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Rally in AI infrastructure stocks (0:20) Tech stock valuations (3:40) Disney earnings (7:40) Layoff cycle (8:25)

Transcript

Rena Sherbill: Brian Stewart, Seeking Alpha's Director of News. Welcome back to another week of Wall Street Roundup. What do you got for us?

Brian Stewart: So I was trying to think of a metaphor for this week and the last couple of weeks, really. This week we had (AMD) report earnings. You had a rally, especially in AI infrastructure stocks.

Meanwhile, we saw the overhang about the Iran war. There was some hope earlier in the week that seems to have fizzled a little bit, but still the market really, really, really wants to believe that that's going to resolve itself positively in a relatively short period of time.

I was just thinking the market has a habit of turning lemons into lemonade, right? So this week is basically turning lemons into limoncello, just raise the glass to the tech stocks, even though we have this Iran conflict hanging over us.

Rena Sherbill: I like the metaphor, by the way. I like where you landed.

Brian Stewart: Thank you. If we we dig into the numbers a little bit, so AMD surge 18% on earnings reached a new high. It's at new highs today. It's continued to push higher. It's now doubled year to date and is up 325 % in the past year.

If you scan through the analysts' response to the earnings, basically you have kind of a split. have the, this was great. The company's obviously knocking out of the park, nothing but upside from here. And then you have the people who are like, this was great. Company's obviously knocking out of the park, it's probably gone too far.

So the battleground over AMD generally is gonna be on the valuation front. Meanwhile, with those earnings, you have Micron (MU) up 25 % in the past five days, you SanDisk (SNDK) up 19%, you have Intel (INTC) up 20%, AMD up 26%, Qualcomm (QCOM) up 28%.

So you have this surge in these AI infrastructure stocks. And it made me think there's a lot comparisons between what we're going through now with AI and the dot com bubble and people wondering if this is sort of a new normal or if it's going to be like the early 2000s where that bubble finally burst.

And I was thinking one of the interesting things about this time around versus then is the leadership is coming from these long established companies where in the dot com bubble, you had a lot of startups, you had a lot of new blood coming to the market. I'm thinking like Microsoft (MSFT), Google (GOOG) (GOOGL), those kinds of companies. Whereas this time around, you're seeing companies like AMD double in the course of four months.

You've seen that same kind of activity in companies like Nvidia (NVDA). These are long established companies that are just sort of finding their moment right now. And I don't remember in the dot com bubble a situation where (IBM) doubled over a year or AT&T (T) doubled over year or the companies at that time were the kind of market cap leaders benefiting.

I think this time around you have the situation where the capital investment required to really make a dent in the AI world is so high. You have these companies like the Metas (META) and the Alphabets of the world spending $150 billion in a year.

And to do that, you have to be a multi-trillion dollar company. I mean, you just need that kind of resources to do it. And then on the other side, you need to have the scale to be able to provide chips at that level. So that's where you see a situation where an AMD and Nvidia, those kinds of stocks can really have the kind of growth rates that we've been seeing.

Rena Sherbill: What would you attribute this exuberance to this moment as opposed to the dot com moment? And then within that question, I would offer up some supposition, namely, I was talking to Steve Cress, who is our head of quant at Seeking Alpha, the quant guy, he was talking about Micron's move up and how the quant system still sees it as a strong buy.

He was talking about Credo (CRDO) versus AMD and how this was two days ago to your point about you know like exuberance and then uber exuberance. AMD at the point was a hold which is not the same thing as a sell which is what the episode was predicated on and how Credo looked better but right now

AMD is a strong buy according to the quant system and I'm not going to get too far off of Wall Street breakfast content, but to your point about valuation AMD, it's a D grade and on Credo it's a C plus.

Just the valuation on Credo has been a little bit better, but it does seem to me the other point I wanted to make is that, have some of the companies learn the lessons because to your point of how their how investors are reacting to them in the moment it's also how they are reacting to the moment would you say a bit of that as well?

