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Semiconductor Sell-Off Tests the AI Boom · The Financial Exchange Show

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Speaker 1: Zada and Mike Armstrong.
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Speaker 2: Chuck, Mike and Tucker with you here, and as we
1:12
Speaker 2: kick things off today, we got to continued sell off
1:17
Speaker 2: that is happening in the semiconductor space, and it's gotten
1:21
Speaker 2: us to the point now where when you look at
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Speaker 2: what's going on there, Mike, you're basically seeing semiconductor stocks
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Speaker 2: as a whole down around twenty percent, but a number
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Speaker 2: of them down anywhere from thirty to forty percent, depending
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Speaker 2: on which ones you're looking at.
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Speaker 3: Yeah, renewed pressure on the index that again, just to
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Speaker 3: be clear, even with the loss is still up a
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Speaker 3: good eighty percent.
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Speaker 2: For the year.
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Speaker 3: I don't want to diminish that piece or lose focus
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Speaker 3: on it. Obviously depends which index you're looking at, but
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Speaker 3: these companies had a massive run at the beginning of
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Speaker 3: the year really, so as soon as tensions in the
2:03
Speaker 3: Middle East calm down really or showed signs that they
2:06
Speaker 3: might not further escalate, saw a big run up. The
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Speaker 3: spending is continuing for the time being, and the questions
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Speaker 3: that are being asked now I think, well, I think
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Speaker 3: there are a fewfold One, just how willing our investor
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Speaker 3: is going to be increasingly high to pay increasingly high
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Speaker 3: prices for their shares, and how long can this spending
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Speaker 3: push continue to drive up prices this high on those semiconductors.
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Speaker 2: So when it relates to semiconductors, we've talked about this
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Speaker 2: quite a bit in that this is one of the
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Speaker 2: most volatile parts of the market. Even before this particular
2:45
Speaker 2: run that we've seen in the last you know, year
2:48
Speaker 2: or so, if you looked back at the tech bubble,
2:51
Speaker 2: just as an example, and the run up that you
2:54
Speaker 2: saw there, it was fairly common to see a twenty
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Speaker 2: percent draw down across semiicintor stocks on basically an annual basis.
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Speaker 2: It's not uncommon this. If we now get to a
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Speaker 2: twenty percent draw down in the Philly Semiconductor Index today,
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Speaker 2: this would be the third one that we've seen this
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Speaker 2: cycle as well. So it's it's a feature of these stocks,
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Speaker 2: not a bug. They are higher volatility stocks, and if
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Speaker 2: you are buying them, you're betting that that volatility is
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Speaker 2: going to be to the upside eventually, not to the downside.
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Speaker 2: But they do go through these kinds of moves on
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Speaker 2: a pretty regular basis. And you know, this is why
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Speaker 2: when we talk about this little corner of the market.
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Speaker 2: It's not a place that you just play around. And unfortunately,
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Speaker 2: what we are seeing is because of the proliferation of
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Speaker 2: you know, short term options and now you know, leverage,
3:51
Speaker 2: single stock ETFs, you've got some you know, bad things
3:55
Speaker 2: that are happening to people. Where again, like you go
3:58
Speaker 2: through different parts of the internet and see some of
4:00
Speaker 2: this stuff and some you can verify, some of you
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Speaker 2: you can't. But just as an example, when you look
4:07
Speaker 2: at what I think is the the epicenter for UH,
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Speaker 2: you know kind of the the UH kind of the
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Speaker 2: the explosion in trading high volatility stuff related to semiconductors
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Speaker 2: UH in South Korea. UH. They're estimating that again, this
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Speaker 2: is kind of wild that they're estimating that around one
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Speaker 2: point two million Korean investors received a margin call this
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Speaker 2: week related to their portfolio. Now margin call margin is
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Speaker 2: a loan that you can take out that is effectively
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Speaker 2: backed by the value of the securities in your portfolio,
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Speaker 2: and you receive a margin call when the value of
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Speaker 2: those securities drops to a point that the company that
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Speaker 2: lent you the money is no longer comfortable continuing to
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Speaker 2: lo undo that money. And it's basically, hey either sell
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Speaker 2: something or we're going to force a sale in order
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Speaker 2: to do so. And so the estimates that we've seen
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Speaker 2: again and that there's somewhere in the ballpark of one
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Speaker 2: point two million South Koreans. This is from Goldman's trading desk.
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Speaker 2: A total of one point two million leverage retail accounts
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Speaker 2: across the Korean market triggered margin calls as of July thirteenth. Mike,
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Speaker 2: do you know what South Korea's adult population is? I
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Speaker 2: don't know, because Goldman Sachs does and they spell it out.
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Speaker 2: South Korea's adult population is thirty five point seven million people,
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Speaker 2: meaning that one in thirty South Koreans were margin called
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Speaker 2: this week. That is a wild number to think about.
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Speaker 2: It isn't that insane?
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Speaker 3: Now again, pretty much the entire Korean market is semiconductor companies. Yes,
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Speaker 3: and most of the Korean market is made up by
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Speaker 3: just two companies.
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Speaker 2: I'm not excusing the.
