Gene Munster: Don't Call It A Tech Crash
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Welcome to the Risk Reversal Podcast. I'm Dan Nathan, joined by Gene Munster. He is the founding partner and managing director at Deepwater Asset Management. Gene, welcome back to the pod. Always good to be back. Thanks, man. I really appreciate your contribution here. Today is a crazy day. It is Monday, April 7th. It's 2.30 AM.

PM on the East Coast, it felt like a week already. We opened down 5%, Gene, this morning after basically two consecutive 5% down days in the S&P and in the NASDAQ. You've been in the business a long time.

Does this feel like a market crash to you? It feels like not quite a crash. Like a crash is when it's flat and then we're down five, five flat down five, five. We got much more to go for a crash. It has been today was a pivotal point from my view in

the surprise on Thursday, that step down. Then I was thinking on Friday that we'd see another step down. I was buying stocks on Friday afternoon and the

I was not expecting that step down initially today. So that one stung and made me start to think like maybe I'm really missing something here. Yeah. And I guess when I say crash, I mean, the speed in which we've dropped, you know, 15% of lows this morning. Oh, for sure. Yeah. In that context. Yeah. On the opening. And again, you know, to your point that it felt really nasty this morning, but now we're unchanged again. This is like an hour and a half.

before the close of the market. And I guess, you know, we'll take a flat day. And I think no matter, you know, how you feel about this tariff policy and a protracted trade war, if that is what ends up, I don't think anybody wants to see the market trade this irrationally.

We've been in periods before, and I think in 2022 is a good example, when the Fed started raising interest rates to battle inflation. It was a very orderly sell-off for the most part in the major indices. I don't remember too many panicky days like we've had over the last three. That being said, and you and I have talked about this on Fast Money and on the pods over the last couple years,

People have very short memories. When you think about some of the best performing names in 2020 into 2021, which was Nvidia, it was Netflix, it was Meta, and it was Tesla, all those stocks went down 70%, from their highs in '21 to their lows in '22. So the idea that folks didn't think that these stocks could go down 30, 40% is just very odd to me, especially for someone who's been in the markets as you have for decades and we remember

the absolute trouncing that tech stocks got in 2000 and 2001 and into 2002. - Well, it can definitely get uglier. And I think that on the topic of it getting uglier, I think that this week

from there's like the headlines and then there's what how the market is going to respond to it the biggest surprise to me as we're recording this is that it's pretty clear that the white house is going to increase the tariffs on china tomorrow and china's not backing down there is i think a very few opportunities for them to do that and so

the market is being flat and I assume that the market is factoring in that we're going to see another turn higher on the tariffs tomorrow. And so I'm trying to discern like, what does that mean? What's it telling us about where the market's at relative to where these headlines are at? Yeah, no doubt. I mean,

you know, one of the announcements this morning or at least a headline and it was not confirmed one way or another that the Chinese are going to increase their stimulus, right, to combat tariffs and potentially for a protracted trade war. You know, this morning, you know, some of the leadership or the prior leadership in the market has been some of the worst performing, you know, to the downside, right? And I don't think that's

so unexpected. It's a lot of the fateful eight. And this morning on the opening, some of those names are down 5%, 6%, 7% or so. But they were also some of the first ones to come back. And so when you think about that from an investor psychology standpoint, and you've been saying this, maybe give our listener, our viewer a little bit of a refresh about how you've been thinking about these eight stocks. And we could really probably expand it to about 15 that you think are the big benefit

not just over the last two years, but many of them going forward of this secular shift in generative AI. And you've been talking about it. It's not anymore just about training the models. It's what is inference used and what is the growth there and continued growth in data center. And there's a handful of other things in and around that. But how are you thinking about it after a lot of these stocks are down 30%, some more in just the last month, month and a half or so? Well, we're trying to...

gravitate to anything that gives us some sense of order in these last few days. And one thing that we look at is valuations. And if you look at the Mag 7 valuations, the average multiple over next 12 months, over the past five years, it's been for the Mag 7, it's been 41 times. It's currently trading at 31 times. If you pull Tesla out of that, we'll call that the Mag 6,

that the numbers go from 33 average over the past five years, a multiple, down to we're at 22 today. And so there's one piece as I think about how the Mag 7 and Faithful 8, how it all plays into what the conversation is, is what's the market effectively factoring in in terms of the revisions to numbers?

