Dear Reader,
Today I want to talk about the question I’ve been asked most this weekend.
Is the AI trade over?
The election happened.
First the market went up, then it went down.
Then a strong jobs report came out, bond yields rose, and the market held off some more.
It’s been a crazy week.
I’ve also seen some of our competitors jump on the confusion.
One in particular, and I won’t say who, has been very dramatic about it.
RIP AI, it’s all over.
When you have a week like that, ask yourself one question.
What fundamentally changed?
What Didn’t Change
The long-term picture is still very much intact, as I said on Friday.
The economy is still growing strongly.
The job market is showing it, and so are the growth numbers.
Some friends of mine said the Democrats are going to ban data centers.
I think there’s a near zero chance of that.
That’s not how our system works.
You can’t create a national ban without a veto-proof majority.
You never say never, but it isn’t very likely.
What Did Change
The nature of the AI build-out changed a little.
That’s what pushed the sell-off in tech.
On top of that, a lot of programmatic selling kicked in.
Once a few levels were tripped, the tripwires in the market cascaded the selling down.
I think much of the selling was over after Friday.
There may be a bit more this week.
Here’s what you need to understand.
A lot of the semiconductor stocks were being valued as if the AI build-out would be finished in three years.
As if the earnings would all land this year, next year, and the year after.
Now we’re probably talking about a five-year build-out.
That means the earnings get stretched.
Say a company was going to earn $5 billion from the build-out over three years.
Now it earns that over five.
That lowers per-share earnings in the short term.
But it makes the whole thing more sustainable over the long term.
For the dominant companies, that doesn’t change much.
The earnings just get spread out.
The Companies That Get Hurt
There’s a second group.
A lot of companies in the AI trade don’t have a dominant competitive position.
For the next three years, they capture some outrageous economic profit.
But their advantage isn’t certain after that.
So the earnings in years four and five may never come to them.
That’s why we avoid those companies here at Behind the Markets.
When we do our research, we start with a competitive position.
It tells you whether the earnings keep coming, and for how long.
The companies we focus on have competitive positions we believe can last at least five to ten years.
What Happened Thursday
On Thursday, fast-money systematic trading hammered the tech stocks.
The NeoClouds, the semiconductor companies, and the data center suppliers took the worst of it.
It cascaded, which was interesting to watch, especially the day after the market did so well.
What I find comforting is going back to first principles.
Some of these companies are really cheap, and they may get a bit cheaper before this correction is over.
Amkor is in the $30s.
That’s a dominant competitive position, and it’s very hard to duplicate what they do.
Arm Holdings is another one.
We recommended selling half of both when they flew into the air and got divorced from reality, and we took great gains.
If you’re a patient long-term investor and you keep your cool, you’ll get a chance to buy many of these same companies again.
They’re being pitched to us right in the strike zone.
This panic is a real gift if you’re focused on strong companies with strong competitive positions.
Stretch the AI build-out from three years to five and you wait longer for the earnings.
But a longer build-out isn’t a smaller one.
Every one of those data centers still needs chips.
And NVIDIA’s next AI superchip could be even more lucrative than Blackwell.
There’s one small supplier NVIDIA is counting on to help make it happen.
Most investors have never heard of it.
And on Thursday, it got thrown out with everything else.
Here’s the full story on NVIDIA’s “secret supplier” >>>
Mr. Market
Warren Buffett talks about something he calls Mr. Market.
Imagine you own a business with a partner who is wildly moody.
Some days he walks in euphoric.
This is the greatest thing in the world, our prospects are great, we just won a customer.
Other days he loses a sale and walks in saying he has to sell everything because the world is coming to an end.
Buffett says you’re free to listen to Mr. Market.
But you’re a fool if you take his advice.
The best thing you can do is take advantage of him.
When Mr. Market gets overly pessimistic, you use it.
That’s the game we’re playing here at Behind the Markets.
I hope I’m getting that across to you.
Have a wonderful Monday.
I’ll see you tomorrow.
“The Buck Stops Here,”
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Written by Dylan Jovine