Exclusive Interview: Coatue CIO on AI's Biggest Winners

25:25But now if you think about it, if you or me in a year or two, we're going to have a claw that's running hundreds of agents at all time. I'm going to have a similar impact at work. I'm going to have hundreds, maybe thousands of agents running at all the time. All of those agents require CPUs, GPUs, memory. Now it's not, it's not persistent memory because it's not running 24 hours a day. Some will run for some amount of time, some less, but you get the, you get the kind of a general direction of where this is going, which is your footprint, your like a semiconductor or technology footprint as an individual is about to expand by like 10 X because you used to have a couple of devices.

26:04Maybe you're someone as an iPad too. So you have X a little more, but like three or four devices is about to go to thousands of virtual devices on top of, and the virtual devices are the agents and each agent requires, you know, semiconductor content. So it is hard to like fathom a world where like we're all having this like big semiconductor footprint, but that's what's happening underneath the hood, right? And if we're all going to be users and we're all going to be using hundreds and thousands of agents at a time, that is where we're going. Like on our call, we had Boris Cherney, who's former Code 2 alum, but also the founder of Claude Code.

26:37And he was saying that, you know, he runs, you know, some number of agents during the day, but when he goes home, he's running or on his way out, he has a thousands of agents running to kind of do work all through the night before he comes back in the morning. So just imagine like if we're all going to be doing things like that, where we're all going to be having periods where we're running hundreds of agents and it can be simple tasks. It doesn't have to be like, you know, very complex programming tasks, but just the footprint of each individual in terms of their semiconductor content, their power content, right?

27:05It doesn't just apply to semiconductors. It applies to how much power each person consumes is all going to increase significantly. Because of those behavioral changes, how is that affecting the architecture of AI? I think that we're now moving to a world where the chatbots, you know, we joke around internally, like the chatbots have amnesia, right? Because every time you might give it some files, you give it some medical records, it does a great job of going through and analyzing it. You go back the next day and you give it the same record, or you ask a question about those records, it doesn't remember.

27:36I don't know if you ever watched that movie, 50 First Dates, where basically he has to re-explain every day what the situation is. It's very similar to that. But what's changing is now you're getting persistent memory with all of the next evolution of accelerators. And so I think that you're seeing memory content is increasing, the agent is not gonna have amnesia anymore, the agent's gonna be able to remember. And now, because the agents are launching agents and they're doing very complex tasks, but also simple tasks, they need offload from CPUs too. The historic list CPUs have done something called serial processing, which is like, you just give it a set of instructions and it does one by one by one by one, critical instructions, but one in a row.

28:16And I think that as an agent has some element, which is like, okay, make a reservation, that might just be very serial tests. That might have something which is like, okay, program something that's super complex and might require parallel tests. And so I think that that is just creating a massive need for more CPUs and more memory. And we're seeing that, we're actually just at the beginning of that. I think agents is really what is driving that. There was a really interesting slide on that where you're showing the shift of GPUs to CPUs and it was like a four to one conversion. So how did you kind of like model that out or how are you estimating it?

28:49Yeah, so for some amount of the last, the greater part of the last three or four years, it was very much a one CPU and even eight GPUs. That was kind of the, and it had gone up to 16 GPUs, which was all of the math and all of the computation is happening at the GPUs. And then they just kick it out to the CPU when it's time to like execute the final step. But now the ratio is actually moving from to one CPU to four GPUs. And so it's improved kind of by 2x already. and we think it actually has a chance to flip the opposite direction, which is one GPU to four CPUs. And some people, very aggressive, say they could go to one GPU to eight CPUs.

29:27And so I think that it's just more a function of how many of those tasks are being completed and how many of those new tasks are being done that don't require the parallel compute but require more just serial task completion. And I think that, again, it's just another way that I think about it is there's 7 billion people or so, plus or minus. Everyone has their technology needs. But if every person has 1 ,000, the 7 billion multiplies by 1 ,000. And so just think about how many more people effectively are on the earth than there are today. And I think that all of those people are going to require serial processing, parallel processing, memory, all the things that every human would have.

