The AI Boom Is Starting To Crack

Now, we start things off today by looking at this dynamic playing out in the market. We know there's a big group of companies, the AI ones, the Nvidas, and Microns that have benefited dramatically from all of this AI capex spend. The spend so far has been funded by investors. And we can see the success of this in the numbers. For example, we have Micron that's up 15, in fact, 16% today as of now. We have Qualrum here noting that this was a blowout Q3 on AI memory. Micron's fiscal Q3 results showed revenue roughly quadrupling year-over-year with gross margins topping 81%. Now, we've seen numbers like this so much throughout this AI capex cycle that you almost become numb to how good these numbers are. But if you really just stop and consider how good like these numbers are that they're actually real. Total revenue was up 74% sequentially and 346% year-over-year. 41 billion of revenue in a single quarter. That's a 345% increase year-over-year. Sequentially, it was a 74% increase. So, even just quarter by quarter, this is growing at rates that we've never seen before. In fact, this is growing so fast that if we rewind to Nvidia one year ago, this is a faster growth rate. They're growing faster than Nvidia did in the past year, and they're expected to grow faster next quarter than Nvidia did the following quarter last year. meaning that right now Micron is literally a faster growing company than Nvidia was during their spike. Now, of course, all of this has resulted in a lot of happy Micron investors as well as adjacent industries. For example, we can look at ASML or the whole supply chain and this bodess well for all of it. We have more demand, higher prices. We have these companies earning more money. In fact, when we look through Micron's financials closely, we see it very apparent that the vast majority of gains of all the revenue growth, all the earnings, all the free cash flow, all of that is due to pricing. Simply prices going up. They're not selling more product. They're not really inventing anything new. In fact, if you look at the exact math, over 90% of the gain in Micron's revenue and earnings and so forth is because price increases alone. Micron just has a a list of products that they've had before and big companies are willing to pay substantially more for those products. So, they're jacking up the price. Now, that's fine and that's great for the Micron investor, but there's one company that doesn't want to bear those costs, and that is Apple. Apple needs advanced memory for every one of their devices. And unlike all these other big tech companies funding all this expansion, willing to throw their free cash flow into the negative and have it hit their margins, Apple's not willing to do that. Apple raised its prices to Macs and iPads after Tim Cook said the soaring costs of memory and storage chips would force the company's hand. The company briefly took down its Apple online store early this morning, as it typically does when announcing new products. When it came back online, the price tags for Mac computers rose by roughly 15 to 20%. And iPad prices ro prices rose 15 to 25%. If we look at these price increases, this is what they actually look like. This is what's on the website today. We have the iMac going up 15%. That's $200. We have the the Neo one, the cheap one, going up a full $100. That's their like discount line. We have the MacBook Air $200. MacBook Pro, this is 18%. And then the Mac Studios is up a full 25%. So far, the iPhone prices have remained the same, but they've actually hinted that those are going to go up as well. Now, in an interview from the Wall Street Journal, Tim Cook blamed the price raises on Micron Technologies. Of course, they're saying our input costs are going up, so they're forcing our hand. He said that the increases have become unavoidable because of the higher component costs. Quote, "There's less supply at a time when consumers want devices, and the memory guys are passing along huge price increases." So Tim Cooks pointing the finger at Micron, saying that it's their fault. They've increased prices so much, we just have to do this. And in fact, Apple timed this price increase on all their their products the day that Micron had their earnings report or the the day after. And that timing was intentional. It was to say, "Hey, right, as they're bragging about how good their company's doing, we're going to have to raise our prices on all these customers, therefore tying the connection between the two." But now we have Micron taking a shot back at Apple, blaming them for it. They said in an interview Wednesday night, Micron chief business officer said the company couldn't make investments during the memory market's last downturn when Micron's gross profit went negative in part because certain customers, they didn't directly call out as uh Apple, but they're saying certain customers took advantage to pay rock bottom prices. Quote, "We told a couple of customers who are being very aggressive with pricing at the time that this is not