And the loose math is that it's probably thinking that numbers over the next 12 to 24 months need to come down something like 20 or 25%, pretty meaningful reduction. And so as I think about where these companies, how they're positioned, I think about the lever of numbers. Do they need to come down? The answer is yes.

And second is the magnitude of how much they're going to come down. How does that compare to what I'm guessing the market is pricing in today? And I think that they come down less than what the market is pricing in today. Now, I still haven't answered your question about how they fit into this bigger picture AI, but I just want to start there. That's something that we've been doing is to try to sort through what's going on.

My guess is that we probably have 10% downside and that would assume that these tariff things kind of happen, kind of go through, we'll call it the middle of the summer between US and China. We can talk about the timing on that, where that comes from in a minute.

But so I'll pause there on that. And then I want to answer your question just about like, how do these companies fundamentally play into this? And you accurately described it. We're going from inference and going moving towards general intelligence. And what does that mean? And there's like even a more basic question that investors should ask themselves is that narrative about how AI plays out. Do you believe in it?

And if you believe that, in fact, these tools are that powerful and can have these applications down the road, then you have to look towards which companies are competent at delivering those. And I think that the Mag7 are still most competent at doing that. There's a lot of other smaller companies that

that I think will benefit from this as well, that probably will outperform the Mag 7. But I think in general, the Mag 7 is in a great place, despite that 10% risk to numbers over the next six months. Yeah, so when I think about those stocks, and I'd love to get your take on my rankings here, I want to just kind of disqualify a few. Apple, Tesla, and Microsoft are probably the least interesting of those three. Now, I would also point out that Apple probably has

a great opportunity at some point when they finally figure out what their strategy is and their ability to deploy it across a billion and a half iOS devices. But I think they're kind of in the penalty box right now. And obviously the tariff trade war situation is not particularly great for them, especially as you think about manufacturing in China. And then obviously a lot of those phones

shipping over here. Microsoft just seems like it's lost its way as it will regard to this OpenAI situation. It seems like OpenAI wants to kind of cut and run from them a little bit. And Tesla, we can talk about that later. Let's start with those two names, Apple and Microsoft, and how you're thinking about my assessment there. And obviously that was just sound bites for both of them. But I'm just curious your take because they're the least interesting to me right now at this moment.

so with within apple there's a surprising dynamic over the past month this is ahead of what we've seen with the tariffs the past week but a past month where the iphone estimates have actually creeped up for the next 12 months the growth was expected to be one percent now it's at three percent and for uh fiscal 26 it's at uh seven percent so

The 26 number didn't, the percentage growth didn't change, but the numbers actually have gone up more recently. And I would just as a starting point is Apple's gonna feel this if in fact these tariffs stick around. And as a point of reference, like is Apple gonna, like how much are they gonna be impacted by this? And we've seen the headlines about Wall Street Journal story over the weekend, about a 50% increase. We've heard, I've seen other reports about a 100% increase in iPhones. That's just simply not gonna happen.

What I think actually will happen is that there will be some form of exemption that Apple is going to get. It would just be surprising to me for all that Cook has invested. And I know that Trump is playing a game much bigger than his relationship with Apple, but Apple holds a very special place in Trump's cards. And specifically is that it is probably the crown jewel when it comes to American innovation more broadly. And if his policies end up having a black eye on Apple, then,

I think it kind of diminishes what is seen as a beacon of innovation for the US. And so this exemption list comes into play. Now at this point, seven years ago when the China tariffs are going on, Apple was already on the exemption list. Some of their products are already on the exemption list. So we haven't seen that yet. And so there's this view that maybe they don't get put on the exemption list.