Brian Stewart: There's a couple things. First of all, I would say a D for AMD is a pretty strong grade. Like if you go through, you know, the Nvidia's and the alphabets of the world, like, you know, you tend to get F's and I really think it's just.

Rena Sherbill: Well, that's what it was, I think, when it was a hold so just changing from a D makes it a strong buy.

Brian Stewart: Okay, so it ticked up. Not to get too much into the quant grade, but I think those are very comparative. So AMD becoming a D compared to all the F's that are out there, that's actually a really strong showing kind of situation.

And I think just investors are, they're doing the new normal thing. It's like these valuations make sense for the world we live in now. They're an F compared to what historically has been true, but this is a different set of circumstances.

I think a bear would argue that people always say that right before things take a turn. So whether or not it's a new normal or whether or not that's just whistling past the graveyard, we won't know until either it keeps going up or it goes down, right?

I think in terms of looking at AMD and kind of its peers, I think a good comparison is Palantir (PLTR), which also reported earnings this week. And it was down 7 % after its earnings and its earnings were strong as well at 85 % revenue growth, beat expectations, strong guidance across the board.

Honestly, in trying to explain why the stock was down, there really wasn't much to say. There wasn't really a reason for it, but the stock was down. And I think that when you look at some of the analyst responses to it, there was a lot of skepticism about the sustainability of those kinds of growth rates, especially in kind of a growing competitive landscape.

And so I think you do still have that dichotomy where on the infrastructure side, the investors are basically like they're gonna get paid either way. Like the $150 billion that Meta is gonna spend, like that money is gonna get spent whether or not Meta ever makes a dime off of the AI projects that they're working on.

Whereas a company like Palantir is a much murkier, forward kind of situation as you're looking at the AI infrastructure. They may or may not get paid. Like they might end up spending a lot of money to create this situation and then just have their lunch stolen by Anthropic or somebody else, right?

So I do think that you have that kind of dichotomy going on and that's why people are more confident in an AMD, in an Nvidia, in companies like that. I just think that they're seeing them as kind of shore bets in an environment where the spending is still eye popping.

Rena Sherbill: Any other names earnings wise that you were looking at this week?

Brian Stewart: An of the beaten track to highlight is Disney (DIS) reported earnings this week, beat expectations, solid guidance, strong growth, especially in entertainment had a couple of hit movies come out. Hoppers was one of them, still seeing some upside from the Avatar sequel.

Meanwhile, the stock was up 8 % on earnings. However, the stock is coming off a low in late March. It's up about 15% since it hit that 52 week low. And over that time, like that's a strong upside, but it's still underperforming the S&P 500 slightly.

So you're basically just seeing kind of a relief rally in Disney. I think there's still worries about the consumer. I think you're seeing that in other places where there's just sort of uncertainty about it. We have to the jobs data today better than expected, but still on the mediocre side.

Unemployment rate solid stays at 4.3%. So you have the situation where people aren't really being fired. There's not really these mass layoffs except at a few of the tech companies that we've talked about.

However, the economy isn't really creating jobs at any meaningful pace. you know, it puts people in a situation where inflation is up. I don't know what's going on with my job. I don't have a lot of options in terms of where I can move, get higher salaries, things like that.

And so I think companies like Disney and others in the consumer space, investors are little leery of whether or not the near term future is gonna kind of hold up.

Rena Sherbill: Is there going to be a lag between the layoffs that have happened and the job creation? Is that a cyclical thing or is that a particular thing about this layoff cycle? Or is this how, or are we like losing jobs that we're not sure where they're coming from? Is that more the line?

Brian Stewart: So if you ask most economists, they'll say that historically, as technology comes in, makes workers more productive, it actually creates more jobs. So there might be kind of a transition period where, you know, a company buys a steam engine to help it make clothes or whatever.

So it lays off all the people who have been doing piecework for them. But then they have to hire those people to come into the factory do it because they have to fulfill demand. And so that would be, I think, the argument for AI is, OK, you're going to get a transition period where you are going to see some layoffs as companies become more reliant on AI. They don't need as many employees.

