas as ZappLove and also their main business is ad tech, but they make a game engine and they just didn't make the same pivot to focus on applying a lot of these breakthroughs in AI to their advertising technologies.

Speaker 2: 49:51

And, david, what's interesting here is you look at the track record. We talked about Meta earlier. They were using CPUs instead of GPUs from NVIDIA. They did a huge build-out to do all their content recommendations through GPUs into 2021. They started flipping the switch with all these new data centers they built in late 2022. If you go and you look at stock charts and they're close to a thousand percent since the bottom app loving was a fast follower. They were doing press releases about how they were, you know, moving their um ad tech to you know again, these, these newer transformer technologies in in 2023 and they're up more than 1,000%. Unity today is worth $8 billion, so about four times sales. Apple opens at 34 times sales.

Speaker 2: 50:44

So what's interesting here, david? A company that clearly hasn't been able to keep up with competitors but this week, buried in the news, they're doing a massive reorganization where they are reorganizing entirely around this ad tech and they're going to have an opportunity to kind of capture the same thing that's produced those almost generational returns in those other companies. So do I think? Do I think Unity is going to necessarily be an automatic 5X in the next year? Not necessarily, but they have this unique data that we've seen other people utilize to get these kind of generational returns. They're making the shifts in their business and this is a company that, again now I'm wondering if the time is, you've been a loser if you've been buying any time in the past few years, but this might be the pivot point where you are healthily rewarded for it. So you know, this is where we see an app loving and a company that's producing credible returns, and maybe we won't buy that. But by following the story and understanding it, it might lead you to discover some other gems.

Speaker 1: 51:51

So I thought that was oh, go ahead, David yeah.

Speaker 1: 51:53

I was gonna say I think this could be a very interesting case study of there's a company that laid out the path to success with AI, and it's a question of execution, of how hard is it to go and execute these ideas. It's easy for you know someone to get on a conference call and say we're going to do that too, but now let's see if they actually do. I think it'll be fascinating to follow. So that is a story with Applovin and Unity. I think that's all we got for today, right, anything else?

Speaker 2: 52:19

Yeah, like you said, we'll answer the questions on our YouTube channel. If you aren't subscribed there, go ahead and subscribe to 24-7 Wall Street on YouTube. We'll get those handled. If anyone else has any questions, send them our way. And, like we said, there's been enough news. We would have liked to have done a show earlier, but maybe I'll return to my sleep hole after we finish recording Go get some rest For Eric Flieger.

Speaker 1: 52:47

I don't buy or sell based solely on what you hear.