Bond market is in control of the narrative, says Citi's Tyler Radke

SWAPS REACHED DISTRESSED LEVELS AS WELL. AND WHILE THE NASDAQ DID POST GAINS TODAY, CORE. WE'VE, AS WE SAID, UNABLE TO HOLD THE GAINS, IT WAS EARLIER UP ABOUT 7%. SO NOW OUR CONCERNS ACTUALLY OVER. ARE THEY EASING. JOINING US NOW IS TYLER RADKE. HE IS CO-HEAD OF U.S. SOFTWARE RESEARCH. TYLER GOOD TO SEE YOU. >> THANKS FOR HAVING ME. >> CERTAINLY. WE'LL GET YOU ON THE WHOLE SETUP FOR SOFTWARE AND IT SPENDING TRENDS AND EVERYTHING. BUT BUT CORE WE'VE I MEAN, YOU HAVE THE MARKET QUESTIONING THE CAPITAL STRUCTURE, THE REALLY THE BUSINESS MODEL OF THE NEO CLOUDS. HOW DO YOU ASSESS IT? >> LOOK, I THINK THIS IS SIMPLY A FINANCING ISSUE, RIGHT? I MEAN, IT'S NOT HELPFUL THAT THE TEN YEAR RATES HAVE GONE UP, YOU KNOW, 30% OFF THE LOWS IN MARCH. RIGHT. THAT HAS RIPPLE EFFECTS TO ANYTHING THAT'S NOT INVESTMENT GRADE. SO I THINK THE BOND MARKET IS REALLY IN CONTROL OF THIS NARRATIVE RIGHT NOW. IT'S VERY TOUGH TO FIGHT THAT, ESPECIALLY AHEAD OF A FED MEETING AHEAD OF SOME BIG MIDTERM ELECTIONS. I THINK IF YOU LOOK AT EVERYTHING FROM A DEMAND PERSPECTIVE, DEMAND COULD NOT BE STRONGER. YOU LOOK AT THE SPOT RATE FOR H 100. THESE GPU RENTAL PRICES, THEY'RE BASICALLY AT RECORD HIGHS. THE AI DEMAND YOU KNOW, AS WE THINK ABOUT THE LABS OUT THERE THAT ARE TALKING ABOUT GOING PUBLIC IS VERY, VERY ROBUST, RIGHT? SO THESE COMPANIES ARE LOCKING IN CONTRACTS AT THE HIGHEST PRICES THEY'VE SEEN. THEY'RE TELLING US THAT THE MARGINS ARE HIGHER. NOW, THE COST OF CAPITAL THAT'S SUPER IMPORTANT, RIGHT? LIKE THESE. THAT IS PART OF THIS MODEL. BUT OUR VIEW IS IF THIS IS SIMPLY A FINANCING ISSUE, THOSE HIGHER FINANCING COSTS WILL GET BUILT INTO THOSE CONTRACTS WHEN THEY GO OUT AND NEGOTIATE WITH CUSTOMERS. SO WE THINK THIS GETS FIGURED OUT. BUT AGAIN, IN THE VERY NEAR TERM, AS WE HAVE ALL THIS UNCERTAINTY ON THE FINANCING MARKET, I THINK THAT'S WHY YOU'RE SEEING A LOT OF VOLATILITY TODAY. >> WE'RE GETTING A LOT OF NEWS OUT OF N SCALE, WHICH IS ALSO IN THE CLOUD SPACE. AND THERE WAS A REPORT FROM BLOOMBERG THAT MICROSOFT IS WALKING AWAY FROM A LEASE. YEAH. AND THAT MAY SIGNAL THAT PERHAPS HYPERSCALERS ARE IN THE DRIVER'S SEAT WHEN IT COMES TO WALKING AWAY BECAUSE OF BOTTLENECKS. IN THIS CASE, IT WAS BECAUSE THE UK DIDN'T HAVE ENOUGH POWER. BUT CERTAINLY WE FACE THE SAME ISSUE HERE IN THE UNITED STATES, POTENTIALLY WITH POWER GRID BOTTLENECKS, BUT ALSO ZONING BOTTLENECKS, ETC. CAN YOU SPEAK TO HOW SOLID THESE CONTRACTS ARE AND IF THEY CAN IN FACT, BE CANCELED? >> WELL, YOU HAVE TO DELIVER ON A CONTRACT, RIGHT? THAT'S KIND OF WHAT IT COMES DOWN TO. WE'VE SEEN, I THINK, GOOGLE WALK AWAY WITH A CONTRACT WITH CARUSO, RIGHT? SO WE'VE SEEN THIS THING PLAY OUT IN THE PAST. INTERESTINGLY, WITH THESE BOTTLENECKS, WHETHER IT'S POWER REGULATORY THAT YOU TALKED ABOUT, THIS ACTUALLY INCREASES THE SCARCITY VALUE OF THE THINGS THAT THE NEO CLOUDS ARE SELLING, RIGHT? IF IT IS HARDER TO STAND UP CAPACITY TO BUILD THESE