The S&P 500 is up over 10% for the year and NASDAQ is up 15%. However, there are a few areas of weakness. There was some good news in the home building sector in a year of mostly bad news. It looks like there is a mini M&A wave. Crypto investing seems to have lost its mojo. It's unclear to me how important Bitcoin is anymore. Microsoft's GitHub Copilot moved all customers to token-based pricing from a subscription model that had drastically underpriced token usage. If customers start to use AI less because of the change in pricing, the AI story could weaken.
Hi, this is Steve Eisman and this is the weekly wrap. This is for the week ending Friday, June 5th, but recorded Thursday night, June 4th. Today's wrap is a mix of news, thoughts, and a mailbag. The wrap includes one, my SpaceX evaluation and responses to comments that I missed the trees for the forest last week. Two, what's new with Anthropic and OpenAI? Three, push-through versus pull-through business models and thoughts on Kalshi and business models that deliberately create dependency and in some cases addiction. Four, Nvidia's entrance into the PC market. Five, a stock market review and some thoughts about homebuilder M&A. Six, private credit news, of course. Seven, two earnings reports. And finally, a mailbag question whether now is a time to buy a house. In premium next week on June 10th, we do a deep dive into Coup and the recent investor day conference. I examine why it's been a terrible stock and company for ages and why the story and valuation has improved under the new CEO Jane Fraser. This is a prequel to my future master class on the banking industry and how to analyze banks. Now, on to the wrap.
Regarding the SpaceX IPO and last week's wrap, I chose to take a somewhat tongue-in-cheek approach to my evaluation because I think the valuation is crazy. First, I want to digress a little into history. Before social media and meme stocks, IPOs were targeted to institutional investors. Top management did what we call dog and pony shows. Carefully written pitchbooks explaining the business models and future opportunities were distributed and discussed. Institutional investors grilled senior management in stuffy conference rooms across the country. Believe me, I know that's how it was done because I was in some of those rooms. Stocks were priced to give liquidity to management and private investors while usually making sure fairness and equity guaranteed room in the valuation was left for investors. The investment banks hosting the dog and pony shows split a fee, usually 5 to 7% of the amount raised, and retail was given a very small allocation. That was the business model for decades. This approach to IPOs lasted until the internet age when retail investors wanted in in a big way. FOMO raged and thoughtful valuations didn't matter. Leaving retail out was un-American. What was actually left out was the idea that stocks could go down. Many IPOs in the past have rocketed up at the opening and given back most of the gains over the next few weeks and months. That's exactly why indices instituted wait-and-see rules before placing new issues into the indices. Well, that's no more. With retail demand being so strong, institutional control over the process has mostly gone out the window. Retail wants to buy hot stocks at the IPO price regardless of inflated valuations and investment banks make bank with an inflated valuation and the industries have bent their rules. This is the history of the change in the IPO business model. This is what led to the current hypervaluation of Elon Musk's SpaceX.
Now, SpaceX, in my view, has priced in all of the potential and possible good news. Elon Musk is being rewarded for everything he has done and might ever do in the future. Investors are meant to feel honored to be in his company. FOMO reigns. That is why the S-1 describes the TAM, the total addressable market, at a crazy $28.5 trillion. Now, I got pushback from some viewers that I was ignoring SpaceX's incredible technology. The point of my analysis is not about the technology. Let's assume for the sake of argument that the technology is world-class, revolutionary. Maybe the valuation assumes that SpaceX will conquer its $28.5 trillion TAM. Say what you want about the technology, the current numbers are just not that impressive. 1Q26 revenue growth of 15% is fine, but it is less than every trillion-dollar market cap company. It does not even come close to Nvidia's first quarter 85% revenue growth. I'd also point out, and this is crucial, that the bulk of the $28.5 trillion TAM is in the AI category, and Grok is not yet considered a world-class AI product. When and if the stock price crashes, we can do a deep dive into the trees and discuss entry valuation points. For now, it's still a sci-fi story and will become the punctuation point on the revolution of IPOs going from being priced in corporate boardrooms to being priced on Reddit boards.