constructive." Now, while Tim Cook and Micron executives point fingers at each other and go back and forth, the bigger point here is that this is a meaningful crossover. We have so far AI being a voluntary purchase, something that people can sign up for a chatbt premium account or Gemini Pro. You can pay for AI through different products like Claude or Microsoft Copilot, but all of those are optin. They're simply people choosing to have the additional value of AI and then paying for it. What Apple's doing here is entirely different. This is a massive acrosstheboard price increase from the inflationary hardware costs of AI that's been directly funded by the hyperscalers. So we have the hyperscalers the effects of this now pouring out into the general economy. The biggest consumer tech company in the world just dramatically increased prices. This is also a very physically inflationary aspect. AI has both deflationary and inflationary aspects on the software side and the service work side. Theoretically, you should be able to get done a lot more work with less effort with AI. And that is inherently deflationary. But at the same time, what we're seeing here is strictly inflationary. Apple's prices are going up 15 to 25% for the exact same product. That is a massive inflationary cost. Apple is one company that's unwilling to sacrifice their margins, even if it means fewer sales. So while the prices are going up, Apple knows full well that this will put a drag on their unit volume sales. It'll put a drag on the entire tech sector. If customers are forced to pay substantially more just to buy an Apple device, then they may be less willing to pay or have less money to pay for AI services for ChatCBT Pro or Gemini Premium or all the different services that these cloud hyperscalers are trying to price them at. Or if just fewer people buy Apple devices, then it could slow down the entire tech sector. Fewer people upgrading devices, people less willing to invest more in technology in general. We could see a general slowdown as well. Now, investors don't like this. Apple's down 5%. That's a lot for Apple, especially even though it's down from its highs already. We have Amazon reacting to this as well. It's down 2.7%. We have Microsoft, which is already a relatively cheap stock based on its growth and its quality, down 3.72%. We have Meta down 2.21%. It seems as though investors woke up genuinely concerned about this entire cycle of spending endless amounts of money, and now they're seeing it impact consumers directly. No longer is the AI boom neatly tied in and concealed to investors directly. It is now broken out into the larger consumer category. And this could mark the first warning sign for this AI cycle. The first time investors could scratch their heads and go, "Maybe this won't last forever. Maybe consumers will pull back or push against this at some point or another." We'll have to wait and see how consumers continue to react, but as of now, this is the first major warning sign. Now, as we move on today, we have to mention Netflix. Netflix is at $71 per share. This is at a 52- week low. In fact, if we look at Netflix's stock price, it is down over the past year 44%. So, we're down 44%. Year to date, it's down 20%. And in the past 5 years, you can see that Netflix raised all the way up to $130 and now it's down roughly half of that. So, we are in a massive draw down. It's at the very bottom of its 52- week lows. And Netflix stock continues to go down. Now, investors want to ask why. Why is Netflix stock continuing to drop? Is it worth buying? or are there real problems here? And I want to give you my perspective. Now, I've owned Netflix for quite some time. I've had it in the the Story Fund. That's my secondary portfolio here. I have Netflix is one of the biggest positions. There's a lot of negative opinions about this stock today. When I looked over the concerns for Netflix, and I read many comments of you and different people across social media, I want to summarize the three biggest concerns of this company. One of them is Netflix has given investors the impression that it is in desperate need of an acquisition to buy another company and to bolster their content library. The first big obvious sign of this was them bidding on Warner Brothers Discovery. Netflix described it as a nice to have but not need to have. But regardless, they willing to pay a lot for Warner Brothers Discovery to get that library. That was the first red flag that maybe Netflix's core business didn't have these key pieces of content that they wanted. Then they also just recently reportedly bid on Roku and on Lionsgate, two other content creators, and they didn't get either of them, or at least they walked away from either of them. In this case, it looked or it gave the impression that Netflix was even more desperate. Now that they didn't get Warner Brothers Discovery, now they're looking for all these different companies to try to buy anything. Desperate Netflix, right? So that's the big concern. Number one is that they are looking for