I think they'll find a way on there. I think they'll find a way on there where it's some trivial product, Apple Watch or something like that, that ends up getting tariffs. So then Trump can say, well, I didn't give Apple a total free pass. But what Apple gave to Cook a few weeks ago with this $500 billion, it wasn't all incremental spending in the U.S.,

but that press release and that support along with how Apple I think is viewed in his administration as this innovation icon, I think Apple's going to probably be in a better place than when it comes to tariffs. So we'll see how that plays out. That's my expectation. If I'm wrong, then it's really all bets off. The stock is probably going lower if I'm wrong on this, if they don't get some form of exemptions because they're

they will probably take most of that heat on their margins. And I don't think investors are going to like that. Well, especially investors have been pricing in margins going higher over the last couple of years or so. And especially you and I've talked about this. I mean, services and then in and around AI services on devices is a big...

Part of that, you know, it just strikes me though that Apple went from on a relative basis, you know, outperforming much of the Mag 7, right, to really underperforming. As we speak right now, the stock's down 3.5% while, you know, Nvidia's up 4% and Meta's up 3.5% and Amazon's up 3%. You know, so it just, this is,

one that people are not willing at this moment to discount the potential for it not being on the exemption list. And your point is a really good one about that headline with $500 billion spent here in the US. And, you know, the only problem I have with this is like, I don't believe what you just said. I don't mean like,

the notion that some of these tech bros who went in there and they gave these big headlines, you know what I mean? And gave the pressers. I don't think he gives a crap about that. I just, I, well, I think he cares about getting them to bend the knee and getting, you know what I mean? The press release, but I don't think he cares about totally screwing them if it really comes to the broader, you know, sort of picture. And when you think about an apple, you don't,

80% of their devices that they make are built outside the US. When you think about that, or maybe 80% in China and 90 some percent totally. So they should have the biggest target on their backs. And they also employ through their OEMs and the like,

hundreds of thousands of folks in China. You know what I mean? So to me, they should be exhibit A, not the digital companies that don't have a lot of exposure. Okay. So that's that. I mean, I want to bring you to meta for a second because this is one that would most interest me.

for a whole host of reasons, but I wanna get, A, if you agree with that, valuation trading at like 18 times next year, you just said that you think there's a potential for 20% haircut, right, to current estimates. - 10, but yeah. - Oh, I'm sorry, so 10%. They probably do better than the rest of them,

right? Given the kind of margin improvement that they have. And now expectations are for margins to go from 80 and a half percent this year to maybe like 79, 78 and a half, which is probably good that that's built in there. I'm just curious how you're thinking about it because I think meta AI is probably of everybody in this space. Everyone who's built a,

a big model, I think is probably the most underappreciated one because they haven't demonstrated any good use cases for the billions of consumers that show up on their devices or to use their platform every day. Well, I think the use case that they demonstrate is below the fold. It's something that it's just harder to see.

because it doesn't come up as like rave reviews of a product, but it does come out in terms of what happens with their advertising revenue more recently. It's continued to be elevated high teens, much longer than what people thought was sustainable when they've kind of had this comeback over the last couple of years. So that kind of plays into the AI piece and also the daily active users. This is a number that just blows me away.

is in 2016, I made a prediction that DAUs, that there was this pushback on social and kind of a better awareness of people of some of the harmful effects of what social does just across all age groups. And I felt like this, that it would be harder for them to grow their daily active users. And since then, like quarter on quarter, it just grows 5% a year. It's just like clockwork, even though we're at like three and a half billion total across all of their properties right now, 3.2 billion total dailies.

I mean, just these amazing numbers that are almost impossible to grow off. And I think that part of what has happened is they just keep finding ways to turn the screws down. And more recently over the past year, I think that they have been doing more using more AI. It's for not only some of the targeting as they've been having more limited tools that they can use since what's happened with Apple and some of the non and not ask for tracking apps. They use more AI that helps with that, but also on the content creation side. So,

Putting it all together is their products are more addictive than ever. And I think that if you believe that, then I think this AI piece has played into it. From the backdrop, like what is the part of the meta conversation? All that's great. Everything that's going on with Lama is great. How they're going to be rolling out basically more addictive products, better ad targeting for advertisers, make it easier for content creators to build content on Instagram and Reels.

All that's in the positive category. But the one big negative category is if, in fact, we're in a trade war, it's going to have an impact on ad spending. It has to. I mean, if consumers truly pull back, advertisers are going to pull back. And that's their business. And so that is something that, again, comes back to how much of that is priced in. But that's the yin and the yang when it comes to the meta conversation.

