AI capex surge, bottlenecks, and the race for ROI

25:42Uttam Dey:And then the NVIDIA Lumentum point.

25:46Amrita Roy:Yeah.

25:47Uttam Dey:You forgot about that. Just moved on. That's what I'm here for.

25:54Amrita Roy:about Lumentum I I'm quite bullish on Lumentum also it's it's in in in my um in the in the recent post that I put out the top five picks for um the AI optical revolution I it just got published a few days ago I I believe Lumentum is a great pick as well so I in that pick in that list I have Lumentum, Coherent Applied Opto Electronics, Marvel, and then Sienna. But I think of all of them, if you had to just ask me to narrow it down, I would definitely say Lumentum and Marvel maybe, along with Applied Opto Electronics. These are my three further narrowed down picks. With Lumentum, what's really great about them is they're delivering 70 % plus revenue today.

26:46Amrita Roy:They're also demonstrating this huge, massive gross margin expansion. By the way, I love watching gross margin expansion in 2026. I think it's apart from the ROI metric that Amrita watches at the macro level, at the industry level, I just love in 2026, love watching when companies can demonstrate gross margin expansion. And Lumentum is one of those companies that's able to do that.

27:12Uttam Dey:Sorry, can you just explain why gross margins are so important for you?

27:16Amrita Roy:The simple reason is that, A, you have these really fast-paced investments from the capital side, capital investments, that's moving into AI. Innovation is moving at such a fast pace, like I just said. And then the other, on the macro side, you have these big geopolitical tension risks. You have inflation risks that's now starting to get priced in. You have supply shocks that's starting to get priced in. Probably a few weeks ago, people were talking about helium shortages. There's obviously memory shortages. So with all of these shortages, supply shocks and inflation risks, and as well as geopolitical tension, how does a company carry on business as usual?

28:06Amrita Roy:not just by growing their revenues at a 50, 60, 70 % because AI demand is there, but actually by demonstrating that your unit economics of the business is sound. The only way to show that despite all these supply shocks and inflation risks is to demonstrate gross margin expansion coupled with top-line growth. If you can do that, the company will be rewarded immensely in 2026. But if you can't do that, no matter whether you're NVIDIA or even Broadcom, for example, you're not going to be rewarded accordingly. And Lumentum is doing that. So Lumentum, apart from the 70 % plus growth that they are already on the path to deliver, they're also saying they're able to, I think, if I remember correctly, about 65 % or 70 % next year as well, or at least that's what the analysts are projecting.

29:00Amrita Roy:But Lumentum is already delivering gross margin expansion. So I remember doing this in one of my posts. I did this comparison between Coherent, that's growing gross margins, as well as Lumentum. And you see this rapid, significant gross margin expansion from probably about, I don't remember the bottom, but it's probably about like 15, 20 percent, all the way to 30, 35 percent. and all these three companies, Lumentum, Coherent and Applied Opto Electronics, they're all trying to target 40 % gross margin numbers by the end of the year. So like I said, high growth, rapid gross margin expansion and Lumentum is able to do that already.

29:44Amrita Roy:What I like about Applied Opto Electronics, by the way, in addition to all of this, is that they own the entire manufacturing ecosystem all the way right from like really manufacturing that laser chip the ingredients that go into that like for example indium indium phosphide is one of the core ingredients so applied optoelectronics is able to manufacture everything all the way from you know the little laser chip to the the optical plug the optical pluggables that um hyperscalers use to do for their for their connectivity applied up to electronics is doing all of that. So they're in command of their supply chain.

30:26Amrita Roy:They're able, they're already deploying CapEx to ramp up that capacity. So that's another good company as well. And then I think your last question was about NVIDIA. Was that about?

30:37Uttam Dey:Well, I was going to say this notion of that the valuation and the pricing and the fundamentals are a bit divergent these days and how kind of to think about that.

30:50Amrita Roy:So about NVIDIA, NVIDIA, it's in a peculiar spot right now. On one hand, they're doing everything, I think, that I just spoke about. They're growing their revenues, especially their data center revenues. And at GTC, with all of these product announcements, Jensen Huang has confidently echoed this outlook where he can navigate the company towards accelerating revenues. And by the way, he's already showed that in Q4 of 2025. They're also signaling gross margin expansion. So that's the other plus point. But what's peculiar about NVIDIA since last year is there are two things that make NVIDIA stand out, I think, if I remember correctly.

