Great market expectations

27:48And it has been five months from my last buy or something like that. So I actually pretty focus on tech right now. It may not make a lot of sense. I just sold AMD, and we can talk about that later, to buy other stocks. And my first stock after my AMD sale was Meta. So I think what I just said explains this well. If I ask you which is the most overlooked or underrated Mag7 right now, I mean, it's not Alphabet, it's not Tesla, I don't think it's NVIDIA. maybe Microsoft or Meta. So I stick with Meta because I think it's dirty cheap right now and it still has a lot of potential. The revenue just grew 30 % and PE is 17, I guess, like 17 times earning.

28:46So I think it's pretty cheap for a company with that room of potential and this level of growth.

28:52Dan Rayburn:And you're still in Amazon, you're just not adding to it? Is that right? Yeah. I'm still on Amazon. I'm still bullish on it, but I still have, I already have a big position on Amazon. So I just don't want to increase it anymore. Yeah. I just wanted to say that it's funny that Kenio said that he's not been buying much as of lately because in March I was like a kid in a candy shop. I literally went and bought like half of the positions that I've already sold. And by the way, can you just remind me, of course, I've held AMD for two and a half years. And that was one of the victims of my portfolio.

29:31I closed my position entirely. And another one was Marvel. I just, there have been a few. It was like I've made actually a substantial amount of trades for some reason over the spring and in the last couple of months. but I completely agree about Meta. Meta is an interesting player, although right now people are putting it with Anthropic OpenAI SpaceX in a Mangos thingy. I just written an article about this, that Mangos is the new Mac 7 and Microsoft is not going to take place, but Meta will. And the reason is, of course, because Meta is spending a lot of money on AI right now.

30:18That's not the story for me about Meta. Personally, I really like Meta because I think that online advertising is one of the industries that has the biggest long-term potential, at least the one that we can definitely tell today that this industry has the potential and we can be sure it will be growing, it will be stable, and we can see the direction, we can see the trend, and it's not going to be volatile. Of course, there are other areas like AI, robotics, space, mining, wherever on other planets and other things. But online advertising has an enormous, enormous potential. I've seen some research showing that people are starting buying more and more online.

31:02People are getting, people are okay making purchases they were not actually going to Facebook to make. So basically they're scrolling the feed not expecting anything. They're seeing some fans or a shirt and they're basically just clicking and buying it In a second and by the way, I had some podcast about buy now pay later And that industry is growing so well because of the online advertising industry So meta is big for me because of that not necessarily because of AI Microsoft I'd really like Microsoft and I think this whole story with Microsoft selling for so long will be repriced once people start realizing what I just discussed before about the fact that it's impossible basically to go and to create a SaaS company from scratch.

31:51So once this whole idea market understands this whole idea, I think Microsoft will be repriced. And I think Kenio has something to add here. Yeah, just a point about meta. You said advertising business and also the AI thing. And I think AI is actually a tailwind for the advertising industry. Meta is growing the price per ad very, very much. And I think the prospect is very good here because the all goals and everything that's personalized ads, it, it, Meta can, with AI, they can make more personal ads, more engaging ads, and people will buy even more so they can charge more per ad. So So I think it's a good thing to...

32:35Yeah, this is actually a great point because while I argue often that this AI thing that we're having today, this is very far from this general intelligence or whatever people want it to be. And I think our current large language models and these AI agents, they have nothing to do with this general intelligence whenever it will come. But anyway, large language models, They're amazing in pattern recognition. And this is one of the areas online advertising. This is actually one of the areas where this thing might be especially powerful. So, yeah, I agree. I think they can really use it. I think they can really leverage it.

33:16And I think they have a whole new market that they may open with this. Yeah, Jack. So I get to be a little contrarian here. I have an issue with meta. And I haven't sold Meta, but I've been, as it's done negative 15 % in the last year, I have not been adding because I worry about the culture of token maxing at Meta. So for the uninitiated, this is a Gen Z-ism turned market effortism about companies that basically say, hey, you should spend X number of AI tokens. And that's how we know that you as a developer are doing your job. And when you prioritize the output of AI tokens, then you're not gearing for efficiency.

34:02And you're not going for the outcomes of what is the best product we can deliver, but how much AI can we use? In March, Meta published an internal, well, I think it leaked. It was like an internal leaderboard of how many tokens they spent. And it came out that they had spent 60 trillion tokens in March. which is like for context, if you took all the books ever written, they would be 20 trillion tokens. So they did about three of those in a month and then they released Muse Spark, which then continues to underperform Claude and ChatGPT and Gemini and all of its benchmarks. So we're going through massive amounts of spend and producing things that are inefficient and like not up to snuff with the frontier labs.

