Fundamentals Still Matter: Lone Pine’s David Craver

0:04Welcome to another episode of Goldman Sachs exchanges. Great Investors, I'm Tony Pascarello, Global Head of Hedge Fund Coverage in Goldman Sachs Global Banking and Markets. And today I have the pleasure of sitting with David Craver. Dave is the Co-Chief Investment Officer of Lone Pine Capital, an investment firm with over$19 billion in assets under management, and a focus on long-term, fundamental-based investing.

0:33Dave, welcome to Great Investors. Thank you for having me. It's an exciting time. You joined Lone Pine in 1998. I think listeners, people close to the markets will be familiar with the broad changes to the industry since then. So the rise of passive, the rise of private markets, increased regulation of the banks following great financial crisis. What, in your mind, what's been the impact of these changes on the market itself? Well, I would say there's been two things that I would point to that are different today than when I first started in the business. One is single stock volatility around events is greater than it ever has been.

1:18And it's often not correlated with what I view as the actual qualitative news that's happening. So that's pretty different than it used to be. I've told our partners that I used to be able to read a press release and tell you what the stock was going to do the next day, and that is no longer the case. And often the moves around events are quite large relative to what a fundamental investor would consider. So that's one thing. The other thing is that there are companies at market caps today that are trading at very large valuations. and that's extremely different than when I first started in the business.

1:59I used to have a rule that anything that traded more than a$200 billion market cap that was over 20 times forward earnings was probably in trouble, and there are dozens of those today, and that's just very different than it used to be as well. So I would say those are two things I would call out, and I think there are reasons for those which we can get into. It's interesting because I think I want a lot of people, whether they saw it or didn't see it, think of the late 1990s, particularly 98, 99, and what became the peak in 2000 as huge volatility, huge overvaluation. But in a way, your compare and contrast is today almost feels more, there's almost more rock and roll today than there would have been back then.

2:44Is that fair? Yeah, that is fair. It's super interesting in that take the MAG7 as a subset of the market. There are several companies in that group that I consider fundamentally undervalued, and there are several that I consider absurdly overvalued. But I do think that is partly a function of the passive flows that we've seen in the market over the last many years. And yeah, there's plenty of froth in the markets today, but there's also plenty of opportunity. And as I said earlier, it's an exciting time. So a natural follow-on question is, what does this mean for what you do? What do these changes to the market structure mean for what you do?

3:24And so in the end, has it created a better or worse opportunity set for someone like you who is a long-term, bottom-up, fundamental investor? Yeah. So I would argue it is better for me. There are fewer people active in the market that are taking fundamental views on valuation. The passive flows, by definition, are not taking a view on valuation. and then the rise of the multi-strats are more of a relative game. It's a levered relative game. It's not typically singularly focused on a company's value. So my firm is leaning into what we consider to be the white space, which is thinking and acting with duration and viewing valuation through that lens, which I think is different than a lot of people are doing today.

4:11And if I were to say, I think in a way you just led me to my next question, which is if I were to ask, what makes Lone Pine unique? Is that it? Is that part of it? How would you answer that question? Yeah. There are several things I would say there. One is I have a very small research team. So I like to say I have a small group that's focused on big questions, right? There's more change happening in the world today than I've seen in my career. And I even put the internet bubble in that same vein. I feel like there are enormous questions around industries, given the rise of AI and the disruption that it's going to cause.

4:49And my group is very focused on answering, you know, where we're going over the medium term. So my team is focused on not the shorter term questions. Okay, I don't care if a company is going to beat the numbers. There's a lot of people that are doing the knife fight and trying to figure out in the short term what's going to happen to an individual equity given a set of facts. And I'm trying to think about what the world is going to look like three and five years down the road. And with everything that's going on in the world, that's a challenge. But it also presents enormous opportunity for someone who has been around in the business for a long time, which we have, has the contacts that we have both in the private and the public world, and is very, very good at performing fundamental deep research.

