#981 - How High Can Tech Fly? with Dave Mazza

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0:57How high can tech fly? Welcome to Real Vision Daily Briefing. It's Monday, February 26, 2024. I'm Ash Bennington, joined today by Dave Mazza, Chief Strategy Officer at Roundhill Investment. Dave, welcome back to Real Vision. Hey, thanks for having me back. Dave, it's great to have you, man, especially talking about what we're talking about right now. I teased it at the beginning of the show. Talk to us a little bit about how you see these markets, especially the high-flying tech stocks. Yeah, well, it's fascinating because on one hand, it's always hard to continue to be bullish when markets just keep going up and price targets just keep going up.

1:34And it's natural for anyone, whether you're a bear or not, to check yourself. But if we take a step back and look at the data, which is really kind of how we like to frame out opportunity sets, earnings season, particularly for the magnificent seven stocks, was downright great on average. Now, certainly Tesla's maybe in a league of its own from being a bit softer. But these companies generated close to 15 % revenue growth. The rest of the 493, a more modest 2.9%, but still pretty good. So we're out of that earnings recession. And what's driving us - That's a huge delta. Massive, massive. And I think that's what's been a bit, not to change the subject here, I know we're talking big picture, but that's been a bit misunderstood, right?

2:22Everyone's looking at the valuations, right? And PEs are high across the board. They're particularly high for tech. and for mega caps in general. But I think the reason why is that the FOMO kind of came back to the market, but it came sort of where there was growth opportunities. And it turned out the growth wasn't from small caps, wasn't from areas that maybe some were thinking that it could be from a rotation standpoint. It's come from mega cap tech on average. And that delta, you're absolutely right, it's massive. And if people are looking for opportunities in the market, right, We're not in a TINA environment.

2:59But where are you going to go? You're going to go for growth, especially if you're concerned that growth, economic growth is going to be weak in the back half of this year or into 2025. Yeah, and you dig in one level further. You talk about the margins that these businesses have and the growth on these margins, which are quite compelling on the surface. Talk us through that. Yeah, so the other interesting point is we know that AI in general really was kind of the initial drive higher, right? The excitement around that, where companies like NVIDIA, Microsoft, Alphabet, going to be a boost from that as consumers embraced it, enterprises embraced it.

3:39But again, if we look at the fundamentals, huge difference between the Magnificent Seven and the rest of the market. One on just simply the margin difference. So we're talking about about 23 % versus 9%. So that's 23 % for the MAG-7, 9 % for the non-Magnificent 7, if you will. But more impressive is the growth of that margin. We're seeing the Magnificent 7 margins to actually continue to grow, and the 493 decrease. So this thesis that we've had, and we're not the first to talk about this, but there's kind of a haves and have-nots. We've heard about that for the economy, but we're actually seeing it in the equity market too, where the haves keep getting more and the have-nots really are out of favor from a sentiment perspective, but also from a fundamental standpoint.

4:30Well, let's talk about that because the margin story here is a really interesting one, 23 % versus 9%, two and a half times. I mean, these are just huge, huge differences. Why are these companies able to generate such higher margins. Is it because of scale and because of the fact that essentially the marginal cost, particularly in the software business, probably doesn't hold this true for NVIDIA, but in the software business, essentially your marginal cost is zero of producing an additional unit of the services that these guys produce. You got a global market. Boy, that sounds like a favorable setup.

5:00Yeah, you're hitting the nail on the head. So really one from a fundamental standpoint, from just the way the businesses are structured, really most of them have the ability to kind of scale much quicker. And we know the talk about hyperscaling with AI and with the chip industry, what have you. So that's an example of that. It's also been the fact that many of these companies a few years ago were some of the first actually to begin with this rolling recession idea of layoffs. And so they actually have seen their revenue growth increase, but also their cost structure improve as well. So that all has helped.

5:40Now, we can talk about, is that bad economically and things of that nature? You never want to see people out of work. But the companies cleaned themselves up, and they were some of the first to do that, where others have not. So I think all of that has actually helped. And then plus, as you alluded to, we just have the fact that these companies, it's not just seven stocks or 10 if we want to go broader. There are hundreds of companies, right? Alphabet alone owns 200 companies. The same could be said about Meta and Apple, what have you. And so I think we get a little bit too hung up on just the concentration of seven names.