34:46I know Llama had its own issues, but it was open weights, so it was a little different, but the new proprietary models are just not as good, but Meta keeps spending an enormous amount on producing them. And I don't know how well that will end up if they just, like LLMs do get good at ads, but they just license Claude later because it's just better than what they can produce. That's a fear that I have for Meta. If I may add a point, I just read that Meta is not token maxing anymore. They are token managing or something like that. So they are now very concerned about the token spending. So I think...

35:25So they're actually correcting this. Exactly, exactly. That's why we have to think that we can't see a company as a photo, as a picture, we have to see it as a movie. So Mark Zuckerberg said, hey, let's token maxing. And then, okay, this is not going anywhere. We are spending billions and billions and billions. So let's correct. So it's just another thing that I am struggling with, but I'm seeing this trend which, well, let's say this is a speculation of mine, something that I've noticed that these companies, I don't really think that they don't know exactly what they're doing. because token maxing had been some kind of a trend and investors were pouring money into the companies that were token maxing.

36:11So this is just, I think they're really trying to play on trend. They've been just included into this manless thing, as I already said. And this is all of these things right now. We're not looking at the tech sector from the standpoint of technology. We're looking at it like they're playing marketing. marketing for investors they're not playing technology for now and this is the biggest thing but at the same time it is working for many companies the company like spacex they they made this incredible ipo first on the very smart financial engineering on how they created this whole ipo situation and how the stock basically couldn't not go up i've written an article about spacex a couple of weeks ago and i called that article the terrible truth about spacex ipo and i explained the whole situation and how in my opinion it was even unmoral on some conditions what spacex decided to do but at the same time i gave it a buy rating and some people they were like well this is inconsistent and i were like i'm sorry guys but this is exactly like they did a smart thing they did a good job and for their company and for their pocket it will be working well.

37:27So here, this is why I'm usually saying we should be careful, but at the same time, I'm keeping my foot. I don't want to miss out on one hand. And if I am able and I think I am able to recognize the game, I can actually try and participate. Of course, not at those levels, but at the same time, why not?

37:48Dan Rayburn:If something doesn't encapsulate the times that we're living in by what you just said, like, it's pretty immoral, but I consider it a buy and I'm going to get in on that. I get the game. I mean, my God. There's a great George Soros quote where he's like, when I see a bubble, the first thing I do is look for more fuel. Right, right, right. Let's talk a little bit about the metrics that you're using. I hear like the narrative points and the story points. And Kenny, I really love that line about we have to look at this like a movie and not like a photograph. Is that your line? I've never heard that before.

38:19Dan Rayburn:That's a very, that's a really nice visualization? It's something that we used to say in Brazil. I just translated the sentence. I think it's pretty common here. Is it in Portuguese? Yeah, in Portuguese. Portuguese. Will you say it in the original, if you don't mind? Pensar na empresa como um filme, não como uma fotografia, não como uma foto. Love it. Tells a story. Anyways, a lot of questions about valuation and how to properly value these tech stocks in particular. For those that can't see, Julia is basically giving a mind-blown emoji. It's very tough to do. So what metrics are you all most focused on?

39:02Dan Rayburn:Kenya, let's start with you. I think I'm mostly looking for expectations. I would say valuation and metrics like price to earnings or price to sales, but it all boils down to expectations. So I sold AMD and I just have some notes here. Let me check. In our last episode, I was still an AMD holder and the stock was$200. And the PE adjusted was 25 to 30 times earnings. And it's now something close to, let me just check again. It's now 70 times earnings adjusted, forward. forward. So we have to wait three years to get at this level again at 30 times earnings. So I think it's pretty inflated right now because market just is expecting that AMD will grow EPS by 70 % per year in the next two years.

40:01And they have some good reasons to think about that, like AMD, the AI PCs, the new AI hack structure, the new AI CPUs and all of that. AMD really has some good reasons to be bullish about. But I think it just doesn't feel balanced. You know what I mean? If I ask you, is AMD more likely to have a derating or a rerating? And you know, I just said market is expecting they will grow EPS for two or three years, like 50, 70%. So I think we have some potential risks here, like regulatory shifts, macroeconomic risks, competition. All of that can be a risk, can be a hurdle to AMD. And of course, positive surprises are a thing too.

40:56But I think market is already priced in the positive surprises, but it's not priced in the risks at all. So I think that summarizes the whole question. It's about expectations and what market is already pricing in. And we can talk about SpaceX again. Market is pricing in all of the potential and none of the risks.