One more very, very important point about SpaceX: it has three divisions — space, connectivity, and AI. And AI is a recent addition. Prior to AI, SpaceX's need for capital was not that large. SpaceX raised around $9 billion to fund its Falcon rockets and Starlink satellites. Now, that might sound like a lot, but it's tiny compared to what OpenAI and Anthropic are raising. The non-AI prior version of SpaceX was relatively capital efficient, partially because it could reuse its rockets. By adding AI to its business mix, SpaceX is now playing in a far more capital-intensive business against gargantuan competitors like Google. Here's some data from the S-1 that shows how much more capital-intensive SpaceX has become because of its entrance into the AI game. For those of you who can't see the table on the screen, let me summarize. In fiscal year 2023, SpaceX generated $10.4 billion in revenue and spent $4.4 billion on capex. That means that back then the capex divided by revenue ratio was 0.42, or 42%. In 1Q26 the company reported revenue of $4.7 billion with capex of $10.1 billion. Thus the capex-revenue ratio has jumped to 2.15, or 215%, from 42%. In other words, by adding AI to its business mix, SpaceX has gone from a capital-efficient company to an incredibly capital-intensive one. That means that the SpaceX story has become far riskier.
Moving on, not surprisingly, this week Anthropic filed its own S-1 for a future IPO. However, the filing was done confidentially, so there is nothing yet to review. And OpenAI is expected to file its own confidential S-1 soon. In other AI news, the state of Florida sued OpenAI for violations related to safety concerns. The lawsuit alleges that OpenAI has created an addiction model to get consumers to use ChatGPT. This is not the first such lawsuit in the United States. Both Meta and Google have been sued for similar reasons. And a few months ago, Meta lost a lawsuit on this very issue. There is plenty of evidence that social media companies have programmed their algorithms to keep people engaged via an addiction model. There are multiple lawsuits all over the country on this very point. And on June 17th, we will post an interview on Premium with Ben Zipursky, a tort professor at Osgoode Hall Law School, where we will explore these addiction lawsuits. If you are interested and not yet a subscriber to our premium service, go to premium.realeismanplaybook.com.
Addiction models seem to be all over the place of late. In the case of Kalshi and its competitors, here too, there is evidence of the fostering of addiction. Kalshi is not an area I have ever covered, but I feel that it needs to be mentioned. Kalshi and its competitors have made anything and everything a betting opportunity, but that's only part of the actual story. There are more subtle points. The story is their modeling of human psychology to realize that people mistake a near miss as an almost opportunity. Every time a gambler nearly misses on winning, instead of being disappointed and walking away from gambling, that same person is actually motivated by the almost win and driven to bet again and more often. Kalshi has taken gambling, which used to take place in regulated environments, and brought it everywhere, including classrooms. It's a lot to take in, so I'll leave it there with one more observation. Crypto investing seems to have lost its mojo. Coincidence or not, this occurred as Kalshi exploded.
Let's now discuss agentic AI a bit. All industries are now impacted by AI. It's an undeniable change in our world since the introduction of agentic AI. In short, the pull-through business model of building demand through algorithms that promote dependency and potentially addiction is being merged with and somewhat replaced by agentic AI's business model of push-through. Prior to agentic AI, tech companies created algorithms that fostered dependency. Now, agentic AI can offer tremendous value, but there are tremendous hidden costs. We will be weaving the impact of agentic AI into all of our future conversations to try and discern how companies and industries are coping with the adoption and their successes and failures with the new technology. We have entered the age of corporate FOMO. There is a path many companies are currently following from trying agentic AI to then requiring it, and not just requiring it, but forcing employees to use it all the time. Some commentators call this token maxing. Thus, some companies are basing continued employment on the expanded use of AI regardless of results and costs. Now, many issues come to mind here, starting with a herd mentality, and I do not believe that token maxing is a long-term strategy. In more thoughtful approaches, a company chooses to seed some software development to agentic AI and software engineers become highly engaged editors. I was chatting recently with an engineer who was raving about the role of agentic AI and how it freed him to have time to oversee a greater range of software development. He is in a heavily regulated industry, so there is no room for error. Sophisticated engineers working closely with agentic AI is perhaps the future for corporate America. That is the AI bull case.