31:47Amrita Roy:The first is there's no company which is a bigger beneficiary of AI than NVIDIA. through 2023 and 2024, NVIDIA was, I'm not even going to talk about, you know, how the revenues were growing. I'm just going to talk about the magnitude of beat that NVIDIA was delivering. They were delivering, you know, earning beats, revenue beats of like 5%, 10%. Right now, all that they're doing is they're delivering an earnings beat or a revenue beat of just 2%, 3%, maybe single digit, low single digits. that's not something investors were probably used to by the way if you look at q4 2025 their china revenues used to be between 4 billion and 6 billion on on you know per quarter in q4 2025 their china revenues grew to about 8 billion so now all through when you start adding that up.

32:54Amrita Roy:You have a company that's delivering revenue beats of about 1 % to 2%. You also have the company where they suddenly delivered China revenues of about$8 billion in Q4 2025. But the same management last year was saying, no, you should exclude China revenues from the expectations. But now that China revenues have come in, which is double, they're able to deliver that little bit of an earnings or a revenue beat. That is probably some kind of a problem that investors have where they're unable to understand now, how do I price the forward revenue outlook? Is it going to be with China? Is it going to be without China?

33:41Amrita Roy:Is China revenues going to expand faster or is it not? Because there's still lots of dependencies, there's still lots of uncertainty about trade restrictions, licenses. How do investors price that forward? But even if an investor wants to ignore all of that aside, the main factor, I think, for NVIDIA stock is they hold about, I think, $62 or$65 billion worth of cash on their balance sheets. The big question now for every investor is, what is NVIDIA going to do with that$60 to$65 billion worth of cash that's there on their balance sheets? You have, over the past two years, you have a huge slate of institutional investors that have come in.

34:31Amrita Roy:They're holding probably about 70 % of, 60-70 % of NVIDIA's stock base. And all these investors, especially these institutional investors, they're starting to ask for what a typical institutional investor would ask for. They're starting to ask for shareholder value, at least, you know, increasing shareholder value. They want that cash. They want a piece of that cash. You could give me, as an institutional investor, you could give that to me in terms of dividend. You could give that to me in terms of buyback. But I need a piece of that cash. What NVIDIA's management is saying, however, is that we're going to prioritize first growth.

35:14Amrita Roy:or rather we're going to prioritize securing our supply chain commitments, which actually is quite, it's actually right. You know, as a growth investor like me, I think they're doing something right because if you don't secure your supply chain right now in the face of all these geopolitical tensions and supply shocks, you look at, you know, what's happening in the memory space, NVIDIA is going to have margin pressures down the line. So if NVIDIA's management right today is able to prioritize its cash towards securing supply chain commitments, I think it's right. But an institutional investor, they're more concerned about buybacks and dividends.

36:01Amrita Roy:And there's this disconnect that's happening between these two cohorts of the investor, which is why if you just look at NVIDIA stock over the past eight or nine months. It's a rattling between like 160, 180. There's this immense battle that's going on. And I think until NVIDIA demonstrates

36:26Amrita Roy:either this significant revenue growth where they can show 5 % plus earnings beat or revenue beat, or they can say that, okay, now we're going to start prioritizing our cash towards dividends or buybacks, you're going to see some movement in the stock. I think that's what our point of view is.

36:50Uttam Dey:Amrita, you mentioned mispricings, looking for mispricings at the start of the conversation. Anything else to add to the mispricing conversation? Like which names you're looking, which names come to mind? Sure. Yeah, so I would like to add something to the mispricing piece of the conversation. And I think, like I said at the start, like, you know, AI, in the AI trade, there are obviously the bottleneck trade right now that is absolutely outperforming everything. Like companies in the optics and memory space do not take a breather any single day, like pretty much like they're just making higher highs every single day.

