Semi Charmed Life Cycle with Gene Munster | Okay, Computer.
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fresh insights on the trends and market forces impacting deal flow across sectors and find out how companies and investors are preparing for potential surge in deal activity and what signals to watch for this year. Listen and subscribe to Strategic Alternatives, the RBC Capital Markets podcast today, wherever you get your podcasts. Okay, welcome to the first edition of OK Computer for 2025. I'm Dan Nathan, joined by Gene Munster, the managing partner at Deepwater Asset Management. Gene, welcome.

Great to be here. I hope you had a great break. I think you and I, the last OK Computer of 2024, you and I did it together. So here we are with the first of 2025. I really appreciate you being here. Want to just hit the semis here. I mean, right out of the gate, you know, you have a NASDAQ 100 that's up 3% in the year. You have an S&P that's up two and a quarter percent. A lot of that performance was

Once again is the fateful eight here, my man. Right out of the gates, up and running. I know that you expected a good year out of most of these names. A lot tracking to the themes of 2024, which were actually the themes of 2023. We have a little bit of a semi-charmed life cycle here, Gene. Let's hit some of the stuff, some of the stories right out of the gate today. Foxconn giving really good revenue guidance for December in particular. I guess we're going to have to wait and see

what the guidance looks like, but it sparked a huge semi rally. We have the SMH up a little more than 4%. We have names like Micron up nearly 12%, ASML up, you know, eight and a half percent. Taiwan Semi, if it closes here, new all-time high just broke out of a big range. Nvidia, if it closes here, new all-time high. Give me your sense of what this Foxconn guidance specifically for December suggests for Q1 here and why these names are rallying. Do you think it's a little too much?

The most basic level, what's going on is that this concern that we're just at the cusp of the hardware trade starting to unwind, that concern was reversed with the Foxconn guidance. Essentially, it looks like early in 2025, the outlook is going to start off on a good foot. And compare that to the middle of December,

when Micron reported. Now, Micron is a story that gets wrapped in as an AI-only story. The reality is that most of their business is consumer, old-school DRAM. They have an AI play with this high-bandwidth piece, but they had guided down 12% versus where expectations were for the upcoming quarter. And that, I think, in combination with some of the commentary from the Fed, really started this sell-off of

on the hardware and the broader AI trade late in 2024. Now we've seen a reversing and some positive comments coming out with Foxconn here. But I think what it comes down to is we're seeing encouraging data points that this hardware trade can maintain a higher growth than what many had believed. And just to put in a perspective of the concern, like how do you put numbers around like what this concern means, is that if you look at NVIDIA on their calendar 26 numbers, it's trading in the low 20 multiple.

It's probably going to grow better than 30. Most of the street is looking for a low 20s growth rate. So kind of a one peg on that, which for this story is evidence, I think, of investors being nervous, essentially, that the stocks are cheapest at the top, that kind of concept. Micron, different market cap, obviously, versus Nvidia. But it trades at like, even with this move, it's like 13 times next year's earnings. And

is going to grow revenue this year around 45% and next year for calendar 26, around 25%. So my point is, is that this market is really sensitive to any commentary from the hardware players about what the sustainability of this AI build-out is. And so I think that's what's going on today. And then also investors are focusing or starting to

Look forward to Jensen's comments at CES. Yeah, no doubt. And we obviously know that he's going to be very positive and promotional. That's the way Jensen is in general. You know, the Micron one is really interesting to me, Gene. So when they reported a few weeks ago, obviously everything in the consumer electronics space was very weak, right? And so the Gen AI component of their memory just didn't

wasn't big enough, right? And when you think about to drive, let's say the performance of the stock. So here it is in one fell swoop, it's up 18 and a half percent on the year. And it's almost filled in that earnings gap. Now you could make the valuation argument and you could kind of be chasing things early in the year. You got a lot of time for things to work out if you're being judged on a quarterly or an annual basis here, but it feels like a little bit of a dash for trash. And I look at ASML because nearly two months ago, remember that the bookings guidance that they gave for Q1