30:08And so I think that it's just another way to think about just almost population expansion. And if we expanded the population by 1 ,000, now this is a digital population that we're expanding, just all of the resources that are required for that digital population. Who are the main players within this stack? On the CPU side, it's Intel, AMD, and ARM. Amazon's done a great job. They actually have one of the most efficient CPUs, but they've always kind of kept it internally. They bought a private company that helped them do this, and it has helped, I think, drive AWS success, especially as we move to CPUs.

30:42I think it really helps be a tailwind of their business. But Intel for years has been almost like the forgotten child in semiconductors. They had a lot of missteps along the way, whether it was a technology issue, product issue. They've had a lot of leadership changes, but they have an amazing CEO now. Sometimes we try to keep things simple, which is you have a four to one going to one to four, which is mathematically is a 16x improvement in a market size. and then you have Elon Musk giving a stamp of approval to Intel and increasing the pace of innovation. And so I think that to me it's just some of the best thesis are the simple thesis and you don't want to overthink it.

31:22And I think that just the combination of that for a stock that, yes, it's had a big move this year, but if you think about every semiconductor company over the last four years in this heyday of AI, they're all up 5, 7, 10x. It's still a laggard over any period beyond 12 months. And so to me, there's still a lot of catch up for that company. Is that really exciting for you? Because you started your career in the semiconductor space. And now you're like, I mean, that was gaming back then. And now I will tell you the first seven or eight years of my career, all I did was work on it with shorts. Because semiconductors are viewed as the deep cyclical business.

31:58You overbuild at the top. You burn a tremendous amount of cash flow, very fragmented. Like just companies go up. They make one product, they sell it to Apple. In a year, Apple says, okay, we're going to now double source you or triple source you. And the companies go down 90%. Now, I spent almost all of my time working on shorts. We never really owned semiconductor stocks. We don't internet stocks, software stocks, other types of stocks. And so to me, it's almost just like, wow, my career has come full circle. I have a chance to make decisions at the portfolio level at a time where the sector that I started 20 years ago is now the most profitable sector, generates the most cash flow.

32:35I never would have thought I would tell you that Samsung and Hynix together generate more cash flow than every hyperscaler. It's crazy. It is crazy. But it is exactly what is warranted in this time and why you have to always be changing how you think. If I had just stuck with the view from 15 years ago that semiconductors are shorts, it would have been the most costly mistake that we would have ever made because those are the stocks that are dominating the market today? We were in the kitchen and I think the analogy was, it was like the nerdy kid who became cool. It's exactly that. I mean, they were the CEOs that no one ever wanted to sign up for meetings for at conferences.

33:14Like everyone wanted to go meet the Facebook CEO and everyone to meet the Google CEO. Everyone to meet like, you know, those were the companies of the 2010s. And now it's like the opposite. You go to, you know, one of the bank's conferences, like there's like 4 ,000 people wanting to listen to Jensen speak. It's like unreal. And GTC is like a Taylor Swift concert. It is an event. It is an event. I've been going to GTC since 2016 was my first one. And it was like a small hall at the San Jose Convention Center that like was a half of one building and like a hundred people there. Like it's amazing what it has turned into.

33:50It's crazy how he does the whole presentation without a teleprompter. Two hours. Yeah. It's so wild. Yeah. It's pretty incredible. So I'd love to talk about how data centers are fitting into this space and how you're monitoring whether or not buildouts are happening and that kind of thing. Yeah, not in space. And it helps me kind of think through how our bottlenecks easing, not easing, is something changing in the environment? At the end of the day, for me, the most important thing is what is the rate of change? And is the rate of change moving towards tighter rate of change or is it easing? And if it's easing, what is causing the easing and what is the degree of easing?

34:30And is it easing to the point where it's a problem or it's just easing to the point that it's healthy and it just facilitates the growth? And so I think that, you know, we're super focused on the data center companies. We're super focused on neoclouds, hyperscalers, on the ground where all the new buildouts are happening. Where is power available? Where is equipment available? Where is labor available? And we're trying to track all of that in real time. Yeah, it's been fun to see. I was recently down in Miami at Exowatt, and they're an energy company, a renewable energy company for data centers.