On the other hand, there is some evidence that companies and individuals are getting more cost-conscious in how they use AI. Until now, users have paid a subscription to use AI and that subscription price is far lower than the actual cost of the tokens they use. Partially because of this subsidization, customers have used AI without any thought as to cost. In an example of token maxing, Uber burned through its entire token budget in just 4 months. Axios reported that an unnamed company accidentally spent $500 million in only a month on Anthropic models because it failed to set any spending limits.
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In perhaps the most important piece of news, on June 1, Microsoft's GitHub Copilot moved all customers to token-based pricing from a subscription model that had drastically underpriced token usage. Microsoft is getting a lot of pushback on this higher pricing. This bear is watching, no pun intended, because if customers start to use AI less because of the change in pricing, the AI story could weaken. Moving on, there was important news about how PCs will be made in the new world of AI. Nvidia is the king of the GPU that is made for data centers, but it is now expanding to chips that will serve as the main processor for personal computers, entering an arena that's long been ruled by Intel, AMD, and Qualcomm. During a keynote address at Taiwan's Computex Conference on Monday, Nvidia CEO Jensen Huang unveiled a new N1X processor made alongside Microsoft. It will be incorporated into a new super chip debuting in the fall on a fresh line of Windows PCs for Microsoft, Dell, HP, and Lenovo. Huang also pointed out that agentic AI will run across all the new computers. Nvidia's initial plan is to release more than 30 laptops and 10 desktops with the new chip over time.
Moving on with some thoughts on the overall market. The trends remain strong across the board among the major indices with not just the S&P and QQQs at the highs, but also the small caps and equal weight. The S&P 500 is up over 10% for the year and NASDAQ is up 15%. However, there are a few areas of weakness. Financials remain weak on a relative basis and weakness in financials could be a leading indicator that investors deep down are still worried about the economy. Also, it's worth pointing out again that Bitcoin remains weak. It's unclear to me how important Bitcoin is anymore. It used to be an indicator of risk tolerance. As I mentioned before, it feels like the young investors who were consumed by Bitcoin have moved on to playing prediction markets. It just feels like Bitcoin has lost its importance to many of its former cheerleaders. I'd also point out that the 10-year has pulled back below 4.5%, which for me is the Rubicon level for rates. I got nervous about the market when the 10-year climbed above 4.5% and I'm watching it still very closely.
Moving on, Google made what I think was some shocking news. It is raising $80 billion in capital, but not via debt, but via stock. This shows how capital-intensive the AI capex story has become. In 2025, Google spent $90 billion on AI capex and funded most of that with its own cash flow plus some modicum of debt. This year, Google will spend $180 billion and at that level, Google cannot fund that capex solely with cash flow and debt. Hence, the sale of $80 billion in stock.
There was some good news in the home building sector in a year of mostly bad news. It looks like there is a mini M&A wave. On Sunday evening, Berkshire Hathaway announced an agreement to acquire Taylor Morrison in an all-cash deal for $72.50 per share. This represents a 24% premium to TMHC's most recent closing price and equates to a price-to-tangible-book-value multiple of 1.25 times. The deal would make Berkshire Hathaway the fourth-largest site home builder in the United States and continues recent M&A activity across the sector including Sumitomo Forestry's recent acquisition of Tri Pointe Homes. Before the acquisition, Clayton Properties Group, owned by Berkshire, was building roughly 10,000 homes annually and this deal brings it roughly to 23,000 homes per year. The M&A wave in the home building industry could continue, but it is dependent on small and medium-sized builders being willing to sell at fairly modest premiums to book value. Over the last few years, most deals have been completed at 1.3 times book value as large-cap builders, Japanese builders, and Berkshire Hathaway remain extremely disciplined about acquisition valuation. With respect to the home builder that I have been recommending, Meritage, the stock is currently valued at 90% of tangible book value. So there is upside in a buyout. Meritage's market cap is $4.5 billion, which is in the area of the size of the M&A transactions that have taken place.