was horrible. And here's a stock, you know, today it's up eight and a half percent, it's up 12% of the year. I mean, listen, everything has sparked. I think a lot of the stuff that's been down on their asses is rallying a little bit. Even AMD is rallying. Intel can't get out of its own way. I guess my question to you, and we're going to get to the whole custom silicon bit, because that's something that

that you've raised on numerous occasions over the last couple of months. And that was one of the reasons why as Broadcom gave their guidance, as Marvell gave their guidance, maybe NVIDIA was kind of stuck in the mud. We've been hearing for months, if not quarters, how all of NVIDIA's major customers, that's Google, that's Amazon, it's Microsoft, it's Meta, 40% of their sales.

How they've been working with the likes of Broadcom and Marvell and others to create a second source or their own chips relative to NVIDIA. So let's talk a little bit about that. I mean, at this point, it seems like Marvell and Broadcom very late to this kind of rally, but it looks like at least the way investors are thinking about it, this is the next leg of the trade. Does that make some sense? You saw Mike...

money cycle out of NVIDIA into these two names over the last couple of months. Kind of part of the narrative for 25 on the hardware side is going to be this custom silicon. And just to add a little bit to what you had said is that the basic concept here is that these hyperscalers have been spending a lot of money with NVIDIA, but that is helpful with a big part of what they're doing and building with AI. They need the GPUs to do that, more general intelligence type of hardware, but they also are going to increasingly need more

silicon that is specific to a function. And so that's this idea of custom silicon. And so that's Marvell and Broadcom. They're going to be some of the bigger beneficiaries of that. And so there's one piece which I think is called a truth. We have this kind of a syntax around undeniable truths. I don't know if it quite

reaches the undeniable truth level, but a truth that custom silicon is going to be at the top of investors' minds throughout all of 2025. And so I think that's good for Marvell Broadcom. I think that's going to continue to be good because the expectation in 2026 is they're going to see more and more business from these hyperscalers.

And then how do you factor in, you know, that to your point, your question like that, the cutting side of this, which is them potentially cutting them being hyperscalers, potentially cutting orders to NVIDIA around this. And I'm going to pull up a quote from the press release from NVIDIA around how far NVIDIA

what their supply-demand equilibrium is. This was two months ago on their press release. They said that demand for Blackwell, which obviously is the upcoming architecture, is expected to exceed supply for several quarters in fiscal 26, which is basically calendar 25, for several quarters. Now,

Now, by my math, several is three. But my point is that this whole conversation around custom silicon is also coming at a time where NVIDIA is saying that they're not seeing any slowdown. And I think at least in 2025, I think both of these can exist. I think you can have NVIDIA

beating numbers and raising numbers, continuing around the general build out. And I think you can have Marvell and Broadcom continue to do well as the custom silicon starts to build momentum. It seems like kind of I'm in denial a little bit, but I think the reality is at least in calendar 25, I think both of these themes can continue.

Yeah, I guess the discount, you just mentioned a little over a peg, a PE to growth of one, right, for NVIDIA. It almost seems like investors are kind of discounting the potential for some sort of drop-off in demand, right? So Jensen's been very promotional. He suggested this kind of insane sort of demand for Blackwell. But, you know, when we listened to the BG2 pod with Brad Gerstner and Bill Gurley a few weeks ago, and you and I talked about it, they had Satya Nadella on, the CEO of Microsoft. He was asked specifically about

the supply demand as it relates to their demand, I guess, for high-end GPUs from NVIDIA. And he said they are no longer constrained. They have the chips that they want. I mean, that was a direct quote. And so I almost say to myself, what's the next leg of this trade, right? And the next leg is exactly what you're speaking to. And then let's just kind of talk a little bit about some of the guidance that we heard, right? So Microsoft, there's a story out this morning, I guess it was a blog post from a Microsoft executive talking about how they're going to spend $80 billion this fiscal year

on AI infrastructure. Now, that could mean a whole host of things, right? It could mean chips. It could mean data center build. It could be leases. It could be power. You know, a lot of stuff going on there, right? And so that is what it is. It reminds me a little bit about what we heard of Broadcom's guidance. By the end of 2027, they're going to see, I don't know, spending between $60 and $90 billion. I think that was the number. And you and I talked about it a few weeks ago. Up from like $10 billion. Yeah. And