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Speaker 3: Behavior of perhaps irresponsible margin trading, but it is a
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Speaker 3: hyper concentrated market to begin.
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Speaker 2: With over there.
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Speaker 3: But that is, yeah, that is a pretty concerning number.
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Speaker 3: Doesn't speak anything about the you know, future of the
6:18
Speaker 3: companies that they are betting on, But that is a
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Speaker 3: fairly wild number, and you know, arguably, well, if you
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Speaker 3: have that percentage of your population being margin called, then
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Speaker 3: it's perhaps a level of risk in your market that
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Speaker 3: regulators should have been paying attention to.
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Speaker 2: Now, the other way that you can look at this is, hey,
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Speaker 2: once all this stuff starts floating to the surface, all
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Speaker 2: the bad news starts coming to the surface. Usually like
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Speaker 2: you're also you know, tend to be getting you know,
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Speaker 2: pretty close to you know, the bottom of things. Just again,
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Speaker 2: I'm not saying that you're actually there, like no one
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Speaker 2: really knows, But what I am saying is, yeah, this
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Speaker 2: is something thing where again, as the bad news you know,
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Speaker 2: comes to the surface, you struggle to see, Okay, what's
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Speaker 2: gonna be the next amount of bad news? And maybe
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Speaker 2: you find just a local bottom for a week or
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Speaker 2: two and then you're able to move from there. So
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Speaker 2: we'll see how this all develops. I don't really know,
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Speaker 2: but I think it's just something that is worth watching
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Speaker 2: as we go forward. Here.
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Speaker 3: Well, Chuck, I was gonna say, I mean, in terms
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Speaker 3: of bad news, I hear you on the margin call
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Speaker 3: were potentially entering bear market territory on the Philadelphia Semiconductor Index.
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Speaker 3: Do you see, I know, we're gonna talk about the
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Speaker 3: Chinese Moonshot AI model, but I can't say that I
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Speaker 3: can mark mid June when this all started kind of
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Speaker 3: going haywire. Any specific news that I look at to say,
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Speaker 3: oh wow, what bad news for semiconductor companies?
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Speaker 2: Can you No? I think it was much more just that,
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Speaker 2: like the price, the run had just gotten extended. Yeah,
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Speaker 2: the price, That's all it was. The run had just
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Speaker 2: gotten extended. And when that happens, Okay, it's time for
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Speaker 2: things to pull back a little bit. That's just kind
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Speaker 2: of how it goes. So let's take a quick break here,
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Speaker 2: and when we come back, we'll talk about what we're
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Speaker 2: seeing from corporate insiders, and then a little bit more
8:10
Speaker 2: detail on that new AI model what it means for
8:13
Speaker 2: the business as a whole. We'll discuss.
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9:02
Speaker 2: Mike, we got a piece here in the blooming Berg.
9:05
Speaker 2: It's titled US corporate insiders or selling stocks at a
9:09
Speaker 2: near record pace. So, first off, what are you interesting there?
9:13
Speaker 2: First off, what are corporate insiders?
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Speaker 3: They are executives at publicly traded companies who are required
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Speaker 3: by the SEC to file their purchases and sales of
9:22
Speaker 3: their own companies ahead of time. They don't need to
9:26
Speaker 3: specify a ton of details, but they do need to
9:28
Speaker 3: specify what they are selling and what they sold. The Okay,
9:34
Speaker 3: so let's take it at face value. If you have
9:37
Speaker 3: a bunch of corporate insiders selling their company stock, it
9:40
Speaker 3: can indicate any number of things. It could just indicate
9:43
Speaker 3: that those corporate insiders have bills to pay and things
9:46
Speaker 3: that they want to do with their cash and are
9:47
Speaker 3: sharing their stock. It could indicate that they are pessimistic
9:51
Speaker 3: about their company's future share value. It could indicate that
9:54
Speaker 3: they're just taking some profits off the table. You don't
9:56
Speaker 3: necessarily know, but I think it's reasonable to acknowledge that
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Speaker 3: this is the second fastest pace of corporate insider sales
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Speaker 3: in the last twenty years, only second to twenty twenty one,
10:08
Speaker 3: when we had another period of exuberance in US markets.
