All right, welcome to OK Computer. I'm Dan Nathan, joined by Gene Munster. He is the managing partner at Deepwater Asset Management. Gene, welcome back to the pod.
All right, this is going to be a fun one. I got to think that you and I have done this once a month over the course of 2024. Our listeners love hearing from you. They love you beat me up a little bit on some of my being maybe a little bit too contrarian here and there. But I have to assume that this has been a great year for Deepwater Asset Management. Why do I say that? Well, you and I have talked once a month for about, I don't know, an hour or so. We've gone back and forth on a lot of these issues. I probably see you two or three times a month on Fast Money, and you've been very consistent. One of the things I love about you is that you're transparent as hell. When you are right, you don't take a victory lap. When you're wrong, you're the first one to admit it. And I think this year in 2024, you've been a lot more right than you have been wrong. So with all that said, Gene, let's before we talk about Tesla's run and before we talk about, you know, Apple breaking out to new highs on a runaway breakout here, and Google playing a little catch-up, and Microsoft really stuck in the mud, so I'd love to kind of get your sense of 2024, what you think are kind of the most impactful trends heading into 2025. And we all know what the main trend is, but we've seen some shifting around of the deck chairs a little bit over the last few months or so. So what are you most excited about headed into 2025, let's say in your universe, and what do you think changes from some of the stuff that worked a lot in 2024?
I think this is, we're going to kind of get more into the, I guess, the leaves of the tree or the trees versus the forest here because we know what the forest is. I think on that front, some of the specifics, I think we're going to hear more about custom silicon. And I think that there are impacts on companies obviously like Broadcom. What we saw with their earnings, and I mean, their guidance wasn't good, it was, I would say, phenomenal. And I mean, they basically guided conservatively to 60% growth for the next three years. To put that into perspective, investors are expecting Nvidia to grow at 21%. So we're talking about orders of magnitude difference. Obviously, Nvidia is coming off of a much bigger number, but this concept of customized silicon, I think, is going to be an important part of the conversation next year. And that has positive impacts on certain companies that could be viewed as slightly negative to Nvidia. I think that's going to be one of the trends. And just a quick fill in the blank, what custom silicon is, is essentially the hyperscalers building their own chips to power a lot of what they're doing with AI. So that's, I think, going to be one of the big trends. I think we're also going to start to hear more along the lines of software. I think that we should start to see some impact to revenue from software. I think it's going to be modest. We're not going to have anything even remotely close to what's happened with hardware, but I think kind of back half of this year, we should start to see some of that. There could be some disappointment kind of along the lines. And I do want to mention one other piece to that, that's kind of the details. But at the very highest level, I would say we're just due for some pullbacks. I think we're due for, typically we have one or two 10% pullbacks in these bull markets. It doesn't change my enthusiasm that we're going to end the year 2025 up on the NASDAQ versus 2024. I think it can be up nicely, but we're going to have some scary moments. I think it's just the anatomy of a bull market that's going to end in a bursting of a bubble. I think we should have, we've only had one or two of them in the internet run. We had about 12 of them, so we're due for some of those. I just want to get in front of that, that I wouldn't be surprised, I would expect that we're going to have some pullbacks as well.
Yeah, so on the pullback front, it's interesting that we had that move from kind of mid-July into the lows in early August, about 15% for the NASDAQ 100, about 10% for the S&P 500. The sell-off into the early September low was probably about half that. It was probably 7.5% for the NASDAQ 100 and about 5% or so from the S&P 500. And then really we just didn't have much of, you know, declines. It was like lower left, bottom right to where we are right now, clearly in the NDX because that was closed in all-time high just yesterday. So I think it's great that you made that point about, you know, the late 90s. And we know that there was a bunch of macro stuff in there too, you know, like as far as in '97 and '98 and the long-term capital and the Russian and the Asian, you know, debt crisis. And in many ways, had nothing to do with the very bubble that was inflating. And in some ways, it probably sent more people over towards the secular stories that were going to work one way or another, at least that they thought so. That's kind of interesting to me because think about where we are right now in the world. You know, we have a new administration coming in. It's kind of the same as the old boss for all intents and purposes. We've kind of seen a little bit about how this might go, but you know, there's potential for a trade war, not with just our adversaries, but with our neighbors and our allies. You see what's going on in Germany and France and, you know, in South Korea. It just seems like there's a whole host of just kind of trouble spots. I didn't even mention Syria and obviously Israel and Gaza, and who knows what's going to go on with Russia and Ukraine. I just can't remember a world that seems this uncertain. And I guess to bring it back is like, where does all this tech fit? Right, we've had lots of issues as it relates to chips primarily with China. We have this worry about Taiwan Semi, right, which is the fab to basically the world, you know what I mean, and what might happen with China and Taiwan. I mean, it goes kind of on and on here, which I guess brings you back to this kind of Mag 7, or as I'm calling it now that, you know, Broadcom has joined the trillion-dollar club, the Fateful Eight here, Gene. I mean, like, is this just a safety trade right now?