an acquisition because they can't muster it on their own. The second thing is that Netflix hasn't had or at least people say that they haven't had a big hit in a while. Remember when we went through the phase where we had Squid Game, we had Stranger Things, we had K-pop Demon Hunter. It seemed like these shows were all anybody could talk about. That's been about a year. We haven't had any massive hits on Netflix in some time. And so when we haven't had that, it seems like other streaming services are becoming more competitive. We hear a lot of buzz about Apple TV and HBO shows. And it it seems like investors are concerned that Netflix doesn't have any hit shows. And then I would say the third thing that investors site is a reason for Netflix's stock going down is that the growth is decelerating. So they were growing at 16 to 18%, now they're going to be growing at around 14%. If the business is getting slower growth and more mature, the multiple should come down. Now, I want to go through each of these, but before I go through them, I want to preface that I don't believe any of these three reasons are the reason that Netflix stock is going down. In fact, I don't believe that they have much to do with Netflix's price action or the way that the stock is trading. I think that it's going down for entirely different reasons. But I first want to just address these three specific claims, each one of them individually. First of all, Netflix's entire business, every single thing they do is acquisitionbased. Yes, they create content, but they create content by acquiring key talent, producers, actors, agreements with different smaller studios, and they also are a massive licenser of content. So, they go to different companies like HBO and Paramount and say, "Hey, that new movie that you made, Obsession, how do we get that on Netflix for 6 months for our people? Hey, that new TV series, uh, House of Dragon, you know, whatever one it may be, which one are you willing to license to us and have it be valuable to our members for a period? Those are acquisitions. Netflix is always acquiring content. In fact, their entire skill set, their business model is looking at potential deals for content, evaluating them to see how good it matches their customer base and the value for their members, and then seeing if it's worthy of buying for the price point. So Netflix has been doing this all the time all around the world with different production companies, different licences, different companies altogether, different actors, different standup comedians. They pay them and make deals. Even different YouTubers that they've gone and said, "Hey, would you like to create content for Netflix?" All of these are acquisition based to wrap all of this into a single membership. They're even doing it with game developers and and so on and so forth. So, the idea that they're going to different studios and evaluating those as potential deals, like they went to Roku and took a look at it, looked under the hood, and they were interested in it. That's not a sign of desperation. In fact, that falls directly in line with their existing business model. That is what they do. They go look at things and see if it's interesting to them. Also, the reports were dramatically overstated by most people reporting on this news. For example, they did not bid on Roku. They didn't make a bid. And Netflix even denied expressing real intent into Lionsgate. So there was a report about that. Netflix said, "No, that's not really accurate." And that was that. So the whole idea that Netflix is desperately in need for an acquisition, I don't believe is founded by the evidence. Netflix has tons of ways to invest and build their own content. They don't need to buy an existing library. Now, the second concern that they haven't had a big hit in a while, I think is more accurate. There hasn't been any standalone hit in some time. They had a live streaming of the uh Japanese baseball game that was the most live viewed event in Japan recently. That's a big marker. They're becoming successful in sports. We also have the new season of Bridgetgerton making huge numbers. Probably not too applicable to my audience, but that is a very big show. Regardless, I believe the big point that investors miss out on this one is that Netflix is highly diversified in its content and in its interest. They have tens of thousands of of shows and series and movies. They have something for everyone. In fact, Netflix themselves routinely shows through the numbers that not any single show makes up for more than 1% of total watch time on Netflix. Not any more than 1%. That's different than Paramount or HBO that only have a handful of shows. Does Netflix want big hits? Of course they do. But it's not necessary. It's not a must-have for their business model. It's similar, I would say, to like YouTube. YouTube is not dependent on any one creator. If Mr. beast stopped making videos on YouTube. That would be a bummer, but it likely wouldn't even show up in the real revenue line for YouTube. It would be more