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Speaker 2: Yeah. Now, again, if if you look at the overall
10:18
Speaker 2: numbers again, it's it's not something that's like hugely different
10:23
Speaker 2: from you know, previous you know periods. Twenty one one
10:30
Speaker 2: stands out and I get it because in the first
10:33
Speaker 2: half of twenty one you had just gone through just
10:36
Speaker 2: the massive rally coming off the COVID bottom in March
10:39
Speaker 2: of twenty twenty. Yeah, and so I kind of understand that, like, oh,
10:44
Speaker 2: like stocks had gone absolutely nutty, and sure, like this
10:49
Speaker 2: makes sense. This one is again you compare like first
10:52
Speaker 2: half of this year to first half of last year,
10:54
Speaker 2: and again it's like, you know, a twenty percent increase,
10:57
Speaker 2: but that comes after a ten percent decrease an insider
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Speaker 2: selling compared to the first half of twenty four. So
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Speaker 2: I'm not sure there's a huge signal here. And part
11:06
Speaker 2: of this is because, in my opinion, that rally in
11:11
Speaker 2: the first half of that rally over the course of
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Speaker 2: twenty twenty. Can that best be described, Michael as in
11:17
Speaker 2: everything rally? I mean, I would struggle to find something
11:21
Speaker 2: that didn't you know, like it was. It was just
11:24
Speaker 2: again as Dave Portnoy said, there it basically felt like
11:28
Speaker 2: stocks never went down yeap, and not just like one
11:30
Speaker 2: or two. It was like this is going up, that's
11:32
Speaker 2: going up. Like it was just it was insane, Like
11:35
Speaker 2: I've never seen a market like that, at least for
11:37
Speaker 2: like six months this this year. You look at and
11:41
Speaker 2: you're like, okay, if we pull up you know, year
11:44
Speaker 2: to date and kind of how things have done, you
11:47
Speaker 2: take a look at it and you say, okay, sure,
11:51
Speaker 2: like semiconductors have gone nutty. But the rest of the market,
11:55
Speaker 2: you know, financials have basically been chopping around flat all year.
11:59
Speaker 2: Consumer discretionary has been chopping around flat. All your communications services, healthcare,
12:04
Speaker 2: they've been just chopping around. It's basically been semiconductors and
12:09
Speaker 2: energy and a couple industrials mixed in there as well. Right,
12:13
Speaker 2: So I don't think there's as many insiders who are
12:16
Speaker 2: necessarily sitting here being like, hey, let's back up the
12:19
Speaker 2: truck and sell this thing. I mean even within tech.
12:21
Speaker 2: Microsoft's down twenty percent this year. Do you think you
12:23
Speaker 2: have a lot of Microsoft insiders that are like, yeah,
12:26
Speaker 2: it's an opportune time to sell. Likely not.
12:29
Speaker 3: It does continue to raise this question that we've talked
12:32
Speaker 3: about though, is where is all this money going to
12:35
Speaker 3: come from to fund these AI companies? Because you have
12:39
Speaker 3: corporate insiders who are, again I don't want to overdo
12:42
Speaker 3: this story, they are not selling at an extraordinarily elevated
12:45
Speaker 3: rate compared to the second half of or the first
12:48
Speaker 3: half of last year, Like this is not extraordinary levels
12:52
Speaker 3: of insider selling. But you have the biggest IPO and
12:57
Speaker 3: history that just went off. You have a bunch of
12:59
Speaker 3: those same companies that are in the AI space issuing
13:02
Speaker 3: a boatload of debt and or shares, more IPOs to come,
13:06
Speaker 3: Korean companies listing on US exchanges, and again, the money
13:10
Speaker 3: has to come from somewhere, and so it does just
13:14
Speaker 3: I guess add to that overall narrative of there's a
13:17
Speaker 3: lot of people trying to get their shares for sale
13:22
Speaker 3: on public markets right now.
13:24
Speaker 2: And this then dovetails nicely into the next story from Bloomberg,
13:28
Speaker 2: which is earlier this week. I think it was it
13:32
Speaker 2: was either yesterday or maybe it was like overnight Wednesday
13:34
Speaker 2: into Thursday. There's a Chinese company called Moonshot. You ever
13:38
Speaker 2: hear of them before, Mike, of course not. No, I
13:40
Speaker 2: haven't either. I don't even know, like if they existed
13:42
Speaker 2: before this Wednesday. So Moonshot put out a an AI
13:47
Speaker 2: model called the Kimmy K three, and based on the
13:52
Speaker 2: publicly available benchmarks, it's pretty much in line with some
13:56
Speaker 2: of the best offerings from US companies that are spending,
14:01
Speaker 2: you know, hundreds of billions of dollars to build out
14:04
Speaker 2: data centers.
14:05
Speaker 3: So question, do we know how much a cost Moonshot
14:07
Speaker 3: to develop this model? No idea me either, but I
14:10
Speaker 3: think we can assume probably a fair bit cheaper than
14:13
Speaker 3: open Ai or Anthropic.
14:15
Speaker 2: We think. Okay, here here's the big here's where we
14:19
Speaker 2: where things are going is ultimately the race now is
14:25
Speaker 2: not on can you build the best model, because every
14:30
Speaker 2: week there's a new one coming out that is coming
14:33
Speaker 2: in like in line with some of the top benchmarks. Yep,
14:37
Speaker 2: the race now and we saw this by the way
14:39
Speaker 2: from open Ai, who cut prices on a bunch of
14:42
Speaker 2: their products last week. The race is on price. And
14:46
Speaker 2: here's the problem with the race being on price. We
14:48
Speaker 2: can't compete with the Chinese on price. It's it's not
14:50
Speaker 2: even you can't compete with the Chinese on price. Mic
14:54
Speaker 2: you can't get enough revenue to cover the cost of
14:59
Speaker 2: one point two trillion dollars a year in data center
15:01
Speaker 2: build out. It doesn't add up. That's like, that's the
15:07
Speaker 2: whole thing. And people be like, well maybe if people
15:11
Speaker 2: use way more. Guys, if you have to compete on price,
15:15
Speaker 2: you're not going to do it. It's gonna be a
15:17
Speaker 2: race to the bottom.
