What ORCL Project Jupiter Says About AI Bottlenecks, Small Cap Beneficiaries

SPEAKER_1 (0:01)

Time to turn our attention and go deep on ORCL and our tech spotlight. Joining me right now, Mario Tufano is with me, Senior Portfolio Manager at Csmc, and I'm so glad that you are with us.

What's the big picture on ORCL? What do you think here?

Mario Tufano (0:15)

Well, first of all, thank you for having me out here. It's a pleasure to be here at the exchange. Now, I don't cover ORCL at Csmc. I'm more of a small SMITCAP base, but there is implications within the entire AI infrastructure.

What happened with Project Jupiter shows that the demand is not the issue. It's the bottlenecks in the infrastructure in and of itself. When you think about it, there was a permitting issue with the pipeline that they needed NAT gas to power some of the fuel cells. Without that permit, it kind of delayed things. For us, we're very constructive on the potential of smaller and mid-cap companies to be a pivotal role in building that infrastructure. It's not only the actual building of it, but it's the powering of it through the NAT gas.

SPEAKER_1 (1:00)

I want to get to some of those small and mid-cap companies and those themes as well. But when you have a force majeure related to something like this, is it okay or not okay? You know what I mean? When you have that kind of action on Wall Street with a big company to lay it out in the way that the delays are needed, but we're getting there, what did you think of something like that?

Mario Tufano (1:23)

Well, I think you have to look at the reason why they did it. The reason why they did it was so they can delay any payments when it comes to any delays happening with getting the data center up and running. That's the main reason why ORCL did it. It was more of a financial decision, not based upon lack of demand, based on getting the thing up and running on time and on schedule. So that's what makes me feel a little more comfortable that it's not that they're overbuilding or capacity is becoming too big. It's literally a bottleneck with regards to the infrastructure that is needed to get all these data centers up and running, which they will eventually in time. But it's going to take time and it's going to take resources to do such a thing.

SPEAKER_1 (2:01)

Something like Blue Owl, which was part of the private credit of this story, and private credit and equity have been always front and center, but that's been hit hard and we need that part of the financing to grow. We've seen a lot of companies that are private versus being public. They go to the private lenders and such.

Any thoughts on that part of the story at all?

Mario Tufano (2:25)

Well, funding isn't a big part of it, but we got to recognize a lot of these technology companies sit with an exorbitant amount of cash and their balance sheets are relatively clean when it comes especially to the large cap peers.

I think they won't have an issue funding it. It'll be a question of how quickly they can implement that funding and get past the logistics and the issues that represent themselves when you're trying to really rewire an entire group and build an infrastructure and ecosystem around it. Those things matter more than actually getting financing. There's money out there that people are willing to deploy. Now, Blue Owl, Private Equity, they have issues onto themselves with rising rates and that may change the math to a certain extent, but money is always chasing good lucrative ideas. I don't think that will ever be an issue.

SPEAKER_1 (3:08)

Well, let's get to some of the investment themes, something like infrastructure is front and center on your mind. I know you're looking at some different strategies, particularly with the small and mid cap names. Tell me a little bit about that.

Mario Tufano (3:18)

Sure.

If you think about all the data centers that are going to be built, they're going to need engineering construction companies to do such a thing. They're going to need people that know how to build these things to bring them up from something of efficiency to a larger structure and Emcor is one of them. They're a $33 billion market cap company. They're trading around 22 times and they have a strong cash flow return of about 30%. What was that name? Emcor? Oh, Emcor.

SPEAKER_1 (3:43)

Yeah.

Mario Tufano (3:43)

Trading around 22 times and their front center can be the players building those data centers. But not only that, you're going to actually need just the road stuff, like routers and switches that all go into connecting these data centers and allowing the cloud infrastructure to take place. One of them that sits at the crossroads that is Belden, it's a smaller cap company around 4 billion. But trading at 12 times and it's booked to bills above one and potentially growing earnings north of 15 to 20 percent.