I think it's more than a safety trade. I think it is still based on a belief. I think the investors who are bidding up these stocks are viewing what we're going to have happen in the next, we'll say, two to three years. When we talked last year, I talked about three to five years, so we're maybe two to three years out that we're still going to have a strong market and that these big companies are going to play an outsized role in that. And as we, I mean, one of the unique perspectives that I have is we also have a venture business. I spend a lot of time meeting with startups and understand, or maybe just have a little bit of a different lens into kind of how hard it is for, on the software side, for companies that are trying to build AI-first businesses to compete with the Mag 7, the fabulous eight, faithful, thank you, the Fateful. But you know what, the fate of the market is in these eight stocks' hands. You know, the pun is next level. So I think that there is, I think safety is part of it, but I also think that there is a part of offense here in owning these too because, again, if you just look at, let's take the app world, use that as an example of what happened and value that was created. You know, there were the Lyfts and the Airbnbs, but for the most part, the value creation came from Google and Amazon and Meta. And so I think that there is, I think that that playbook is being kind of run from my perspective. I think there are some of those companies that are continue to do very well, but I also think that we should see some of these smaller companies, kind of the less frequent ones, I think that they're also going to start to get a bid here in the next year.
Yeah, so let's go back to this custom silicon because I guess this is probably at the core of the next leg of this bull market, if you will, in around generative AI. At least that's what I'm hearing from you. And you know, we were sitting on the desk at Fast Money and that quarter came out and it was just, eh, you know what I mean, it wasn't like a great quarter one way or another. The Q1 guide wasn't particularly off the charts. It was really that long-term guidance that, that TAM, and you know, when they talked about 60 to 90 billion dollars by the end of 2027, I'm saying to myself, this is a bunch of, Gene, like, seriously, a bunch of, because who knows, we've been hearing about all those Nvidia customers, these big hyperscalers, like, looking to do custom silicon. It's Amazon, it's Microsoft, it's Facebook, it's Alphabet. So why is it, Apple jumping into, yeah, so why is it that Broadcom gives this three-year guidance about a TAM, not saying that they're going to capture all of that, but they implied it based on their market share comment. But it's true, they did step short of saying that they're going to fully. I just thought it was really interesting. And the other thing I'll just take away is that there was this big rebalancing that went on and Broadcom was part of that on Friday afternoon. And from what I hear, it was just an epic short squeeze given what indexers had to do and what, you know, the rebalancing process was. And so when I think about that, I'm not sure, like, when I see a 30% gain or a 40% gain in two days, that is the opposite of bullish to me, especially in a name like this that, you know, it went from 800 billion market cap to 1.1 trillion. So speak to me a little bit about that if somebody is skeptical of long-term guidance like the way I am about this, and especially matched with the sort of move that we had on such a, you know, short-term basis, $300 billion in market cap.
I think any tech company that gives a three-year guidance, I think, is being optimistic. That's probably saying it nice. I think off the rocker would be an aggressive way to say it. And I just, the point is that who knows what's going to happen in three years. I believe what they were trying to communicate was that they are seeing a step function change in their business and they probably are taking some trends that they're seeing over the next six to 12 months and implying that over the next three years. And I think that there's an, so the move, the 30, 40% move, I think part of it was because of what you're saying with the short covering, but I think there's also this underlying nagging question that investors have about when is this going to end. And I think when the hardware side is, that this is like juggling with fire here when you talk about hardware. Remember, Nvidia's business was down 21% in the quarter before the AI boom started. And so I mean, these hardware businesses by definition are boom and bust. And I think investors are just nervous that, you know, we're going to see some data point that's going to make this party end. And I think that is what effectively Broadcom was trying to communicate was that, you know, this is going to go on longer than you think. And so I take their numbers with a grain of salt as you do and as we should all do. But I think that the underlying message is that we're still early in this. And I do believe that. I think that everything that we're talking about, we can, part of this conversation comes back to Benioff's comments with Salesforce and what SoftBank is going to be doing about investing in AI infrastructure in the US and what OpenAI is talking about with their own custom silicon. And all this kind of comes back to a place that says that probably the hardware trade, and this is an uncomfortable truth in my view, is probably going to last longer than a lot of investors think.
