Who Doesn’t Feel Comfortable Owning Apple? Nvidia’s Upside Volatility.

Summary:

• How Alex King from Cestrian Capital Research and Growth Investor Pro is thinking about the tech sector and bull market.
• Late money arriving and likely heading to Apple.
• NVIDIA stock outlook: High volatility expected, potential for further growth, but caution advised.
• Leveraged ETFs, sector ETFs, and hedging strategies recommended for investors.

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How Alex King from Cestrian Capital Research and Growth Investor Pro is thinking about the tech sector and bull market (0:50). Nvidia’s upside volatility and why it has further to run (3:45). What he really likes about ETFs; favoring leveraging and hedging (18:30). Money coming into Apple (23:20).

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Transcript

Rena Sherbill: Alex King from Cestrian Capital Research, always great to talk to you. Always great to have you on Seeking Alpha. Thanks for making the time.

Alex King: Not at all, Rena. Thank you very much for having me back. It’s always a pleasure. Thank you.

RS: Yeah. It’s always great to talk to you. And I think I’ve probably said this the past couple of times we’ve talked because tech is at the forefront of most investors’ minds, I think, and passive participants, similar to active participants at this point, a lot of tech talk specifically around NVIDIA (NASDAQ:NVDA), but also some other players.

So given that that’s your – the crux of your focus, how are you thinking about tech? And if you want to go broader than that market-wise, happy to hear that as well.

AK: Yeah, sure. Okay, great. Well, I think the first thing is that the – I think the notion of this bull market finally sank in, I guess, where we’re almost two years into the bull, right? So technically speaking, the bottom was October ‘22.

But really, if you look back through 2022 from around April, May onwards, you could see institutional accumulation in the big names, right, not the really scary high beta stuff, but in the S&P, in the NASDAQ, Apple (NASDAQ:AAPL), even NVIDIA, you could see those positions building from Q2 onwards.

And there were a couple of scary spike lows late in ‘22, but for the second half, basically, that was big money accumulating tech. And early ‘23 afterwards, from there on, tech just took off and it hasn’t really looked back ever since then. And it took a while, I think, for lots of folks to realize that this was a real bull market and that you didn’t have to be hung up on the pretty tough environment in 2022.

And in particular, if you are long, the smaller caps in ‘22 is a really painful experience. Akin to the dot-com bust, you saw many, many 2021 darlings crash 80%, 90%, but that isn’t what happened to the big names. It’s not what happened to the indices. The indices saw a typical sell-off bounce and a move up, and they took the big caps with them.

So I think where we sit now, I would say, if I had to call it, I would say we are in the later stages of this phase. So I don’t suggest we’re at top. I don’t think we are. But I think when everybody starts to turn bullish and when money starts to come back into the market that really in truth should have been here two years ago. That’s when you have to start to get a little bit cautious that things are going to keep going up forever, or certainly keep going up at this rate.

So I would not call myself bearish at all. We can think the market’s going to go higher. I think tech’s going to go higher. But I personally, I’m sort of sat back thinking, okay, let’s not miss the top here when it comes. So I’m just getting a little bit cautious, I would say.

RS: So speaking to that caution a little bit and to the volatility and to navigating that volatility, one of the main stocks that’s representative of this is NVIDIA, obviously, and we’ve seen $200 price targets, we’ve seen a decrease this week, we’ve seen some volatility there.

How are you thinking about how NVIDIA is leading the market and how investors should or shouldn’t be reacting to that or thinking about it?

AK: Yeah. Well, first of all, I mean, everyone now, of course, claims to be a genius. And everyone will say, oh, yeah, well, I knew NVIDIA was going to run this high. And no one knows the future. But I will say that the upside volatility that NVIDIA has shown in the last couple of years isn’t abnormal for that stock.

So if you looked at the run-up from the 2018, 2019 lows to the 2021 highs, it was about a 10x move. So split adjusted, it was about $3.60-ish at the lows in 2018, 2019, and it peaked at 35 or thereabouts, split adjusted at the top of the 2021 bull market, and then it dropped a textbook 78.6 retrace, almost to the $1. It’s an institutionally traded stock. You can see that in its movements.

And since then, it’s moved up from split adjusted 10 up to about split adjusted, let’s call it 140 was the recent high. And that is a, in our world, where we like to use these Fibonacci extensions and retracements, that’s a 3.618 extension, which that sounds a bit esoteric and boring. It isn’t really. Anyone could do the math. It’s simple. You just have to know the patterns to overlay.

And that’s a big move up, but it’s not an unprecedented move up. It’s a very high beta stock, and it happens to be a big cap and so it gets all the news. But the up and the downside volatility is sort of normal for this business.

And if you think about what drove the last run up for NVIDIA, it was crypto basically and gaming, but primarily crypto. If you wanted to do crypto mining at that time, you pretty much had to buy NVIDIA GPUs. Then what happened was two things. One, the value of crypto mining in itself fell because of the economics of crypto and the cost of power and so forth; and two, cheaper, more generic ASIC-type Solutions came along to make the compute cheaper.

And I think that in the end will happen with this AI-driven move up in NVIDIA, too, but I don’t think it’s going to happen yet. What happens in semiconductor and tech more generally always is the leaders get deflated away by the challenges.

So at some point, NVIDIA’s fabulous cash flow margins, fabulous rates of growth driven in part by pricing, they’ll be eroded. Someone will come along or a collection of vendors will come along with the ability to do this at comparable performance levels, but much lower price levels or perhaps even slightly worse performance, but much more attractive price. And that inevitable, inexorable trend will hit NVIDIA, but not today, I suspect.

