Forget the Mag 7: Gene Munster Reveals the Next Leg of the AI Trade

Wonderful to be here.

I think the market has it wrong in the sense that you should still own some of the big tech. This idea of just owning kind of a basket, not giving it much consideration, I think is going to perform less well. And I would kind of describe it this way: from a tech investing perspective, which is my focus, the benchmark really is how the NASDAQ performs. And I think by owning big tech, you can outperform the NASDAQ even though that represents about 40% of the NASDAQ. So it's a pretty big weighting there, but you can fractionally outperform. But I think that the real upside is going to come from these smaller companies, these companies that are 500 billion in enterprise value and less. And so I think that both of them are good to own. I probably bury the lead in that question is that there's almost a concept that we have to go to even before like big tech versus small tech, which is where do you believe we are in the current state of AI? What inning do you believe that we're in? And if you take the approach that AI is going to be impactful, that it's going to change the world, that it is going to be something that we're all going to use, it probably doesn't really justify being overweight tech. And I realize those are positive comments, but I think that that's kind of the baseline that most people are at. If you have a view like I do that this is still very early, the second inning, that the transformation is going to be much more dramatic, 15% knowledge work unemployment, if you have that view then we're still very early. And I think that whether it is the big cap or the smaller ones, you should still be overweight. Now I just put it this way: I'm a partner at a venture firm, we also have public private funds. I would say that 70% of my net worth right now is in something AI related and I think I'm probably underweight given the significance. So back to answer your question is that I think that the performance is probably going to come from these sub-500 billion market cap companies but some of the big, most of the big companies are still going to reap massive benefits in the next 5 to 10 years of what's going to be just some crazy innovation.

So, for the piece around, I would say that the kind of the next two years, there's still, you should still have some infrastructure ownership like Nvidia. Let's just take that as an example. This is a position we've held for a long time. About a month ago, we sold half our position. I realize this is kind of a half of an answer but the infrastructure piece I think is still an important, if in fact we are still in the second inning and if inference, which is really the thinking part of AI, is going to be thousands, hundreds of thousands of times bigger than the training piece, Nvidia is going to benefit from that. The reason why we did so, we hold it, I mean that's the easiest way to understand how investors feel about a company is to ask if they own it. So we do still own it, the position is smaller today than it was. It's still a material position, but I think that the infrastructure opportunity is still significant and I think Nvidia is going to be a big beneficiary of that. The one area that I think is underappreciated around big tech in the next couple years is what's going on with Apple and Google around personalized AI. We recently added to our Apple position based on what we think is going to be personalized AI and how that's going to influence Apple's business over the next 5 years. And we got a glimpse of it with Opus 4 back in November and how that created the co-work and open claw and we're seeing these agents really think more on their own. We saw a glimpse of that but it really got us to think about the concept of a lot of value utility if in fact someone can solve that problem and that problem is of course allowing personal contextual AI that keeps your privacy. And so I think Google and Apple are still going to be good beneficiaries of that. So those are a couple, that's another kind of theme. So, we still see infrastructure, but again, personalized AI, it's one that you probably haven't heard people talking as much about, but we think that that's going to be really the center of the bullseye in terms of the opportunity for Google and Apple over the next 5 years.

Well, we, yeah, I mean, we still think you should own Nvidia. I mean we take the approach as most investors do that if you own it at the beginning of the day you're buying it, whether you're not actually buying it or not you are making a decision to own it. And so I think Nvidia is another good company there. We do own Amazon, that's more in part for, we think that based on Amazon's perspective it's a more compelling valuation and we don't feel like that they have a very high bar when it comes to what they're going to do in AI. And so from that perspective, it seems that this agentic commerce opportunity could be a benefit to them. And of course, AWS is still this inference piece if it's as big as we believe it will be. So I just, I want to, we put that kind of in the infrastructure camp. I mentioned Nvidia, but that Amazon piece around infrastructure. It's worth noting that we don't own Microsoft. We have not been buying any of the big software companies on this pullback. And so whole different topic around what's going on in software and so I would kind of sum up our views is that just because something sells off doesn't mean that we believe that you should be buying it. You have to ask kind of a bigger question. What's causing the sell off and at what point will it be remedied? And so that is some context. I just wanted to add that Amazon piece in there.

We think that there is a reasonable probability, I'd put it at a third, 35% probability that AI, really this vibe coding over the next 5 years really has a big impact in terms of companies' willingness to pay up for software and willingness to expand and willingness to continue to renew some of these contracts. But it's not like a, you know, it's still majority of my view is that these software companies are going to be around. The real substance of our belief on these seat-based models. So we do own software. We own companies like Snowflake that are usage-based models. We think the usage-based is going to do exceptionally well. But on the seat-based side it's a view I mentioned earlier about this unemployment, the knowledge worker unemployment piece is if that does come to fruition we're going to see an impact in terms of the number of users out there. And right now it's not clear how companies like Salesforce are going to be able to charge for agentic seats. Essentially our view is that they will use one human seat, you will pay for it with Salesforce, for example. And then that human may have hundreds of agents that work within that license. And so our belief is that this kind of shift around knowledge work over the next five years is going to at a minimum create a level of uncertainty from investors like what's the, when's the real impact going to happen and that looming impact can be negative and can dilute the multiple. And so that's, those are the two reasons why we haven't got into the seat-based but again on the usage-based we have exposure there.

