Dan Niles Tilts Bearish: How OpenAI Revenue Revision & Treasury Yields Tell Same Story

Marlee (0:00)

But let's shift gears here, bring Sam back into the conversation, and turn our attention to the macro environment. Bring in our guest, Dan Niles, founder of Niles Investment Management. Dan, thank you for being with us today. I was looking through some of your recent calls, and you had some that were spot on, getting bullish in late July, you became more cautious in August. As we sit right now with the S&P, just right near a record high, how are you looking at the markets? Are you bullish? Are you bearish? You're somewhere in between right now.

Dan Niles (0:30)

I would say I'm bearish because I have sort of simple rules, which is don't fight the Fed and don't fight the bond market. And we've seen the bond market continue to go up and rates keep pushing higher. And at the same time, you know the Fed's gonna raise, they're probably not gonna raise in October, but they're on more of a hiking cycle because at the end of the day for 66 months, inflation has been above their target. And Kevin Warsh is focused on that. So I think between those two things and the elephant in the room, which is you've got some, you could argue mixed messages coming out of the AI trade, such as the firmest IPO, which was backed by Nvidia in Australia got pulled.

That data center deal is not gonna get done. And today you found out that that 70 billion ARR number for OpenAI actually is 50 billion, which is a pretty big difference. And so I think you have to be looking at all of that and sort of take this day by day because there are a lot of cross currents going on.

Sam (1:44)

Yeah, but for today, Dan, good afternoon to you.

It's really hit a nerve with the market clearly. I mean, what is your take on what we've just heard reportedly about OpenAI as it pertains to this entire trade which this market is hinging on right now, particularly because we've actually seen the down, the Russell turn positive. I mean, it's really exacerbated the rotation we had been looking at earlier this morning.

Dan Niles (2:10)

Well, I mean, the top 10 stocks are all AI related in the S&P 500 The top 10 stocks are about 40 percent of the S&P 500 So this is really what's driving the overall headline number, and semiconductors are at the tip of that sphere. The thing that people should be focused on, there are two things. If you're bullish, you say, well, Agentic AI really showed up on January 30th with OpenClaw. Then you had Meta introduce Muse, and then that really took off. It's been number one on the free apps for Apple now for a couple of weeks. People are really getting excited about it. So that's the bullish side. The bearish side is if you look at the data, and one of the things that people have focused on is open weight models, cutting and putting price pressure on what you can charge per token. If you look at the ramp index, which I think is pretty good, you can see that spending has been up about 9x from the beginning of the year through about August 2nd. But from August 2nd on, if you add OpenAI and Anthropic together, it looks like the spend for both of them has gone down about 11% over the last two months.

You look at that and you go, huh, maybe the amount of tokens being produced is not growing faster than the price pressure that we're seeing. Then you get this news that, you know what? The revenue figures are 50 billion, not 70, and you have to start thinking about it and forget today. Micron is down from when they reported, right? Beat and raise quarter, Samsung, similar situation, though they actually came in light.

Numbers were obviously spectacular, but at the end of the day, they were below street expectations.

Those are all things that you have to work into this because these companies, I think everybody who's been doing this a long time knows that they're over earning. You don't necessarily have multiples out of control, but what you do have is earnings out of control relative to what they are normally in the sense that you don't see 80 percent operating margins at memory companies. You don't see 80 percent gross margins even at these companies. You have some investors who are hyper bullish thinking this is going to continue for the next several years, and I just don't think that's going to be the case. You have all of these things coming together all at once, which is why I think you have to be pretty nimble, and that's why we've moved back and forth in terms of our thoughts. Based on what's going on with the AI trade over the course of the year.