35:03And Hanan, the CEO, he was explaining out the labor that they're bringing to market because of this new industry they're pretty much facilitating. and it's down in Miami, it's manufacturing and then they build out for these facilities and it's like manufacturing all in the United States. And I think there's a lot of negative sentiment about job, obviously like there's scale to these things but there's a job replacement because of AI but there's also job accretion and like new layers of the economy that are being created. Yeah, I mean, I think that's the, we'll ultimately see where the T plus 10 years looks.

35:46We've gone back and looked at all the different innovation waves of technology, even back to like the, you know, the automobile, everything like even beyond the seven major waves of tech that we talk about. And usually there's some job loss at the jobs at risk. But then there's a whole giant section that people don't talk about, which is new job creation, new business formation, you know, like all of the different types of innovation that come off of the core innovation of new companies that are formed. Like even today, people don't talk about it, but we're actually at one of the highest new business formations that we've ever been at because everyone's now, oh, I can use AI to maybe redefine how this business works or start a new business that does this.

36:23And so I think people are very focused on the negative side of things, or at least like whatever, some people choose to focus on the negative side of things. But I think that there is a significant opportunity for new job creation. And again, it'll depend on how fast the disruption happens, because maybe there's a window where the disruption happens a little faster than the new electrician can be trained because it takes two or three years for the new electrician to be trained or the new plumber to be trained or the new construction worker who's building out the distribution lines for utilities.

36:49You can't flip overnight to those jobs, and so maybe there's a little bit of a time lag. But broadly speaking, there's a lot of companies that we look at that are massive shortages of the amount of labor that they have. And it's not one type of labor. It's a lot of different types of skilled labor, But which usually means that the salaries for those jobs are going to go up to try to lure more people to do that. And so it might just be that the next X number of years in a world of AI, like those are the jobs that are actually in the pole position versus maybe what was in the last 20 years. In our interview with Thomas, he was talking about the bank teller and how that actually evolved.

37:23It didn't really actually decrease any jobs. There were just more jobs spread out. So that's always a hot topic. So in talking about market dynamics, you have this framework of sellers of shortage versus buyers of shortage. Can you break that down? Who's winning and what's kind of the explanation? Yes. We try to simplify sellers and buyers of shortage in the concept of you have semiconductor companies, you have power, you have memory infrastructure, everything where you have a fixed amount of capacity and you have greater demand. And that greater demand is driving price increases, margin expansion.

38:04And when price is the main lever of your revenue growth and you have fixed costs, your operating profit actually go up multiples of what your price increases or your revenue is growing at. And so we've seen companies that have been able to increase their earnings 3, 4, 5, 6, 7x just in a matter of a year or two. Companies that would have been plus or minus a certain range for 10, 20 years. And so these shortages, which are critical to AI, whether it's memory, hard drives, like their shortage to kind of the development of AI, have driven significant earnings power. And the market is rewarding that set of earnings.

38:37What the market is not rewarding and not rewarding as much is the companies that are buying that shortage. And so that would be the companies that are putting the capex into the ground. And so if you look at the multiples of Microsoft, of Amazon, of Meta, they've actually all compressed in the last couple of years because their CapEx is going up. And if you just think about it, if memory pricing goes up 100 % and Microsoft has to spend two units instead of one, they're not actually getting two units of benefit. They're still getting the same benefit they would have gotten if they spent the previous price because it's not like the memory is always different.

39:13Right now, you're just seeing like-for-like price increase go up so much. And so I think that the market is, for the moment, punishing that the ROI on that dollar is a little bit less because it's just cost inflation versus actually new technology driving the higher price. And so, you know, the stocks that are working and the part of the market that everyone is really excited about, optical, power infrastructure, even labor stocks, because labor is in shortage. You're seeing rates rise in labor, memory, CPUs, GPUs, even TSMC, which is one of our largest holdings. They're taking price, too, because they just like we have a finite amount of capacity.

39:52And so we have to try to figure out how are we going to make sure that we're generating enough profits and knowing that if we're going to reinvest in more capacity that we're getting the right pricing, the right margins and the right return on investment. So those are the types of companies that are winning. Now, I don't think that, I actually think Amazon and Google are an unusual camp, and those are the two companies that we really like, because they are also a bit of a hybrid in that Google has TPUs that they sell, and Amazon has talked about selling Tranium, or at least openly discussed what the value of Tranium is.