And, you know, in this Microsoft, I think they probably, what, spent 60, $70 billion in the last fiscal year, right? So this is a bump, but who knows whether they're going to complete that or not, which brings me to the story. And the information is reporting this also that Microsoft paused construction on a data center that they were building specifically for OpenAI. We know that they have this partnership with OpenAI. It seems like every week we hear a new story about some wrinkles in that partnership, their

Yeah.

this trade has. And as we get to Q4 earnings and really expectations for guidance, and most importantly, I guess, CapEx by these major hyperscalers, if we're slightly disappointed by that, I'm hard pressed to think that the names that have been benefiting the most for the last two years are going to continue to rally in this way. Does that make some sense? Totally makes sense.

I think one of the contrarian views is that these companies can keep going. So I think just naturally, when you have runs like this, NASDAQ up 89% over two years, 33% or whatever it was in 2024. Naturally, you have to expect some sort of a pullback. And I expect pullbacks. We can talk about why I expect a pullback. But I still think we are going higher in 2025. I think NVIDIA is going to continue to go higher. And part of the reason is we spend time, understandably, talking a lot about the hyperscalers and

And being 40%, that's a big part of NVIDIA's business. But I believe there are other things, whether it's industrial AI applications, sovereign AI, I think there are other things that are still just getting going on that front that are going to benefit their business. And when I think about to the point of Jensen's comments at CES or what earnings, each window that we go into today, given we have some good commentary from Foxconn, the flavor of it is painted more positively. But in general, when you have the marketplace

has done, what it has over the past two years, each window, earnings and any company events, I think investors are nervous going into this. And so any sort of blink, I think you can see pullbacks. And I think what you're going to see is maybe some commentary around in three weeks from one of the three big hyperscalers around how much they're spending and the timing on that, you'll see a pullback. But ultimately, I just...

believe that AI still is in its early stages on building out the infrastructure. We can talk about where I get that belief from, but if that ends up being the case, then NVIDIA is going to grow faster than what people think this year and next year. And even though it's going to be a wild ride, I think it still goes higher. And

It's hard to grow at 20% when you've gone from being a $20 billion business to expect it to be $150 billion next year or something like that. I mean, it's just this incredible move, but I still think that is how big the infrastructure spend is. And just one quick comment, you mentioned OpenAI and Microsoft and you flagged this, but I am in agreement that that relationship seems to be fraying and

I think that hearing about pullbacks, about what Microsoft is doing around building any sort of capacity around open AI, that to me feels more like a feud versus a shift in the paradigm. Let me just ask you on the infrastructure, like what are some other names in which you're looking at? Like is some of the like semi-chip equipment guys like an AMAT, which, you know, was participating biologically?

The first half of last year, right, was all, you know, it was a free for all. And anything related to that, right, if you're building out fabs to kind of build more chips, to go into more servers, to go into more data centers, you would think that the semi-equipment guys would do pretty well. AMAT had a massive run and then it gave it all back. It's up a bunch today, maybe five, five and a half percent or so.