Yeah, I mean, listen, and to be fair, you've been saying that about Nvidia for six or seven quarters. And it is something that a lot of folks have been trying to take the other side. I mean, me, specifically, trying to pick the story apart a little bit. And I think that to your point, the custom silicon bit, and again, we've been reading stories in The Information or in Bloomberg or in CNBC.com, you know, Wall Street Journal for like the last, you know, I want to say year, you know, with this concentration that Nvidia had, all those names that I just mentioned are probably 50% of their revenue. And then you kind of put some curbs on what they can sell into China, and you say to yourself, this is not going to be good for Nvidia. Maybe this is why the stock has been down 15% since they had guided higher. And you know, the stock had gapped up, closed on the lows of the day of their earnings. I think it was maybe November 26 or 22nd, November 22nd, and it's been down like 15% now. That's not a particularly dramatic move for a stock that was up 185% on the year, you know, heading into the print. But it seems like, you know, some folks are kind of leaning into this narrative, and it was Broadcom's guidance that just kind of lit a fire under it. But again, if you look about the near-term performance and then you think about $300 billion in market cap added, and let's just say the midpoint of that range is 75 billion, let's say they capture 25 billion of that, you know what I mean, over the next few years or so, you just value those sales, you can do the math on that at like seven, eight times, you know what I mean, and right, is that fair? And so like to me, I see a lot of that going on in the market right now. I see a lot of folks kind of giving, you know, the benefit of a doubt on something that's far from, you know, like reasonably proven anytime soon. I mean, we, yeah, we, I mean, that's, you just define the market. It is giving the benefit of the doubt. And then we see some comment that talks about, you know, the scaling laws might not be holding up when it comes to model training. And then, you know, we see a broader sell-off of AI because, you know, there's some commentary from an ex-OpenAI employee, for example. And so I think that there is, and then we go into this period of concern, and then you go euphoria. We just kind of, this pendulum just keeps going. But again, I keep coming back to, I still believe we're early. And I think that the reason why I believe that we're early is that we, outside of hardware, we haven't seen the impact of what intelligence at scale at almost no cost is. And it's not totally intelligent yet. I use these tools a lot and they are still just riddled with hallucinations. And so we're still ways away. I just want to caution, and I think the this ways away piece is why I think that the market can keep going up because as investors start to see glimpses of how this can impact different segments, I think that that euphoria will return.
Yeah, one thing I just think is worth noting, the SMH, the ETF that tracks the semiconductor space, we know Nvidia is about 21%, Taiwan Semi nearly 14%, Broadcom 11%. That is what's been going on here for the better part of this year. But aside from, let's call it that 45% or so, the SMH is down 13.3% from its highs made months ago, you know. So there's a whole host of names in that ETF that don't act particularly well. And this is probably part of the theme in the year end, or at least over the last few weeks, we are seeing a dramatic narrowing of this rally. If you were hoping that the rally was going to broaden out after the election, well, that's not been the case. You have had some big moves in like financials and, you know, industrials and energy after the election. They've all come back in, or at least given back half of their sorts of gains. The equal-weight S&P is up 14.5% versus an S&P that's up nearly 27.8% and a, you know, NASDAQ that's up a lot more. So we're seeing some dispersion here. And I think the concentration, you know, those eight stocks make up $2 trillion in market cap and 40% of the S&P 500. We have never had a market that concentrated. I think, I mean, speaking my own book here now, is that we have an ETF, it's been around for five years, but basically invests in emerging tech that is a sub-500 billion market cap. I mean, that when we started five years ago, that was like a big company was 500 billion. But I'm more optimistic about that ETF today than I was two years ago because I do think that yes, there's going to be some outperformance, and the numbers are just hard. You talk about 40% of these indexes are based in these eight companies, it's just hard for it to keep working. But I, so big picture from my end is I don't want to get too involved in that. I just kind of trying to figure out like how impactful is AI going to be, where are the levers going to happen. And we probably should just check a couple more boxes before we go on and talk about some specific names. We talked about these themes for 2025, silicon, and for those who have not maybe been paying as close of attention, agentic AI is going to be another theme. And then also this time-scale inferencing concept where these models are starting to kind of stew and think more about responses and there's an impact to how different hardware needs to be built to accommodate that new form of inference. And so those are some other big topics I just wanted to hit.