6:17What's happened over the recent past is that these seven names might just be seven stocks, but they're not seven companies at all. There are many more. Yeah, I want to come at this from a slightly different angle. I want to read a tweet that you retweeted, because it gives you a different sense, a different context of where this might be coming from. One of the questions that folks ask is, is this rally overextended? Do they have room to run? What's the question? What's the context? Just read this for you. This is from Bespoke Invest. Here's a stat for you. It's been 309 trading days since ChatGPT was released on 1130, 2022, and the NASDAQ is up 46.07%.

6:55In the 309 trading days after Netscape, the first web browser, was released in December 1994, the NASDAQ was up 45.9%. Doesn't get much closer to that. Now, here's what's interesting. When you look at this chart, where we are today, some 300 trading days in, it suggests that the other two cases here continue to run for a great deal longer, about a third of the way through. If the cycle holds more over, you start to see the second derivative, the rate of change, steepen, not decline over time. Again, not suggesting that the past will repeat itself, but there is always the question to ask is, does the past rhyme with what the future may be?

7:33Dave, thoughts on this? Yeah, I thought this was a fascinating stat, and kudos to the team at Bespoke for kind of thinking about this, because many have said that the release of ChatGBT is AI's iPhone moment. And of course, that means there's a lot more to come. And I generally have to agree with this. Really, almost for about a year, perhaps even more, we've been discussing, or I've been thinking from kind how I frame the market is that we are not, when folks were saying, are we in a bubble or are we heading? We're nowhere near that. We might end up in one because of charts like this that suggest that we actually are in the early innings as companies embrace AI, as we learn from the most recent earnings season that this is not, wasn't just a flash in the pan, right?

8:19There is true, real demand. This isn't a theme that's pretty regenerative AI that's happening 10 years in the future and we got to get on the bandwagon now. I mean, it's happening now. Companies are using it. Consumers are using it. Of course, there's going to be issues. And whether that's the news about Gemini and Alphabet and things of that nature, or just look at the release of Sora that came out of OpenAI. This is amazing stuff that we're seeing. There's going to be a lot of hype around it. Not all of it is going to pan out. But I do think we're in the very, very early days. And even though it makes people uncomfortable to say, hey, how can markets keep going?

8:57when we have PEs above 30, let alone price to sales multiples of some of these companies that are under traditional lenses extended, well, it can because now you have people embracing it and sentiment will come along with it. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Join over 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, June 5th and 6th, 2024. Raoul Pal, Benedict Evans, Balaji Srinivasan, Edward Snowden, and over 150 others will join the industry's most influential to explore and unveil the next wave of transformative AI technologies.

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11:10Well, Dave, since you mentioned sentiment, we've pivoted away from fundamentals for a second. We're talking about sentiment and technical factors. All this week on Real Vision, we're hosting a series called How the Pros Do It, and we're talking about research. Today, we had a phenomenal kickoff with two RV OGs, Jared Dillian and Tony Greer, sitting down with Maggie Lake. Let's take a listen to that clip, and I'd love to get your response to it just after this. What's in the pot when you're looking at something? Basically, sentiment and technicals. I do look at charts, and the best trades are when the two line up, when the sentiment and the technicals line up.

11:44So, for example, back around$4 ,800,$4 ,780 in the S &P, I took a shot on the short side, which was purely based on technicals. And it worked for two or three days, and then I got stopped out. And the reason it didn't work was because the sentiment and the technicals did not match up. The sentiment was not extended enough for that to work. Okay, if you want access to research from the pros, go to realvision.com forward slash RV marketplace. That's realvision.com forward slash RV marketplace to see what RV member discounts are available. Dave, you heard it right there. Tony Greer and Jared Dillian talking about the idea of sentiment and technicals when they align, when they don't align.

12:29Any thoughts on this in terms of the way you look at markets? I think it's kind of spot on, particularly for kind of the more trading standpoint, right? So let's use the technical point, right? So we know that that can provide insights into entry and exit. But it's sort of how I was trained from a fundamental standpoint around valuation, right? Look at the Japanese equity market, right? Classic example. It was cheap for 30 years for good reason. There was no earnings firepower, let alone revenue growth. Demographics weren't there. It wasn't until there was some catalyst that made that market attractive.

13:07And then a big part of that was Warren Buffett's investment into trading houses. And so people said, we got to relook at this. And the sentiment began to change. So I agree. When those two elements align positively, particularly if you're on a bullish side, it's going to be very helpful because we are in an environment, at least a thesis that I have, is that fundamentals and technicals in isolation don't matter as much because we're so often algorithmically driven or quantitatively driven. But the bigger trends or the more kind of medium-term to longer-term trends is where you have sentiment aligned with technicals or aligned with fundamentals.

