We’re Only in the Third Inning of AI—But Gene Munster Would Still Sell Microsoft

Fabulous to be back. Thank you.

Well, between the two, it's the former, it's the healthy reset, and the latter would suggest that we're somehow kind of reaching past a point where most of the value has been created. And so, I still believe that we're largely in the third inning of this. I still think when I talk about third inning of the AI, I think of that in terms of wealth creation, not like the technology rollout. And that's kind of hard to believe given what we have seen over the past three years. But to put some more context on what we have seen in the past few weeks, that down 7%, the market really is struggling with these numbers continuing to go higher. Growth rates in particular have been much stronger than expected and this concept that the market kind of knows all the numbers for the mega cap earnings are going to be impressive and which obviously raises the bar for next year. And said a different way is that since last November we've seen this dynamic where the law of large numbers has been making investors a little bit nervous about the sustainability of the trade as the numbers get higher in the near term, it makes it harder to grow in the outyear. And I think that that dynamic is really weighing on a lot of these companies. I mean, look no further than Google's cloud business. It grew at 81%. The street was looking for 63. I mean, these are just breathtaking numbers. Just looking back, they grew in September of '25 at 34% a year ago. So, that is the bigger picture. And something else is that this market has a vibe. It's just it is more of a vibe than it is a little bit about fundamentals. And I think that the vibe right now is people are risk off. And I think that that has a negative impact on the broader AI trade.

Well, the cut would definitely be a lose-lose situation. I think that's exactly right. And we of course have seen from two of the mega caps reporting with Tesla and Google and both of those raised their capex for this year and for next year. At least they gave commentary that suggests next year is going up. On average, that's about a 7% increase to this year's capex and probably around a 10 or 15% for next year. And that kind of builds the continues the narrative that all these other companies that are building into the AI infrastructure are going to continue to do well. To your point, imagine and those stocks have been penalized for that increased capex. It's a little bit of a mystery to me why investors, I understand the mechanics of it that they're concerned that this will be profitless prosperity, but I do think that that mentality, the sell on the higher capex number really misses the bigger point about how transformative this would be. But back to your point, if we do hear from Microsoft and Amazon that they're going to be, you know, maintaining or cutting capex, I think that that probably would be viewed directly as a negative for the broader AI trade. At least kind of the view that if they're starting to maintain when they've been increasing those numbers so dramatically. I just want to put that one piece into perspective is a year ago at this time. So this is in the summer of '25 as we looked at what the expectations were for growth for capex from the four big tech companies for '26. It was just over 20% and it's going to end the year just over 80%. And so my point is that if we continue to see these numbers go higher and higher, which kind of reinforces that we're early, but if we do get to a situation where the numbers don't have these upside to it, I think that that could create at least a near-term air pocket for some of these companies.

Well, two things. I mean, each of those companies has a slightly different dynamic to them, but in case of Microsoft, they're really fighting for really the broader half of software. And last quarter, they talked about a change in some of their pricing to go to more usage-based versus seat-based, kind of recognizing that how people are using their tools are changing. That sent a shockwave through Microsoft shares just whenever you hear about a company kind of changing its pricing dynamics that can be concerning. But I think that's going to be an important piece for investors to hear is that AI is being a positive force for Microsoft's growth. Of course we saw the IBM numbers, their software business missed. It was a small miss but it is so rare for IBM to miss their numbers so I think that that's kind of the IBM piece what they need to see there. In terms of Meta, the big question is what are they doing with their proprietary model and separately getting potentially into the cloud business. I think investors are going to want to hear more about that. That of course is highly likely they will do that. They've talked as much about that. But the question about how much capex, if they end up blowing up that number, my guess is that's probably negative for Meta, but that's going to be one of the big X factors beyond what the advertising number is. And of course with Apple they hit a milestone and the milestone was related to personalized AI and the new Siri went to beta a couple weeks ago and the feedback so far and present company included in using it is that really is a game-changer in terms of how you can get value out of your phone. And so if we look at the current growth rates for iPhone for the June quarter it's 21%, 18% for September and next year the street has that going down to 7%. I suspect that even with the higher prices that, you know, Apple on average raised their price by 15% about a month ago. Even with those higher prices, I suspect that the growth rates next year will be measurably higher than where the street's at because I do believe we're starting to enter into a consumer upgrade cycle around AI and Apple will be one of those beneficiaries. So, unfortunately, there's not one narrative that's going to kind of capture all three, but those are kind of the three pressure points for each of them.

