AI Spenders vs AI Earners

Schwab network.com. Welcome back to Opening Bell. I want to talk markets and this AI trade. Joining me right now, Christopher Zook, chairman and CIO. CAZ investments. And we just finished speaking with Phil Rosen and saying how CapEx spending sometimes can spook markets. And you see a big sell off in other cases. Then you say, oh, there's so much demand it's needed. And this is the plan. And he was noting that may be the case right now, seeing some justification for big CapEx spending. What are your thoughts on the AI spenders versus the AI earners? Well, thank you for having me this morning. Nicole. Great to see you as always. You know, there's there's two companies that really are kind of the poster children for what we're talking about here right now. The first is meta. Meta spent about $31 billion in CapEx which ate up nearly their entire operating cash flow for the quarter. Stock got hammered. You look at Palantir they grew revenue by 93%. Total commercial demand in the United States was over 130%. And the stock was up over 12% on the news. So what the market is doing is evaluating, okay, if meta is going to spend $31 billion, the kind of understand why they need to do that, but when are they actually going to get paid for doing that? How, how long is it going to see ROI? And then you have other companies that are more the service providers like Palantir, that are able to utilize their skill set to be able to add value to companies using AI. That's a big difference. And it's much easier to see how they're going to continue to get paid from this revolution that we have called artificial intelligence. As you mentioned, Palantir. I think about when the numbers came out and the sentence I saw was that AI demand is real, and Palantir made folks believe it. Is that right? I mean, I think so. I mean, full disclosure, we've had a strategic partnership with Palantir for the last three years. And it's something where we're all in on AI and the ability for all companies to be able to get a return on investment of what they spend is going to be highly dependent on who their skill. You know, skilled workers are internal inside of their firm. And then how many outsourced or partners that they have that are able to come in and overlay, you know, this incredible technology on their business. The great thing about Palantir is, you know, purely as an investor and also as somebody who is, is a customer, is that they have the ability to take something that's wildly complex, that we would not be able to necessarily be able to replicate internally, at least not as fast and be able to do that in a, in a way that really makes a lot of sense for our business and gives us a visibility to that return on investment. We have to get a good ROI. Like most companies, you're not going to spend it unless you're going to get something for it. And Palantir has done a really good job of helping companies see a path to that profitability, if you will. You talked about nine consecutive quarters of beating estimates, raised guidance. The growth Palantir has been seeing, and that is, in fact, one of your picks for today. I didn't want to leave that out. I still want to stay big picture. Before I get to your other picks of cerebrus and x-energy on some of the other ideas, such as energy. Why is that important right now? I mean, we think about AI spend building data centers around Iran and and the Strait of Hormuz. Tell me about some of the structural bottlenecks in AI that come from energy. What's your outlook? Well, basically, almost every single technology company talked about not having enough compute. And I'll just translate that for the audience. I mean, compute is basically everybody wants AI to work instantaneously whenever they want it, whether it be on ChatGPT or on anthropic and cloud or on Google, whatever your platform is, you want it to work immediately. Well, the only way that happens is that when you send your prompt into the ether, which is wild, if we all think about actually how this works, you send your prompt out there and you get it back. It takes time for that to occur. And the more constrained. The highway is between your prompt and that data center and that data center back to you. The more traffic on that highway that there is, the slower your response time is going to be, and potentially the less compute that actually can occur at that data center in order to be able to have the brain, if you will be able to calculate all the possible scenarios and give you the answer that's going to help you achieve your outcome, that is what is the biggest constraint that we have. Well guess what? All of that takes an enormous amount of energy, not a little amount of energy, an enormous amount of energy. And so when you think about the data center development, you think about how much we all want to be able to use AI in our daily lives, in our businesses, to be able to find drugs that never existed before, and all the other things that we're doing, you know, as a society, we're able to do that only because there's energy to power it. But oh, by the way, we still need to be able to power our homes, power our phones, power our cars, and do all the other things that come along with it. So you have the normal growth of demand that comes from just a lot of people, you know, wanting to have power in their homes, etc. and there's more people and that continues to grow. But then you also have this new demand that is artificial intelligence, this enormous amount of compute that is needed in order to accomplish the entire growth of that sector. Well, all of that together means you have a growing demand much faster than the amount of supply that we're creating. To put it in perspective, so far this year. So excuse me, so far this decade, I should say, you know, we're six years in now. So far this decade, we're only replacing about one third of the amount of consumption that we consume. So just think about it like a milk carton. If you drink literally an entire milk carton and you only go to the store and buy a third of the milk carton, eventually you're going to run out of milk. That's what's happening with energy. That's why it's so critically important that we use all sources of energy to be able to meet this growing demand. I wanted to touch on something else and thank you for that. I wanted to touch on something else that you sent in your notes about the likes of Apollo, Blackstone, Blue Owl, and that those fundamentals are showing some resiliency. They are at a discount at this point. When you think about these alternative asset managers, what are your thoughts on those stocks, that group, where they're headed? We're in a thematic investor. We find a theme, we find the best risk reward, and then we find a way to take advantage of that risk reward the best we can in this particular area, the theme is irrefutable. I would not have anybody argue with me, basically, that assets in the private markets are going to grow from here. Growth rates, people can debate, but everybody's going to agree with 401 K plans and all of the, you know, access that's now through democratization of alternatives like we've been able to do with interval funds that literally every single person in the world can now buy literally every single person in the world at a $2,500 minimum. That didn't exist literally a year ago. Well, now they exist and they're available for folks to be able to do in a way that really is going to drive assets to someone to manage. We want to own the firms that are going to manage those assets. So whether it be in the public market, where there's certainly some good alternatives, or in the private market where we're much more active and the valuations are a lot less expensive, we're able to participate in both. Now, what happened earlier this spring is with the whole society and the private credit concerns. You saw the entire sector sell off dramatically. And don't get me wrong, there are issues in some parts of private credit, but there's not like every single firm ever is going to cease to exist as a business. That's not what's going to happen. And particularly in the private asset managers, some have more exposure, some has less, but they all got hammered. So as a result, you now have great companies trading at very good valuations that have solid fundamentals. That's an incredible combination. And we love that sector right now. And another area and theme that you liked was space and defense. A lot of spending going on there and new technology. That was something you noted. And your stock picks today here that we have featured include York, Space X energy, Palantir, and Cerebrus.