37:26Uttam Dey:And yet you have pockets in software as well as in cybersecurity, which are getting no love. And there is a lot of conversation about especially software getting disrupted by AI. And I would like to add the mispricing part to the AI eating SaaS conversation. So, yes, I think AI does have a big role to play in disrupting parts of SaaS right now. So we are seeing companies like Monday.com, Wix, perhaps even Atlassian, and generally the entire software sector has gotten immensely derated, like to a point which we have not seen, I don't know when in history, But it has been completely massacred, this space.

38:20Uttam Dey:The question obviously lies as to, is there going to be a revamp in software in general? And then just this morning, I think I was reading something around Anthropic launching something called managed agents, where now it's going to be much easier for developers to just develop and deploy AI agents, which was not previously possible. This is, again, like a space that ServiceNow has a strong hold in. So despite me being bullish on ServiceNow, I think I need to take another look at ServiceNow right now. But coming back to mispricing, I think one of the micro sectors within SaaS or software as a service that is getting also clubbed into this whole massacre is cybersecurity.

39:09Uttam Dey:And I think cybersecurity is one of the areas which is currently very, very mispriced. So far, I think since the start of the year, we have had announcements from Anthropic regarding their cloud code security, which just, you know, hit the cybersecurity complex like a rock. I wrote a post about it explaining like why it like how why the fears were irrational. And during that time, we also doubled down on our position and CrowdStrike and Cloudflare. And soon afterwards, the sentiment did improve because of the war in Iran, where a lot of investors flocked into cybersecurity stocks as a form of hedge.

39:52Uttam Dey:But then again, I think with the series of cybersecurity incidents that happened at the end of March, starting with Anthropics, Cloud Code source leak, Mythos leak, along with the Mercos supply chain attack. I think the whole narrative in cybersecurity is very, very sort of volatile at the moment. But I think, I don't think when it comes to cybersecurity, it should not be viewed as a standalone solution. It is a full stack solution. And the biggest evidence of that came yesterday or two days ago from Anthropics Glasswing announcement, Project Glasswing Initiative, where they sort of created a security coalition with CrowdStrike, Palo Alto, and 40 other companies, plus some more, to really sort of like get together and prepare for what is to come as AI models are becoming more and more capable.

40:58Uttam Dey:And I think on that front, particularly, I think CrowdStrike is one of the biggest mispriced stocks at the moment. Because it has a full stack solution with its Falcon platform. It has cloud security. It has next gen identity solutions. At the same time, it has also got partnerships with Cloudflare and Zscaler for zero trust solutions. So really, it's giving proper competition to companies like Palo Alto Networks and Fortinet, which has been actually sort of, you know, has been put in the garbage bag right now. But coming back to CrowdStrike, I think it's one of the biggest mispriced talks because one of the biggest things we are also noticing in cybersecurity is that there's a lot of vendor consolidation that is happening.

41:46Uttam Dey:Enterprises are moving away from like point solutions and consolidating in like full stack solutions like CrowdStrike or even Palo Alto. So like, you know, you would often hear words like platformization, for instance. So companies that have a full stack solution offering a full spectrum of cybersecurity solutions. And now that is validated by Anthropics Project Glasswing that AI won't kill cybersecurity, but rather these companies are essential partners to like power the next generation of cybersecurity solutions as AI becomes more capable is something that the market hasn't woken up yet. So I think cybersecurity is one of the probably the safest spots in SaaS right now or in the entire AI eating SaaS or AI eating cybersecurity and the whole software space in general.

42:37Uttam Dey:I would say CrowdStrike, Cloudflare, particularly CrowdStrike is one of my biggest and favorite picks. Appreciate that. I'm curious. You mentioned service now that you may have to rethink your take there. What does that look like? Like, A, what makes you rethink something? Is it a thematic? Is it narrative driven? Is it fundamental? And then how do you go about rethinking your strategy? I think, well, it is fundamental. I think at a valuation level, these companies have never been cheaper. So if I go with the valuation argument, these are like, you know, bargain hunters, bargain stocks. But I think this is not the way to think about a sector which the whole industry or where everyone is thinking that is about to be disrupted.

43:27Uttam Dey:so yeah from a valuation perspective I have no doubt that the entire software sector is trading at a discount including ServiceNow I think when it comes to ServiceNow over the last in the last quarter you know the company demonstrated RPO acceleration its margins are stable its retention rates are strong it has also been making some solid progress with its sort of AI control tower, where now assist AI solution is part of. This is part of the AI agentic roadmap that it has been building over the last 12 months or even more, perhaps. But the thing is that it has not been able to move the needle on revenue acceleration.