Yeah. And I guess not too different than 2022. Some of those similar concerns, again, you know, tariffs weren't the big headwind. You know what I mean? That they are right now. But so you could put obviously Google alphabet in the exact same bucket, at least from that standpoint, they haven't had the benefit, like you said, under the fold, how they're using their AI technology for targeting and the like, that sort of thing. But

For instance, you know, their model, I don't think is perceived to be, you know, that much better or worse than let's say Lama at this point. Lama is open source. So there's probably a whole host of things that a lot of different folks can do with that. Let me know how you're thinking about this one, because this also it also, you know, checks that valuation bucket. It's been in the penalty box versus some of the other, you know,

ones that value has been accrued to. But, you know, just about a month and a half ago when this company reported earnings or two months ago, it was trading at an all-time high. And it had a little bit of excitement in and around what they're able to accomplish of late and how they might integrate, you know, that technology across their suite of platforms, but also with GCP, which was trying to play catch-up market share-wise to Azure and AWS.

So our view on Google has changed and it's factored in by, I think, a more realistic sense about what consumers are going to want from search longer term. And I'll give you the punchline as we've recently sold the stock. And the reason isn't, and this is something that as an analyst I believed in, I was positive on for many years as an investor, positive, believe that what they had, you know, we're talking about the DAUs for what Facebook did.

Instagram, Meta, Facebook, what Meta has. The DAU for search is probably, they don't break out the number, but it's probably about two and a half billion a day. I mean, it's just off the charts. We've got six billion people on the internet every day. Two and a half of those six use a Google property, Google search every day. And that just kept coming back like data. It's just got to be really powerful. And they've made a lot of progress with Gemini. But the reason essentially is that we think that they're just in...

long term, a tight spot. And the tight spot is what Google search results page looks like. And today it's a combination of at the top. And we've talked about this, Dan, at the top, it's it's it's AI overviews in the middle of the sandwich. It's it's ten blue links. And then at the bottom, it's what people really want, which is the the the organic results. And they have to come to a place where it's just a simple answer. And I think that that

I think reality as more and more people start to see, use these tools, which is still relatively small. We've talked about this in the past, 300 million, 400 million DAUs when it comes to some of these AI driven search models, whether it's GPT or perplexity. And so like it's going to become a bigger and bigger number. And I think people are going to start demanding from Google more simplified search results page. And I don't know how they pull it off from a monetization standpoint.

I'm not predicting, by the way, that they're going to, there's going to be some, they hit the road. They're going to hit a wall. I'm not, I don't think that's going to happen. I just think this is going to be one of those kind of slow burning conversations with investors and your money is probably just better spent someplace else. But it's funny, you know, investors seem to be discounting a lot right now, you know, double digit expected earnings and sales growth for this year and next, uh,

margins are already expected, gross margins to step down from 69%. I think consensus is like 64 and a half. So this current year, and I look at the thing trading at 16 and a half times this year, 14 and a half times next,

it seems like there's a discount built into that but you and i are going to continue to track this one let's see about some incremental changes to that search page and that experience because to me i'm 100 with you it's messy right now and there are simpler better solutions but they're you know they're not they're not the things that most consumers are using just yet

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Let's quickly check on Tesla. Last week, that delivery number, I don't think you were surprised by it. We've been talking about it. Obviously, I think the late last year, I think the expectations for Q1 deliveries were 420,000-ish, like consensus, or maybe it was like 400 or so. They came in at 336,000.

So it wasn't like eye popping consensus had been moving down. I think consensus was down to 340 or something. So analysts were really, you know, chasing this number down. Where does it go from here? Because the stock is kind of stuck. We just talked about how a lot of these stocks bounced off the lows. This thing was down seven or 8% on the opening is down 55% on the year still, but it's down on the day here. And it just seems like investors to your point, what you just said about Google, they're looking for better opportunities elsewhere.

This morning when I was doing those averages of what the Mag 7 was trading versus the historical or the five-year average, I was surprised to see that the Tesla earnings numbers for this year haven't come down and next year really haven't come down. So we're at $2 for this year. The street's still at just under $2.70.