of a rounding error overall because as big as Mr. Beast is, he's just not that big even on the platform YouTube with how massive the scale of YouTube actually is. And I would say that Netflix is very similar. There are big shows that happen once in a while, but those make up a very small portion of Netflix's overall catalog and their overall viewership. So, I think that they're far less dependent on these big wins that many investors are used to. And then the third thing, Netflix's growth is decelerating. While that's true, it's also well priced into this stock. Netflix is at a 21 PE ratio expected to grow 14% revenue and increase operating margins. They're printing 12 billion of free cash flow. They're doing massive amounts of buybacks. The numbers back up a company trading at a low PE ratio. So, I don't believe they're in quite as desperate of a position as people make them out to be. But more to the point, I said that I don't think any of these reasons are the reason the stock is going down. And the biggest piece of evidence I would give for that is this chart right here. This is a comparison of Netflix and Spotify together. This is their price comparison. Do you notice something here? Netflix is in red and Spotify is in green. Every part of where they trade is nearly identical. Now, if all of these concerns is really the reason that Netflix stock is going down, then what is your explanation for Spotify? Spotify hasn't had a big glut in content and they haven't been trying to acquire anything. They've shown no desperation for new content. But Spotify has fallen just the same. In fact, Spotify has fallen even more than Netflix. I think the intuition here from investors is to always plug in some material fundamental reason a stock is falling. In some cases, stocks just fall. There's massive trading that goes on. There's big funds that pull money out of entire sectors and they put it into different sectors. Today, nobody really cares about Spotify or Netflix. They just don't want to own these companies. It's not nothing to do with their growth rates or their hit rate with series or what percentage of subscribers are watching what. It really doesn't have a lot to do with that. They're just taking money out of Spotify and Netflix and putting it into Micron, putting it into ASML, putting it into every AI company that continues to go up 10% a day. That money has to come from somewhere. investors are pulling money out of different parts of the market to fund the parts that they think are the most exciting. So while I think that there is valid concerns for every company, when I look at Netflix, I do not see this fall as being a consequence of the latest fundamental developments. I think those are attempts for investors with good intuition wanting to try to explain this, but sometimes investors can learn the wrong lessons. I believe that Netflix is in a strong position. I think they're going to continue growing for long into the future. I think that they're evaluating businesses and opportunities just like they should be and that things aren't quite as bad or desperate as the media is trying to portray. Now, moving on, I have to go over the news that Meta is building a prediction market app. Now, this is notable for a couple reasons. One of them is that they announced that they're building a prediction market app one day after I went over a 20inut segment on how bad I think prediction markets are, how bad for society they are, how I want to discourage people from using them in any way that I can, and in particular how deceiving and I believe illegal Poly Markets advertising campaign has been. That was a 20-minut segment in the previous episode if you missed it. If we look at the position sizing, Meta is a $145,000 position. I've invested nearly $180,000 in this company. It is my biggest loser today. I'm down 37%, but I haven't sold any of it. I've continued to buy this one as it's gone lower. Now, again, I hate prediction markets. Nothing about that's changed. The meta news doesn't make me like prediction markets anymore. Every prediction market up until now uses real money. Whether it's crypto or cash, they're using money to bet on stocks. And people are obsessed with trying to get easy money. It's free money, right? That's what the advertising campaign says of Poly Market. Many creators saying that it's it's like getting money for free. In this case, Meta, an employee from Meta, was asked about this. He couldn't speak on the record or this individual could not speak on the record. But they said, and this is confirmed by CNBC, that the prediction market app would not use actual money to trade on the platform. A big contrast from other prediction markets where traders use cash to speculate on future events. The Times report said that Meta's app would instead rely on video game system point styles, but that money may be used on the app in the future. They're reportedly calling the app internally Arena. It would be a separate app from Meta social media platforms, Instagram and Facebook. Meta would seek to leverage