But as the employees become more productive, they therefore become more profitable. And so eventually, they're going to hire these people back. Now, the question becomes, are you going to get hired for a lower salary? Are you going to be doing the same job? If you're just maintaining AI, maybe that computer science degree wasn't really necessary. It's impossible to tell the long-term implications this is going to have.

In terms of the overall economic numbers so far, because we've seen layoffs, we've seen layoffs at Amazon (AMZN), we've seen layoffs at Meta, but it hasn't really hit the overall economic metric. you see initial jobless claims are still pretty low.

You see unemployment rate is still pretty low. But obviously these companies aren't like even the companies that aren't laying off aren't hiring. Like that's what we're seeing in the data. And so I think everyone's kind of cautiously approaching the situation. AI is one of those things where it's extremely impressive on first glance.

But then when you try to put it into sort of a mission critical production environment, you start to see the flaws and you start to see the places where, you know, experience and just sort of human flexibility and those kinds of things are extremely necessary. And so I think these companies are going to have to learn how to do a more hybrid approach.

I really think that it's going to be a collaborative process, sort man and machine going forward. And I think there's going to be a period of sort of complicated trial and error negotiations, figuring out what the right mix is between AI and people.

Rena Sherbill: I think anybody who has used like any software that uses AI or anything that uses AI will attest to the fact that the promise of what it can do is not the same as what it can do. And human oversight is essential.

What would you say about the energy side of things as it pertains to the Iran war? What's happening with oil?

Brian Stewart: Yeah, it's so oil is down. Recently, like I said, like there was a lot of hope earlier in the week and that kind of fizzled a little bit. So, it's still extremely high in historical terms. Just anecdotally, every time you go to the pump and sticker shock, right? I think it was like $4.60 last time I filled up in a lot of places, if you're in Alaska, Hawaii or something, I can't even imagine what gas prices are and I think that plays into the consumer part of it.

AI is extremely power hungry. You have that kind of weighing on, as the data centers come online that's like more of a demand for energy. You already have higher energy prices now. I'm kind of conflating sort of near term problems and longer term structural issues. But again, I guess we'll have to wait and see.

It's an interesting situation with Iran because first of all, it's hard to get good information because both sides are posturing for negotiations. And so they're kind of making public statements that are mostly aimed at the negotiators on the other side. They're not really meant to give a clear, concise description of the way events actually are. It feels to me like both sides want a resolution.

I think that's what the market is betting on is just sort of this understanding that it's in everyone's best interest to just kind of figure out a solution. There's a big gap between wanting to resolve something and then like actually reaching a resolution that can stick. And so I think that's the kind of space that we're stuck in.

Rena Sherbill: Anything else to add about this week and/or next?

Brian Stewart: No, just looking ahead, we got some inflation figures coming out next week. We already have - basically the market has decided the Fed has no room to cut rates anymore.

So it's like a 96%, 94%, somewhere in there chance. So we'll get no rate change at the next meeting, which presumably would be led by Warsh coming in.

If you look ahead to December, so just the end of the year, it's like a 75 % chance that we're not going to get any rate changes between now and the end of the year. So the market's basically betting that the Fed is done for 2026.

I think the thing to look for in those numbers is not whether or not those numbers come down, but whether or not you start to see more, more betting on higher rates, you know, like the next move is actually going to be up because we have seen a dramatic reinflationary trend start to come into the market, especially with energy prices, working their way through the system, not just like the prices of energy, but the way that energy forces inflation kind of downstream.

And so I think that'll be the big takeaway from the inflation numbers, not just next week, but as they come in is just where, where are the odds of a rate hike looking going forward.

And then earnings season is kind of slowing down. You don't have as many big names next week. You have Cisco (CSCO). I think it's the highlight next week. Looking ahead, we have Nvidia coming later this month.

We have Walmart (WMT) coming later this month. Walmart will be a good indicator on what's going on with the consumer. But again, that's a couple of weeks down the road. So I think next week is going to be very macro based inflation data. What's going on in Iran and in terms of individual stocks and sectors, you might see some earnings movement.