Thomas Hayes Says "Sell the Rip" in Chip Rallies, We're in AI's "Fifth Inning"

than 5%, but they're up nearly 100% year over year. All right. We're back on morning movers. I want to welcome in Tom Hayes, who is the chairman of Great Hill Capital, joining us here at the Big Board. We're taking a look across the mag seven this week because it's in focus. We've got Microsoft reporting, meta reporting Amazon Apple reporting the end of last year. You told us to lighten up on mag seven. And you say to continue to sell the shiny objects. Tell us a little bit more about that view. Yeah. So mag seven became lag seven. Okay. They've underperformed the index. And I think you have challenge that we're going to see between Microsoft and meta reporting tonight Amazon Apple tomorrow is it's kind of like they're stuck in a box. If they increase CapEx, the semiconductors go up and everyone says, you know, AI beneficiaries, if they moderate their CapEx commitments, I think the hyperscalers will mag seven will actually get a bid because the market likes that. So why is the market so up in arms? Because it's like everyone's excited about AI. We all use AI day to day. It's going to be revolutionary. It's going to increase the quality of life. If the robots don't kill us, it's going to be great. But the point is, is that these you know, you saw Google, okay, Google, for the first time in history, reported negative free cash flow. So they need and often in these revolutionary breakthroughs, it's not the ones that do all the investing that make the money. It's the ones that use the technology that someone else did all the investing. So with the mag seven, they've run out of free cash flow. They've stopped doing buybacks for the most part. They're now issuing debt. Okay. So that that levers their balance sheet. And in the case of Google, they even issued equity. So they're diluting shareholders. So the market's saying on the one hand, we want you to spend because we want you to have a competitive advantage 2 or 3 years out. The problem is they're not seeing the return on invested capital as fast as they anticipated, and they're probably not going to see it for another 12 to 18 months. So if they spend more, the mag seven hyperscalers will go down. If they moderate, semiconductors are going to continue to go down. And we said that last last month we said this is crazy land. You know, gamma squeeze retail buying. And the average semiconductor stock is down 25 to 45%. And you know what? They're going lower. They're going to bounce in the next few days because I think you're going to see something off the mag. Seven earnings that people are going to get excited about short term. But going into the fall, I think you want to sell any rips in semiconductors and memory. Oh you you're the sell the rip crowd. Yeah. And I do remember the last time you sat down with us. You were concerned about and I don't remember the last time or the time before that, the direction of travel for free cash flow. And you said to watch that. And you were right in terms of how the market was interpreting that. Is there going to be, do you think, with this round of earnings, is there going to either be a reset in terms of how expectations are? Because, for instance, you know, I know SK Hynix is not something that you're necessarily covering, but like they saw profit surge more than 550%. Yeah. Like it's like, what more do you want from this? Expectations, expectations. You're like, we want more. We want more. Do you expect a reset? Or is there going to be a new definition of what beat and raise is? I don't think anyone really cares about beating raise like in their legacy. You know the issue a couple of things. Here's a word you haven't heard in since the great financial crisis. Credit default swaps. Okay. Oracle's record high higher to ensure the cost of their debt than it was in 2008 when the world was falling off a cliff. You're seeing that now. Even Nvidia credit default swaps are going up. So the question is maybe they all want to continue to spend. But the question is, will the market allow them to continue to spend and give them the money without repercussions? And I think we're seeing a moment like we saw with meta a few years ago with the metaverse, where the spending got out of control. There was no return on investment from the metaverse. And eventually he blinked. When when they blink and they bring back that spending, whether it's today and tomorrow or in a few weeks when credit default swaps go out, the semis are going to get hit even harder. So they could retrace that whole move that they made since April. That's not saying the AI trade is over. That's saying we're probably in the fifth inning seventh. We're not in the seventh inning, but like a seventh inning stretch where everyone says, you know, by October you're going to have a lot of