Data Center Spending Stays Hot While Quantum Waits

SPEAKER_1 (0:00)

And we welcome you back, and now it's time for our Tech Spotlight. We bring in our next guest, Paul Meeks, Head of Technology Research at Freedom Capital Markets. I'm so glad you are with us.

We think about IBM one way, and now it's time to think about IBM in a new way, because you think it has potential to be a leader in quantum. Let's hear about that.

Paul Meeks (0:23)

So it's a good thing, bad thing. The good thing is, I do think that they can lead or be among the leaders in quantum, but unfortunately, that might be a couple years out. In the meantime, the bad part is, they have some game in AI, but the problem with IBM is in one way, they're being disintermediated by AI, and in another way, they're being boosted. So for them, I think it's net neutral. So if you want to play AI as I do before quantum comes to rain, there's probably bigger fish to fry than IBM.

SPEAKER_1 (0:54)

Yeah, and I know you have some names that you want to talk about, but let's just stay on IBM for a moment. What has been, and obviously, this stock really had some year, it went from a high of 332 over the summer, to a low of 199 July, August. It really has had a big swing top to bottom.

I guess there are some strong points that still held it up to allow it to go to those highs. What are those?

Paul Meeks (1:19)

So I think that whether it be their services business, or they still sell big steel hardware, that they were getting, at least for a while, a boost by AI in the most recent quarter. Unfortunately, order to intake slowed. As I said before, they could be great in quantum. Unfortunately, quantum may not be coming quick enough for it to be an adequate bridge.

So a lot of investors have said, OK, well, AI is a mix. Good and bad at IBM. So maybe we just go for AI pure play in the meantime. I think that's what's happened.

SPEAKER_1 (1:58)

Similar or different to some of these other quantum names, like Rigetti, which ran up and then pulled back, right? So if you look over one year, the stock's down 33%.

But it did have an incredible run up. Name some names you said about tech, the bigger fish to fry in tech. And I want to get some names here. What does that mean?

Paul Meeks (2:16)

So I am a big believer still, because I think AI infrastructure spending will be hot and heavy through the end of the decade. In some of these data center companies, I covered the Neo Clouds, and I also covered the AI co-location companies. Examples of Neo Clouds are CoreWeave, Nebius, Iren, the AI Colos are companies like Core Scientific, Terowolf, Cipher Digital, Hut8.

I think all of these companies should do quite well once we get through a lot of anxiety as we head into the election with some of the governors, congresspeople, and senators campaigning against AI development because the electorate has started to push back.

SPEAKER_1 (3:04)

What did you call the names like CoreWeave and Terowolf? Those were not the Neo Clouds. Those were the?

Paul Meeks (3:10)

AI Colos. Here's the difference. Colos? Right. Colocation companies.

SPEAKER_1 (3:16)

Okay.

Sorry. You're using that inside jargon and I don't know, I usually know it all, but that one I somehow didn't. Thank you for clarifying.

Paul Meeks (3:25)

Yes. The ones that have existed for a long time in this space are real estate investment trust like Digital Realty.

SPEAKER_1 (3:33)

Right.

Paul Meeks (3:33)

Right. And Equinix.

But this stage, these are companies that they secure the land, they get the permissions, they build a data center, and then they are the landlord and the tenant could be Amazon Web Services or CoreWeave, a NeoCloud and they come in with their own GPUs. That's the expensive part because we know the GPUs are about 80 percent of the cost of the entire data center.

SPEAKER_1 (4:02)

So as we get back to IBM then, so those are the kinds of names that you do like and you're seeing the growth now or near term, let's say, versus the IBM story for Quantum, you're worried it might take years to come to fruition. So when you look at the earnings per share or P ratio, P ratio to really see the valuation of this company, where is the buy signal? When do you get in and hit a low of $60.55 over the summer? It's at $86 now.

Where do you see the get in or buy signals on IBM?