its Facebook and Instagram user base to direct potential traders to the platform, the report said. Now, some people have asked me, am I going to sell Meta because of this news? Right now, the answer is no. I don't like what they're doing. I wish they would avoid prediction markets. I don't think we need more of it. But at the same time, there's many things that many of my companies do that I don't like. There's a lot of content on Netflix. I don't like uh with Meta themselves. The fact that there's kids using Facebook and Instagram, I don't like. I've expressed moral objections to that many times in the past, yet I still hold the company. So, there's judgment calls we have to make about all of these stocks. Some stocks I like almost everything they do. Costco is a shining example of that. But in many cases, it's more nuanced. There's things that Amazon does that I don't like. I I wish they would do it differently. Uh the same thing for Google and many other companies. So, we have to make judgment calls on where we draw the line with investing in these companies. Now, on the topic of Meta, when I look at this company, Meta now trades at a $ 1.38 trillion market cap, a 17.5 PE ratio. This is one of the stories of a company that's growing incredibly fast, has a huge moat, is not being disrupted by AI, is growing into multiple categories, including announcing that they're growing into video, and you know, prediction markets now, they're just going everywhere laterally. And yet, investors don't want to own this stock. And I believe a lot of the reason that Meta Stock's doing so poorly is because of how it's covered in the news. Meta is a company that runs directly contrary to a lot of media outlets. They don't like them because Meta aggregates news. is they show it in their app and they they make a lot of money doing that. So naturally, a lot of journalists don't like Meta. And you can see that in the way that these headlines get printed. For example, if we look back throughout the history of Meta, this is the Guardian back in 2012. Facebook buys Instagram for $1 billion and everyone hates it. Obviously, Instagram's worth hundreds of billions of dollars at this point. It has billions of users. It was one of the best acquisitions, if not the best of all time. We have here uh this is Facebook massively overpaid for WhatsApp. Another one here. Will Facebook survive the shift to mobile? Questioning Mark Zuckerberg's ability to transition with the time. Facebook doesn't feel like it was designed for mobile. The desktop service is great, but Facebook on a phone can feel convoluted and unnatural. From the New York Times, this is back in 2011. Google introduces Facebook competitor emphasizing privacy. Even going back before all of this, we had Yahoo trying to buy Facebook and many people criticizing Mark Zuckerberg for not selling to Yahoo. This is back in 2006, a New York Times article saying that Mark Zuckerberg is a member of the Google generation. One too young to remember all the ambitions dashed and fortunes lost when the last dot bubble ended. So, they're describing Mark Zuckerberg as being this naive kid. He doesn't know history and he's not willing to sell Facebook to Yahoo for billions of dollars. They acted, of course, like he was making an obvious mistake and obviously they were wrong. Remember the Cambridge Analytica scandal? This was supposed to be the thing that finally sunk Facebook. It was this big scandal. Most investors don't even care about it now, but it was the only thing that occupied the news whenever whenever investors were looking at Facebook back in 2018. We have right here, this is again 2018. This is from the Guardian. Teens are abandoning Facebook in dramatic number. Study finds. And by the way, there's still studies finding that everyone's leaving Facebook. Nobody uses it anymore. The app's basically dead. So what you're what you're getting here from the media is that meta is shrinking. Facebook is in decline. The younger generation don't want this platform anymore. In the first quarter of 2019, there was just over two billion people using a Facebook or Meta app every single day. two billion unique users. Today, that number is 3.56 billion. That's an additional one and a half billion users since this article was printed saying that teens are abandoning Facebook. Finally, we get to a more recent one. This is just from 2022. Is Tik Tok killing Instagram? Overall, it seems clear that Tik Tok is gaining popularity at the expense of Instagram. But what Met actually did was looked at what Tik Tok was doing, built in similar types of tools within Instagram itself with Instagram res, and then grew Instagram res to one of the biggest social media applications in the world, therefore growing their revenue and growing their overall profits. Most of these articles had some semblance of truth to them. The concerns were very real and valid at the time, but Meta has grown nonetheless, and investors that paid attention too much to these articles and all the bearish narratives at the time missed out