Latest / ausbiz a.m / 21.10.26 Luke Winchester, Merewether Capital
Transcript
- Andrew: Good morning. Welcome to your morning wrap from OSBs. It is Wednesday, October the 21st, and a positive start expected on the local session. ASEX futures up around four-tenths of a percent in a moment. We'll preview the day ahead with Luke Winchester. First to global markets, European markets weighed down by fiscal uncertainty in France. On Wall Street, strong corporate earnings bolstered confidence there with a major rotation into value sectors. The Dow up 1%, strong earnings beats from 3M and Northrop Grumman. SP Three tenths percent high healthcare sector leading there with Eli Lilly and Moderna. And the Nasdaq ending flat. Now, a couple of key reports out earnings-wise SpaceX reporting a 160% jump in revenue for the third quarter, 14.6 billion US beating estimates, boosted by its AI business and Starlink satellite unit. Netflix did report a beat on earnings, but shares fell at six percent at the time of recording. Due to soft forward guidance and advertising revenue downgrade. And Anthropic reportedly recording a net loss of more than $80 billion in the first half as it looks towards its IPO. Grink crude easing to 109 US barrel, gold 4,120 an ounce, Bitcoin higher at 82,000, and the Aussie dollar firmer at 70 US cents. Let's get across those moves. Luke Winchester joining us from Merriweather Capital. Luke, good morning. Luke Winchester: Good morning, Andrew. Andrew: So let's start with look, key earnings results, obviously out of the out of the states highly anticipated. SpaceX, what do you make of that? Luke Winchester: Yeah, very anticipated SpaceX. Obviously a very hyped IPO a few months ago and has traded pretty well since IPO. I think a few people are expecting with the valuation it came up on came on at and and sort of the the stock coming to market that it maybe see some weakness. But the earnings look pretty strong. I mean, you outlined the headline numbers there, a strong beat on revenue, strong beat on earnings. I think one of the things I noticed as well was CapEx was sort of in line with estimates. That's something that has been a a bit of a point of interest for a lot of these mega cap tech companies where, you know, they're they're really pushing forward with particularly the AI CapEx and it's sort of you know, being hard for the market to get its head around the sort of dollars that are being spent, but that was in line, revenue beat, earnings beat, shares up a couple of percent after hours. It looks like, you know, the the the the trend of the AI trade still intact as far as SpaceX is concerned. Andrew: all right. Now I don't know whether you got a a quick look at Netflix has only just dropped at the time of recording, but obviously I mean it's been struggling, share price under extreme pressure, just about what's coming forward, particularly as far as its advertising revenue. Luke Winchester: Yeah, haven't seen that one. Just as you were just brought it up as you were talking. Yeah, seeing it's down about five percent after hours. Netflix always seems to be one of those stocks, very volatile around these earnings reports. And I think you know, it's it's definitely one that's right in the firing line of all of these sort of changing trends going on in in media and content and I think AI as well. you know, it's a real arms race for our eyeballs. we know that that you know Netflix has sort of dominated things for quite a while, but the rise of social media, the rise of AI content. I I think we'll s probably see a few more quarters like this from Netflix. Sometimes I'll probably beat expectations, sometimes, you know, we'll see what we've seen today. But I think, you know, it's it's one where you'll need an iron stomach to own this one into the future. I suspect. Andrew: look, as I mentioned, Anthropic reportedly recording a net loss of eighty billion US in the first half. That's according to the Wall Street times. But look obviously comes with that much greater investor scrutiny of of AI companies. Of course we've seen that locally too with you know what how it all transpired for firms. Luke Winchester: Yeah, look, I I think, you know, Anthropic potentially looking to list in the near future. So, you know, we're when we get those prospectus documents, we'll get a better look at what's going on under the hood with the business. I think investors would be, you know, quite willing to look past operating losses at this point in time, focus more on revenue and the top line. and I think the the big the big driving factor for a lot of these names, you know, as you said, not just the frontier models like anthropic and open AI, but Taking a step back to the neo clouds and the other sort of players in the in the AI space. The big concern for the market, I think, is funding right now. obviously it's been a a bit of a hot topic around core weave in the US and and you know its floating debt being traded in the secondary market up around a 15% yield. You know, that's the sort of number that's reserved for you know, junk bonds and and and sort of distressed debt. and I think, you know, s those fears as probably what really projected onto to firms as well. We know the sheer amount of capital they required to embark on their on their medium longer term plans. And so if the market's getting question marks, getting a bit of a bit of fear or concern around where this capital's come from or even the the cost of that capital, that's why we're seeing some of these moves. I think I think, you know, as I said before, I I I I don't think we'll see any of those sorts of fears with an open AI or an anthropic. I think those guys, you know, there there's plenty of capital at at the at the top of the food chain where where they are. but I think it is worth keeping an eye on, as I said, sort of coming down to the more capital intensive providers and keeping an eye on, you know, can they actually achieve their plans, these these these these contracts, these take or pay long data deals without the the capital or at a at a significantly higher cost than maybe what was initially expected. Andrew: What's your view of what's going on locally? Obviously, as I mentioned, in the wake of the failed firmness float and whether