guests on that are saying AI trades over. It was a bubble, and that's when Tom will be coming on. I'm buying all these tech stocks. You're going to be like, what? You never buy tech. Yeah that's exactly. But what's going to work right now is defensive stocks that no one wanted a couple of months ago. You remember last month we were pitching Hormel Baxter. You're like, what the hell is he talking about? He should be buying semiconductors. Those things are up this month, and we want more defensive stocks for the next couple of months. We'll get into the tech. More spam. We want more spam. We want we want some Diageo. Okay. Some of the people that own semiconductors are going to need our product because they're the leader in Johnnie Walker Casamigos Smirnoff. They're going to be they're going to be consuming that like nobody's business with our troubles is that they get their margin calls on SK Hynix and space. They're going to need Diageo products. The other thing with Diageo, everyone said, okay, Gl-ps, no one drinks anymore. Well, the facts are 85% of the people who start GLP one are often by the end of year two, whether it's nausea, whether it's cost, whether it's everything else, not not to discount the value of maybe they lost the weight that they were trying to lose. Yeah. And they can keep it off other ways. So so that's number one. Number two, you got Drastic Dave Lewis, who turned around Tesco, which was the supermarket chain in the UK. Tesco. Yeah. And also he spent 30 years at Unilever. He's cutting out all the fat in the business, pun intended, $3 billion of free cash flow. I mean this is people are drinking less, but they're drinking better. They're the leader of Premiumization premium top shelf brands. They also have the Guinness business. Every region is growing double digits except for the US. U.S. had a tequila problem. You know. Yeah. And they're fixing that between Casamigos and Don Julio. Once that gets fixed, this thing's going to be a machine. So and you're seeing activity in the space. You saw Brown-Forman the other day offered to buy them was rejected. They're like, this is too low. Same thing is going to happen with Diageo. And you like Advance Auto parts as well. We love advanced auto parts because this is like a consumer staple. I know it's retail 4000 stores. The average car on the road is 14.5 years. You know it's like deferred maintenance. You can say, I'm not going to spend money, but when your battery runs out, when you're when you're tire breaks, your axle breaks, you go to advance 50% professionals, 50% do it yourselfers. This was a poorly run business. Shane O'Kelly came in from HD supply. It was an $8 billion business he sold to Home Depot, sold off the Canada business, which was losing money, paid down the debt, delivered the balance sheet. He's targeting 7% operating margin by 2028. Last time they had 7% operating margin was 2018 to 2022, when it was $180 stock. It's a $60 stock today. He's taking all the right stocks. We're going to see this thing soar over the next few years. I am not surprised about the average age of the car on the road. Now. I you know, only because the direction of travel for age has only increased now. And given prices of new vehicles, I don't know exactly where they sit now, but the. At my last check, the average price of a new vehicle was somewhere around $50,000, which is crazy. I mean, we're not even talking fancy vehicles. Obviously, they're. I want to ask you a final thought from you, Tom, about oil prices and inflation. And if that how you look at that in terms of what's on your list, sectors that you're interested in and how you see things through the balance of the year. Yeah. You're not going to be able to predict what happens in Iran. But what we do know, why, why is why are oil prices relatively subdued given all the situation? And the answer is the Chinese. So when everyone was selling oil in the hole in Covid, Chinese were hoovering up as much oil into their strategic reserves. Trillion plus, they've got the largest reserves, probably by three times the U.S. and other nations. So during this period, they built up in 2020, they built up in 2016, and they built up during the Great financial crisis. They have the largest oil reserves by far, so they've been restraining themselves. When oil is elevated during this war, they've bought nothing. And that's what that marginal buyer has kept the costs subdued. Can that persist forever? No. Eventually, you know, you could have a scenario where it spirals out of control. The administration knows it. The rest of the world knows it. Europe is experiencing it with their energy costs. But but the Chinese have laid back on on the bid for oil, which has helped us kind of ride through this geopolitical uncertainty. Great conversation as usual. Appreciate that. That's Tom Hayes. He is the founder and