And before they had reported, it was like 280. So it's come down like fractionally on a pretty significant delivery miss. Now, maybe it takes some time for us to get there. We got to wait till April 22nd when they report their earnings for those numbers to fully get reset. But I'd say as a starting point, like I'm surprised that the numbers haven't come down by more. I think this is just some context about what happened in the March quarter. What happened was brand damage happened.

happened. They talked about the Model Y switchover. I don't think that had much of an impact, maybe no impact. There was a benefit to the quarter potentially because they were getting rid of old Model Ys that were still great cars that were, they're given 15% discounts on them. And so I think that essentially what this meant was, and the number, by the way, at the end of last year is like 420. You said 420 or 400. I think you were right on that 420.

So 420 down to 335, pretty big drop there. I think that most of that was related to brand. And so I think the conversation around Tesla, at least for the near term for this year is like, what's the extent of the impact of the brand damage?

And I think that if, in fact, Elon does take a step back from Doge, I think that's going to be a positive impact on Brandon. I just think the more that he can focus on his companies, I think it's a positive for Brandon. So from my perspective, I think he's going to wrap it up by June. I know there's a

debate about what the white house is saying related to that yeah it's funny um and i'm gonna take the other side a little bit i think the damage is done as if as it relates to brand i think that a lot of those folks who are a natural buyer of a tesla car here in the us who don't agree with his politics and that goes for europe too um i just don't think they're ever going to come back i don't think they're ever going to buy a tesla and i think that you know just some of the stuff you know that he has been doing you know really messing around the edges of some really

anti-democratic sort of stuff both here and in europe i think it's lights out for him man i really do and i you know it is what it is we can sit here and debate something can't prove a counterfactual but um i just think when it comes to consumer choice you got a really easy way to kind of when when somebody kind of steps into the political realm like this

And this is not him being like, you know, a right down the middle, whatever, left of this or slightly right of that. There's some really creepy shit that's gone on over the last year. That's my personal opinion. I hear you.

I, I think that there is a camp that will turn it off, but I think that like, I'm just surprised at how short people's memories are and how they just move on. But, but yeah, but I mean like, listen on the low end, if, if Y and three are 90% of the cars that they sell, and I'm just going to say this, they're shitty cars and they're more expensive than lots of other EVs. And, you know, again, you know, maybe not so much here in the U S but in other parts of the world. So, um,

I'm a seller of the Y and the three, and I don't think they're going to get to a $25,000 retooled Y. Not this year. And I think Robotaxi is pie in the sky. I think robots are pie in the sky. So you better believe, you know, what is he going to end up doing? Buying X and XAI and making one super company and, you know, SpaceX and Starlink are next. So again, I just think there's much better opportunities as far as playing a bunch of these themes. I mean, this is a great topic. I love this conversation. I think that

they're the best bang for your buck. I think the cars have like the fit and finish is not even close to what a European car is. - The Model 3 and the Model Y, do you spend a lot of time in these? - Yeah, but I do not own them. I don't own an electric car. My next car will be electric and most likely be a Tesla. We'll see what's out there. I've got a reservation by the way for the Cybertruck just ran away from me on price.

But I've got to say, I got a reservation for an electric Ram. That's my current. I got a Ram 1500 that I drive today. I want to get electric, but I digress. I do think that the fit and finish is in a Tesla subpar. I think that the overall package, your bang for your buck, and this is, I mean, we're just debating this. I think it's still, I just want to be on the record. I still think that they have the best bang for your buck when you put all the factors together, when it comes to electric. Yeah.

What about Bitcoin? They own $11,500. Last quarter Q4, they took a $600 million gain, new accounting rules that had put in place, you know, that was $106,000. Today it's trading at $78,000. At the end of the quarter, you know, a week ago, it was I think $81,000, $82,000 or something like that. So they're going to have a big chunk of that reverse. So when you think about the volatility in and around that and what it kind of means for them to make their quarter last quarter, I

I just think that's something you got to keep an eye on. He has not been shy of playing fast and loose with that. And that goes back four years. They originally owned 44,000 and remember they sold a bunch of them to make a quarter. I want to say in 2021 or so. We should be able to break it out and, and,

investors will, I think, quickly extract that out. Yeah. I think it was one of the reasons why when they announced that Q4, stock didn't go down though initially. You know what I mean? It was still trading up there above $400 or something like that. That initial reaction took people some time to pull it out. Let's talk. One of the first groups to rally this morning when the market was down 5% was semiconductors. NVIDIA was down at one point about 7% and it was up as high as 5%. It's up 4% as we speak. That is a massive move for a company today.