How are you thinking about this trade broadening out a little bit? Because especially if we're kind of in the blow-off phase, which feels like early this year we could be, if that guidance is fine and it's better than the whisper, you're going to see these names continue to go higher and not too different than a Broadcom, which had been in this range, although it was up a lot.

prior to its earnings and a massive breakout. Marvell did the same thing. We're seeing that right now in Nvidia. We're seeing that right now in Taiwan Semi. So if you talk about the churn, the digestion that a lot of these stories had or a lot of these stocks had, while the stories remain fairly good, the trade broadened out a little bit. Now they're breaking out. I can't figure out whether that's just a new year sort of

thing, you know what I mean? Where folks are just saying, hey, listen, we had a bang up year. Maybe we took some chips off the table as we headed into the end of the year. There was definitely some volatility in December. We saw the VIX go up above 20. That had a large part to do with the Fed and what they might do. And the other thing is, I'll just say, is that you have a 10-year yield at 4.6% and you have a Fed funds rate that might not be going too much lower in 2025. This was the exact

ingredients that made it really hard for some of these long duration, high valuation tech trades in late 21 and all of 22. And so I wonder whether macro and some of this, you know, kind of rate stuff and the dollar exposure might start to play out in this space too, because throw China in there. You know what I mean? Like who knows what's going to happen in the first year of the Trump administration. We know that there are plenty of China hawks that exist in that administration on the new coming administration. My goal is to get this right. And I'm

I've been continuing to believe that we still got a couple of years left on this. And I, I don't want to get lulled into this performance that we've had with some of these companies and just think that because they've been performing well, they'll continue to perform well. So all those factors that you mentioned are things that are top of mind for us at Deepwater. And

I just want to mention, you know, and talk about kind of like the hardware trade piece of this. And I think at the most basic level is I probably have more optimism about what is in store, the spending ability outside of the hyperscalers and the ability to keep some of these companies going. One company, you mentioned Power early, but Vertiv is another company we owned. I mean, those, the four that you had mentioned almost down that checklist, Broadcom, Marvell, a lot.

NVIDIA, Micron, we own all those companies. We're still there. We're still believing that this hardware piece is going to continue. But there's a but. The but does not mean everything before it was not true. I think that is true. It will continue. There is going to be a day of reckoning around these.

And this is the nature of the hardware business. And this is why you see these big swings around all the hardware companies on the micron news is that investors know these are boom and bust. That has not going to change. This is not going to be a subscription based revenue from these companies. And so ultimately we're going to see some more material slowing of growth rate and

My sense is it's probably in year three from here. And then I think that's one piece to it that could cause this to fracture. The other is related to recession. Recession will pull the plug on the AI trade. It's almost impossible for recessions happening for the market just to continue to rip.

And then you throw in what's going on in China. My sense is that it's almost like a foregone conclusion that China is going to make a move on Taiwan. And I think most people think it's like in calendar 27 right now. So we've got a little bit of time there. But when I put all this together, my sense is that the commentary, the guidance from these hardware companies over the next few quarters is going to be optimistic enough, higher than where investors think. And we'll see what plays out. But that's where we're at.

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I want to talk a little bit about these equipment manufacturers, about other foundries, like a global foundry, for instance, right? Will AMD and Intel finally join the party? You know, like some of these names that have kind of been left for dead. Dell had some very poor guidance. Supermicro did, right, on the server side. So it still seems problematic.

pretty narrow despite having this custom silicon kind of theme play out over the last few months or so. So how are you thinking about equipment sector? How are you thinking about some of these server names? And I'm just trying to find some places that maybe investors aren't focused on right now. We're not there. Some of like the Dell and Intel and AMD products

We've been there at different times, but we're not there. And so I think that the commentary that we have is that sometimes the obvious trade is the one that works. And so it feels like the reason why these companies that we've been, or we're positive on are working is because they actually have something that's different than the ones that are more contrarian. I think in the contrarian cap, Micron, just given its growth rate relative to its multiple feels like

That is contrarian. But for the most part, I think that at some point there's going to be a big trade and, but we're okay missing that on these. And the reason why we're okay missing it, because we just think structurally they're still in a challenging place relative to some of the other companies that we own. Let's talk about use cases for a second, because I think you and I've discussed this, you know, the consumer facing applications, whether it's chat GPT or perplexity or however you're kind of accessing these models as a consumer, it's just not a big number.

