The 2023 Unhedged stock draft

0:05Pushkin. They are sexy. They're salubrious. They are magnificent. They are the seven tech stocks propping up the S &P 500. But which are the sexiest, the most salubrious? Today on the show, we have two contestants duke it out in a draft-style game for the most magnificent tech stocks at the top of the market. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, your host today for this tech stock rumble. In one corner, we have Rob value this Armstrong. I'm here to win, Ethan. When are you not? And in the other corner, we have Elaine putting the flex back into Lex more.

0:50Hi. I've got a lot of other knickness. Sorry. You're also here to win. I'm here to beat Rob. That's the most important. That is the most important. Elaine is the deputy head of Lex and our resident tech stock expert. And today, Elaine and Rob, you're both going to pick three of your favorites out of the seven tech stocks in a draft style competition, and there will be one left over. The criteria for your decision-making is from today, July 13th, 2023, to the end of the year, December 31st, which stock will have the best price appreciation in the market? That's your metric. And since first pick is very important, we're going to have a little trivia question, a little over-under to decide who gets that first pick.

1:35But first, what are our seven stocks, Rob? Our seven stocks are Alphabet, Meta, Apple, Microsoft, Amazon, NVIDIA, and Tesla. Of these, I think pretty much inarguably, the stock du jour is NVIDIA. I mean, it's just had a preposterous run-up in both valuation and its stock price. So today, for the privilege of getting first pick, in the second quarter of 2022, to NVIDIA earned 51 cents per share. What is the bottom-up analyst estimate for the second quarter of 2023? I'm giving you$2. Elaine, do you take over or under on$2? 100 % over. Over? Over. Robert, are you okay with that? I can live with that.

2:16Yeah, I'll take the under. Okay. NVIDIA's analyst estimate for the second quarter of 2023 is$2.06 a share, just over$2. It's pretty much quintupled in the space of a year. So I'm sorry, Rob. Elaine's going to get the first pick today. Off to a flying start. Okay, Elaine. Which of the Magnificent Seven are you starting with and why? I'm going for NVIDIA. I'm starting strong. There you go. I know the haters will say that competition is coming. NVIDIA won't keep its advantage forever. But I can't think of a meeting I've been to this year that hasn't included AI in there somewhere. And NVIDIA is completely out on its own in providing semiconductors in this market.

2:56So Jensen Huang, noted style icon, cool leather jacket is leading the way. And there's no Intel, there's nobody else you can compare to NVIDIA right now. So even if we've had the stock rocket up this year, he was handing out hints about what the second half of the year might be, but without giving any numbers. And I have a feeling that when we get the next set of earnings, we'll hear some numbers. And I think the stock is just going to bounce up even further. Elaine, it's very interesting that you pick NVIDIA first because I have before me my secret draft order list and I put NVIDIA last. Not only did I put it last, I put it last for the exact same reasons that you put it first.

3:40We are at peak AI hype. The stock trades at 60 times earnings. as of a few days ago anyway, it had over almost 200 % price return for the year. This is a great stock that is at the absolute top of investor excitement. So they only need to step on a very small banana peel to fall directly on their faces. Yeah. And given this is a second half bet, decent chance of a reversal, you might have to think. No way. No way. No way. No way. I mean, I should say that I say this as a person who got into finance working for a value investment shop and looking for stocks that are cheap and underappreciated. So it's partly you see my biases talking here.

4:35And for the last 10 years, having a value orientation has worked exactly zero times for me. So history is on a lane side. Yeah. Elaine, you might be in good shape. I agree that we're in the midst of AI hype. What I don't agree with is the idea that that's peaked. There are so many companies that are still trying to figure out their AI strategy. What they all want is compute power. They don't really understand how they're going to price or what kind of AI services they're going to use or sell. But what they all want is the ability to have some kind of AI that they can tell investors that they are including in their company.