of this size. Any thoughts on Nvidia? Does it have a chance of really going back towards those highs anytime soon, the prior highs? We're still there. We still own it.

uh that's trades right now 16 times next year's earnings the street's looking for 23 growth in calendar 26 calendar 26 down from about 55 growth this year so seen a step down there still believe that we're early in the ai and i know this sounds like i'm disconnected from reality but i think we are still early in the ai build out continue to believe that these companies are going to do well and i think nvidia's

seat at the table is going to last longer than people believe. I think that next year, mentioned the 23% growth that the street has, I think it's probably closer to 30. I mean, listen, I can't disagree with you down here, down 35%. It's taken a lot of froth off. If I just look at the 52-week low going back,

to April of last year, you have a stock that was trading, I don't know, 75, 76 bucks. And this morning, I think the low was $86 or so. You know, you get back to that prior low, the 52 week low, you've been cut in half.

like the stock has been cut in half and the estimates haven't moved to your point lower. And if you think they're higher than at some point, it becomes a screaming buy, especially at this point, we know that there's really no competition, but then it comes down to the lack of China demand. It comes down to export restrictions all over the place. It comes down to, you know, really how much compute that we need. It comes down to is the data center build at least,

You know what I mean? Pause for now. And so when I think about all those things combined, you know, there is a proper bull bear debate right now, even down here, down 35%, trading at 16 times. Well, the reason it would be a debate if that next year number, it's not 23%, girl, that's down five. Keep in mind this, I know you know this, but $20 billion, $23 billion business three years ago, expected to do 200 next year.

There is that, I think, part of the conversation. If I'm wrong on this AI build out, you're going to see a decline in NVIDIA's business. And the quarter before things started going with generative AI, their overall revenue, I think it was down 19%. And that was a really difficult time because they were benefiting from gaming, crypto mining, metaverse and that sort of thing. So I think that's...

Really important to remember. The one thing I'll just say, and again, really quickly here, in a few weeks, we're going to get all the hyperscalers. They're going to be reporting earnings. And NVIDIA doesn't do that for a while afterwards. And my question, we've talked about this a lot, the sanctity of these CapEx numbers. And I think that if these stocks keep going lower, the customers of NVIDIA,

OK, and let's just say we're seeing a deceleration in the hyperscalers as it related to their cloud businesses and the like, and they're not seeing the uptake of some of these products and services which would be reflected to some degree right in the in the cloud growth and everything like that, that at some point they're going to just cut these capex.

you know, or the street's going to start discounting it. And, you know, it wasn't in 2022 until a lot of these companies started rationalizing their costs and firing people. Did the stock start to work again? And I think cuts to CapEx are going to be that new thing, especially if you have the stocks cut in half at some point over the next month or two. I think if one of those four, the key four, if one of them cuts,

Their spending, I think you will see the other three do it this quarter or next quarter. But I think they're playing this chess match about this race to general intelligence. My view of how AI, how profound of an impact it's going to be, I think these companies, the four we're talking about, share that same view.

And there is a race going on. And I still believe that if you're the one backing off, if you're the one making the call, these companies, we should back off on our CapEx because all the macro that's going on, we don't know a consumer and all of our free cash flow that's funding this.

you got to be pretty sure that the AI thing isn't going to play out like people think because you give up six months, a year, it's going to be hard to catch up down the road. And so I don't think these companies are at a position right now, especially with what happened with DeepSeq to let off the accelerator. Again, it will be interesting to see any more data out of DeepSeq and how that compares to some of the other stuff that's going on here. And then really the uptake, I think, of these open source models, which

You know, a lot of these Chinese guys have, you know, kind of given their own data about their own models. I know that Baidu had one, Alibaba had one. I think there was probably a couple others that came out. All right, Gene Munster, I really, really appreciate your intelligence, man. Fun to be with you in these cat five times and hope to see you soon. Thank you so much. Gene Munster, managing partner at Deepwater Asset Management. Appreciate it.