41:20Dan Rayburn:Julia, you want to go next? Sure. For me, that's a very difficult question to answer because, like, talking about the long-term perspective, I guess it's easier because we're like, as Kenio said, we could be looking at the expectations and very much hope that we'll get it right. although I found a very Funny and interesting thing about Nvidia and my YouTube channel and some of the videos I randomly threw in that In 2023 we were expecting because I remember something like that. I'm a long-term Nvidia shareholder So we were expecting that the company will be still growing by around 13 % by 2026 by 16 % by 2026 and i it was and i talked about this in my article where i broken down the recent nvidia's water and nvidia is growing by that quarter over quarter and not annually as we were expecting back in 2023 and back in 2023 it was um an article from an author on seeking alpha actually and he's been bullish on nvidia it was not a bearish article and it was actually a bullish expectation for this company going forward.

42:31So a couple of things that I learned from this. First of all, it's very important to get the direction. You don't really need to know by how much it will grow. The direction is what matters. And I guess with this, all of our projections and expectations could help. On the other hand, it doesn't really matter because the market, especially right now, is so volatile and in general the geopolitical situation and everything that's happening it's changing so fast that if we will actually sit down and try to evaluate company we could be changing this valuation every single second of the every single day and we might be getting different results so what am i doing for myself is um i'm breaking down the business i'm breaking down what companies are planning on doing i am checking whether for me it sounds logical whether for me it sounds something that this company should be doing well may it may not be the right way but i'm choosing the company for myself and for my investments so i'm really trying to understand whether the direction and in general the narrative that this company builds uh looks right of course i'm looking at the valuation of course i'm looking what was projected for growth of this company but at the same time if we're looking at some like celestica i just traded it although i'm not really i'm not a trader i've pretty much never done this maybe five years ago when i just started out i traded snowflake and it was actually very successful i made in like a couple of weeks some incredible returns but that was the only time i've actually traded something but i started doing it again because right now the market is so crazy and sometimes i just see this disconnects with what's going on with the company and how the market reacts and sometimes that's just enough for me i just see the disconnect and i'm like well okay i will jump in on that so it's it really depends on the company it really depends on how long i'm planning on holding it it really depends how i'm feeling about this how i'm feeling about the industry it's really it's really important for me to know that the industry is stable and for example with software i know that software will not go anywhere and i've been buying software i don't care people are saying that i'm trying to catch the falling knife i'm happy to get in early and i will be averaging down because i just know that we're not not there that software companies will be killed the same for cyber security for For example, cybersecurity is one of the industries that's been sold off.

45:08And there are plenty, plenty of stocks that people can buy right now. They're very cheap and they're great companies. There is a competition there, but I just seen interesting that Ovas has just published. They're usually making a list of main cybersecurity threats that we are having. And right now they've made this list of the cybersecurity threats created by AI. This is one of the points that I've mentioned in some of my articles that AI is not going to kill cybersecurity. It's actually going to help it grow because it will create a bunch of threats. So now we've got an official confirmation of this fact because Ovad just published a full official list of the problems that AI is creating.

45:53So basically that's that. Just the common sense logic, some valuation metrics, and that's it.

45:59Dan Rayburn:It's a bit more art than science. Jack? That's my take. It's a little more art than science. I think on the micro level, valuations are so blown out in some firms and not in others, but you have to know their business really well. And that's how I've always felt about valuations on any individual firm. Micron's trading at nine times forward earnings, which is like, oh, wow, That sounds great for a chip company, but their normal is like six in a given world. So you have to know and understand their bits. And they may already be in the peak of the cycle. So the margin is like 60%. The operating margin, the gross margin is even better than NVIDIA's.

46:47So what happens when the demand becomes more neutral or the supply becomes more normal? so if the margin falls the the expectation will fall too so the multiple is now higher yeah and actually with micron especially people are looking at the forward metric something i wouldn't do at all because forward metrics basically right now are overblown by a lot even even with this memory shortage that we are having right now the expectations that actually it will be only intensifying for a couple of years forward which is it could happen definitely but if we're taking a look at the trailing 12 months which in my opinion is a right way right now to evaluate micron just just in order to maybe not evaluate but in order just to see how expensive it got and this um you know the difference between the forward and the trailing 12 months just shows how people actually hope for this ai rally to continue and that may happen but they also, it could stop.