5:34And that's what we're focused on. And so I think if I were to take stock of everything you said so far in the conversation, my guess is you view your staying power and the long term kind of orientation of the way you do things as a competitive advantage. A, is that right? And then B, the adjunct would be, how do you know when you're wrong? Sure, sure, sure. Yeah. So that is the competitive advantage, the ability and willingness to act with duration. The volatility we talked about earlier is often presenting opportunity when the market overreacts to certain information flow. And the firm itself has longevity both in terms of our reputation, an enormous amount of the money that we manage as our own money.

6:14OK, so that by definition has duration to it. And the LPs that have signed up for what we do understand that we're thinking about the world in the time increments that I'm describing. So I don't get beat up when a quarter is not quite as good as somebody who's smaller and more nimble than me. And people view my performance over a long period of time. Right. And how do you know when you're wrong? How do I know when I'm wrong? That is the art to my business, particularly in a world where there is enormous amounts of disruption that's happening. we constantly need to be asking ourselves the counterfactual on the businesses that we own and that we're underwriting.

6:55And I'm sure we're going to talk about AI today as an example. And I can walk you through some of the things that we're watching very closely there to understand whether this super cycle is going to continue. Got it. And then to dig down one more level, some people identify as contrarians. Some people identify as whatever is diametrically opposed to that. Where do you fall along that continuum? Yeah, I am more of a growth at a reasonable price guy. Okay. I grew up in the business with Steve Mandel, who's my partner at Tiger Management, you know, 33 years ago, which is a little hard for me to believe.

7:31But back then, we had, you know, a dozen or more category killer retailers who were in seven states, and you could map out MSAs and figure out, you know, where they were going to go and how many boxes they were going to open and do unit economics and figure out that they were going to be much larger businesses, right? Many of those were trading for, you know, higher than the market multiples, but were deservedly so given the outlook in those businesses. So I sort of grew up seeing a lot of acorns turn into oak trees, and it's always sort of framed how I think about the world. We're looking for companies with moats around them that have a secular tailwind where we can own them with duration.

8:17And I tell the team to think about, let's talk about the stock market closing tomorrow and reopening three years from now. What do you want to own in that scenario? And using that lens tends to weed out some things that are a little less higher quality where you feel like you have an edge on a data point. And they tend to be the things, in my experience, that you look back five or 10 years later and you say, that was kind of obvious and there wasn't anything specific in the short term necessarily that was going to change the view that the market had. But if you just thought with duration and held on to what you had, then you ended up doing quite well.

8:56Right. Yeah. Let's talk about AI. Sure. I remember you and I had a conversation. I remember where I was standing. This is like late July last summer. Okay. Yeah. And my recollection is you kind of said this is going to be – this buildout is going to be so much bigger than people think. Yes. Where – directionally, did I get that correct? And then if you flash forward today, where are we? Yeah. So you are correct. What's going on is a little mind-blowing, okay? And I totally understand the concerns that people have around a bubble here because of the magnitude of the money that's being spent, okay?

9:32But this is a generational platform shift. We are in probably the third or fourth inning of the actual build out. And that's a judgment call. We are looking at a number of things to inform how we think this infrastructure bet is going to go. The first thing is the models themselves. So the models continue to get better in scale. So the productivity of the models, what they're able to do, as you throw more silicon at them, they are absolutely getting better. And the use cases are going to continue to grow. So we have scaling continuing, and we're watching that very closely, but it absolutely continues apace.

10:13Okay, that's the first thing. The second thing is capacity-wise, we're short. Okay, so when you talk to the hyperscalers, and people that are hosting inference, so this is the use cases for the silicon itself, they do not have enough capacity today. They're rapidly in the process of building out more capacity, which you know, but the use is extremely high. So that's the second thing. And then the third thing, which is probably the most important thing, is that companies we trust, both small companies and medium-sized digital-first companies, are seeing enormous value from implementing the technology.

10:49When we talk to the companies we have in our private portfolio, when we talk to digital first companies in the market that are run by founders, okay, what they are getting from using this technology today is mind blowing, okay, the obvious benefits from coding have been well documented, processes are being taken away from human beings and put it put to agents now. So it's making the businesses a lot more efficient. And we have had numerous CEOs say to us, I think I can triple or more the revenues in my business and I'm never going to have to hire another human being. OK, so that is the beginning of what this is all going to become.