40:24And so maybe there's room for them as well, because they would be buyers of the shortage, but they could also be sellers of the shortage. And, you know, Google has been a great stock and they have their own bottle. So there's a lot of other things that they're vertically integrated, which makes them great. But I think that that's a little bit how we're thinking about the market today. There's the buyers and then there's the sellers. The buyers are being punished because they're spending their capex is so high that their near term cash flow is gone. And that transfer is happening directly to the pockets of the sellers of the shortage.

40:52And so those are the ones that are being rewarded at the moment. Have there been any surprising breakouts? Yeah, I mean, you know, an area that I think has done really well is optical. You know, optical for years was viewed as just an area that had constant oversupply, undersupply, oversupply, undersupply. And now I think it's becoming more of a critical part of the infrastructure of the future. And I think that that is the one that probably surprised me the most. We'd been following memory. We'd been following CPUs, GPUs, accelerators, all of these. but optical is the one that I think surprised me the most.

41:27And where are the biggest bottlenecks? So some people would say memory. Some people would say power. I think there's so many bottlenecks, actually. It's like the big bottleneck is the fact that there's so many bottlenecks. It's not any individual bottleneck. It's the fact that you can talk to so many different people across different areas. It's like power generation is a bottleneck. Transmission and distribution is a bottleneck. NAND is a bottleneck. DRAM is a bottleneck. optical components are a bottleneck labor to put all the the data centers up is a bottleneck i mean it's i've never seen so many bottlenecks at the same time and i think that is what makes it so hard because if it's just one one vertical slice that's the bottleneck you can say okay well if they put enough dollars in they'll be able to solve the bottleneck but the problem is is like even if let's say memory solves their bottleneck that doesn't solve the power bottleneck that doesn't solve the optical bottleneck that doesn't solve all these so i think that the the real bottleneck is that there's so many bottlenecks.

42:20And so I think that right now, this is one of my favorite charts too. You can see that the market is really rewarding the sellers of the shortage, but it is not rewarding the buyers of the shortage because the profits are so high that the market is really focused on grabbing the short-term profits. And that's fine. But I would say that at one point, there will be a power that shifts the other way. And we need to be extremely, extremely aware and well prepared to do that. And we'll speak about what we're trying to do that. VCX by Fundrise, the public ticker for private tech, allowing investors of all sizes to invest in venture capital.

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44:22so your teams ship product, not plumbing. Mistral, Dropbox, and Drada already trust Merge and production. Start building at merge.dev. Founders scale faster on Deal. Set up payroll for any country in minutes, hire anyone anywhere, get visas handled fast, and get back to building. Visit deal.com slash sorcery. That's D-E-E-L dot com slash sorcery. One of the interesting things, or I guess there's many interesting things that are going on right now. But in the news and headlines, sentiment for AI and the economy is super negative. But the public markets are performing better than I think it was, it was like a specific, it was April 2020.

45:09So if the negative sentiment is so high in the news and online, but the markets are actually better than April of 2020. How do you explain that? What is going on there? So we actually did a couple of calls ago, we did an analysis on sentiment and how indicative is sentiment of what's actually happening in the market. And it's basically a coin flip. There is no correlation between negative sentiment means the market should be down or it's contrary. And so I think that there's different moments where people are going in the news have different things that they jump on or in social media, different things that they jump on.

45:50But what is core and what is underlying is that companies are beating earnings. The S &P 500 earnings growth through 26 is like 15 % accelerating to 18%. During periods of that type of economic growth, the stock markets do well because there's drivers of that growth. The economy is strong. The consumer is strong. Even though there's been some issues with higher gas prices and things in the near term, but the consumer got a really strong tax refund. And so there's no panic in terms of consumer spending, enterprise spending, earnings are really strong. And so at the end of the day, like fundamentals do matter more so than sentiment.

46:26And I think the fundamentals are really strong. Like you look at the earnings revisions for some of these sellers of shortages, just up and to the right. Like every quarter they're beating earnings by like 30, 40%. Like I remember seeing like the SanDisk earnings or the Micron earnings, like the street would estimate like a dollar VPS and they do 250. It was just beating numbers by so much. And so to me, the fundamentals are really strong and the market is going to follow the fundamentals. And the multiples for the market actually haven't gone up that much. The multiples for the market are actually staying kind of consistent because the growth is so high.