15:18
Speaker 1: M hm.
15:19
Speaker 2: And if it's a race to the bottom on the
15:22
Speaker 2: price of the model, then it can't be a race
15:24
Speaker 2: to the top on the price of the memory, which
15:27
Speaker 2: means and this might you know, also be why the
15:29
Speaker 2: last couple of days memory stocks have you know gotten bludgeoned. Uh?
15:33
Speaker 2: You know, Micron was down what was it like ten
15:35
Speaker 2: or eleven percent yesterday. It's trying to rally today, but
15:40
Speaker 2: like the numbers just don't work.
15:42
Speaker 3: Yeah, we've talked about this at length before, Chuck, and
15:45
Speaker 3: I don't know if it's gonna come because of competition
15:48
Speaker 3: from a Chinese model.
15:49
Speaker 2: I don't know if it's going.
15:50
Speaker 3: To come because the likes of Uber realize they're spending
15:53
Speaker 3: more on artificial intelligence, then they would have to pay
15:56
Speaker 3: an intern to do the same task. But at some
15:59
Speaker 3: point price has to matter for artificial intelligence, and it
16:03
Speaker 3: hasn't so far. But once it does, then the model
16:08
Speaker 3: builders like open ai and like Anthropic and then a
16:12
Speaker 3: bunch of Chinese ones too, have to start competing on price.
16:15
Speaker 3: To do that, they need to negotiate with data center
16:19
Speaker 3: builders such as well, I don't know the companies that
16:22
Speaker 3: are actually physically building the data.
16:24
Speaker 2: Center as well.
16:24
Speaker 3: So when Microsoft and Google are funding a lot of it,
16:27
Speaker 3: sure they data center builders in order to deliver a
16:31
Speaker 3: lower price and need to negotiate better rates with utility
16:33
Speaker 3: companies and electricity providers. They need to negotiate better rates
16:37
Speaker 3: with chip designers like Nvidia, and then those chip designers
16:40
Speaker 3: have to negotiate a cheaper rate with TSMC and all
16:44
Speaker 3: of the suppliers of raw materials that go into that.
16:47
Speaker 3: And the defining factor of this AI rally for the
16:51
Speaker 3: last three years has been that prices are just going
16:55
Speaker 3: to go higher and higher because sales are going higher
16:57
Speaker 3: and higher, and frankly, companies don't really care what they
17:01
Speaker 3: have to spend in order to be at the cutting
17:03
Speaker 3: edge of this stuff. I don't think that we've reached
17:06
Speaker 3: that defining pivot where now they suddenly do care about
17:10
Speaker 3: the price of this stuff. But that is, you know,
17:13
Speaker 3: when that pivot happens. That is the concerning point for
17:16
Speaker 3: these markets in my view.
17:18
Speaker 2: Now Here, here's the counter that I will put out there, Mike.
17:22
Speaker 2: What's the number one reason why a company hires a
17:25
Speaker 2: third party vendor? Because they don't know how to do
17:28
Speaker 2: it themselves or they can do it cheaper elsewhere. That's
17:31
Speaker 2: the number one. What's the number two reason why they
17:33
Speaker 2: hire a third party vendor? I don't know, because someone
17:36
Speaker 2: else is going to fix it when it breaks. Yeah, okay,
17:39
Speaker 2: because it's not my Like, it's not my problem. If
17:41
Speaker 2: you have part of the reason, like I work to
17:44
Speaker 2: help manage our CRM internally yep. CRM is a customer
17:49
Speaker 2: relation customer relations management software. It's a piece of software
17:52
Speaker 2: that basically keeps track of where all your customers are.
17:55
Speaker 2: The reason that I will never ever try to like
17:58
Speaker 2: build one internally is because if something hits the fan,
18:01
Speaker 2: I don't want the responsibility. Not only that, I don't
18:05
Speaker 2: want the liability it's someone else's problem if something breaks, Like,
18:10
Speaker 2: it's just it's not You're not going to have Pepsi
18:14
Speaker 2: being like, hey, let's develop our own CRM because Pepsi
18:18
Speaker 2: likes being able to call Salesforce or HubSpot or red
18:21
Speaker 2: tailor whoever it is they use as their CRM and
18:25
Speaker 2: be like, why isn't this working the way it's supposed
18:27
Speaker 2: to be working. They don't want to deal with that.
18:29
Speaker 2: They want to sell soda. So I think part of
18:33
Speaker 2: this is okay, Like, yeah, you can roll out all
18:36
Speaker 2: of these cheaper and cheaper models. Are they actually going
18:40
Speaker 2: to be big enough and reputable enough to sell to
18:43
Speaker 2: a corporation though? And that's an interesting question because it's
18:47
Speaker 2: great that you know Moonshot rolled out Kimmy K three.
18:52
Speaker 2: Do you think Brian moynihan or do you think Jamie
18:55
Speaker 2: Diamond's like, hey, get the Moonshot guys on the phone,
18:58
Speaker 2: we're gonna ditch open AI for them or Anthropic for them.