11:31And those three things, the models getting better, the use cases and supply being short of demand in the market is why we remain bullish on infrastructure. And then the other thing I would say about infrastructure, I think is really important is it's hard to build all this stuff. OK, it's not like you can snap your fingers and get massive amounts of capacity online. So there is going to be stuff that gets pushed to the right just because there's bottlenecks in the system. And I think that's going to extend probably how long this cycle actually goes on. So that's what I would say about AI. We sit here today and remain quite bullish on that overall bet.

12:09And I have a catchphrase internally, which I say it's not a bubble when everybody thinks it's a bubble. It's going to be a bubble when we get to the other side of this, which is probably going to be when OpenAI and Anthropic are public companies. And we're seeing a bunch more of these use cases proliferate in big companies. And we're just a long way away from that right now. And one final question. I think your view is super clear. Yep. If you were to prosecute the view today, how would you think about it? I would say there's this incredible simplicity to the first three years of the AI era, from the birth of Chatt GPT to its third birthday.

12:47You really could just pick one or two stocks and have captured the lion's share of the convexity. Are we moving into a different phase of the game now? I do think we're moving into a different phase. I don't think that means that the original winners are in a poor position because I still think it's early. So we are seeing now, you know, memory has gone crazy in the last, you know, several months. There's some tangential things that have gotten tight as the build out has progressed that are not, you know, NVIDIA and Avago. But the other thing that I think is going to be super interesting and exciting for Lone Pine is that I have a theme that I call Revenge of the Dinosaurs, which is larger companies are going to adopt this technology and take costs out of their business in a huge way over the next two and three and four years.

13:37And I think we're going to get on conference calls in 2027. And CFOs are going to say, I just took half a billion dollars out of my spending on an annual basis because we're implementing this new technology. So it is going to proliferate across all kinds of businesses. OK, this is super bullish for the market, in my opinion. And the infrastructure is obviously the first way to play this. The application of the technology is going to be the next big thing. And you can play that through hyperscalers. Obviously, Anthropik and OpenAI are going to be beneficiaries, but there's going to be companies in logistics that are able to do things that they heretofore could not do, or they're going to be able to do things much more efficiently than they did before.

14:20And if they have moats around their businesses, they're going to be able to keep those economics and be a lot more profitable. And that's all on the come, and I absolutely believe it's going to happen. Super interesting. I want to go back a little bit to how you operate the fund and how you kind of manage some of your ideas. Clearly, you have big core positions. How much do you trade around them? Do you pair them up? Do you use options? How do you think about establishing and then risk managing positions over time? Yeah. Well, the single greatest risk mitigate is knowing our companies. Okay. So on the long side, we tend to run quite a concentrated book.

14:59We get convicted around a theme or a company and we get sized in it. And then knowing that company and understanding the change that's happening around it is the single biggest risk mitigant for the portfolio. We don't do pair trading. OK, my view on pair trading is that works great if you're running quite a levered balance sheet. We don't tend to run the hedge fund that levered. And so we're less concerned with alpha on the short side and we're more concerned with making money on the short side. And what that means is that we're often short things that are quite different than what we're long.

15:35And we're looking for industries, sectors where value is being destroyed. And those are the things that we tend to be short and the mirror image of that on the long side. That means that you can't run nearly as levered because when you have a factor rotation or the shorts often act like the longs the other way when factors turn in the market. So the short book is smaller than it used to be. OK, we used to run it a little more paired, I would say. And today, you know, we are positioned quite bullishly for a bunch of reasons. One is this AI bet. We're also in, from a macro environment, a period where inflation is continuing to moderate.