right? When you think about it, it's nice to be growing users at that pace and having users pay for it, right? There's free versions of these sorts of things. I mean, our team has four different subscriptions, mainly to perplexity. But again, it's not going to justify the spend by a lot of these folks. So we need enterprise applications, right? And that's why I think this kind of Q4 reporting period is going to be really interesting. I think any company that has the

opportunity to talk about, you know what I mean, the return on investment as they spend, you know, lots of cash renting this compute, if you will, right, to do things within their own businesses. Do you think we're going to hear a bunch of that as we go through this reporting season over the next couple of months? Because to me, that's also a really important component, not just the CapEx. Yeah, kind of the handing of the baton from the hardware to the software. We saw that late last year. And just in

peer ability for these CEOs to get investors on board about the potential. I mean, there was no substance in terms of what the guidance was around the AI contribution at the enterprise level, at the consumer level. It just still hasn't happened. It's crickets. And I want to

Just mentioned, I don't think we're going to see much. I think maybe in Q4, but we start to see some of the substance, but we're still on the hardware, still on the infrastructure build outside to actually go from infrastructure to applications, to the sales cycle, to impacting guidance. That's going to take some time. And so I think the good news for some of these software names, as you said, I think expectations are not for much of a lift this year, but the management teams need to be talking it up and be just as aggressive as they have been over the last couple of quarters about the

potential in 26 and 27. I think if they continue to do that, I believe investors will believe in that just because there's these kind of glimmers. And back to the use cases, one other piece is that to put the use case in perspective, we went over these numbers late last year. But if you look at GPT, daily active users are about 150 million. Now, the company gives a

weekly number of 300 million, but it's probably, that was back in November. So the dailies are probably 150 million. Google search, 2.5 billion. And the reason is that a lot of it hasn't been localized outside of English. And my point is, is that when we think about the use case and the most basic use case is a chatbot.

is that even though we talk a lot about it, the majority of people, it's just a buzzword and it doesn't, it's not impacting their lives. They don't care about it. It blows my mind away that people haven't experienced and don't use perplexity or GPT or Gemini on a daily basis that Google overviews is where they get it from. And I think that is representative that the fact that most people don't is representative that we're still that early. And then to your question,

My answer to the question is so far, really, it's limited what the use cases are. But I think the potential I've mentioned, you know, we do some experimenting and have moved that into an affiliate company called Intelligent Alpha, which uses AI to help pick stocks. I mean, that's like a real use application.

of how AI is impacting the world. And so I think that we're going to hear more about it in the use cases this year, but the substance probably won't hit until next year. I think that's okay for these stocks to keep going higher. Yeah. And to your point about the software, you know, we've had kind of some diverging sort of price action. I think Microsoft was really underperforming for the better part of Q4 because just some of the commentary around Copilot and, you know,

the uptake of that. And then we had Salesforce come out and talk about agents versus co-pilots, right? That was a big story in December. I think it's interesting that Salesforce gapped up after that earnings report to an all-time high. I think it was up more than 10% or something like that. It's filled in that entire gap. Adobe, which was an early beneficiary, at least around the narrative in 2023, basically hasn't seen an uptick in a year. It's trading at like- That's an example of they've been talking the talk, but investors aren't buying it. Yeah. And I don't have a good explanation for why they're not buying it with Adobe.

Yeah. And, you know, some of the thought process is that a lot of these SaaS models and SaaS was the big trend of the last, call it 15 years and software might be going, you know, by the wayside a little bit, especially as you have some of this new technology that is probably more efficient than a lot of the

the models, I guess, that we saw, the business models, if you will, right? So the whole idea is that, you know, you're going to be able to disintermediate a lot of processes, right, if you're going to incorporate this technology into your work processes. So again, interesting stuff to track that. The software outperformance in Q4 was massive. It really started in early November. I think the IGV had like a 20% rally or so.