46:57And so the market is up, whatever, 7%, 8 % this year. But earnings growth is 16%. So you're actually, the multiple by the year end, if the market stays flat, goes down from here. And so I think that we're at a period of really high growth and that's really what matters more. I think this might circle back to the beginning of the conversation. but you've been at KOTU for many cycles, especially in one like this. I talked to Thomas about this on stage, but how do you deal with this hot flash volatility and like this misguidance and sentiment and all this stuff? How do you stay focused as a firm?

47:30You know, it's funny. Philippe always says like when we do these presentations, we should do them more because it helps us ground our thinking again because we kind of re-come back to, okay, what are the five or seven things that really matter in this moment? It is hard. There is a lot of noise. The volatility in the market has been way higher than I feel like I've seen. Usually, I don't view Liberation Day as volatility. I view that as, okay, a bad thing happened, and so the market goes down when bad things happen. You kind of know. You might not know exactly how much, but you know, okay, there's bad stuff happening, so the market goes down.

48:02The volatility we're facing now is, wow, I'm still really bullish. AI is still doing great things. But wow, some days, some of our stocks are just down 5 % or 10 % for no reason. And that is the part that gets a little bit challenging. Sometimes it's because of a clawed release. And that's the part that's challenging because you're always thinking, oh, does someone know something? Is something changing and we're not at the forefront of it? Are we asleep at the wheel, which is obviously such a critical cost in this business if you're not paying attention to everything that's happening? And so we always try to reground ourselves in fundamentals.

48:38We try to reground ourselves in the big picture, in the theme, and making sure that the stocks that we own are high quality business models. We have great relationships with the management team that we can really understand what is happening and allows us to kind of deal with the volatility. And we have other tools at our disposal, hedges, puts, shorts. There's a lot of things that we can do. But I think ultimately what we've concluded at the moment is that fundamentals are really strong. The market is really resilient and AI is accelerating its pace, even though it's hard for me to say that. And maybe someone says you're crazy, like AI is all everyone's talked about for three years, but it is accelerating today than even where it was one or two years ago.

49:17When you're looking for new market leaders, what are the characteristics you look for? How are you evaluating the companies? Yeah, so I think that what we've been doing and what has worked is we're thinking about what is the leading edge change and who are the companies that are driving that leading edge change. And so NVIDIA almost sets the standard for what is like the accelerator market going to look like in terms of capabilities two years down the road. And what are the things that they're changing? Broadcom does as well. TSMC does as well. And what are areas that they're changing? because they're all trying to figure out ways that they can alleviate their own bottlenecks, that they're trying to reduce certain costs in some areas that they feel like there isn't technology advancement, but they're also trying to optimize their profitability too.

49:56And so, you know, there's a concept, let's say that people are talking about, okay, today, the way that accelerators connect is using copper wires. It's like a way that you send data. There's a scenario two, three years from now where there's going to be less copper and more optical, or at least like maybe not less copper, but more optical, right? Because it can transmit data faster, but there's limitations. It needs to be longer distance and things like that. And so I think that we're always trying to figure out, that's just one example, but there's so many, like every new version of NVIDIA's accelerators have things that they're taking out, adding, et cetera.

50:29And so we try to follow where the change is happening and what is that industry looking like today? Is it an industry with like 50 players? Well, that's not that great. Is it an industry of consolidated players where maybe they're making something for a legacy market And now all of a sudden they're in a massive windfall of demand that they weren't expecting and they can't really add supply. And so, oh, wow, maybe that's the industry that we need to go and chase down and follow. And so we're really trying to stay at the forefront. We have a big investment, OpenAI and Anthropics. So we're constantly talking to them about what are things that they're doing to optimize their models, what are technologies that they're using.

51:03So we try to do research to really stay at the forefront of where the change is happening. It is so crazy because whenever someone mentions OpenAI and Anthropic, I just assume they're a public company at this point, but they're still not. Yeah. So how are you thinking about these trillion dollar IPOs? I think that it's great for the market. I think that leadership changes in tech. We've done the studies on it. almost plus or minus every five years, a quarter of the top 25 in tech usually come out and a new four, five, six come into the top 25. It's like a very basic analysis. I'm sure if we did it more detailed, it would show even more granularity, but tech changes and leadership changes.