19:01
Speaker 2: Quite certain that they legally would not be allowed to no, like,
19:04
Speaker 2: of course they're not going to. So this is the
19:07
Speaker 2: thing is until you get a critical mass of these
19:10
Speaker 2: companies that are actually capable to sell into enterprises. It
19:15
Speaker 2: doesn't quite matter what the cost is yet, because there's
19:19
Speaker 2: only a limited subset that companies are willing to buy
19:23
Speaker 2: from based on the reputation that they know of. Quick
19:27
Speaker 2: break Wall Street watches next.
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20:00
Speaker 4: Seeing another route in tech to close out the week,
20:03
Speaker 4: driven by a global sell off in ship makers and
20:07
Speaker 4: ongoing worries about spending on a I. Right now, the
20:11
Speaker 4: Dow is only down by fifteen points, SMP five hundred
20:16
Speaker 4: is down by two thirds of a percent, Nasdaq selling
20:18
Speaker 4: off one to one third percent of three hundred and
20:20
Speaker 4: forty eight points lower, Russell two thousand is edging higher
20:24
Speaker 4: mostly flat, Tenure treas reeled down four basis points at
20:28
Speaker 4: four point five to two percent, and Oil jumping over
20:32
Speaker 4: three percent higher today trading at eighty one dollars a barrel,
20:38
Speaker 4: Alphabet down by nearly three percent after Bloomberg reported that
20:41
Speaker 4: Google is months behind schedule on delivering its flagship AI
20:45
Speaker 4: model Gemini three point five Pro, as the company has
20:49
Speaker 4: been taking time to try to improve its capabilities. Meanwhile,
20:53
Speaker 4: Netflix sinking eight percent after the streaming giant posted its
20:56
Speaker 4: weakest revenue growth in years in the previous quarter. Nefflick
21:00
Speaker 4: said it expects revenue and profit gains to slow in
21:03
Speaker 4: the third quarter. Elsewhere, Shares and SpaceX are off four
21:07
Speaker 4: percent after it aborted the launch of its starship Mega
21:11
Speaker 4: Rocket due to some of the engines not starting. Elon
21:15
Speaker 4: Musk said the company will try again in the coming days.
21:18
Speaker 4: An Intuitive Surgical tumbling eleven percent after the maker of
21:22
Speaker 4: surgical robotic tools saw growth in one of its robots
21:27
Speaker 4: slow to its weakest pace in four years. I'm Tucker
21:33
Speaker 4: Silva and that is Wall Street Watch.
21:36
Speaker 2: Mike. Let's dig in and talk a little bit more
21:39
Speaker 2: about that Gemini piece that Tucker mentioned during Wall Street Watch.
21:44
Speaker 2: Apparently this new version of their Gemini Pro model is delayed,
21:51
Speaker 2: and why is it delayed and is there a problem?
21:57
Speaker 2: Not with Google, but like we've seen this from a
22:01
Speaker 2: few companies over the last couple of years where it's like, oh,
22:03
Speaker 2: we're trying to roll out our new model, but it's
22:05
Speaker 2: taking too long, and again you got kind of these
22:08
Speaker 2: upstarts that just keep popping up and being like, hey,
22:10
Speaker 2: here's a great one, here's a great one. Is is
22:14
Speaker 2: it a sign that maybe there's just, you know, not
22:17
Speaker 2: an understanding of the commoditization that's happening within models by
22:22
Speaker 2: some of these big US firms.
22:23
Speaker 3: Yeah, I'm I'm not sure what to make of it.
22:26
Speaker 3: And I'm not sure why Google needs to play that game.
22:30
Speaker 3: I get why open ai and Anthropic need to play
22:33
Speaker 3: that game of leapfrogging each other. I'm un clear on
22:36
Speaker 3: why Alphabet does. And furthermore, for a delay in their
22:42
Speaker 3: latest AI model to sink a four and a quarter
22:45
Speaker 3: trillion dollar company by two and a half percent is
22:48
Speaker 3: just I guess it's just telling of this moment. I
22:51
Speaker 3: don't think it's shocking, but I think it's telling of
22:53
Speaker 3: this moment. I mean, what is that in terms of
22:57
Speaker 3: dollar amounts that's being wiped out of the share price today?
22:59
Speaker 3: It's massive? I mean why delay? Probably because of the
23:03
Speaker 3: thing sucks, right? Is there any other reason you delay
23:07
Speaker 3: a model that you would otherwise release. The model is,
23:11
Speaker 3: in my opinion, probably not testing well enough to be
23:16
Speaker 3: as competitive as the top three to five models that
23:21
Speaker 3: are out there, and so you don't release something that
23:23
Speaker 3: you know is going to get you slapped down by
23:26
Speaker 3: the media and by the experts, and so you just
23:29
Speaker 3: hold off on it. But I think the price reaction
23:35
Speaker 3: to me is kind of shocking, giving how little this
23:38
Speaker 3: means to Alphabet's business today.