47:49To answer your question, Rina, about what I'm looking at, is I think in terms of S &P 500 valuation, big picture valuations, right now we're sitting at 20.5 times forward earnings on the S &P. We were at 22 back in January. And if we got back to 22 by the end of this month, so we've got two weeks, the S &P hits 8 ,000. And I think a good peace deal news cycle, and Julia's closer to that reality than I am on what's going on with that. But actual good news that comes through, I think, could easily re-rate us back to 22, and we could see the S &P jump, just like we're watching SpaceX. I'm a little bit of a bull, I suppose, in that way.

48:37Dan Rayburn:We got a comment a few weeks ago. They're wondering what about the B2B AI companies that we talk a lot about the semis and we talk about the software stocks. What about the B2B AI companies? Any thoughts there? B2B AI companies. I'm just trying to think what it could be like all of those companies like Anthropic. Anthropic is B2B whenever enterprise. Like Ballantir maybe? The frontier labs, I think, generate almost all of their revenue from enterprise solutions. At least, well, we don't, and we'll see when they IPO. I'm so interested to see OpenAI and Anthropics actual financials because there's a really big question.

49:18I know they filed their S1s confidentially, which I didn't know you could do. Yeah. Yeah, yeah, that's right. So we didn't get the crazy presentation. I mean, SpaceX was, that was the loudest S1 I've ever seen. It had like 28 pictures of rockets in it that were like full page, just pictures of a rocket. It was cool. And it was a lot of fan service. But then you get into the numbers and we start talking about the numbers issues. And I worry that we're going to get that whenever we get our first big investor presentations for these frontier labs. I worry that they're spending way too much money on subsidizing tokens for end users.

49:52I worry that that's why a lot of small businesses, which I think are benefiting from the AI a software ability or creation ability more than anyone else. But if they're just being subsidized, it's so good for them because the Frontier Labs are just paying for all the tokens. I wonder if they'll actually be good businesses. And until we see their numbers, I couldn't tell you. Yeah, actually, I expect the numbers to be bad on one hand. But on the other hand, I see how the interested part is, basically, they're helping each other. I just in my recent article, I mentioned how Google conveniently made a deal with SpaceX.

50:28I had like a week ahead of IPO for$30 billion over the next three years, something like that. And SpaceX and they can actually break the deal. Any side can break the deal at any moment after December 2026 for basically no reason. And they will have to just give a month's notice and they will stop paying. And anyway, they find ways to boost each other's books. And this is something I expect we will see from SpaceX on its first waterly results. But I think as ones from OpenAI and Tropic, they will be something. I think they didn't have the time to actually boost those numbers yet. But anyway, SpaceX, no one really cares about the numbers, right?

51:12People are loving the story. people are looking forward and they're like yeah but there they became public and now we're seeing all of those huge deals and google will be pouring the money and everyone basically will be pouring the money so spacex will be good let's see that that could happen with entropic and open ai but i actually think that it might be the time when we when we see the first cracks in this whole narrative and in this whole bullish rally whenever we see the s ones and i think they will have to publish them, make them public two weeks before the IPOs, I think. But I'm not sure.

51:47Dan Rayburn:I've taken up a lot of your time. But Julia, I did want to ask you about the private credit, because you said you were somewhat bullish on some names there. And private credit has been a space that we've talked about a bunch recently on the podcast, for I think, obvious reasons to all of you. Yeah, I guess so. I can't say that I have so much. I've broken down a year ago, So I think a couple of companies and even funds there. For myself right now, I can say that I've picked ours. Just, I don't know, it seems like a good one. I've picked it for a portfolio of mine, not for the tech portfolio, but for the other one that I have with my mom.

52:25So it's more like stable portfolio. They pay 11 something percent dividend right now. So I thought, why not? I'll lock it in. and even though I think the rates will be held as they are, there is still a chance that they will be raised by the end of this year and if it happens, then private credit might do very well. So this is what I am not expecting, but this is something I am preparing for. If the rates are being raised, at least I will have something to mitigate the risks that will be happening definitely with the whole AI story. I had one thought on this. is my take on private credit, because I have been a little spooked alongside the market since Jamie Dimon got on that call and was like, where you find one cockroach, there's more.

53:13The opaqueness of the industry scares me. The ability for the managers to use what are called continuation vehicles where they can basically like, oh, we can't sell the portfolio companies, but we, either because the valuations are low or there's no buyers or whatever it is, but we need to pay out investors. So they'll start a secondary fund, dump the entire portfolio in, The secondary fund buys it at a discount and they can pay out the investors and keep the portfolio cos in play. And this is now getting to the point where they're doing this. And these companies have been in three portfolios so far, three continuation vehicles.