It's since come in a bit. The SMH, the ETF that tracks the Semi, it went sideways. I mean, it really consolidated for months. So to your point about the hardware trade maybe getting back on its horse and maybe the software stuff is really a show-me story, that could continue to be outperformance of the Semis versus software for maybe the first half of this year. I mean, that's generally how we're positioned is for that and still think there's legs to the AI trade as software starts to kick in. I want to just give a little insight in terms of how we internally talk about

these themes and the impact is that when we think about the opportunity applications, AI applications, the enterprise is obviously dollars to be spent there. When you start to think about the consumer side and how advertising dollars impact consumer, I'm not going to go to the punchline here because it's something we're still debating and digging into, but consumers' willingness to pay subscription is limited.

And I think that the investing community, I'm guilty of this, loses track of that. I also have multiple subscriptions to these chatbots and use them frequently. But for most people, that's just not a reality. And so I think that if you kind of want to push this to the next level, like what should people be debating right now is how does...

a simplified experience that's powered by AI impact consumer behavior and specific to companies that benefit from advertising and what impact does that have in 27 and 26. And so I would just encourage people to look at your own behavior about how you're using search, perplexity, GPT, Gemini, all of that, that whole mix together. And then remember that you're in a very small group that's actually experimenting with all of these. And how do you think that this is going to

ultimately impact the ability for these big companies to monetize. Away from the big companies, and I think you're talking about obviously the hyperscalers and the hardware players, but then their customers are the ones that are really important, right? And we just talked about use cases. What

sectors? What industries in 2025 do you expect to hear more of? And Walmart's a great example. They talked about the e-commerce growth being re-accelerated by some of the generative AI tools that they're using, whether it be for logistics or serve recommendations or just to help kind of consumers arrive at certain purchasing decisions.

Do you think that retail remains a spot where we're going to continue to hear? I would think that at some point, you're going to hear Nike that is in a big transition right now. The stock has been on its ass for a couple of years. There's management change. At some point, they're going to adopt Nike.

a narrative around generative AI, how it can re-accelerate growth or something like that. And so I'm just curious, because that reminds me a lot of 1999, where a lot of companies started, you know, talking about how internet was going to basically change their business model altogether. And a lot of companies outside of the internet space started participating in the rally. Now, a lot of those companies had that premium taken out in the

back half of 2000, 2001 and the like. So I'm just curious, are there a couple sectors that you want to focus on for almost immediate use cases as we think about it in 2025, or at least the narratives around it? Yeah, the immediate, I think it's going to be retail and content. Those two are on the retail side. I mean, Walmart's chart looks like NVIDIA's growth rate. I mean, it's spectacular what has happened there. I totally missed it.

And I think that the ability for them just to improve operations, improve their recommendations, streamline operations through use of AI, improve recommendations, I think it's getting that kind of that tech multiple. But I think that Amazon's got a big opportunity. I think is it Rufus, kind of their answer bot that is experimenting. I think what Meta could do around commerce, I think can expand that.

dramatically. Meta in terms of just think about like today, beneficiaries of AI, I think what can happen around content creation. And I'm still finding it hard to believe how fast they grow their active users, their daily active users, still growing at 5%. It's a 3.2 billion act

number. And the reason why they do that is that they're just making it more efficient to create content using better targeting through AI. This isn't buzzword bingo. This is like substance that's happening with their business. And so I think those are like two very obvious areas. And then I think that what you described, that Nike example, I think that's probably like calendar 27. I think we're still a couple of years away. I think next year is probably the year where this is going to be a fun debate that we're going to have throughout this year, Dan, but something around autonomy. And I

I think that setting up, I think there's a whole piece, not just talking about cars, but around robotics. And I think that's a very real, tangible example of how AI can be a segment to invest in this year in anticipation of next year. All right. Well, Gene, you and I are going to have many conversations about it. I really look forward to it. I hope you and I can check back on the pod before we get to Q&A.

for earnings. And so I really appreciate your contribution as always. That's Gene Munster, managing partner of Deepwater Asset Management. Gene, great chatting with you. Thank you, Dan. If you like what you heard, make sure to hit follow and leave us a review. It helps other people find the show. We also want to hear from you. Email us at contact at riskreversal.com.