5:09And if you want that, then you have to have NVIDIA's services. and because it's the only one that has the chips that will do this there is no competition right now i agree with you on the valuation and if you look for a cheap stock of course nvidia is not that but i think if we're just talking about the second half of this year nvidia is just going to keep on going up what stands in its way what is the banana peel that could come along that's the thing about banana peels you don't see them you don't see them you don't see them until you step on them okay rob elena's done you a great favor of taking your bottom pick off the table what's your first pick?

5:42I'm taking Microsoft and I'll tell you why. Now this pick would have been very easy to make before yesterday's inflation numbers because I was pretty much in the recession camp for, you know, that the economy would slow a lot towards the end of the year. And I was thinking you're going to want Microsoft because it has business customers. In a slowdown, the business customer will keep buying Microsoft's stuff. Also, reasonable valuation, expectations are not very high. Earnings growth for this year is expected to come in like mid single digits. It hasn't run up as much as some of these. It's up 40 % this year, which is a lot less than some of the others.

6:24I just have this feeling that solid old Microsoft in a group of stocks that has had a great first half of the year with the possibility of some choppy weather coming in the second half of the year, Microsoft might come out ahead. I'm not terribly optimistic about these stocks in general for the second half of the year. So if they're all do so-so, I think Microsoft will do the best so-so. Yeah. And no, we've seen its cloud computing business be the source of resiliency as other tech companies are struggling. Yeah. All right. That's round one. Elaine's chosen Nvidia and Rob's chosen Microsoft. Elaine, round two, five left.

7:04What's your next pick? She's taking Tesla now. No, I'm going to take Apple. And it is very much not because of the mad expensive$3 ,500 mixed reality headsets that they announced, but then that they're not even going to start selling until next year. What matters for Apple is that it is still the leader in the smartphone market. Smartphone market hasn't been amazing, but because Apple is still very much the king of that market and it keeps on selling these high margin services, the company is throwing off so much cash. It can afford to experiment. Free cash flow, five times the size of Meta, so while Meta is just draining its budget into the metaverse.

7:48Apple has so much more. It had$166 billion of cash, marketable securities. Keep saying it's going to keep handing it out. If you were looking at value stocks, it's not the best. It's not some kind of hidden gem, but I think that it's solid. But Elaine, are we at peak smartphone saturation? We keep on thinking we're at peak smartphone saturation. Didn't we think that about three or four years ago? Yeah. For me, it was 10 years ago for me. Yeah, someone comes out with an incredibly expensive new version or a version that's half the price and has half the power and everybody buys it. Also, if you keep on producing phones that smash and keep running slow after a year, then I guess there is no such thing as saturation.

8:29I shudder to agree, but I agree. This was my second pick. Grudging consent is my favorite. No, I think, first of all, Apple's an amazing company for a million reasons that I could talk about. I don't think the stock is terribly expensive relative to the other ones. And I also like it because it is not only the smartphone leader, it is the high-end smartphone leader. And if there is anything we've learned over the last couple of years, the high-end has been a sweet spot for the market. Marketing to the richer end of the economy has just plain worked. Expectations for this year are low, too. Agreed, yeah.

9:08People think they're going to have a meh year, hard time lapping the excellent year they had last year. A lot of room for this company to surprise the upside. Maybe I should have taken Apple first. Thing is, if there's no growth anywhere, then it doesn't matter so much that smartphone sales aren't rocketing because the comparison against other tech stocks is not about growth. It's about profitability and it's about how much cash you're sitting on. Rob, what's your next pick? We're in the meaty middle. The meaty middle and the hard part of the draft. I am stuck between two names here, and I honestly don't know which way to go.

9:44But because I picked Steady Microsoft as the first pick, a pick designed to help in a weakening economic environment, I'm going to take Amazon next. Now, this goes against my value investors in general hate Amazon. But what I like about Amazon is that the stock hasn't gone up very much over five years. It's gone up a lot this year, but it's been parked where it is. If the consumer is strong for the rest of the year, they just reported they had their first day of Prime Day was their biggest sales day ever. So the concern with the stock, why it's been parked for a couple of years now is because people feel like the retail business is not that strong.

