3 Stocks to Buy Now for the Next AI Breakout

Hey folks, Luke Lango here again, another Being Exponential podcast for this week. Brooke still sick, under the weather, but I will be doing this one solo because there's a lot of information I need to get out to you. Brooke will be back next week. Do not worry. Do not fret to fans of Brooke. Okay. The AI stock bounce back rally is here and it is very, very, very real, very, very, very legitimate and the buy window is open. I think that's just kind of the short and sweet of the outlook on stocks right now. Um this July sell-off that really hurt the AI trade, that blew up Leopold, that blew up a lot of stocks, that sent a lot of stocks down 30, 40, 50% plus core stocks in the AI trade. That was built on peak spending fears, which we are finding out are complete hogwash. Like complete bogus. There is nothing to them whatsoever. And the reason we are finding that out is because we are getting a flurry of earnings reports to suggest the opposite. The actual companies in this AI infrastructure build-out, the ones that are the recipients of the hyperscaler spending, are essentially saying that business is absolutely awesome, that there is nothing wrong with what is going on. So, let's start with some of those earnings reports. This week we heard from two of the major neo cloud players, Coreweave and Nebius. Now, the neo clouds are they're super important to the overall read-through for the AI trade because while hyperscalers can tell us how much they plan to spend and that's obviously super important, that's the top of the funnel, the money flowing down the funnel, and chip and equipment vendors can tell us what is shipping and what their orders look like, the neo clouds show whether customers are actually renting that infrastructure, at what prices they're renting that infrastructure, and for how long they're renting that infrastructure. And on all three of those measures, utilization, pricing, and forward commitments, the evidence for Neoclouds and and for the broader AI infra trade is overwhelmingly bullish. I mean, on on the revenue growth side of things, I mean, these companies put up just like dumbly big numbers, okay? Um what is it? Coreweave's revenue surged about 112% year-over-year to $2.6 billion. Adjusted EBITDA, 1.5 billion, 59% margin on that. And management projected an 18.5 and 19.5 billion-dollar annualized revenue run rate by the end of the year. Enormous growth across the board. Now, Nebius, even bigger, right? One of the reasons we like Nebius the most is because this is the fastest-growing player in the hypergrowth Neocloud space. And the numbers back it up this quarter. Revenue up 454% to $582 million. Annualized run rate revenue jumped 56% sequentially to $3 billion. And adjusted EBITDA reached 236 million at a 41% margin. Let me repeat that. Nebius is at a 41% margin. Coreweave's at a 59% margin. And one of them is growing at 112%, and the other one is growing at 454%. I mean, you couldn't dream of better stocks, better numbers. Triple-digit revenue growth with 40% plus EBITDA margins. I mean, nearly 60% for Coreweave. That's absurd. That's absolutely insane. And it's going to continue because both companies said that newly deployed capacity is effectively selling out immediately. The moment that um new capacity hits the market, it's selling [clears throat] out. And that suggests that physical supply, not customer demand, remains the principal constraint on growth. Backlogs are soaring. Coreweave finished Q2 with a $104 billion backlog. It's up 246% year-over-year. Nebius at over $40 billion committed backlog. They signed four new AI cloud agreements in the quarter averaging more than $1 billion each. And they said they could sell [clears throat] out all of their planned 2027 capacity today. So, Michael Burry >> [clears throat] >> short Nebius. This was a bad week to be short Nebius. I think the peak spending fears that have plagued these stocks are absolutely ridiculous. The numbers completely prove that out. And let's look at the charts. Nebius, you can see here, this this is beautiful. This is a stock that came in massive uptrend, came into its 200-day moving average on that July sell-off, bounced so preserve the biggest, most important long-term uptrend line, bounced above the 100. This remained resistance, the 50, came back down, turned the 100 into support, and then soared back above the 50. I mean, this is classic resistance turning into support, short-term sell-off, short-term rebound, long-term uptrend resuming. We love to buy into long-term uptrend resumption trades. That is Nebius. And then Coreweave looks like it's just breaking out of a sideways trend, in a very bullish fashion. And look at the Coreweave chart. Stock has been [clears throat] stuck in sideways for a while, clearly, but breaking out above all of its MAs, above the 50, 100, and 200 all in the same day pretty much. Bullish MACD crossover, RSI recovery. This one looks pretty solid, too. So, Nebius is my favorite play in Neo Clouds. Coreweave looks good, but this is also a great read-through for Applied Digital. This is a great read through for Iran. This is a great