13:48And just like we're seeing with the potential for the AI story to play out in that same way, is that we've seen this time and time again, particularly as now we have to recognize that the movement and the flow of funds and the movement of money, especially with retail coming back into the marketplace post-COVID, it can be really important. Let me ask you this, because you mentioned the Japanese equity market, sort of one of the great tropes that the bears always rolled out about whether it was a technical technology, skepticism, or what have you, or overvaluation in general was this idea that the Nikkei 225 never regained its 1989 high.

14:28Well, that one got blown out. Here we are trading at, what is it, just shy of 40 ,000 on the Nikkei 225. Any significance that you attribute to that? Or is this just a case of essentially Japanese central bank intervention in the yen and devaluation? Well, that's probably a topic that you could spend three days talking about the impact of what the BOJ has done over the long term and the benefits are not. But I do think, just let's go back, let's go talk about the chart for a second. I do think that that's incredibly significant. We know that, you know, for many years, we were waiting, you know, it's like a waiting for good to go.

15:05You're waiting for markets to regain, not just from kind of a classic technical standpoint, but just how people feel about it, right? Are we back to a place that makes sense? Did we finally regain all of that? And again, oftentimes that happens when you have sharp run-ups in prices that aren't truly sort of backed up by fundamentals. But now, if you see that being regained, it took over 30 years to get that. Then I think it makes the potential for the reforms that the government has tried to put into place and that companies are taking a bear kind of much more real and actionable and something that I think has the potential to play out, not just.

15:46kind of a hope and a dream, if you will. Yeah, by the way, here's a segue for you talking about the risk of purchasing power declines in fiat currency. Let's talk a little bit about Bitcoin trading right now on my screen 54 ,462 up five, five plus percent trailing 24 hours. Thoughts on Bitcoin more broadly? Yeah, today was really a huge day. We're talking about this in the intro here, really impressive sort of gains. What I've thought that's interesting about sort of the Bitcoin setup is that our expectation was that we were kind of due for a bit of a range bound year. Perhaps we might still find that out to be the case, but I think the most recent moves have been impressive.

16:30We know there was, like Bitcoin always does, or really any more speculative asset does, is that we tend to see extreme run-ups in positive news, whether that's the Coinbase IPO, introduction of futures, and then the really important introduction of spot Bitcoin ETFs. And then you see the kind of sell the news event. And that kind of happened again here. But to me, now that we're seeing really, even with the outflows from GBTC, the impressive inflows from, I think, a non-crypto specific investment community into ETFs, which the bulls have been waiting for or pointing to as a big part of the potential bull case, outside of all the other issues from a fiat standpoint, is impressive.

17:21So although we've been thinking it's probably due for a bit more of a range bond trading environment, we may be pleasantly pushed to the upside on that because there does seem to be this idea that now it's not just, you know, when we're in an environment where we're not just having kind of what we'll call it, you know, crypto people or whatever the haters want to say, you can't say that anymore, right? So we know that we're going to have Bitcoin ETFs used in traditional investment portfolios, and that's great. And so now we have that sort of as another driver of demand. And really, if you look at some of the numbers, at least that are coming out, But most recently, the ETFs for kind of a relatively small size in the grand scheme of things have been a pretty big driver demand, which I think is impressive.

18:09Yeah. By the way, I should say questions coming in hot today. We're going to get to those in just a second. Not surprising given the topic that we're talking about here. But before we do that, you guys at Roundhill are in, at least in part, in the ETF business. And I want to talk a little bit about the Roundhill Bitcoin Covered Call Strategy ETF. First of all, tell us what it is and give us a bit of a primer for people who are not familiar with the income bets on covered calls, what it is, what the downside is. Talk a little bit about the structure of that fund and how you guys see it. Yeah, so let's a lot to unpack there.

18:43But so YBTC is the U.S.'s first covered call Bitcoin strategy ETF. And the idea is quite simple. It combines exposure to crypto or Bitcoin and the potential for high income. So traditionally covered call strategies are used in the equity market as a way to extract income out of assets that may not pay you income, which is one of the knocks on Bitcoin itself. And so we implement a covered call strategy where we sell slightly out of the money options to generate income. And when you have an asset actually that has inherently high volatility, the potential for high income can be very robust. So, for example, the distribution yield, the most recent one based on the distribution that we announced today for YBTC is over 40%.