Well, let's hit the agentic AI because that's something you just mentioned. Benioff before, and a lot of his commentary, you know, after that quarter that they put up, I mean, I was sitting on the desk of Fast Money and I saw him speaking to Jim Cramer. They kind of cut into their conversation and man, he came in hot about agents versus co-pilots. And he made this point, I didn't listen to the conference call, I suspect that he kind of made it there too. He's like, ask anybody at Microsoft who works at Microsoft if they're using co-pilots. He's like, nobody's using them, you know. And so talk to me a little bit about that commentary and this whole notion of agents versus co-pilots because some of our listeners might not know the difference. And by the way, some of these companies might not know the difference either.
Just maybe a disclaimer on Benioff is, he runs Salesforce and he's probably one of the world's best salespeople too. So you just always have to kind of have a guard. And in his prepared remarks on that last earnings call, that was called it 20, 25 minutes, there are 21 times that I kind of identified bold statements that, you know, in a normal conference call a CEO might make one of them, you made 20 of them. And then went back and looked at the previous quarter and it was just a little bit less than that. But he is, I mean, he's all in. But to answer your question about the difference between co-pilot and agentic AI, co-pilot is effectively infusing generative AI into existing Microsoft products and just make it easier, Excel to write formulas, email, Outlook to write emails, things like that. Agentic AI is, think of this as like a human that happens to be a digital bot that actually has the ability to go out and do a task. And so, you know, you could, in the case of what Benioff talked about, is an agent would be maybe you have an agent that calls on a customer and the call on the customer could be through digital communications, emailing, text messaging, things like that. And then when it's time for a human to take over to close the sale or to advance whatever the conversation is, then the agent kind of turns over to. And so that's, that is Salesforce's example of agentic AI. But the reason why Zuckerberg talks so much about it too, and the thing that gets me excited about it is you can have an agent, think of it also maybe as like an app that is smart and can actually do something, you can have it do anything. And so I think about all the pain in the back, I just recently switched out my cable modem and it was, it felt like four hours on the phone with Xfinity. It was probably 45 minutes, but in the future, you should just have an agent do that for you. And so I think that there are, that's why, that's what's exciting about agentic AI.
Yeah, and we're probably what, the first pitch and the first inning of that. And again, something like that, yeah. But it makes sense when you think about the underperformance of a Salesforce until they kind of put two quarters together and then had this ability for Benioff to kind of sell this whole thing. But that was all sales. I mean, he, there's no substance in their business, you know, when they talked about Agentforce, they said twice on the call that it had either fractional or like almost not even measurable revenue. Their growth has gone from 18% last year to 8% and the most recent quarter bookings were like 10%. So it's a little bit better, but I think that this comes down to, you know, the, just, it's, this is like a religion. Like, do you believe that this is going to happen? Benioff did a good job of preaching that message and investors accepted it.
I guess the problem I have, Gene, is the next day they did more than accept it, you know, they bid the stock up 11% the next day, you know what I mean? It did come, it's come back five, I think, since then.
Yeah, yeah, it's come back a bit.
But like that sort of euphoria to new all-time highs, we're seeing this again and again. We saw it in Marvell, you know, with, so I guess my question is, and again, you know, I missed a bunch of this stuff, I'm going to be very clear on this. What I try to do is kind of pick apart a little bit of the, you know, universal bull story. I think if you don't attempt to do that, I just don't think that's particularly useful because that's how bubbles get way out of hand, right? If no one's basically saying this is how this could go wrong. I mean, like, so again, I know the people want it, so have a ball, go get it. But you know, that's the thing to me. You just confirmed something that I suspected, that they've seen a step down in growth, revenue growth, they've seen a step down in bookings, yet they're telling a story that got investors to bid the stock up to new all-time highs, you know, up 11%. And then on the flip side, Adobe, which is perceived to be on the wrong end of all of this, hasn't seen an uptick in nine months, you know what I mean? It is down on the year. You could say the same thing for AMD and Intel, right, on the wrong side of this, down in the year, haven't seen an uptick in a while. I'm really curious by the time folks are listening to this, Micron's earnings might have come out. This is Wednesday after the close, you know, where does Micron fit in all this, you know what I mean? Because we saw Micron and Dell on the server side and Super Micro, obviously, early in the year, it was like a full-on party, right, in the late spring, and some of those names have just come back to earth in a big, big way. And so to me, I just think that there's legs of this story that are starting to weaken a little bit.