read through for the entire Neo Cloud complex. I do believe that there is a lot to like about what's going on there. But we didn't just hear from Neo Clouds this week. We also heard from a major major optics player. The major optics player we heard from is Lumentum, LITE, another one of our favorite optics stocks and one of our favorite AI infrastructure stocks, clean and You can see here just start with the charts. I just pulled it up. Again, another textbook rebound scenario. Massive uptrend, lost the 50, lost the 100, came into that 200-day moving average, the most important long-term uptrend line, held it in late July, big V-shape recovery off of that, bounced around, retook the 50 100, bounced around that, and then is now turning the 50 100 back into support. So again, classic support turns into resistance, turns back into support, short-term sell-off turns into a short-term rebound, long-term uptrend resumes. Great buying opportunity on Light and our view. And the fundamentals were were so good, right? Lumentum's Q1 revenue Uh well, actually no, the the big thing was that Q1 revenue growth, the guidance, is going to be accelerated from Q4. So I think Q4, if I can pull up the numbers here, um Q4 revenue was up 109% year-over-year, and the Q1 guide calls for 130% revenue growth. That to me is the most important thing here. This is a company that had triple-digit revenue growth this past quarter, and is guiding for even bigger revenue growth this coming quarter. There is no clearer, no more emphatic rejection of the peak spending fears. If we had peak spending conditions, then you would see revenue growth for one of the high-octane players like Lumentum decelerate quarter over a Instead, we're going from 109 to 130. Acceleration of that top line growth rate implies acceleration of the overall spending growth rate, which means this pie is getting bigger. And not just that, but the rate at which it is getting bigger is going up, too. That is that is super super bullish. Now, for optics in particular, the read-through is really really um bullish because if you kind of repeat the to reiterate the the story on optics, AI creates a a structural increase in optical content because every new GPU, every new chip, every new accelerator uh generation that produces more data operates at faster lane speeds and requires more bandwidth and shorter latency. Now, the industry is now progressing through these several overlapping growth waves, right? We got the the 800G today, 1.6T and 200G per lane to 2027, rapidly expanding OCS deployments, and then near package and co-packaged optical scale-up beginning around 2027 2028. So, the scale-out opportunity is going to be scale-up opportunity. The growth market is just expanding and getting bigger. Lumentum is clearly winning dollar share in that market, so you can't kind of translate one for one to Applied Optoelectronics AOI or Coherent COHR or Fabrinet, but it does suggest that this whole market is doing really really well. And if you look at the charts for these other names, too, AOI also reported earnings recently, I think about 2 weeks ago, and those are really really good. The chart here is also very very attractive. Stock came into that 200-day, bounced right above it. Now, it's in the process of retaking the 100 and the 50. That this is a great rebound to be buying into. Um Coherent, I think, is a similar story here. We're going to get earnings from them uh soon, so we'll have to uh listen to that, but same story here. 200-day break, retake of the 50 100 turned into support. And then Fabrinet, I think, has been the weakest name in the group, might be the most attractive play actually. Stock came down way below the 200, turned it into resistance, but then now turned into support on this most recent bounce. So, this is one that could have a lot of runway left. FN might be the most attractively positioned in the group, but I think the optics read through is really, really bullish. I would be a buyer on the rebound of these optics stocks. We also heard from Hon Hai, who is Nvidia's big supplier. They reported fantastic numbers this week. Who else did we hear from? Actually, that's all as far as this week is concerned, but last week we heard from, like I said, Applied Optoelectronics, Power Solutions gave good numbers, MP Materials gave good numbers, SI Time gave great numbers, TTMI gave great numbers, Lumentum gave great numbers, Arista Networks gave great numbers, Astera Labs gave great numbers, AMD, when the stock fell, I thought gave great numbers, SpaceX gave great numbers, they're becoming a big spender in this pie. Global Foundries, GFS, gave great numbers. The story is pretty consistent, folks. Everybody is giving great numbers. And so, when there's a narrative that AI spending is peaking, and that narrative is running head first into these really great numbers that completely and emphatically rejected those that narrative, then the narrative falls apart. And that's what we've been saying. There was a disconnect in July between strong underlying AI fundamentals and this kind of the sky is falling chicken chicken little narrative. When narrative and fundamentals, when