when the stock eventually recovered, when the financials grew. You can never guarantee success in the future, but what I know now is that the stock is growing very quickly. The fundamentals look very solid. The valuation is very low. And Mark Zuckerberg has a lot of flexibility. There's so much optionality baked into this platform. so many more ways to earn money that they haven't fully realized that I believe Meta still represents one of the best opportunities today. Now, moving on, we get to the fail of the week, but I have to to make just a quick edit here. I don't usually do this, but I want to throw this in because I think it's very applicable to my opening monologue and major point in this episode that the confined AI costs that investors were primarily funding have now broken full well into the consumer economy. We have not only Apple raising prices on all of their Apple devices, we have Microsoft now increasing prices of Xbox consoles due to soaring component costs. And these are huge price increases, $100, $150 for the consoles. Microsoft says, quote, "Console storage and memory prices have increased by more than 2.5 times, and we expect another doubling by fall of 2027." So, I'm not going to belabor the point here, but I believe the floodgates are opened. consumer prices for virtually every product are going to start going up and we'll see what happens with that because I have some serious concerns about it. Now, let's go ahead and move on to the fail of the week that a woman who went viral for taking a NYX themed trash can is no longer working with JP Morgan Chase. So, you got it all in this headline. Like in one headline, you just got a lot to work with here. There's some woman that went viral for taking a trash can and she used to work with JP Morgan Chase. Now, before we watch the video, I just want to outline who she is. She's someone that that worked at JP Morgan Chase, apparently until now, until this video footage was released. She was formerly an executive at the company. So, she held an executive role at JP Morgan Chase as a director of community and industry engagement. So, her job title is director of community and industry engagement. She must be really responsible with like community endeavors, trying to get the community together, right? Create goodwill. positive public image and represent JP Morgan Chase positively. She is the community engagement expert. Right. So, what happened? Let's go ahead and take a look at the video here. >> Now, a couple things bother me about this. One of them is the thought to steal a trash can is just bizarre. I I don't know how anybody could ever think I'm going to just take this city trash can for myself. That is such a bold, bizarre theft. It's just public theft. You're okay literally stealing from your own city right in front of people. Like there's people filming. You're you're just okay stealing right in front of other people. On the surface, this is just crazy to steal a trash can. But then the other thing that I I think bothers me for some reason is she wasn't even good enough to like steal it with the trash in it and deal with the trash. She was willing to just pour it on the ground. Just pour garbage, drinks spewing out all across the ground. No thoughts given about it whatsoever. Someone else's problem. Some person in the department of sanitization is just going to have to clean that all up. I guess it's their problem. Now, she is the community engagement expert. That is her title. And I must say in her defense, I think she got a lot of community engagement. Like this is incredibly engaging. A lot of people, it went viral. So if her job title was just to get people engaged in the community, this certainly did it. Lots of people talking about this, very engaged in the community and community affairs. So maybe in her defense, she was just trying to bring the community together and garner engagement, which she certainly did. There's actual people responding to this video, not ironically confused of why JP Morgan fired her over this. Oh, she just stole a trash can and left some garbage. But should she really lose her executive role? She's a community and industry engagement expert at JP Morgan and she was filmed publicly pouring trash on the streets of New York. I I don't know like what else could you be fired for? Does your behavior, your honesty, does none of that mean anything in employment? Would you hire this person to work for you? If you think it's such a big injustice, you go ahead and hire her. I know I'm defending the big bad JP Morgan Chase, but I can completely understand why they don't want to hire someone that's brazen enough to steal public property in broad daylight. I wouldn't want them working for me either. That'll be it for this episode. And if you want additional exclusive content, you can try out qual.com. I just released a 90-minute video of me interviewing one community member that's grown a a portfolio to $100,000 at age 22. So that's a great conversation. If you want to see it, you can try it out risk-f free at qual.com.