23:43
Speaker 2: Yes, but I think the big thing that like where
23:48
Speaker 2: I've gotten to on AI at this point is the
23:52
Speaker 2: reason why these like the companies are spending money trying
23:55
Speaker 2: to develop these frontier models is very much because they
24:00
Speaker 2: want the models to be good enough that they can
24:01
Speaker 2: develop the next iteration. Yeah, because it's it's they're kind
24:05
Speaker 2: of looking at it like, hey, if we can spend
24:07
Speaker 2: all this money to develop this now, then we can
24:10
Speaker 2: spend less because the model will develop itself in the future.
24:14
Speaker 2: But we're not there yet. And that's what like all
24:17
Speaker 2: the big guys are saying now. They're saying like, we're
24:19
Speaker 2: not there yet, but you know, we think we can
24:21
Speaker 2: get there at some point in the next couple of years.
24:24
Speaker 2: And maybe that's true, maybe that isn't. But it's also
24:29
Speaker 2: just this thing where again it's it's this race because
24:34
Speaker 2: you're pretty much saying Okay, we're we're gonna spend all
24:36
Speaker 2: this money developing data centers, and we hope that the
24:39
Speaker 2: models are good enough to you know, get the cost
24:41
Speaker 2: down for us to run these, you know, in the future.
24:45
Speaker 2: But in the meantime, we just got to keep spending
24:47
Speaker 2: all this money on data centers that isn't profitable for
24:49
Speaker 2: us right now. Yeah, you brought up.
24:51
Speaker 3: A point during the last time of Chuck, which was,
24:53
Speaker 3: you know, today the idea of some new upstart Chinese
24:56
Speaker 3: model isn't all that important because US company, or probably
25:02
Speaker 3: any other developed nation company is likely to use that
25:04
Speaker 3: model in the short term. But I'll point out again,
25:09
Speaker 3: when it comes to equity markets, the thing they care
25:12
Speaker 3: about is not what's happening in the most recent quarter
25:16
Speaker 3: or what happened three months ago. It's what investors believe
25:19
Speaker 3: is going to happen a year from now, two years
25:22
Speaker 3: from now, or two days from now, but in the future.
25:25
Speaker 3: And I gotta say, if there's one thing that the
25:30
Speaker 3: rest of the world, Europe especially but also you know,
25:33
Speaker 3: good parts of Asia as well.
25:35
Speaker 2: Have proven to me, it's that.
25:38
Speaker 3: When it comes to Chinese technology or products, they will
25:43
Speaker 3: use it so long as it is cheap. I think
25:45
Speaker 3: about the Germans in their car industry and what they've
25:48
Speaker 3: done there, and so I'm.
25:50
Speaker 2: Not market It's that's a B two C transaction that
25:55
Speaker 2: is will random, you know, calued. You know, I can't
26:00
Speaker 2: even think of like a good French name right now.
26:02
Speaker 2: Will you know, Sven's Fenberg buy a Chinese EV? Fine?
26:09
Speaker 2: But will Spen Sfenberg, chief technology officer of you know,
26:14
Speaker 2: Ikia two point zero, commit to using a Chinese model
26:19
Speaker 2: for their LM. There's a lot more risk there, there is.
26:24
Speaker 3: But show me the evidence over the last thirty years
26:27
Speaker 3: that companies across the globe are unwilling to take.
26:32
Speaker 2: That risk with their intellectual property. They won't from startups
26:37
Speaker 2: like they won't. Yeah, like you look at the places
26:40
Speaker 2: where Europe or even the US where they've lost market
26:44
Speaker 2: share to Chinese competitors. It's not from like this new
26:47
Speaker 2: company that sprang up this year. It's from Hey, here's
26:51
Speaker 2: this Chinese you know, telecom company Huawei that's been around
26:56
Speaker 2: for you know, fifteen twenty years and finally is making
26:59
Speaker 2: inroads into you know, Europe now. And it's you have
27:03
Speaker 2: to get to a certain scale before corporate anything. Trust
27:07
Speaker 2: it generally there's a reason why IBM stock did as
27:11
Speaker 2: well as it did for you know, thirty forty years,
27:15
Speaker 2: longer than that sixty seventy years. The reason was, hey,
27:19
Speaker 2: like the old adage, hey, you never get fired by
27:22
Speaker 2: buying IBM, Like businesses are stodgy, like they don't want
27:26
Speaker 2: to take risk on something that runs their business. What
27:30
Speaker 2: imagine that. Let's say that General Motors, just as an example, says,
27:35
Speaker 2: you know what, these Moonshot AI guys, they seem like
27:40
Speaker 2: the real deal. We're going to use the Kimmy V
27:42
Speaker 2: three model. What if like they wake up one day
27:46
Speaker 2: and Moonshot's just gone, like they're just not in business anymore,
27:51
Speaker 2: and now GM can't use their LM and everything's housed
27:54
Speaker 2: on it. Like that's the risk. And so that's why
27:59
Speaker 2: I think that there has to be a certain maturity
28:01
Speaker 2: of the companies in the models before it's really a threat.