So, there is this, there's an infrastructure piece around it. I think that is important on the, I mean smaller companies you think about like a Coherent, like a Vertiv for example. These companies have performed relatively well over the past years, the stocks have, but I think that these, just given the size of their revenue, they still have more opportunity to have these kind of eye-popping surprises versus like a mega cap versus, you know, companies that have hundreds of billions of revenue. And so, I think there is that piece around it. I mentioned kind of the software usage side with a company like Snowflake is also within that. We're doing more work around energy, that's a lot of, that's kind of coming on the private side. But I would say kind of collectively we see that opportunity. We do have an ETF, the ticker is LO, that focuses on that 500 billion and less. And so feel very good about collectively, you know, call it 60% of that ETF is related to AI that tends to be some of those smaller companies. And so I think again we need to come back to that really that fundamental question and this is the beauty of the whole AI trade is just asking yourself, you know, do you believe that this is going to be really impactful and change our lives or do you believe it's going to be like outrageously impactful? And I think that if in fact that's the case these smaller companies are going to have an outsized opportunity over the next two years.

I think for people who, again, if you believe that this is, we're still early within AI, the NASDAQ I think is going to perform well. I think it'll do better than the S&P, I think that it'll do better than the Dow. I think you should be invested in, still be invested in equities. So that piece it does hold but there is like a nuance, again this is what we saw in 2023 and through really 2025 was kind of the basket approach really worked. And I think that there is kind of this nuance, we do own some companies that are outside of the US. And so to answer your question I think the NASDAQ is still a great place to be. I think you still want to be long AI. And there's probably ways, you know, we're trying to find like that kind of incremental step up from that baseline, which I think that baseline is going to do really well. Like I wouldn't, I don't think this is a good time, for example, to answer the question a different way. I don't think this is a particularly good time to be invested in like bonds for example. I think we're still very early in this growth phase.

Definitely it's the piece to really get it moving. I think if you can have some positive iPhone numbers for example or maybe the new MacBook does well, you know, that can be a small boost but really for this stock to be re-rated they got to show that they have competency in AI and they of course have not done that. To answer your question of how much time will investors give them, if you look at kind of the longer arc here I think they will give them as much time until some other competitive AI device really captures the imagination of investors and we haven't seen that yet. I mean for all the talk, think about what's going on with vibe coding and how that just has had this profound impact in terms of how software has been written. As a reminder, Anthropic in December talked about they no longer use humans to write the model and it now is the machine is writing the machine. I mean this is just like a profound shift. When you look at the consumer side it hasn't happened. I can't point to any consumer device, any phone, any feature on any sort of AI phone, anything within Apple Intelligence today that is a must-have. And so this comes back to the question of how much time will investors give Apple. And I think the answer is they will give them again enough time until we see something else. It may be years before we see something else. If again a very shiny product comes out from OpenAI and Jony Ive's team, I think investors are going to want to see results immediately. And if nothing comes out, then they're going to give them some time. And I think we probably are, absent Apple and Google, I think they're the two companies that can ultimately do this.

I think that most of those companies that you mentioned will succeed. If you know, we've really taken out what happened around the dot-com as kind of the playbook of how this is going to play out with AI and I don't think that that's necessarily useful. Of course, what happened? We had leadership that was squandered, famously squandered by a long list of companies that aren't even around today that would have thought to be the leaders in 1996, for example. And that's kind of the angle against companies like OpenAI or Anthropic. And you're seeing just an incredible shift in terms of how OpenAI is approaching the market, shifting away from consumer, more towards these enterprise type of use cases. But to answer your question, I mean, I'm in the camp that this is just going to be so transformative and the need for intelligence at scale is going to be so high that all the companies that you mentioned I think are going to do exceptionally well. I think this is the new leadership. If you look at Meta and a handful of their executives, they redid their comp and they have a similar target to what Elon has with his comp over the next five years to get to a 9 trillion valuation. I mean this is remarkable of kind of I think their confidence and why, where does that come from? I don't think it's out of just hubris ignorance. I think it comes out of confidence that they see that this can be a huge opportunity and if in fact this is as big as I think it will ultimately be the companies that you mentioned I think will all be successful.

I own it. I own Tesla personally. I can say we don't own it in our funds and I just want to like, as I'm a believer in Tesla and we don't own it in our funds. Like what's kind of, you know, that angle there like what's the disconnect there? And it is like a valuation sensitivity I think within our managers. But I do believe this company is one to own. I believe that what they are doing around autonomy is still underappreciated and I would just welcome anyone who wants to get a sense about like what's the state of what's going on here to take Tesla up. They'll give you a 2-day test drive. You go in, doesn't cost you anything. They'll give you a Model Y with full FSD for 2 days. And I recently was using the latest updates. And there have been almost no interventions. That's very different than when I was using it 3, 4 months ago when I was getting interventions multiple times a day. And so my point is is that when you think about Tesla, like it just comes down to this concept of autonomy and robotics. I think that that is something that it's hard to really wrap our heads around how big physical AI can be, but they're going to be a huge leader there. And well, it's often forgotten about their electric business. I still believe that cars need to be electric. That it's an undeniable truth. It's just a better, simply a better way to power. It's more efficient and ultimately that these decisions that traditional auto has made over the past few years about pulling back their investments in EV, still investing but at a much smaller scale, really creates an opportunity for Tesla and it comes down to this is that autonomy of the future is not going to be powered by gas. You're not going to have a gas powered autonomous vehicle. That isn't how it's going to work. And so I think that these companies that want to participate in autonomy, they don't have the chops right now around autonomy and then separately they don't have the ability to build that EV infrastructure. And I think when you put all that together and then you got the optionality value around Optimus, I mean I think this is just going to still be one of the most exciting companies over the next five years.

The answer is yes. And I think that the simple takeaway is again if you believe like I do that the transformation is going to be so significant, physical AI is going to be one of those growth phases and Tesla's one of the leaders within that. And so that's where, that's why I'm a yes.

I'm ready.

Early innings.

Fair.

Breakout.

Small cap. I think that one was obvious.

Buy the dip.