I mean, it's hard to grow off of these numbers and we've seen decelerating growth rates. I think that there's been a reset on expectations. And this is not a blanket statement about the infrastructure trade, but I think that some of the darlings are going to exceed expectations. Will it be enough to keep the stocks going? I don't know. But I don't think, I still believe we are early in how what this buildout is going to look like and just how these agents and applications are going to change our lives. And so it's an easy fallback position because I think it, I believe in it and I believe it's going to be that transformative.
What about Microsoft? I know the stock has had a rally over the last few weeks, maybe 10 or so percent. It's still below, you know, those all-time highs made in July. You know, the stock ran into their print and then it kind of got killed after, or you know, it went from like 470 down to, I want to say, you know, just below 400 into those lows into August. It was really stuck in the mud in around 420 until just the last couple of weeks. So it's had this little run, but it's really the only of the Fateful Eight that is not trading at an all-time high right now or just off of it. And so what's the story there? Is some of the sentiment around co-pilot and their ability to kind of sell this thing or upsell it to folks? Because it sounds like there's not a lot of uptake on this right now.
Yeah, I think they were talking about this early and they just haven't delivered kind of the upside, that even fractional revenue acceleration. We do see a little bit in the estimates. They're expected to grow at like 14% this calendar year, 14% next year, and the street's got them bumping up to 15%. But kind of when you put that together and you look at what some of these, I think more exciting, again, the software companies are growing much, much slower, but it's just, it's just not enough. And you know, I think that there are some of these bigger companies that are going to do really well. Microsoft's a company that I have not been particularly constructive on just because I just don't think that they've got the levers to pull and I think that they're still trying to figure out exactly how they're going to navigate their partnerships within AI. And so there, I think, are there are more open-ended questions with Microsoft in my view.
Yeah, and so just can you explain one thing, and I think the listener might appreciate this. So let's just say they're having less success with OpenAI integrating that technology across their suite of services, right? Is the idea that if they never kind of get going in any real scale, that there's going to be less demand for that compute on Azure from those existing clients, right? As they put the models on their cloud service, they integrate them into their product services, does that, is that one of the thought processes here or no?
Yeah, I mean, that's like the next level thought process. I think this market is operating more at a superficial level, at a service level, I should say. And I think it's more that, you know, they've got two essential businesses. Azure continues to do really well, growing, call it 30%. And you've got, you know, the software side of the business just isn't getting the bid on, not investor bid, but a customer bid on a co-pilot. So I think that's, I think Microsoft, the story about what's going to happen with Azure, I think that they're going to benefit, they're in a share gain position right now. They've been gaining share, they're the number two player. And so I think that that business is still in a great spot. It's just the software side which hasn't delivered what I think a lot of people had hoped for at this point.
Yeah, here's one that wasn't delivering, I want to say in 2023, they started to get their act together in 2024, and over the last few weeks, it just seems like everything's coming up roses for Alphabet here. So there's been a lot of chatter about, you and I have talked about Waymo, this is not going to be moving the needle anytime soon, but if you can kind of model out what robotaxi might mean for Tesla, and we'll get to Tesla in a second, you can also see the first mover advantage that Waymo might have, right? And then there's a lot of ways that they can leverage this network and the like here. So a little buzz there. There's a little bit on the quantum side. This is not something that we expected to kind of think about, or at least I didn't, I didn't know much about it until I started reading about it. That stock gapped up 5% after that data, that's a massive move for a company like this based on a headline that no one was expecting and very few people understood. Okay, and then they've kind of gotten their act together with some of their generative AI models. And when you think about right now, you know, Gemini is working pretty good across a lot of their products and services. So talk to me about Google here because I know this is one you've been constructive on. You like the valuation, you thought that people have to be a bit patient here, that these guys will probably get it right if you're just patient enough. Still in that camp?
