AI Trade Doubts May Ease With Usage Growth, Gene Munster Says

Joining us now to kick you off to the close is Gene Munster, managing partner over at Deepwater Asset Management. And I do wanna just, first, Gene, start with today's moves and the knee jerk reaction that we're seeing on a day where Meta gets punished for spending maybe a little bit too much on AI. Tesla punished for maybe not spending enough. Don't forget we had Lam Research that had a record quarter and yet is getting punished as well. What do you think the market actually wants out of these companies right now? What do they really wanna hear that's gonna give them a little bit more confidence to bid prices back up? Well, I don't think there's much that they're gonna hear at least next week or today that's gonna kind of reinstill the confidence because I like the setup there that con... That theme around the academics are winning in the conversation right now. There are two basic investment camps when it comes to AI, the academics, and then there's the visionaries. The academics are people like investors, sell side analysts, third party research like Gartner last week when they really came out with a piece that said that 80% of the neo clouds won't be around by 2030, and that is just because simply the math doesn't work. That's the academic side. That is what is ruling the roost today. But on the... When you think about the visionary side is that those are the companies that are making these bold predictions about how much they're gonna be investing. And in that visionary piece, we're still just so early. I just wanna put that in perspective. So I... Romaine, the answer is there is no... Gonna be no silver, comment that's gonna kinda save the trade for now. Mhmm. But what I sense is gonna happen is that the academics will slowly move over to the visionary camp, And part of it is these undeniable usage trends. And so just just quickly frame in why... Like, an example of what's going on right now. Meta's comments about this aggressive CapEx spend is based on Muse. Muse today, they haven't disclosed the number of users. It's probably somewhere in the order of 10,000,000 daily users. They have 3,700,000,000 daily users, but there's probably about 10,000,000 Muse. But the... But Zuck is saying that they're gonna center the whole business around Muse next year. So why on earth would he talk about that kind of a shift of such a small set of numbers? And the reason is that that small set, even though 10,000,000 is small, either getting enough evidence from that in terms of how usage is growing that an engagement is increasing that they can make these bold bets. And so the market is still gonna be in this flux around, what's going on with the spend, but I think it's important to stay focused on the vision, which is we're still so early. Well, on that vision, on your point about that, on the vision also, it raises the question as to whether maybe at least at this... Let's just call it an inflection point, if you will, whether investors are maybe invested in the wrong names. A lot of them are still tethered to chip makers, optical equipment makers, etcetera. Yet you talk about the use cases for AI. Obviously, it's not to say NVIDIA doesn't benefit from that, but there are a lot of other companies that could potentially benefit that, companies that maybe haven't seen the same phenomenal run up in share prices that the others already had. I mean, there... There's that piece. I think there's things around, for example, like the security, the software security space that will benefit. I can feel with, I would say, with a high level of conviction. In the next six months, we're gonna have a big security breach somewhere that's gonna spook the market, that's gonna bid up some of these AI security companies, like a Datadog, for example. So I think that there are companies like that. But I do wanna go back to the infrastructure side of the companies is that, you know, one of the benchmarks and what we're gonna get next week is what the hyperscalers are gonna be spending, how their increase is gonna change next year. And currently, the street is looking for about 38% growth in CapEx in calendar twenty seven. Calendar twenty six is at 86%, so a deceleration, 86 to 38%. Mhmm. If we look at the comments that, Zuck had yesterday, we look at what SpaceX said, I think there's a good case that those numbers are gonna be pretty close to that 86 for for next year. I know that sounds difficult to to wrap your head around. Maybe this is part of the reason why the debt markets are are starting to have issues here. But I... My sense is it's probably somewhere between 70 to 80% growth. So these companies that I think are getting hit so hard right now, like, we're not selling them. We think that, again, the the size of this trade still hasn't started and the really big buckets that the reason why this can keep going on, the reason why... And when you look out to 2028, the street's looking for 11% growth. That's probably closer to 40 ultimately is, the usage is, again, just so nascent. So I, I I think that you can still own the broader AI trade. Of course, there are gonna be pockets that are gonna be bit bigger beneficiaries, but I think that it still makes a ton of sense, at least over the next couple of years, to stay along the AI trade. Well, speaking of debt markets, a key credit risk gauge for Meta, specifically, the price of five year credit default swaps on the company's debt or trading around records. How much does that concern you when you see that for a company like Meta as well as some of its peers? So it's concerning because the the cost of capital goes up, and and maybe this is this is where, like, the the friction point can become a self fulfilling prophecy on the negative side is that if the cost of capital does inch up and we look at the hyperscalers, they're paying somewhere around 6% for debt a few months ago, a couple months ago, and it's probably gonna be closer to 8% now, something in that. But is... Does that change going from six to 8% mean that they pull back a little bit? It's not about the the free cash flow. That's kind of this odd conversation today around Meta. That doesn't matter. What matters is is the... Are the companies gonna stay true to what they believe the vision is and how much they need to build out around that. So if the cost of capital moves up to a point where it starts to cause some of these hyperscalers to pull back on spending, that's when things really start to unwind. I think the probability of that is low in part because if... As they go and do this analysis, I think that incremental cost of debt is relatively small to the risk of falling behind of what is still a a massive transformation on the horizon.