28:05
Speaker 2: But it's also the the piece that is still being
28:09
Speaker 2: missed is that's open Ai two weeks ago said that
28:13
Speaker 2: they were going to start competing on price. Open Ai
28:17
Speaker 2: is one of the companies that corporate America will trust
28:21
Speaker 2: now like that because they're like they're they're they're a
28:24
Speaker 2: household name. And so if one of those companies is saying, yep,
28:29
Speaker 2: we got to compete on price, it's not just random
28:32
Speaker 2: you know Chinese startups saying it. It's Open Ai like
28:37
Speaker 2: the but it's almost the Google. It's the Google of Ai. No,
28:43
Speaker 2: I don't want to call them that because remember Google
28:45
Speaker 2: wasn't first. I'm gonna call them the Yahoo of Ai. Okay,
28:50
Speaker 2: even Yahoo wasn't first, but like Yahoo is the first
28:53
Speaker 2: brand name search engine, and so you know, open Ai
28:58
Speaker 2: is the Yahoo of Ai. And I think the question is, hey,
29:05
Speaker 2: if the dominant player is saying we're gonna compete on price,
29:09
Speaker 2: then until a Google comes along whose product is just
29:12
Speaker 2: so much better and people will flock there because that's
29:15
Speaker 2: why people went to Google. It was because their algorithm
29:18
Speaker 2: was just better than anything else out there. Until you
29:21
Speaker 2: can get to that point, hey, commoditization is is ultimately
29:26
Speaker 2: what killed a lot of companies in the tech bubble.
29:29
Speaker 2: It was okay, like yeah, like, here's this website and
29:33
Speaker 2: here's this one, and they're all free. Well great, how
29:36
Speaker 2: do we make money? Well we can't, so we're all
29:38
Speaker 2: out of business. And by the way, Amazon survived because
29:42
Speaker 2: they actually had the best product that was able to
29:44
Speaker 2: be sold. So if everything's being commoditized there, I don't
29:49
Speaker 2: know how you will get any of these companies. And
29:51
Speaker 2: you're like, yep, there's the moat, Like, what's the moat
29:54
Speaker 2: for any of them? Yeah? I still know. I'm not
30:01
Speaker 2: saying again. You got to hold two views in your head.
30:04
Speaker 2: One is we're gonna use way more AI five years
30:06
Speaker 2: from now, and the second is, well, if there's no mode,
30:08
Speaker 2: I'm not sure how much any of these are worth.
30:11
Speaker 2: And that's kind of where I am. Maybe they'll figure
30:15
Speaker 2: out ways to lock people into their ecosystem, but at
30:17
Speaker 2: this point it's kind of hard to do that. Let's
30:21
Speaker 2: take a quick break. When we return. I think that's
30:24
Speaker 2: enough AI talk. We've spent forty five minutes talking. Ah,
30:28
Speaker 2: I can't. I just I need other vowels in my life.
30:32
Speaker 2: So let's talk Netflix and then we'll talk World Cup
30:36
Speaker 2: after this.
30:37
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31:16
Speaker 2: Netflix reported earnings after the bell yesterday. The stock is
31:19
Speaker 2: down nine percent, not because the earnings were bad, but
31:21
Speaker 2: because they were in line. Netflix doesn't really give a
31:24
Speaker 2: ton of guidance going forward at this point, and they
31:28
Speaker 2: also said that they were going to pull back on
31:30
Speaker 2: the frequency by which they released data about viewership of
31:35
Speaker 2: their programs. And so when you meet expectations in a
31:40
Speaker 2: highly priced market and tell people you're not going to
31:42
Speaker 2: tell them as much data about what's going on, the
31:45
Speaker 2: obvious interpretation is, hey, you guys are still having trouble
31:48
Speaker 2: trying to keep eyeballs the same way you have been
31:51
Speaker 2: for the last year. And this has been kind of
31:54
Speaker 2: a theme that's popped up a lot where we've seen,
31:56
Speaker 2: you know, one season of a Netflix show comes out
31:59
Speaker 2: and season two doesn't get as many eyeballs on it.
32:02
Speaker 2: And I gotta be honest, I think it's a really
32:05
Speaker 2: simple problem that Netflix has. They release very short shows
32:10
Speaker 2: that are like six to ten episodes. The cadence often
32:13
Speaker 2: has huge gaps between seasons of like two to three years,
32:17
Speaker 2: and as a result, people watch it over the course
32:20
Speaker 2: of a weekend and then forget about it by the
32:22
Speaker 2: next time and they've moved on to something else.
32:25
Speaker 3: Do you agree with this statement from the CFO, because
32:26
Speaker 3: I'm not sure I'm there.
32:28
Speaker 2: Executives emphasized on a.
32:30
Speaker 3: Call with analysts Thursday that the company still has room
32:32
Speaker 3: for growth, noting that it only makes up five percent
32:35
Speaker 3: of TV market share globally. Quote, we believe that we
32:38
Speaker 3: have lots and lots of runway ahead of us. I know, right, Like, no,
32:44
Speaker 3: you know that is the that's the China argument. Hey,
32:46
Speaker 3: if we can just get another percentage point of the
32:50
Speaker 3: global TV market, then look at the amazing model. You know,
32:53
Speaker 3: the amazing business model will have. I'm sorry, Netflix, like
32:57
Speaker 3: you are in the home that you are going to
33:01
Speaker 3: get at this point. Your path to more revenue and
33:05
Speaker 3: more profitability is new business segments like what you're doing
33:10
Speaker 3: with live sports, which I kind of hate, or raising prices,
33:14
Speaker 3: don't I don't know how much of your business is
33:16
Speaker 3: going to be about capturing a larger share of the
33:20
Speaker 3: global TV market.