SITES, THE SUPPLY THAT'S OUT THERE TODAY AND VERY LIMITED SUPPLY IS ONLY GOING TO BE WORTH MORE. BUT LOOK, I THINK YOU GOT TO DO THE RIGHT THINGS, RIGHT. YOU HAVE TO PUT THESE IN THE RIGHT PLACES. YOU CAN'T ROUTE THINGS THROUGH RESIDENTIAL AREAS AND EXPECT THERE TO BE NO ISSUES. YOU GOT TO GO THROUGH THE RIGHT PERMITTING PROCESS. I THINK THAT WILL IMPROVE AS WE GET PAST THE MIDTERMS ESPECIALLY. IT'S VERY POLITICALLY SENSITIVE RIGHT NOW. BUT BUT YEAH, I MEAN, I THINK THE HYPERSCALERS, THEY NEED THIS CAPACITY. THEY'RE WILLING TO DO IT IN HOUSE. MICROSOFT BUILDS A TON OF THEIR OWN DATA CENTERS. RIGHT. AND SO, YOU KNOW, I THINK THAT THAT'S A, THAT'S A GOOD SIGN THAT MICROSOFT HAS CONFIDENCE IN THEIR OWN ABILITY. >> I DO THINK THERE'S THIS ONGOING DEBATE ABOUT JUST ONCE THINGS ARE BUILT OUT TO A GREATER SCALE, WHERE THE PROFITABILITY IS GOING TO SETTLE, AT WHAT LAYER OF THE WHOLE FOOD CHAIN. AND THE MARKET SEEMS TO BE SAYING, NEO CLOUDS ARE AT THE END OF THE LINE, RIGHT? I MEAN, IN OTHER WORDS, YOU HAVE THE ABILITY OF EITHER THESE BIG COMPANIES TO FIND OTHER SOLUTIONS BEYOND JUST PAYING UP FOR THESE MASSIVE DATA CENTERS. THEY'RE TRYING TO DO THINGS MORE LOCALLY. AND THEN YOU HAVE THE SOFTWARE LAYER WHERE IT'S KIND OF IMPLEMENTING THEM ON THE ENTERPRISE SOFTWARE SIDE. >> YEAH, ABSOLUTELY. AND LOOK, MOST OF MY COVERAGE IS KIND OF MORE THE SOFTWARE COMPANIES, THE MICROSOFTS, THE PALANTIR. I MEAN, THESE ARE SOME OF THE BEST MARGIN PROFILES ON THE PLANET, SOME OF THE HIGHEST, HIGHEST CASH FLOWS. SO I REALLY DO THINK THAT'S WHERE THE VALUE IS HEADED. AND IN PARTICULAR, ENTERPRISES ARE KIND OF GRAPPLING WITH, DO WE USE FRONTIER MODELS? DO WE USE OPEN SOURCE MODELS? DO WE USE SMALL MODELS, LARGE MODELS. RIGHT. BUT THE SOFTWARE ECOSYSTEM IS REALLY WHAT'S KIND OF SELLING THAT THAT VISION TO, TO ENTERPRISES. YOU THINK ABOUT THE THINGS THAT MICROSOFT AND, AND PALANTIR AND SOME OF THE OTHERS ARE DOING. SO ULTIMATELY, WE THINK THOSE ARE THOSE ARE THE BEST POSITIONS, ESPECIALLY MICROSOFT. THEY DON'T HAVE THEY'RE NOT RELIANT ON THE DEBT MARKET, RIGHT. THEY'RE STILL FREE CASH FLOW POSITIVE, YET THEY'RE SPENDING, YOU KNOW, TONS OF MONEY ON CAPEX EVERY YEAR. >> SO YOU REALLY THINK THE VALUE IS GOING TO BE ACCRUED AT THE SOFTWARE LEVEL? NOT NECESSARILY THE CLOUD. IT SOUNDS LIKE THERE ARE A LOT OF QUESTIONS ABOUT HOW MUCH IS GOING TO BE NEEDED LATER ON. AND SO THEREFORE, ISN'T IT SORT OF A QUESTION MARK AS TO WHETHER OR NOT YOU SHOULD BE IN THE CLOUD LAYER? >> WELL, LOOK, I MEAN, I DON'T THINK THEY'RE MUTUALLY EXCLUSIVE, RIGHT. I THINK, YOU KNOW, AS WE KNOW ABOUT THE THE TECH CHAIN, RIGHT? LIKE THE SEMICONDUCTORS AND THE HARDWARE LAYERS WHERE WE'RE SEEING, YOU KNOW, THOSE STOCKS HAVE MASSIVELY OUTPERFORMED SOFTWARE SINCE THE AI BOOM. NOW YOU'RE STARTING TO SEE SOME, SOME SOFTWARE STOCKS REALLY, YOU KNOW, RESPOND FAVORABLY HERE. BUT LOOK, I THINK THERE'S FEWER QUESTION MARKS ABOUT MICROSOFT'S LONG TERM PROFITABILITY, THEIR LONG TERM VALUE. YOU DON'T HAVE