44:14Uttam Dey:And what investors really, really want to see is like movement on revenue. what investors really want to see is revenue acceleration, not 20 % revenue this year, next year, the following year. They do not want to see like, because 20 % revenue continuously over a three-year period projections is quite strong, but not anymore in this agentic AI era, I think. I think in order for these companies to be re-rated higher, investors want to see these companies actually be able to accelerate their revenues. So the company, I think...

44:50Amrita Roy:That becomes really tough when you have Anthropic. The point that I made earlier, you have Anthropic that they were probably on the pace of generating about 4 to 5 billion in ARR last year, which is significantly scaled to 30 billion just a few days ago in one of these announcements. So if Anthropic can generate that kind of significant acceleration, the market's now looking at ServiceNow and saying, we don't just want 20-25 % stabilization in the revenue growth. We want an acceleration right now. And there needs to be some meaningful acceleration from here on. And that's not happening yet. Yeah.

45:36Uttam Dey:So, yeah. So, so with the managed agents piece announcement from Anthropic, it'll be curious to see how, you know, how, how, how the earnings call goes later in the month, this month. Like I said, I think, yeah, it's not about just beating the current earnings and revenue estimates, which I'm, I'm quite confident service now will. but it's about really showcasing that it has, you know, it's usage-based revenue. It's now Assist can be a real contender to Anthropik's solution or that Anthropik really doesn't pose that big of a threat given its data advantage and enterprise customer relations. And so far, markets are not convinced and I don't think the management yet has the numbers to showcase that.

46:21Uttam Dey:And until that happens, yeah, the entire software space will be kind of depressed. And like I said, I think in the entire depression of the software space, cybersecurity is caught, unfortunately. And that piece I do not believe is, and that is a mispricing part that I talked about earlier, which where cybersecurity actually should be benefiting from all of this. But right now markets are just like, shoot now, think later mode, really. Amrita, I also wanted to ask you about meta. You were bullish on them. I'm curious if you have any compelling risks in the back or the front of your mind. Sure. I think the biggest risk to meta at this point is really the macro backdrop, to be very honest.

47:13Uttam Dey:And I can talk about this even from a portfolio management standpoint, because like yesterday and even perhaps even today, we are seeing the markets bounce higher. but we are but is this bounce really sort of a tradable bounce or a durable bounce and i think that until we get some sort of a confirmation that inflation has peaked the higher for longer narrative will stick in the market and as long as the higher for longer narrative sticks in the market equities will be pressured because you know higher for longer generally elevates the risk premium and equities get pressured as a result. So I think from a general market direction standpoint, we do expect inflation to tick up higher in the short term.

48:05Uttam Dey:And as a result, we do consider the current bounce in the S &P 500 as sort of like a tradable bounce before we probably see more weakness in the summer. And I think with every S &P 500 weakness, We will obviously see more pressure building up in each of these stocks. And that is not because necessarily of like earnings, downward revision and earnings, but because multiples are getting compressed. And I think that is probably the biggest risk that I see for Meta at this point. I mean, yes, there are other risks like regulation and things like that. But I feel like those are just story. I mean, those are past us.

48:44Uttam Dey:I think those are not fundamental structural issues that can harm the long-term path of a stock. But from a position building standpoint in a company, these are the sort of short-term volatility that needs to be taken into mind, needs to be taken into account from a positioning portfolio allocation cost basis standpoint. There's so many more questions that I can ask you. So I hope that this is just the first time that you both come on. And I hope this is just the first conversation we have because there are so many more names and things to get into. But as we wind down this conversation, I'll ask you both, Udam, I'll start with you.

49:25Uttam Dey:A, what are you thinking about in the coming days, the coming weeks, the coming months? Yeah, I guess I'll just leave it there. Anything you want to put in there?

49:32Amrita Roy:My thoughts out here would just be an echo of the tactical sort of outlook that Amrita had just mentioned a short while ago that we do expect some kind of a tradable bounce that's going to keep moving the markets higher. there could be some more volatility that we might see through the next few months, maybe into the summer. And we do then expect some, this volatility to then just sort of find some resolution. But through all of that, I think for investors, it's just a matter of keeping calm, watching a few metrics. That's really important. Not many, just a few. And then moving ahead with their portfolio capital deployment strategies just as they are comfortable with their risk appetite.