10:33Maybe it surprises to the upside. AWS continues to be a great business. And maybe the fact that the stock has gone nowhere in five years lights a fire under the management. Maybe they start turning the profit dial a little bit, which is something that they've always had the ability to do. earn more money than they earn, but they've always put the money back into the business instead, maybe they start shifting that mix to get the stock moving. Amazon's second pick for you is surprising to me. I thought this was going to be one of the underdogs coming into this draft. It should be. Yeah, yeah, yeah.

11:06Rob, they spent$7 billion on shows for their streaming service. Yes. And they were all great. That's insane. And they were all, I watched all of them. That terrible Lord of the Rings program. Yeah, the streaming business, it's a problem. The structure of the streaming business is the reason Netflix isn't one of the big tech stocks anymore. Right. And you have put your finger on the hardest bit. And that is evidence of what I talked about there. Incredible appetite for investment over time. Investors seem finally to have become a bit wary about that. They ate it up for 20 years. And now they're kind of looking at this thing and saying, it's not the world of 2005 anymore.

11:52Yeah. All right. That was round two. Elaine's chosen Apple and Rob's chosen Amazon. Elaine, what do you got for round three? We've got Meta, Tesla, and Google left. I wouldn't touch Meta. They've got threads. Come on now. I do quite love threads, but they've done so much cost cutting. There's only so far they can go. So I think that's kind of it for meta. I'll go alphabet, which is a weird one in a way, because it's investing a lot in AI, and yet AI could kind of eliminate their central search business. But Microsoft Bing hasn't taken over from Google search. I don't know anybody that goes straight to Bing when they're looking something up online.

12:30Valuation multiples are fairly low. There's really low debt to equity ratio. The digital advertising market seems to be doing a lot better, was definitely doing a lot better in the last quarter than it was towards the end of last year. It's not my favorite of all the tech stocks, but it would be definitely my pick over Tesla and Meta. Well, Elaine, am I right to detect a tension in your NVIDIA pick and your Alphabet pick? You're betting that AI hype's not over. It's going up, up and to the right. but it's not going to cannibalize Alphabet's core business. I mean, Alphabet is kind of trying to cannibalize its own business.

13:04That's quite strange. I guess my feeling about AI is that it's the classic, you want to back the stock that's selling the tools. So it doesn't really matter what happens to AI next year or whether this all turns out to have been overhyped. If there's investment going on right now, you want to be backing the company that's selling the compute power and that's NVIDIA. Yeah, yeah. So Alim's picked NVIDIA, Apple, and Alphabet. Rob has Microsoft, Amazon, and he is now going to settle the cage match between Mark Zuckerberg and Elon Musk by picking Meta or Tesla. I'm taking Meta. And I'm taking Meta because I'm not taking Tesla.

13:40Okay. As a value guy, I can't touch a stock that is up 123 % this year, even while estimates of its earnings this year have fallen. So all the work of getting that stock up and more has been done by its valuation, not by its performance. I hear the cars are great. I think Tesla might win the... Is it ultimate fighting they're doing? Are they doing jujitsu? No, he's not. Haven't you seen the pictures of Mark Zuckerberg with his MMA trainers? He's like all skinny. He's ripped now. No, Zuck's ripped. Have you seen him? No, no, no, no. I'm saying Zuck, like the person who is physically larger just wins.

14:26Right. And my impression is that whatever the appearance of their body, Musk is bigger. Have you seen Musk? Not Musk. No, no. Have you seen Zuck shirtless recently? Yeah. It's impressive. I don't know. Beach muscles don't win fights. That is what I'm saying. Elon did promise to sit on Zuck. In a fight between two people who are not fighters, just pick the bigger one. That's the rule. But for the stock, not necessarily. Now, Meta has had an incredible run. And a lot of that is to do with them saying, we won't be quite as stupid as we were before. That's put the stock up 150 % or something this year.