33:22
Speaker 2: Netflix in twenty twenty one, their mid tier product. Okay,
33:27
Speaker 2: their standard ad free plan was thirteen ninety nine. Today
33:31
Speaker 2: it's nineteen ninety nine. I did the math on this,
33:34
Speaker 2: oh and I know I love the math. That's a
33:40
Speaker 2: forty two percent increase over five years, which is about
33:43
Speaker 2: a seven percent annualized rate of growth seven to seven
33:47
Speaker 2: and a half. Over the last five years, Netflix's revenue
33:51
Speaker 2: has grown by twelve point six percent, which means that
33:54
Speaker 2: of that revenue growth, only five percent is organic annual growth.
33:59
Speaker 2: A company growing sales by five percent organically is fine,
34:02
Speaker 2: but it's a mature company at this point, right Like
34:05
Speaker 2: that's that's what they are, and that's totally fine. The
34:10
Speaker 2: problem for Netflix is that they are still trading at
34:15
Speaker 2: you know, six times sales, and there's still priced you know,
34:19
Speaker 2: twenty two times earnings, which in this market isn't isn't
34:22
Speaker 2: crazy Again, the margins are Finally they're a profitable company,
34:26
Speaker 2: but you don't get those higher multiples on you know,
34:30
Speaker 2: earnings unless you can prove that you're going to grow
34:32
Speaker 2: earnings faster than low double digits, with most of that
34:36
Speaker 2: being pricing. So I just look at it, and they're
34:40
Speaker 2: a perfectly fine company, but the growth has clearly slowed,
34:45
Speaker 2: and I think they also I think they've also gone
34:50
Speaker 2: through a change in sentiment regarding their content. Ten years ago,
34:57
Speaker 2: is it fair to say that like self produced netflit content,
35:01
Speaker 2: you would be look at it and you'd be like, yeah,
35:03
Speaker 2: it's pretty high quality. This was when like they had
35:06
Speaker 2: what was the Kevin Spacey shows, Husse the Cards, and
35:10
Speaker 2: they like a couple other ones that were like pretty
35:13
Speaker 2: high quality shows. And now the way that I think
35:18
Speaker 2: a lot of Netflix shows and movies are are, you know,
35:20
Speaker 2: talked about is slop. You know, it's just like they're
35:23
Speaker 2: very generic. They all have the same look. Netflix has
35:27
Speaker 2: told it's it's content producers, Hey, we want you to
35:30
Speaker 2: make this as if the person is listening to it
35:32
Speaker 2: in the background and not watching it. And I think that,
35:36
Speaker 2: at least personally, I view the quality of Netflix shows
35:41
Speaker 2: as not as strong as it used to be. And
35:44
Speaker 2: gotta be honest, if it weren't for the fact that
35:47
Speaker 2: I'm paying for my parents Netflix like on my subscription
35:50
Speaker 2: as an add on, I probably would cancel the thing
35:53
Speaker 2: because I don't think it's worth the cost.
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37:05
Speaker 3: Chuck back to Netflix real quickly. Not a subscriber to Netflix.
37:11
Speaker 3: But I gotta say to me, I don't know how
37:14
Speaker 3: much of it is because of netflix sloppiness on production.
37:18
Speaker 3: As it is, they are no longer the only game
37:20
Speaker 3: in town. Like It's true, it used to be that
37:24
Speaker 3: if you wanted to have the office conversation around the
37:26
Speaker 3: water cooler, it was about a Netflix show.
37:30
Speaker 2: That's completely morphed.
37:32
Speaker 3: You know. It is Apple, It is HBO Max again,
37:36
Speaker 3: it is Amazon, all putting out apples incredible content.
37:39
Speaker 4: Apple's making big strides.
37:41
Speaker 2: But the way I think Apple might actually, in my
37:43
Speaker 2: opinion right now, be putting out the best stuff, be
37:46
Speaker 2: putting out the best, most consistent quality TV out of
37:49
Speaker 2: anyone stories. Not a ton of it, but they're making
37:52
Speaker 2: good stuff. Yeah, yeah, yeah, I would tend to agree there, Mike.
37:57
Speaker 2: Do you remember before the World Cup when everyone was
37:59
Speaker 2: pooping like, oh, Bar's are gonna stay open later and
38:02
Speaker 2: no one's gonna be interested in the World Cup? I do. Yeah.
38:06
Speaker 2: Over the first weekend of the World Cup, Boston beer
38:08
Speaker 2: sales were up fifty percent. According to data from Toast's
38:13
Speaker 2: that good. I gotta be honest, it's been like the
38:15
Speaker 2: most fun month of my life. It's been fantastic. I'm
38:18
Speaker 2: gonna take a quick break. Hour two coming up in
38:20
Speaker 2: a little bit