Well, the most to prove is Apple because the general sense is that, you know, they've had this resurgence of iPhone growth over the past few quarters. As I mentioned, the growth goes from 21% in June down to 18% in September. But the key question that people are going to angle towards is how they feel about that kind of outyear. The second piece is much bigger in terms of it's not as measurable like growth rates and guidance, but much bigger in terms of something to prove. Apple still has something to prove when it comes to AI. Do they have AI chops? And I think that the significant outperformance of shares over the past 3 weeks has been more of an indication that investors are getting more comfortable that in fact they do have that competence as based on the new beta. But that's going to be really the substance of I think the company that has something to prove. At Deepwater, we own Apple. We own it because we believe that there is a big opportunity for a narrative shift on the company from being a laggard to something unique in AI around personalized AI. And then separately, we believe that there's going to be a two to four-year hardware upgrade cycle on consumer hardware based on what they're doing with the new Siri.

Yeah, I mean essentially, I mean there's four pillars, that's a good point and we recently did a survey. This one really surprised me. It was a poll on X, I think we had maybe 4,000 respondents. This is last week, but it was if you look at iPhone users, I think it was a third never, just flat out never use Siri. I think it was 20% use it on a daily basis, but the vast majority of people still are skeptical about it. And of course, because the utility of it is limited. When they talk about the new Siri there's four kind of key areas but I just want to give an example of what is unique when I talk about this being a game-changer. Essentially it allows personal context so you can ask it to look between your text messages and emails for a document for example and gives some context to the document and the people that were on the text chain. And I mean just something very simple like that just being able to find something you're looking for has been a struggle and I think that that's one key area that the new Siri will shine in.

I do want to warn, yes. I want to warn if you do the beta, it does have some, it's not fully polished. It takes up a little bit more battery and there's some other bugs in it. So, it's fun to see it and try it out, but I just want people to be aware you kind of give up on some of the fit and finish and the phone doesn't work as well, for example.

The simple answer is yes. I think that if you had to sell one, it would be Microsoft. And just to put some context on that, typically when you're believers in a theme like an AI theme and you have a company like Microsoft who has a lot going on in AI, when you see the pullback that we've seen this year, that's usually a buying opportunity. That's viewed as a buying opportunity. I believe that the stock will have kind of surges higher but overall will be below where the market is over the next few years and the simple reason is around what is at the core of software. Software effectively has an abstraction layer that allows humans to interact with a machine. That's really what software is. Humans don't think in terms of machine language. Of course, when it comes to AI and bots and agents, they can speak native bot language, native computer language, and they don't need that abstraction layer. And so, my belief is companies that have long kind of been successful at providing that interface, that abstraction layer, I think are going to struggle. There will be software companies that provide some of the infrastructure around data that I think will be very successful. But when it comes to Microsoft, I think that, you know, I wouldn't judge my prediction on a quarter. You could see a decent number and the stock up 10%. But I think if you look over the next couple years, it's going to be challenged.

Well, when we think about the, I think there are some brands around software where, I'll just say this is that we have an ETF, the ticker is LOOP and we have several of those software companies in there but some companies that are going to be beneficiaries in the public markets that we're excited about would be like Databricks for example. We invest in that in our venture fund and we're excited for that to be a public company but I think that's a good example of a software company if you want to put it in that category that will be very successful.

The question is like what's your time horizon? And I mean if you kind of rewind to what we talked at the beginning, there's probably more headwinds, more negative potential reaction to what's going to happen around the June quarter than positive. But I think that if you kind of take a step back and look at what these companies are ultimately doing, they're making a very big bet that we're still extremely early in AI. And if you believe that they're competent and they have the infrastructure to pursue this, I think that they will continue to do well. I think what AI is going to do with not only the digital economy, but the physical economy is going to be much bigger than kind of what we can comprehend today. And I think these companies are going to be beneficiaries. That said, not all of them are created equal. I mean, we own as I mentioned, we own Apple, we own Google at Deepwater. I personally own Tesla, so I think that there are certain pockets that are there. And I would also kind of bring in like SpaceX into this fold, too. Like this is one that hasn't historically been considered kind of one of the key companies, but it definitely is. And this one is trading purely on fear about what's going to happen with these lockups in the next 3 to 12 months. It has nothing to do with the fundamentals and the opportunity around the business. And so that's a company that I believe can go lower in the near term as it's hard to gauge when people's anxiety is going to start to recede on these upcoming lockups. But eventually once the lockups hit, usually that's when the stocks start to rally. And so I'm most optimistic about what SpaceX is doing.