19:39We cannot guarantee it will always be that case. It's a function of the difference between implied volatility and realized volatility, but very attractive for someone who's looking for income, but wants to have exposure to Bitcoin. Now, the downside would be, one, you got to think about it as a bit of an income-first approach combined with the potential for total recurrent coming from Bitcoin. But if you're looking just to get all of the upside that Bitcoin can have, you're not going to get it with a covered call approach. It will lower the volatility of the asset significantly, which could be a benefit.

20:18But if you're looking to invest in Bitcoin just to maximize returns, YBTC will lower those return potentials. But on the flip side, providing with the potential for high current income. So the way I view it is there's been so much great advancement in Bitcoin, in ETFs, with all the spot Bitcoin ETFs out there. This is another opportunity to say, hey, Bitcoin is being institutionalized. There's more access to it than ever. And this is a way to combine the potential for returns that you get from Bitcoin, but actually harness the volatility that can come from it and use it to your advantage. We're going to take another quick break to hear a word from our partners.

21:04We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:12Yeah, by the way, when people talk about markets maturing and the sort of the structural buildup that needs to happen, folks, this is what they're talking about. By the way, of course, understand your own investment needs and objectives, whether something is right for you or not. Clearly not financial advice for educational purposes only, but it's an interesting point to talk about. Listen, talking about covered call ETFs, Ralph Humphrey has been paying attention. His first question to us is, I noticed that Roundhill has a covered BTC ETF. Are there any plans to have an ETH version of this strategy?

21:42And if the SEC were to approve a spot ETH ETF, do you foresee any real obstacles to having a yield component to it via staking? Great questions. A lot there. Yeah, so certainly we are always, I'll say this, we are always looking for new opportunities. to introduce innovative strategies. I think the fact that we brought something like a Bitcoin-covered call ETF very quickly after spot Bitcoin ETFs can give you a sense of how Roundhill thinks about the world and thinks about being nimble in opportunities. There's a lot of work to be done on the approval of Ether. However, a lot of that work was done with the approval of Bitcoin and then the introduction of Ether ETF.

22:28So time will tell. I think it's really difficult on this one until we have some more information to say, hey, I think ETFs are coming under this time frame or another time frame. But the door is open. There's an opportunity set there. And I think what's interesting there is integrated into some of those funds could be that staking component, or you could implement a covered call type strategy or other options oriented strategy on an E-facet itself, which is what really why BTC is doing with a Bitcoin asset. Yeah, I guess the only proviso to say there is one never knows how the SEC is looking at this.

23:09Do they see Bitcoin as different because it's sufficiently decentralized in some different way because it's not controlled by a group of, you know, a group of whatever, however they think about it, right, in terms of the governance perspective? I don't want to sort of attribute anything there. and does the staking component potentially raise a complexifier? Unknown, have to wait and see, but certainly an interesting thing to think about. Next question comes to us from Mark Naismith Beely. Dave, what do you think the sentiment means for Apple and Tesla? Yeah, so this is a question we've been talking about a lot.

23:42Is that any time you see, and maybe we'll take those two stocks separately and then combine them for a minute. So we actually did a study because we were getting a lot of questions, right? Is Tesla still magnificent? Does this make any sense? And what's fascinating is that if you look at rolling returns, so looking at rolling 12-month returns on a monthly basis, the differences among those seven names, and this, of course, predates when they were packaged together and thought about this way. But before then, there was FANG and FANGM and MAGMA and all sorts of other acronyms. To me, I think Magnificent Seven kind of captures it well, because it's just talking about the group of stocks that's less reliant on whatever the ticker symbol is of one of those names.

24:27To me, just an expression of mega cap leadership and mega cap tech, is that there's times where there's 100 % return differences. So it's actually normal, even among these seven names, to have dispersion. Now, so that's kind of fact. But what I would say from a sentiment standpoint, to go back to that, is, yeah, sentiment on Tesla is weaker because they disappoint it. The company, I think, has a, the one thing I would say is you never really, you should probably never bet against them because they've impressed time and time again. And everyone loves, not everyone, but there's a good group of people that love to bet against Musk and bet against what that company can do.

25:09And I think he showed some firepower in fighting back on that. But at the end of the day, there's some cyclicality with the business. They are an EV car company. Demand is slower. Lowering prices didn't help. And they had a week Q4. And that's been reflected in share price. Apple's kind of a bit more challenging. I think people are hoping. But this week, they do have an annual meeting. And the question is going to be AI. That's the focus. with the other names, with the five of the other magnets from seven, it's very clear, not just the fundamentals that we spent some time talking about a few minutes ago, but they're all AI, right?