00:00 Speaker A
What is the future of the AI trade and how are you playing it next year? Art, is it Max 7 or bust for you?
00:09 Art
Uh, it’s not. and I’ll tell you this. I think this was the year after uh three years of AI uh being rolled out and the revolution starting where investors clearly had to start to differentiate. Now the differentiation point really came to the fact that
00:27 Art
if you were spending massive amounts of money on CAPEX to build out your large language model, that’s fine if it’s coming from free cash flow. If you’re putting a lot of debt out there, your return on invested capital is starting to be called into question and rightly so. We know there’s six large language models being developed right now. We know there’s not going to be six at the end of this revolution or at the end of the rainbow here.
00:52 Art
So the winners will have to be picked and largely right now that’s happening in a form of how much debt are you laying out to make this happen and how long is it going to take to return that investment? So I I agree with one of the hits that you just put on and I think Google uh is in the in the lead. It goes back and forth between chat GPT 4.0 and open AI. We really don’t know if they’ll ever become public, so that’s not an investment opportunity. But where you want to be careful is in those names that continue to lay out debt.
01:14 Art
Uh companies like uh Corven and Oracle clearly have been the poster child of you’re spending too much money and we don’t think you’re going to get it back.
01:21 Speaker A
Are you unsettled by the valuations on some of these AI names?
01:26 Art
Well, let’s look at Nvidia trading at 24 times next year’s earnings. Uh they’ve laid they’ve laid out what the demand is for the Blackwell and and they’ll have another offering by the middle of next year. So clearly, they are at the tip of the sword of where the CAPEX is going and they’re profiting from it and here and now. So there’s no question about their return on invested capital. So in in that case, I’m not whatsoever concerned.
01:46 Art
Uh Alphabet’s trading at a reasonable multiple, 33 times forward, continues to have uh strong free cash flows and, you know, all the concerns that we had about the relationship with Google, I mean with Apple. Now they’re going to be a partner with Apple with Gemini. So that’s going to be where your smart Apple Apple intelligence comes from. So in those two names, no. I think when you move down the ladder and look at some of the names like Meta,
02:05 Art
Tesla, I don’t throw into that basket because it’s not exactly uh artificial intelligence play.
02:08 Speaker A
We’re still trying to figure out what what Tesla is at this point, Art. You’re not alone.
02:10 Art
Yeah, I I still think you know what? I think they’re trying to figure it out too. It’s always about the future and what they’re able to deliver. But I think the sneakiest of the uh AI plays is Apple and continues to be. Everyone said they had no AI strategy, all of a sudden they’ve delivered that. They’ve been blowout returns for the iPhone 17 and they’re they’re going to buy it. They’re not going to build it. So, you know, they’re going to partner with uh Alphabet here than somebody else internationally and and clearly they will be the winner and that’s how we’ll likely consume artificial intelligence next year.