51:50And I think that these companies are, in my mind, again, let's just say that they're all effectively worth with over a trillion dollars, SpaceX, OpenAI, and Anthropic, they have already catapulted themselves into the top 30 companies in the world in terms of size. And so it doesn't even matter whether they're public or private. They've already reached that milestone. And so to me, when they go public, it's just going to be investors that didn't have access to it. The retail investor who had to only focus on public stocks now gets access to these stocks, and it's going to be great. I don't think that there's this concern in my mind of, oh, that means you got to sell Mag7 or this and that because the S &P is$60 or$70 trillion of market cap.

52:27We're talking about three$1 trillion companies. It's not like there's some massive flush out of all these other stocks that need to fund this. It's all in line with the size of the IPOs that probably are necessary in this market. And I think it's great that there's new names that come out there because if it's just the same names over and over, it doesn't really represent the beauty of technology. As the CIO of KOTU's public sector, I would be remiss not to ask you about risks. What are the biggest risks that you're watching? Look, the biggest risk is that there is some technology on the other side that materially changes where some of these shortages exist today.

53:10And that risk exists only in the grand scheme of, OK, the types of stocks that would be impacted by that. But if there was, let's say, let's say that the DeepSeq moment that happened last year, another moment like that happens where someone figures out a model that can do all the calculations with less power, less semiconductors, less memory, all of that. If that happens, it is probably good for the long run of AI, because that means that the adoption is going to happen faster, more people are going to use it. If AI becomes materially cheaper, there's the whole Javon's Paradox argument, which is like, yeah, the cheaper it becomes, the more people will find creative ways to use it and do other things, right?

53:45Right. Humanoids are still kind of in the back burner. But maybe if it gets cheap enough, like there'll be way more dollars that get put behind solving that problem. And all of a sudden, like other things get accelerated. And so I think that like that is a risk that I'm looking at as, you know, someone who has a mark to market portfolio every day that I'm thinking about. And then, you know, there's could there be some regulation that comes out of nowhere that maybe changes the or dampens the ability to kind of grow unconstrained the way that things are today. But generally speaking, I think that it's, you know, we're talking about a topic of national security at this point.

54:17And so I actually think that the regulatory environment is going to do what it takes to allow for as cooperative of an AI environment as possible going forward. But those are kind of the things. And, you know, we did another study at one of our previous calls about every 10 years, there's like a what we call a crisis or like a down 30 kind of moment for the markets. And every year, there's probably a down 10. I feel like last year we had our down 30 in the tariff moment, and that was kind of in between, right, crisis or correction. We had 2022 that was already like a down 30 for the markets. And so I feel like we're at a point now where there's always going to be risk, but I think that we're really set up with a great secular trend.

55:00Other than being on camera more, what are you most looking forward to this year? I think that we moved into this office, which is great. And just overall, one of the things that I say about Philippe is he's an amazing investor. He's in the Hall of Fame of risk management investing. But what people maybe don't fully appreciate is that he's an amazing CEO too, building the business. I joined when we were like 12 people,$700 million in assets. Today we're over 80 billion, 200 people, multiple offices. It's crazy when I sit back and think about the 20-year trajectory. And I think that he probably still comes to the office before I do, leaves after I do, works more than I do, and doesn't rest, right?

55:43And so to me, like the journey is still, you know, we talk about the inflection leading to another inflection. I feel like we're, as an organization, are at our second inflection, maybe probably not second, like fifth inflection. But we're at another inflection, where I think we're really on this journey to really just break out. What do you think his secret is? He plays a lot of padel tennis these days. I feel like that's his new hobby. and I think it keeps him energetic, keeps him young, and he's very curious and always thinking about what's changing. And it's almost like a mindset, right? You're just in the mindset of like what is changing, how do we capitalize?

56:15What is changing, how do we capitalize? And it's hard. A lot of people like being in an environment where like you have comfort and coziness and you're like, I know what's here, which is great for some people, but for this industry, for this sector to be successful, you always have to be thinking about what's changing and how do I catch it. Amazing place to end. Thank you so much. This was a lovely conversation. Thank you very much.