perhaps that's unnerved the market here, perhaps those l in that space, the small companies looking potentially to list it sometime, balking at doing that, thinking perhaps the Australian market is not the place to do it. then of course we look at what's going on with data centers. I mean the likes Next D C Goodman Group have been struggling. what How are you seeing the local sort of AI trade? Luke Winchester: Yeah, look, I mean, it's it's been a tough one for local investors because it's a it's a trade that's hard to get you know, really good exposure to. the most direct way investors have been able to play it is through the contracting style businesses, the electrical contractors, the the building contractors who are sort of winning winning the the the physical construction of these data centers. there's some smaller players at the at the small micro end that that have a little bit of sort of AI exposure, but again, I sort of as I said before, they're not the they're not the top of the food chain. They're sort of coming down that that value chain a bit. They're they're LLM wrappers or you know, businesses that are incorporating it into their operations, but not at the forefront of the technology that the investors are really trying to find. Firmus, you know, was probably going to be that best exposure for investors. And that's why in the lead up to the IPO, I think they were able to generate, you know, so much attention and and really push up that prospective valuation. And you I've heard comments from people that I tend to agree with, which is, you if if Fermis was able to IPO, you know, one or two months earlier, it probably gets away, you Andrew: Mm. Luke Winchester: know, up at the valuation they were seeking or close to it. But we started to get those sorts of concerns and fears I was talking about before, largely through Core Weave and Nebius in the US. and all of a sudden investors just start to get a bit of cold feet, particularly that valuation. And then as a lot of people pointed out, once you have to talk about cutting an IPO price or winding back the the amount of capital you're trying to raise, you know, the markets sharks in the water start to circle and it was probably the right decision to pull it at that time. from a broader point of view, I mean look, I I've sort of said a few times, you know, I'm I'm a small microcap investor. I wasn't looking at Fermis from an investment point of view, but just as a you know, market commentator, as a as a, you know, a bit of interest in the stock, I I I thought it would have been nice to have, you know, a large IPO on the market. it's been a while since we've had one. We've seen some successful IPOs, FDC Consolidated, Skin Candy, Koala. They've all come onto the market in the last sort of six, nine months and and performed quite well. but you know, it's fair to say they came on at at very reasonable valuations, established business models, established revenue or profitability. The market really hasn't had the appetite come back for earlier stage companies and and taking on a bit more of a maybe speculative mindset. Andrew: Yeah, as you say, it'd be nice to get some companies listing rather than disappearing given the amount of and A activity that's on at the moment, Luke Winchester: Mm-hmm. Andrew: with private equity taking out companies almost daily it would seem. so Luke, as you mentioned, you're very much in the in the smaller microcap space. What what opportunity are you seeing there at the moment? Bearing in mind obviously, you know, it's all about interest rates and and and the very negative pressure that they apply. Luke Winchester: It it is, yeah, yeah. And look, you know, I'm a I'm a fundamental bottom-up stock picker, so so you know, I'm trying to focus on on businesses and what they're doing and things like that. But unfortunately, you know, particularly for for micro and small caps, they are very much at the mercy from a broader market sentiment point of view around rates and yields and and those sorts of moves. And so it's no coincidence that you know, the smaller end of the market perform really well. At the back end of last year, when when you know we had yields coming down and the RBA was cutting rates, and then you know essentially at the the turn of the calendar at the start of this year, that that pivoted. We've had the RBA hike a few times and and we've seen the lower end of the market really struggle. you know, I think I think where what what was being boosted at at the smaller end of the market was was commodities really supporting things. you know, we had a obviously a strong gold price, but even you know, materials, rare earths, tungsten, some some critical defense minerals like that. a lot of stocks exposed to them performing really well and holding up that end of the index, but we've seen that sort of reverse in the last few weeks as well. lithium price has has really come off quite strongly. Some of those other rare earths and critical minerals I was talking about as well. So it's it's a pretty tough sentiment right now in microcaps, but you know, I I try to remain positive and you know it's always darkest before dawn. and you know, most most pundits and and commentators, you know, seem to think we're we're getting close again to the peak of this rate rise cycle and and yields, you know, where they are the Aussie 10 year up around, I think 5.3, 5.4%. It does feel like that's the upper end of of the range. And so fingers crossed, you know, if we if we start to see them pull back with the RBA cutting rates without too much damage to the economy and and the underlying businesses. you know, we might see another another strong period for small micro caps again. But in the meantime, I think it's a market that just continues to be very much a stock pickers market. you can't really rely on the rising tide. You've got to be very selective with the businesses you own. Andrew: Luke, great to get across your perspective, what you're seeing in the market at the moment. hope you have a a good day in the rest of the week. Thanks for joining us from Maryweather Capital. Luke Winchester: You too. Thanks, Matt. Andrew: And that is your Ausbiz Morning Wrap. Hope you have a good day. I'm Andrew Gagan. Thanks for listening.