Get Into The AI Trade BEFORE This Happens

Hey guys, it's Flankster here. Sorry for doing a voice memo this week. We wanted to get the podcast out to you. I uh I cracked my tooth this week. I ended up actually on the way to the dentist to well, fix the situation. Unfortunately, it's one of my front teeth, so pretty uh pretty big deal in my line of work especially. Nonetheless, um I'm on the way to the dentist right now, but still wanted to get a an update out to everybody who watches this podcast and tunes in regularly for our insights. So, just going to do a quick overview of what I'm seeing in the markets right now and why I am pretty much largely unconcerned about the recent weakness and continued weakness, I would say, in AI infrastructure stocks. So, context, we know that the AI trade has flatlined since, you know, early May, mid-May is probably when it really started to flatline. So, you've had pretty much 2 months of consolidation in the AI infrastructure trade amidst a bunch of peak spending fears. Now, there was the hope that once we started to get earnings, that those earnings would reconfirm, reassert very strong underlying spending fundamentals for the AI infrastructure group and reignite the bull trade on AI stocks. Now, that hasn't exactly happened. We got really bullish numbers from TSMC this week. We got really bullish numbers from ASML this week. We got really bullish numbers from Teradyne Systems this week. We got a really bullish update from Samsung last week. And yet, despite those I would say three really major earnings updates and one or minor A or B or minor one. Despite those really strong fundamental reconfirmations of the AI trade, the AI trade itself is not re-awoken. Now, some people are concerned about that and saying, "Oh my gosh, the strong earnings didn't reignite the trade and maybe the trade is indeed rolling over." But, to those folks, I say two things. First, the my period has always been that those guys were never going to ease the overspending fears. There's just no way they could because they aren't the spenders. TSMC is a CapEx taker, they're on the receiving end of the spend. ASML is a CapEx taker, they're on the receiving end of the spend. Uh Samsung is a CapEx taker, they're on the receiving end of the spend. They are test systems that CapEx taker, they're on the receiving end of the spend. And so, what we had is yeah, we had four really great earnings reports, but all from CapEx takers. None from CapEx spenders. So, what those CapEx takers told us was the current state of the AI infrastructure buildout is as hot, as healthy, and as strong as it has ever been. What those reports did not tell us is what is the durability of the CapEx spending cycle into 2027 and 2028. ASML did say they're pretty much sold out in 2027 and 2028. TSMC is largely implying the same thing. A or also gave a really, really bullish 2027 guidance. That would also imply that they're seeing similar sellout dynamics in 2027 and 2028. So, yes, they did provide some color in terms of their stuff is sold out, but there was no color around what will be overall capital spending trends look like in the 2027 and 2028 because they can't comment on it. Again, they're all capex take or sell. From that perspective, the only companies that can really truly ease these overspending fears are going to be the capex vendors. It's going to be Alphabet, it's going to be Amazon, it's going to be Microsoft, it's going to be Oracle, uh it's going to be Meta. Those guys have to report earnings, and those guys have to collectively either reaffirm or preferably hike their explicit 2026 AI capex numbers guidance forecast, and provide bullish and directionally positive commentary without explicitly giving us numbers on 2027 and 2028 capital intensity. So, this sell-off doesn't end until those guys step up to the plate. And they haven't stepped up to the plate yet. So, yes, TSMC steps up to the plate, hits a home run, ASML steps up to the plate, hits a home run, Samsung, same thing, ASML, same thing. Market doesn't really care. AI stocks keep dropping. That's because the the overspending fears are not reassured by those companies and even reassured by the hyperscalers. Now, fortunately, I do believe the hyperscalers going to step up to the plate and hit grand slams when they report because they are seeing tremendous growth. I mean, Google just signed that massive multi-billion dollar deal with SpaceX for for cloud computing. Meta is launching its own Meta cloud business, pouring several more billion dollars into it. I think it's a uh compute cluster down in Tennessee or somewhere down there. Um So, all the recent news flow here is highly suggestive of companies that are continuing to spend like crazy. ChatGPT 5.6 just launched, Anthropic is launching new models. So, it's like the evolution is is continuing. I don't see any slowdown there. So, I do think that these companies are going to step up. They're going to report great numbers and accelerate. >> You know, so I think those hyperscalers again, they're going to reaffirm 2026 CapEx plans, provide bullish commentary in 2027, 2028, and the peak spending fears are going to fade into the background. The AI stocks are going to come roaring back. Now, I think it's also really important to note that on the technical front, remember we pointed out before that AI infrastructure stocks, when you look at the SMH, you look at the SOX, they have regularly bottomed. Every one of the pull back in this trade since the launch of ChatGPT in late 2022 has bottomed in that 10 to 15% max drawdown range. And that is exactly where we are right now. We've been hanging out there for a few weeks now. We have not, very importantly, broken lower. We have not broken lower. That to me is the tell. That is the tell that Wall Street is waiting for the upside catalyst to arrive before buying the dip and reigniting this trade. If indeed there were more concerns, then we would have broken lower. SOX and SMH are holding their 50-day moving averages. They're staying in that 10 to 50% historical bottoming zone. Th- Those are really bullish tells for me. This just again, this feels like a really good buy zone. It feels like we came down to the bottoming level. We're holding the bottoming level. We're holding the technical uptrend. We got good news on the horizon. We've got good news right now, too. And this is all feels like a great time to be buying. I think we're in the buy zone. I think this is the buy window. I think this is when you want to be buying AI infrastructure stocks. And indeed this week we did release some new recommendations for our model portfolio. Um it's the first time we've done so in a few months, actually. So, um so yeah, that that that that should tell you pretty much everything you know about where we are right now, where we think the market is, and why we think the opportunity is here and now. I just also want to touch on the fact that we got a really soft CPI inflation report this week and a really soft PPI inflation report this week. So, those reports confirm that we are over the inflation or on the other side of the inflation hump. Inflation was, you know, rising significantly because of the Iran war and rising oil prices, but May was the peak. June numbers were softer than May. The estimates for July numbers are softer than June and I think August is going to continue that trend. So, we're on the other side of the hump. We have disinflation. That will likely compel the Fed to actually cut interest rates and not hike them. And that's important here because the AI boom is becoming more debt financed, right? Like, we've already drained the cash flows. These companies their cap backs to to operating cash flow ratios are nearly 100%. So, if they want to find more money, they got to go to the debt markets and they are going to the debt markets and that'll be more helpful if the rates go lower, right? Rates on debt go lower, they can tap the markets more easily, it's cheaper to finance and they finance for and the spending goes up. So, across the board, I'm just feeling really good about things despite the continued choppiness or extended sell-off, whatever you want to call it, extended consolidation. I'm feeling good about things. I think this is the buy zone. We are in the buy window. And I I'd be aggressive here. And I think by the end of July, this trade will be back in full force. By early August, we'll be back at all-time highs on socks and SMH. And I think you get a, you know, 15 to 20% bounce across the whole complex and then in some specific names, probably, you know, 50 to 100% bounces over the next few weeks. Like, these stocks, they're high beta stocks. They They go up 100% and then come down 50% and they go up 100% and they come down 50%. 15 steps forward, five steps back, right? That's That's the the semi trade right now. And I think we're on the fifth step back right now and it's time for those 15 steps forward. All right, folks, I'm just pulling up to my dentist appointment right now. So, thank you guys for sticking with us this week doing an audio update. We'll be back on camera next week. Take care and everyone have a great weekend.