Well, I think it's 90%, it might take a year or two. And I talked about that lockup with SpaceX. I think the shares rally once we get very close or once the lockup happens and that's going to be starting in the next 3 months. And so, I think you can see that revision. I think it's probably best just to own SpaceX in this case. But yes, I think that the probability has increased. I think this has been a pretty well-traveled rumor since the SpaceX IPO. What really stood out for me, the reason why I bumped up my odds was on the earnings call. They let that question in about whether it makes sense for these two companies to come together. Elon answered the question, then the legal team answered it, kind of stepped in, then Elon took the mic back to elaborate on all the goodness that can happen between the two. And so I think just overall they're going to come together. It's going to be really an AI powerhouse when you think about what they're doing in physical AI with Tesla and then what SpaceX is doing with vertical AI.

Well, the big ones that we don't know about, I'd say this is that all these companies we're talking about are good. The big ones are good companies. Most of them are good companies to own for the long haul. I would say Microsoft with the exception of Microsoft, I think there's going to be a new class of companies that are going to be really impactful. I mean if you look at, I mentioned Databricks earlier, I think that the core model companies will be highly successful IPOs, that of course being Anthropic and OpenAI. Companies like Anduril, what they're doing in defense tech, I think is, I don't know when they're going to go public, they've for the last couple years they've talked about going public soon in the next couple years. But I think that those are kind of the companies that I think are going to be really exciting. So it's the SpaceX, it's Anduril, it's Databricks, Anthropic, OpenAI. I would even put OpenAI in that category. So what's the kind of bigger picture is that this leadership that we're talking about right now has really been in place for the last 15 years essentially. And I think that when we kind of fast forward a year from now, I think we could have just, you know, two or three or four new companies that are going to be very impactful and really exciting for investors.

Well, on the, it would be Anduril on the private side. I mean, because, you know, they will go public eventually here in the next year or two. And I just think what they're doing is so unique. And how do you value, I mean, what, you know, people think of this as like a defense robotics and AI company, but at the end of the day, this is the future of defense. It's the future of war. And how do you value like peace? I mean that there's some very high level, it's a very recurring business too. I think that that detail gets lost on the Anduril story. For those of you who don't follow Anduril, it's I think the last valuation was close to a hundred billion dollars. But still relatively small compared to these other companies. But, you know, they have a business where they sell these AI drones and, you know, you got to imagine that if you're the US government or one of the allies and you've got a drone that's three years old, you probably want to replace it just like your phone. And so there's a powerful kind of upgrade piece that's built into their story.

Microsoft. That's right. Yep. I would own, I'd throw SpaceX into that group. I think that's a good one to own long term.

I think they do. I think on the memory side, for example, is still a big opportunity. We of course saw this breathtaking IPO in China on a memory company, the CX company and ultimately I think that there is more room to go with memory. Just to put some perspective on that if you look at Micron for example in the December quarter they added one new customer for a 5-year duration. That's the first customer they ever had. And then on the March quarter they added seven customers. So when you see that kind of jump going from an unheard of concept of a company of memory adding a 5-year plus large customer, similarly Intel increased the number of long-term contracts that they've had. I think they added five in the June quarter. Typically they don't have customers that lock up for multi-year and so I think specifically on Micron on the memory side is a big opportunity. I think other companies kind of on the infrastructure side, Vertiv which is on the cooling side and companies like Coherent which is on the optics side all parts of building the infrastructure on the data center I think they'll all be beneficiaries and really capitalize on that third inning approach.

Well, I think that the, you know, the biggest piece is there is going to be a rising tide here and you have to make a decision. Is software part of that rising tide or not? And so that influences a big piece of what we're doing. We talked about that earlier. But when you think about kind of the long-term winners, I think that we're still at a pace where custom silicon companies like Marvell and Micron are continue to I think going to have another few years of better than expected growth and I think those shares will be rewarded. And then I think you think about the kind of the big infrastructure plays companies like SpaceX and Tesla, Apple with kind of a rerating of the multiple higher based on AI competence. I see those as some of the biggest opportunities over the next two to five years.

I am ready. Let's do it.

Temporary shakeout.

Wait for lower.

SpaceX.

Not Microsoft. Salesforce.