Latest / ausbiz a.m / 28.09.26 Mitch Stone, Invest with Mitch
Transcript
- Andrew: Good morning. Welcome to your morning wrap from Ozbiz. It is Monday, September the twenty-eighth, and we're expecting a positive start for the week. ASX futures up around one-fifth of a percent. In a moment, we'll preview the day ahead with Mitch Stone. First, though, look at global markets where they finished on Friday. Wall Street, the Dow up around point nine percent, the NASDAQ and the SP five hundred also up about half a percent. Investor concerns about the Middle East tensions they sort of eased following reports the US and Iran are exploring diplomatic. To lift naval blockades and reopen the Strait of Humuz. That pushed Brent crude down. And the pullback in oil prices helped stabilize the recent global bond route. And AI optimism reignited. Tech heavyweights led the late week buying surge, with the likes of Microsoft, Qualcomm, and Dell doing well. So among the commodities, Brent Crude sitting about $97 a barrel, gold at $4,320 an ounce. at eighty four and a half thousand US and the Aussie trading at seventy US cents. Well let's get across the market moves and what to watch out for. Mitch Stone joining us from Invest with Mitch. Mitch, good morning. Hope you had a great weekend. So ⁓ interesting time in markets. As always, I mentioned that AI optimism having reignited, but ⁓ I note that you're actually pretty cautious on the AI trade of the Mitch Stone: Yeah, I think we're starting to see the first real cracks appear. I'm not saying AI's gonna go away, clearly it isn't, but there is a big difference between saying saying AI is gonna transform the world and then saying every company associated with it is worth whatever price investors are prepared to pay for it. For the past couple of years the markets has basically been, you know, AI, data centers, GPUs just buy it. But I think we're reaching the point where investors are finally asking who's actually gonna pay for all of this. Sorry, so if you will do everybody. Andrew: All right, so what in in your view then what has changed, Mitch? Mitch Stone: Well look, Oracle caught my attention last week. They invoked force majeure protections around this enormous project, ⁓ Project Jupiter data center that's over in over in New Mexico. Look, they're not canceling it, but they're protecting themselves if permitting or regulatory or power issues cause delay. And I think the bigger message is that these projects are incredibly complex and incredibly expensive. Talking about lands, power, cooling stations, construction, GPUs. Look, potentially ten Tens of billions of dollars tied up before the the thing even starts producing many full cash flow, then you've got regulation becoming a bigger issue as ⁓ as well. You know, here in Australia we found out ⁓ just last week that an open AI agent had gained unauthorised access to Medicare statistics ⁓ earlier this year. There's been no evidence that you know Medicare records were accessed, but ⁓ the government has launched an urgent review. And that's the broader point, Andrew. Every time something like this happens, governments start asking whether they need tighter safeguards, more c cyber security requirements or more approvals and that can really slow the rollout down. Andrew: Yeah, of course we've heard ⁓ more and more of the industry and also government ⁓ just sounding the concern at the moment. So at the same time though, bitch, we've also got the cost of money is rising and ⁓ with particularly like locally, we're looking ahead potentially another rate hike. Mitch Stone: Yeah, exactly. Yields are going up up here as well in in in America. You know, ⁓ US ⁓ bond yields are now what are they? They're around levels that we haven't seen in two decades, right? The thirty year treasury hit its highest level since two thousand and four last week. It's it's pretty crazy what's going up what's going on. And that matters because AI infrastructure is enormously capital intensive. Now you've ⁓ if you've modeled a data center opening in three years. years and a regulation power constraints or permitting push that out to four or five, you're carrying that capital for much longer. And then at the same time, if your borrowing costs are going up, ⁓ your borrowing costs are going up. So suddenly the economics look very different. You know, when money was cheap, investors were happy to pay for earnings, you know, five or ten years into the future. But at five percent plus risk free rates, that calculation changes. So I think we're moving from showing me the story to show me the cash flow. Andrew: All right. Well let's then look at what's going on locally and the headlines are dominated by firmness in the AI space. ⁓ Mitch, what are your thoughts? Mitch Stone: in a high space which we want it's gonna be interesting. I think it's gonna be the first real test of how much investors are still prepared to pay for the AI story given the problems that I've just discussed. Andrew: But more broadly, what what are the concerns you have? Mitch Stone: Well, they're looking to raise, you know, a a lot of money. ⁓ they said they're looking to raise five billion, potentially five and a half billion, in including the the greenshoe. ⁓ the institutional ⁓ book build is what's set for October sixth and seventh, which is Expected ⁓ i trading later next next month. And look, there is absolutely a bull case. Dem ⁓ the AI demand could be iner ⁓ enormous. They've got some serious investors and enormous expansion plans ⁓ across Australia and Asia. And I'm not saying that it's a bad company, Andrew. I just the question is What are you you know, what are you prepared to pay for all of that future success? Because you're not buying a mature infrastructure business. I mean it's it'll be roughly on the same sort of ⁓ market cap as Woodside Energy, right? And ⁓ you know, you you're paying a lot for today. ⁓ you're paying a lot today for the infrastructure that still has to be funded, built and filled with customers and all of that comes back to everything we've just discussed. Higher borrowing costs, potential regulatory delays, power constraints. Construction risk and execution risk. Okay, something that Andrew: Okay, so I mean that that brings that valuation ⁓ question in into front and centre then. I mean they potentially could grow into that valuation though, couldn't they? Mitch Stone: run and center down the teacher growing to the well that's the bull argument. I mean if demand keeps accelerating, the sites get built on time, everything if everything lines up, capital stays available and margins hold, you can make a very strong case. My concern is simply how much of that success is already priced in. You know, the more assumptions you need to get right, the less margin for error you've got. Andrew: All right. So I guess bottom line then, ⁓ would you be buying into furnace? Mitch Stone: Well, for me personally, ⁓ that sort of valuation being discussed, I wouldn't touch it, not because I think AI is a fad. I actually think AI infrastructure could be one of the largest investment themes of the next decade, but a great theme doesn't automatically make something a great investment at any price. I'd rather miss the first twenty percent and see the numbers actually arrive and then pay today for several years of near perfection execution and really that's the bottom line. Andrew: All right, so overall then, what ⁓ with with that in mind and locally I guess, what w ⁓ what are you watching at the moment then, more broadly at the moment, ⁓ Mitch? Mitch Stone: Look, ⁓ I I'm into the the boring brick and mortar businesses or sort of cash flow positive low P E businesses. You know, I mentioned last time I was on Karoon Energy, ⁓ you know, trading on a P of eight in the oil space, ⁓ share buyback program underway, just stuff with, you know, lower P E multiples. All right. ⁓ what are you thinking of the module market? Andrew: All right. what are you thinking of the local market potential compared with perhaps what you're seeing on Wall Street? And once again, that comes back to that AI player, doesn't it? Mitch Stone: potential compared with that what you're saying on what Yeah, it does. You know, I think our Aussie market ⁓ it could h hold up quite well compared to the US. We've obviously got less exposure to the AI trade here and we've got some fantastic opportunities, especially in the in the ⁓ in the mining space. You know, like BHP at the moment's absolutely killing it with their ⁓ with their copper and iron ore. So look, I I think we're gonna hold up okay. The banks look fully priced in my opinion. ⁓ but they're probably more of a hold at this point in time. Andrew: Right, but ⁓ I mean I do know clearly y you're still worried about those where those bond yields are at the moment. Mitch Stone: ⁓ I I do know clearly yours to worry that when there's funding source money. I think everybody is. You know, the it really is the ⁓ the opportunity cost. If you're a big fund manager and you can get risk free five percent in bonds, it's makes a hard case to pile it into equities at current valuations. So what's the level of cash you're holding by? Andrew: So what sort of levels of cash you're holding at the moment? Mitch Stone: Look, we're still all in. ⁓ we're a hundred percent invested, but our stocks at the moment are are those sort of lower multiple stocks. And bearing in mind the likelihood is the is an effect. Andrew: And bearing in mind the likelihood is that the Reserve Bank is likely to lift rates again tomorrow, ⁓ well if not, I mean one or two hikes by the end of the year, how much of a drag is that gonna be on on earnings growth, I guess, particularly for those interest rate sensitive stocks? Mitch Stone: It's gonna be it's gonna be a a big drag. It's really gonna it's gonna test the market and then I'm a little bit more concerned about the banks in that environment. You know, if we set start to see ⁓ a little bit of a little more stress in in the housing market, are we gonna see defaults? And this is at a time where there's a lot of competition around the the the mortgage market, it is a concern. So it's ⁓ it will be a balancing act for our for our government to really get this right. Andrew: Well, speaking of balancing acts then, ⁓ Mitchell, I'm summing this up perhaps as your view as cautious yet seeing opportunity still. Mitch Stone: Speaking of balancing acts then ⁓ Richard Summer is I think you'll be as cautious yet seeing options. Yeah, yeah, I think that's a pretty good summary, Andrew. Thanks for joining us from investors. Thank you. And that is your Os this morning wrap. Andrew: Well, Mitch, ⁓ great to get across what you're seeing in markets at the moment. Hope you have a great week. Thanks for joining us from Invest with Mitch. And that is your Osbys morning wrap. Hope you have a great day. I'm Andrew Gagan. Thanks for listening.