Moving on, news about private credit, of course, remains bad. We are now entering the period where funds announced redemption requests for the second quarter. The largest private credit fund in the world is BCRED, a Blackstone private equity fund with assets of $79 billion. In 1Q26, BCRED received redemption requests of 8% of assets. BCRED just announced redemptions for 2Q and they climbed to 10%. But they only allowed redemptions at the 5% cap. And it looks like the problems in private credit are beginning to spill over into other areas of alternatives. Partners Group is a European alternative asset manager largely in the private equity space. It has a private equity fund that is evergreen called Global Value Secondary Fund. As is well known, private equity has been having monetization problems for years as the IPO market has been weak. The Global Value Fund received a quarterly redemption notice of 9.8% of assets, but Partners Group only allowed for redemptions at the quarterly 5% cap. This is a bad sign that investors are beginning to question not just private credit, but the entire alternative space. Needless to say, on Tuesday when this news came out, the stocks of European and US alternative asset managers were weak.
It was a very light week for earnings. I'll flag two. First, Palo Alto. With the exception of software, tech has mostly outperformed this year. Within hardware, investors have played bottlenecks, hence the strong performance of CPU and memory chip manufacturers. Software has mostly underperformed because of AI fears. But recently, there has been a strong rally off the bottom. However, not all software stocks have been bad. There is a growing recognition that the advent of AI creates even more need for cybersecurity because old software systems are increasingly vulnerable. That is why Palo Alto, the largest and supposedly best company in the space, is up 60% this year. Despite the positive narrative, Palo Alto's numbers when they reported were not great. Earnings per share was up 6% versus last year, just 6%, which is not stellar and a deceleration from recent quarters. The 85 cents in EPS was a beat but on lowered expectations after the company gave disappointing guidance in February. The stock was down 6% on this week's print. Nevertheless, the narrative around this stock remains powerful and these days narrative trumps all.
Broadcom also reported and it was also disappointing, very disappointing, which is somewhat surprising. Broadcom reported $2.44 versus $2.40 expected. That's fine. And revenue climbed 48%, but it still missed on revenue versus expectations, which given the huge move in the stock is a big no-no. The stock declined in the teens Thursday and took the entire semiconductor group down with it.
And now for the mailbag. Own or rent. Last week I gave a lecture to a high school class and then answered questions. One question was whether owning a home is a good decision. My response was that if you want to own a home, own one, but don't assume it will make you money. Own it under the assumption that when you sell, you will hopefully break even. Right now, buying a home, I believe, is not a good investment decision because most homeowners refinance during COVID when rates were zero. These homeowners have mortgages of 3 to 4%. They can't sell because the buyers are getting mortgages at 7%. The housing market is locked and inventory across the country has dried up because of the lack of inventory. Housing prices in my view are artificially inflated. Also, never forget buying a home is just the beginning of your financial obligations. There are local taxes, the cost of maintenance on the home, and don't forget the cost of maintenance on the property. My advice to anybody who wants to buy a home is not to be aspirational, but rather to buy one below what you can afford, so when the hidden costs appear, you can afford them.
This last Monday, June 1, we posted an interview with Gary Marcus, professor emeritus at NYU and a well-known critic of AI. Gary sums up his thoughts on what might break the AI story. This coming Monday, June 8th, we will post the whole interview with recurring guest Stacy Rasgon, the semiconductor analyst at Bernstein. We touched on the explosion in revenue growth in his sector and its level of sustainability. Hope you tune in. Be sure to check out our website realeismanplaybook.com. Thanks for joining. And that's the wrap.
This podcast is for informational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.