16:17We get those views from companies that we speak to and a lot of people that we trust. And so we feel like there's still room for the Fed to continue to move in an easing direction. And that tends to be conducive to risk. And so we're positioned accordingly. I want to ask a question about the hedge fund business, I suppose, in the context of the private equity business. I've said before, in the immediate aftermath of Lehman, hedge funds managed less than$2 trillion. Today, that's north of five. So point to point, decent growth for sure. At the same time, in the private equity business and kind of the alt space in general, has considerably outpaced that growth.

16:58How do you think about the rise of private market investing as it relates to your business? Yeah. Well, we are private market investors, okay? I feel like being active in that world is an imperative if you're going to be a good public market investor. It absolutely behooves the other part of my business. And I learn things through the research cycles on private companies that inform how I'm positioned in the public markets. We will do transactions periodically, as I said. And so we are active in the late stage pre-IPO world. That world is astonishingly large today. I don't see it changing anytime soon because the investors love the fact that there's no volatility in what they're investing in.

17:48The entrepreneurs love the fact that they don't have to do a conference call every quarter and answer to the SEC. And so there's a number of companies that have become very large companies in the private markets. And I see that continuing, quite honestly. I think there's a lot of stuff that was funded in, you know, 20 and 21, that's probably not going to be so great. But the world of private investing is similar to public market investing beyond once a company is a made company, so to speak. And we need to have our eyes and ears in that world to inform what we're doing in the public markets. Okay.

18:24Yeah. One last kind of mainline question, and in a way it comes full circle to where the conversation started as relates to market structure. As we say today, how do you think the industry will change going forward? Yeah. Well, I do think that we've been in an unusual period of time when passive investing has been very successful. Some of the largest companies in the world have been creating a lot of value and investing passively against that opportunity has worked quite well. I do think with this platform shift that we're seeing now, disruption is on the rise. You know the data around largest market caps by decade and what that looks like.

19:11Okay. If history holds, when we get out to 2035, we're going to look backwards and the names that are in that list are not going to be the same today. Okay. So, so I'm an active guy. And then the fact that there is as much change going on in the world as there is today means that the value of fundamental research is higher than it's ever been. And as I said at the beginning, it's a really exciting time because there's so much change happening in the world. For sure. Yeah. Yeah. Okay. The proverbial lightning round. Okay. Hit me. What's your greatest strength as an investor? My greatest strength as an investor is the willingness to change my mind.

19:48Julian Robertson, who was my first boss, taught me that the rear view mirror is not the way to look at the world. Okay. And I saw him pivot when the facts changed in ways that were super surprising to me when I first got into the business and you asked me the question earlier, how do you prosecute your views? You have to be willing to change, right? And the world's changing. And so it's an art more than a science for sure, but I'm willing to turn and move when I need to. Yeah. What is the best piece of advice you've ever received? Best piece of advice in the investment business I've ever received is to trust my instincts.

20:30I have good instincts, market instincts in general. And if you were in my employee review with Steve Mandel for the last 25 years, that is the thing he has always said to me, just trust your instincts. And because I can be slow to move sometimes, but I'm usually right about what my instincts are telling me to do. Okay. Yeah. Which investor do you admire most? Well, this answer is obvious for me. I mean, Steve has been the train that I've attached myself to now for 33 years. So I respect his investment acumen. And even more highly, I respect him as a human being. He's always been a great partner to me.

21:10And he's the person I would point to as the person that's most influenced me. Last question. Where do you spend your time outside the office? I read a lot. Everything. I read fiction, nonfiction, everything. I'm voracious in that way. And then my wife and I spend a lot of time philanthropically helping nonprofits that are helping kids help themselves. And, you know, I did not come from a Silver Spoon background. I grew up in South Carolina going to public school. And a couple of people, you know, took a chance on me along the way, which I'm forever, forever grateful. And so I get a lot of joy from helping other people find opportunity.

21:52And to the extent that I find nonprofits that are helping them do that, we want to help those organizations as much as we can. Okay. We're going to leave it there. Dave, thank you for doing this. Absolutely. Thank you very much. Thank you all for listening to this episode of Goldman Sachs Exchanges Great Investors, which was recorded on January 27th, 2026. I'm Tony Pascarello.

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