53:48So they can't get rid of them. But if I had to make a trade here and I don't know how to actually take this trade other than the one side, which is long GPs. I want to be long the people selling all of this stuff, ARIES and KKR and this group, but short LPs. I would not be buying into private credit funds. I would not be buying into low-grade CLOs right now. We're seeing a lot of those equity CLO and BDCs and these kinds of groups get hit really hard. And I think that's rightfully so. But I like the issuers a lot more, I'd say to Julia's point here.

54:24Dan Rayburn:Let's get your final thoughts, how you would encourage listeners, investors to be thinking about these markets. Yeah, Jack, let's start with you. Yeah, I think that I'm optimistic about where we go from here, but it has to rely on the AI trade continuing forward, right? We're talking about AI companies are pulling the market. So I'm looking at markets and I'm trying to make this call of, I think we re-rate before the end of the year up to 22 times. I know, I mean, at the end of June that would take us to 8 ,000, but that'll go even higher if it takes us until September, we might be 82, 8 ,300 in the S &P.

54:58So I'm staying long here, but I'm long in a very macro sense. I'm avoiding a lot of the riskier companies in my portfolios, the ones that have taken off Micron, I had to get rid of too. I kept some, but barely. I mean, after a 400 % run over not that long a time, it's like, I don't know how it sustains it. And I think that investors should be really scrutinizing what's left in the portfolio if it's been part of this big AI trade. Because if there is a rotation, it'll be quick and we won't see it coming. And then we'll be talking about it on a podcast after the fact. So now is the time to get ahead of it.

55:34Kenio? I will just summarize everything I said here. I think avoid FOMO, avoid euphoria, and try to think what market is pricing in on your portfolio or what market is pricing in on on your stock, like we talked about SpaceX, AMD, Meta. Market is pricing in the risk, but it's not pricing in the potential about Meta, of course. So that's it. And I would avoid FOMO mainly because we all know that even we have some rational thoughts about SpaceX, we feel the FOMO. We have to, like, regret, why didn't I buy it and then just sell in the first two days? So we have to avoid it. Yeah, I guess I just want to remind our listeners that even though, as Kenio just rightly said, that we're in this kind of crazy form where people are afraid that they will be left behind.

56:32But I just have to remind all of you that just six months ago, people were actually afraid and were telling that the capex is too big and that the bubble is bursting. So this is just about the cycles and how the market works. And even if nothing crazy happens, but just the sentence changes or people get frightened or whatever happens, we may enter another fear cycle like that. And it would actually be the good time to buy once again the same AI that I just was skeptical about. And this is just for me, it's just the balancing act, probably, because on one hand, I am very bullish on technology and I think it's great.

57:14And I think that companies can achieve great results. And I think that mixed with people, I don't believe it will change or substitute the workers. But I think mixed with the right workers, companies will be able to make great, I don't know, rich efficiency levels, productivity and whatever they want to achieve. But they have to take some time and to manage in the right way the token spending, how it will be working out. It's still very fresh. It's still very new. So not only the market is volatile, not only the investor doesn't understand what's going on. CEOs and workers at the companies we are discussing, they have no idea what's going on.

57:53And I know not one CEO like that from an AI company, a tech company, and they're all trying to figure out how they should manage this landscape. So try to manage this landscape together with them. and as I already said back in time when everyone were screaming that AI is not going anywhere I was the one buying AI stocks and telling I was bullish on AI right now I'm still bullish on AI but I think the market is just way over its head at the moment and I'm buying software and cyber security I think in any case if you want to stay in the market stay in the market and you can definitely find especially now cheap stocks out of AI And for me, I think this is the best thing that anyone can do, or at least this is what I'm doing.

58:44I'm not only in private credit or I'm not, of course, switching all of my money. I just said that I'm trimming my position. Some I'm closing, but some I'm leaving behind. So as I said, balancing and trying to not get burned, but on the other hand, to stay in and stay put in order to catch those incredible upsides that we're seeing. Something I've been noodling on, and I hope to come back to this in six months when we get back here after another one. But I hope we start tracking for some of these companies like Meta and Amazon, whoever else, return on invested tokens. I want to see the actual returns on these.

59:22And I think that would be very telling of market valuations and what we should and shouldn't be buying.

59:27Dan Rayburn:Is that a likelihood in any way, shape or form? Nobody is going to tell you that. Nobody is going to tell you that in no way. In no way. We've already seen that Uber just burned in a month or like a crazy amount, a yearly amount of tokens, right? And they said that it's not efficient and they didn't see the productivity of all of this. So, but no, I don't think that we actually will be getting those numbers. Maybe I'm too hopeful. 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.

1:00:02If you enjoyed the episode, leave a rating or review on your favorite podcasting app. And we'll see you soon with a new episode.