15:04They downplayed the stupid metaverse. And they have promised to focus on efficiency, as you referred to earlier, Elaine. I think your concern is exactly right. Where do they go from here? It seems like all the good stuff they can do is now priced in the stock. However, it's trading at a kind of market multiple. It costs you the same thing as the S &P 500. It's a very profitable company. I think, you know, they're okay. Sixth pick out of seven. Yeah. But how do you downplay the metaverse when you've called your company meta and you've spent$37 billion minimum on it? You have to keep spending on it.

15:45You have to keep pushing forward unless you change your name back to Facebook. The fact is Facebook is sitting there with 17 kajillion users worldwide looking at its products. It has Instagram. And the fact that the founder lives in a complete fantasy world probably doesn't matter all that much. Elaine, do you have a higher estimation of Tesla? Van Meta, yes. that's not saying much is it see more see more well the cars are good the charging network is expanding that's going very well that means a potential you know another big source of revenue if it's opened out globally and lots of other car companies use the charging stations and and give money to tesla model y sales are going quite well there are so many red flags the big price cuts they've been using to lift sales that are just dragging on operating margins.

16:42And the idea that you're betting on people's willingness to buy big, expensive cars. And if there is any kind of uncertainty about the economy, that will go badly wrong. Where's the cyber truck? I don't know. Self-drive modes, autonomous driving. Was that the one where the windows broke during the stage demonstration? Yeah, that's the one. It looks cool, but it's nowhere. All right. Thank you both for these picks. Elaine has NVIDIA, Apple, Alphabet. Rob has Microsoft, Amazon Meta, and nobody picked Tesla. People have been short Tesla a long time, and the stock's proven a lot of doubters wrong, but maybe this time is different.

17:18We'll have to check back at the end of the year and see how our drafts did. I feel terrible about my picks now. I'd like to take it all back. I feel great about mine. I'm looking forward to coming back and chatting about them. If Tesla is the best performing stock out of all of these, I think we will eat an actual crow. on the podcast. I don't know where you get a crow, but I assume you can order one from Amazon. It's just the both of you crying while hacking away a crow.

17:46All right, we'll be back in a minute to talk about the stakes of our bet.

18:01Welcome back. This is normally the part of the show where we do a long and a short, But instead, for this special episode of Unhedged, we're discussing what the shame and the glory is going to be for the winner and the loser of this bet. Rob suggested eating a crow live on the podcast. I don't want to do that. We only have to do that if Tesla is the best performer, the unpicked member of the Magnificent Seven is the best performer of the bunch. We do this annual stock picking contest on the Unhedged newsletter. And, you know, we write either a mea culpa or a, hey, we got it right piece every year.

18:35Maybe we can do something like that. I'm always happy to write a mea culpa. Mea culpa is my strength. Your bread and butter. I mean, should we put, should we bet on it, Elaine? Sure. Dinner, a beer? I say beer. Well, yeah, a green juice. A green. Yes. No. A nice coffee. I hereby bet you the alcoholic beverage of your choice that my picks will prevail. She's going to take you to one of the martini places you reviewed a couple months back. I know. It's$50 martini. I don't know why I didn't say yes to dinner and she's the most expensive place I can think of because my bets are definitely going to do better than yours.

19:13But I'll take an expensive drink. Okay. One expensive drink at the winner's choice of venue. Perfect. Rob, Elaine, we'll see you both back here in January. One person will be hanging their head in shame, and one person will be pounding their chest in glory. Looking forward to it. All right, listeners, we'll catch you next week for another episode of Unhedged. See you then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, John Schnarz, Eric Sandler, and Jess Trulia.

19:58FT premium subscribers can get the Unhedged newsletter for free, and a 90-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.

20:20We'll be right back.