Is The AI Trade Over? | Jack & Max on Panic in AI Credit, SpaceX Earnings, and Semis

Jack Farley (0:02)

This episode is brought to you by Sarmaya Partners, who manages a Return to Tangibles ETF, ticker L-E-N-S, the Sarmaya Thematic ETF, built for a return to tangibles. Learn more at sarmayaetf.com and see the show notes for disclosures. Let's get into it, Max.

Max (0:19)

Thanks for having me, Jack. I am excited to be here. We just had SpaceX report earnings, and generally there's just a lot of concern about whether the AI trade is dead. We've got a lot of big earnings reports coming up in the weeks ahead that I think are going to help us determine some of the answers to that question. Obviously, CoreWeave and how the bonds have been trading is top of mind for everybody. Certainly, if you were listening to that SpaceX call, it sounded pretty bullish, and we talked about some pretty large numbers of gigawatts that Elon is planning to bring on, and he even put out an even bigger number that could be out there by the end of 2027, so we could get as much as 20 gigawatts SpaceX up, semiconductors up, NVIDIA is up a lot. I think a lot of people are saying that pretty much 100% of that new compute would be coming from NVIDIA chips, so a lot of exciting things to talk about.

I guess also, yeah, we did get the Anthropic S1 recently, so this is going to be mostly AI today. I just want to start out with a big question for you, Jack. You have been quite the AI bull. Do you think that the AI trade is dead?

Jack Farley (1:36)

My short answer is no, Max. I'm just checking to make sure that we are live on all platforms, which we are. We are getting some ads from James Talarico in Texas, so it just shows you go. It's political season. But Max, all right. God, this SpaceX call, God, does Elon know how to pump a stock and pump a vision? Talking about annualized recurring revenue of half a trillion dollars to a trillion dollars by the end of 2027 A simply extraordinary number. Is that my base case that it gets there? No. But if that happens, what is the rational price for the AI-related stocks? Certainly, it is higher from the depressed levels that they have been. Max, just to set the stage, as you were saying, the AI trade has really fallen apart from late September, early October. Actually, it was the biggest, longest consecutive decline, nine consecutive days of sell-offs in the semi-index, which is actually the tide for the longest. The last time that happened was in 2006

Not in percentage terms, but in terms of the length of consecutive decline, there's a severe level of very auto-correlation. It's been just like literally no breaks at all on the decline. Of course, the pessimism has extended not just from the equity market, but also the credit market. I can argue that's where the bulk of the pessimism is with CoreWeave, the heavily indebted NeoCloud that has borrowed a bunch of money. Those bonds, the unsecured bonds, 2032 is pricing in a roughly 60 percent of default cumulatively from now until 2020-2032 over the next six years.

There's been a panic in AI from Anthropic releasing its Q3 revenue numbers that were below expectations. I literally went crazy analyzing those over the weekend. Then also, I think the Chinese memory, CXMT said it's going to increase production of memory more than expected. I will say, Max, that I don't want to say a majority, but a very large percentage of the expected profit growth in AI, excuse me, in semiconductors is specifically in memory. There are three ones, only one of them is a US company, Micron. Actually, Max, when the bulls, hey, you got to be bullish from time to time, right? I don't want to hate on the bulls, but one bullish argument that I didn't love is just how earnings expectations have been rallying so much this year for the S&P, because it's extremely concentrated. It was extremely concentrated literally in just Micron and other semiconductor stocks and oil companies.

That's a very strong argument for semiconductors and perhaps energy as well, but for the overall market in terms of like, yeah, healthcare stocks are going to do great because Micron earnings are seven times higher than we thought they were. That never really made a bunch of sense to me. But Max, I mean, yeah, so SpaceX just reported revenue.

It's increased 161 percent and the AI business tripled in a single quarter. That's, Max, I say AI, artificial intelligence. It's super intelligence now. Yeah, it's super intelligence, Max. Forgive me. And I think, yeah.