50:30Uttam Dey:Udam, what would you add? I know you mentioned gross margins earlier, but what would you add to the few metrics? What would you consider the most salient for your average retail investor?

50:39Amrita Roy:For semiconductor companies especially, whether it's memory, GPUs, CPUs, memory, equipment, it doesn't matter. I think gross margins rules all of the metrics. One of the other metrics that I watch a lot is the amount of inventory that a company holds on its balance sheet. And that sort of tells me how the gross margins could be moving ahead. The more the inventory, the more pressure there could be on the gross margins. It also sometimes would signal that there is going to be some more pressure that's coming in in the next quarter or two. Sometimes, though, the companies do have some reliable, you know, some kind of explanations as to why they're holding more inventory.

51:40Amrita Roy:And that needs to match with their product roadmaps. Maybe they're holding more product and they're seeing some general launch that's coming in over the next few months, which is why the inventory levels are moving up. But that sort of needs to flow through in revenues in the coming quarter or two. But, you know, in terms of just the semiconductor company, I would say that I look at these two companies. Outside of that, it's just also gross margins, I think, for software, but it's also ROI. It's also a backlog. So these are big ones.

52:13Uttam Dey:Just to add a little bit more to Uttam's, not necessarily to metrics, I think to the general backdrop of how to think of market. markets. Like I said, I think we are definitely in a higher for longer narrative right now, now that the supply led inflation story has, you know, settled in, and we are going to see inflation tick up in the long term. And until we see sort of a peaking of inflation or markets realizing that inflation is now peaked, and it's about to head lower in any sort of bounce would likely be a tradable one. So during this period of time, I have like two things to say, which is, A, it's like the way we are sort of navigating is, you know, understanding where to raise cash, like cash preservation versus sort of structurally identifying which companies to invest in, given the weakness that we are currently seeing or the mispricings that we are currently seeing.

53:10Uttam Dey:So it's really important, therefore, to manage the risk, the portfolio risk and the risk management in general, between cash preservation and new investments. That's one. And the second thing that I would like to just talk about is that I think, yes, we are hardcore AI investors and we are bullish on the thesis and what it brings over the next many years. But the AI story, I think, is also entering sort of a messy in-between stage right now where, again, like this conversations about ROI on AI CapEx are coming in more and more. In fact, I think this Q1 earnings, there's going to be a lot of focus, a lot of scrutiny being placed on like CapEx, margin pressures and things like that.

54:03Uttam Dey:And usually this is the time where there is often a mismatch between when investors are expecting the revenue to show up versus when revenue actually shows up. Like the timing, there's often a timing mismatch. The revenue eventually shows up if it's an end and we believe it will. But because of the timing mismatch, there can often be like very hard, very hard periods of like sharp, long term drawdowns before the narrative again picks up speed. And I think that's something to keep in mind when building positions and, you know, investing in AI and the tech space in general at the moment. That's all I have to add.

54:42Uttam Dey:Don't invest first and ask questions later. Ask questions first and then invest. Yes. Uttam and Amrita, I'll let you both have the last word. You can follow each of them, both of them on Seeking Alpha, but happy for you to share your substacks as well and where listeners can get in touch with you. So yeah, we have been publishing our research on Seeking Alpha and Substack. We would love for you to follow us on both. We do like a top-down research across the AI supply chain. We are very passionate about the space and finding the winners and also helping you identify losers ahead of time. We are very passionate about this space and will continue to be involved in it for the foreseeable future.

55:25Uttam Dey:And so please follow us. And you're so excited to be part of Seeking Alpha as well for giving us the opportunity to be part of this podcast today. Couldn't be happier and hope you guys enjoyed our conversation. Just a reminder, anything you hear on this podcast should not be considered investment advice. This is for entertainment purposes only, and you should seek advice from a licensed professional before investing.

55:46Amrita Roy:If you enjoyed the episode, leave a rating or review on your favorite podcasting app, and we'll see you soon with a new episode.