sentiment and fundamentals detach, they have to reattach at some point. And they have to reattach through weakening fundamentals or through strengthening sentiment, re-strengthening sentiment. And in this situation, we just got a fresh batch of earnings over the last 2 weeks to suggest that the fundamentals are not going to deteriorate. They're all actually strengthening. And so, the only way fundamentals and narrative sentiment reattach here and now, if fundamentals are strengthening, is for the sentiment and the narrative to improve, to restrengthen. And we're seeing that across the board in all these stocks. The best way to capture that is going to be the SMH or the SOX ETF, uh the the semiconductor ETFs. These are ETFs that I mean, look at that. >> [clears throat and cough] >> Big rally, big sell-off to the 100, V-shape recovery off of it. And pretty much an oversold RSI recovery, bullish MACD crossover below zero line. Looks great to me. Now, the SOX situation, the exact same thing that's going on here. SOXX, big rally, big sell-off to the 100, V-shape recovery off of that, about to retake the 50, nice RSI RSI recovery, bullish MACD crossover. So, we're now getting technical confirmation alongside the earnings confirmation, and all that is telling me this rally can continue. We also got a CPI report this week, July inflation, that was, I mean, pretty benign. It It was good enough. It wasn't like this, you know, inflation is is dead and everything's all fixed and it's amazing, but it was um comfortably soft enough to weaken the case for another Fed hike without signaling that the economy is collapsing. It was this Goldilocks cold report, right? So, headline CPI, pull up the numbers here, it rose just 0.7% month over month. So, I mean, basically flat month over month. That's awesome. And the headline rate, the inflation rate slowed from 3.5% to 3.4%. That is the second quarter of this second month of disinflation, rather, after four straight months of reinflation from January to I think it was May. But then we cooled down in June, we cooled down further in July. Core CPI only rose 0.22% and the head uh the core inflation rate slowed from 2.6 to 2.5. That's the slowest reading in roughly 5 years on core CPI 2 and 1/2. Now, more importantly, core CPI is now running at just 1.6% annualized over the past 3 months and 2.4% over the past 6 months, which tells us that the current inflation trend, kind of the more real-time dynamic inflation trend 3-month annualized, 6-month annualized is actually better than the backward-looking headline of 3.4% or sorry, of 2.5% on on core. With core running at 1.6% annualized over the past 3 months, the Fed's not going to hike against that, especially when we got that jobs report where the US economy is losing 23,000 jobs. It lost 20,000 jobs in in July. Um You don't hike rates when your core CPI real-time rate essentially is below two, below target, and the economy is losing jobs. So, I think we're going to take the rate hike off the table. I think Treasury yields move lower, and I think as rate hike fears decrease, and as long-term yields come lower, that's going to be supportive of risk assets, especially long-duration risk assets like AI stocks. Now, the mix or the read is more nuanced for consumer stocks because, you know, inflation is still 3.4. Wage growth is 3.2 based on the motions in jobs report. So, we're still at -0.2 on on real wage growth. Real wage growth has been negative for several months now. Uh real wages are they're under pressure. And so, that's probably going to mean weak discretionary spending on hotels, rental cars, recreation, parking, all stuff like that. We saw Dutch Bros report earnings recently, it wasn't that great. We saw Sweetgreen report earnings recently, wasn't that great. Uh there was another one, another consumer stock, uh uh, I'm forgetting now, but there was another consumer stock that reported this with uh, in the past 2 weeks that wasn't that great. The consumer names are not putting up great numbers like the AI companies are. And so, I think that CPI report coupled with the earnings backdrop suggests that the bifurcation that we've had in markets since Chat GPT launched, really, is going to persist. The The broadening, it says not going to happen. Um, we're going to stay in a narrow market led by AI stocks with most other stocks struggling for gains. And that's that's a dynamic that has persisted and it will persist. And so, I think the thing you want to do here is I do think the buy window is open, but I think the buy window is only open for AI stocks. I think AI with AI, all in with artificial intelligence remains um, the mantra. And so, that's that's what I would be doing this week. That's the outlook that that I would have. It is the outlook that I do have. All right, folks. That's all I have for this Being Exponential episode. Appreciate you guys, as always, for tuning in. Next week will be better because Brooke will be back and there'll be more dynamic back and forth there. We all love Brooke and we all miss Brooke. So, Brooke, please get well. We'll see you guys next week. Everybody, take care. >> [music] [music]