I’m long the stock personally, I’m long (SOXL), the levered ETF personally, which is about roughly 8%, 9% NVIDIA from recollection, and I think the stock has further to run. But it’s – with all these huge winners, when everybody’s piling in, when everyone has decided it’s a stock that’s going to go up forever, that’s when you have to, I think, start to become cautious.

So I read recently that (NVDL), which is a 2x levered single stock NVIDIA ETF, this apparently is a retail favorite now. Well, I’ve traded NVDL personally in and out successfully for about 18 months now. At the start of that, it was a fairly esoteric thing that was little to use. Now when I hear that retail is piling into that, that makes me think, okay, again, time to be cautious. And again, I don’t think it’s the top of NVIDIA. I think it’s got plenty to run.

But I think that it always pays with any high volatility stock, with anything in tech, always look ahead, always know that it’s going to get deflated and destroyed in the end because that’s what happens in tech and it’s what happened to NVIDIA from the 2021 highs to the 2022 low. Nothing unusual about that at all and nothing technically unusual about the rise that the stock has put in since then.

So I think it’s a stock like any other. It’s a very high volatility stock. It’s a big company. And so it makes the headlines, but it can be treated like a stock like any other.

RS: So let me ask you, how would you articulate why NVIDIA has further to run? What might set you off of that bullish path or things that might come along that would make you more averse to it?

And what is going to make you get out of it? What’s the top? What makes you dip out?

AK: Yeah, I think two things. I think the first thing that will cause NVIDIA’s stock to fall is probably nothing to do with NVIDIA.

So, if you were to take some extreme circumstances, let’s say the Fed hiked rates tomorrow, which I don’t suggest is going to happen, but let’s say they did, then NVIDIA stock is going to fall and fall pretty hard as a simple reaction to the cost of money.

I don’t suggest that’s going to happen. But changes in monetary policy, changes in the economic environment, they’re probably more important to the stock’s trajectory than anything NVIDIA’s earnings can do.

Another thing that would be a risk for the stock, I would say, would be, let’s say the Fed cuts, but let’s say they cut late, the economy is deteriorating, the Fed’s playing catch up.

And it turns out that falling rates are not, in fact, the key to stocks going up more. They’re actually playing catch up on a weakening economy where earnings are declining, but because of overly restrictive Fed policy that lasted too long. In that circumstance, I’d expect NVIDIA’s stock to fall.

In a balanced macro environment, where the economy is doing fine, inflation is trending down a bit, rate cuts start to flow through at a measured pace, then I think sheer earnings pressure can drive the stock up because the stock actually isn’t expensive. I don’t have today’s valuation in front of me, but it’s trading at or around 55x trading cash flow, something like that.

Well, you’ll pay 25x trading cash flow for Raytheon, (RTX), which is an ex-growth defense contractor, as I’m sure your listeners know. So if the market’s asking you to pay only twice the multiple for a multiple 100% growth rate, high margin, currently no real competition stock at the heart of the AI boom. If it’s twice the price of an ex-growth defense contractor, that’s not expensive on fundamentals.

And if you look at the stock chart, the stock chart isn’t overextended, again, given that this has historically been a high volatility stock.

So I think in a balanced outside environment, earnings, I think, can drive the stock up. I think if material cracks appear in the macro environment, that’s the biggest threat to the stock. And here I’m talking in the next six, nine, maybe 12 months. Nine, 12 months out, you have to believe that every single NVIDIA customer is looking for alternative solutions because of the price premium that NVIDIA can command.

So between NVIDIA’s lock-on GPU unit production and Taiwan Semiconductor’s (TSM) lock-on advanced process node manufacturing, you have two price setters at the absolute sharp end of the chip industry there and that won’t last. It can’t last. It never lasts in tech. Something always comes along to deflate it.

So not today, not tomorrow, not in six months, my eye would be – if macro is okay, if it’s balanced, if it’s not worse than today, my eye will be when does the price deflation come? When do multiple ASIC Solutions come in that NVIDIA customers can design in part themselves, take margin away from NVIDIA to keep for themselves? When does that start to happen?

And some months before that appears in the market, then the stock will be getting hit because large account players will have much better visibility, by which I mean large account investors, will have much better visibility into that than those of us who just sit and watch the screen. So the price will tell you, if you watch the stock price, the price will tell you what’s happening with competition. You don’t need to read EE Times to learn it. The price will tell you.

So I would say, short-term, macro is key. If macro is overall balance supportive, I think that earnings can drive the stock up longer-term, meaning, nine, 12 months out, then I would be looking for lower cost alternatives coming up through the supply chain sponsored by NVIDIA’s customers.

That’s the thing that will start to undermine pricing power, therefore margins, therefore the multiple that the market will pay for the stock. That’s how I think about it. So I don’t have a particular price where I think, okay, we’ll run at 200 or something. But those are the input factors I would watch.

And chart-wise, I would be just looking at, well, we’re at 3.618 extension now of the prior move up placed at the bear market low. Stocks like this can run to a 4.618, a 5.618 extension, but they don’t do that often. So I would be looking for, well, when they hit those extensions, that point, then even for a stock with this sort of momentum behind it, that’s starting to get stretched.

So, for reference, those prices would be 180, 215, that sort of level. And at that point, I’d be, and again, I’m long NVIDIA, I’d want to be really certain that nothing bad was happening in the supply chain in macro, because then that the air is starting to get rarified up there.

RS: I mentioned before that you run Cestrian Capital Research. You also run an Investing Group called Growth Investor Pro. Given that you have a chat room and trading alerts, I’m curious, what is most talked about these days, given that there’s so much to talk about in the tech world? What are subscribers most wanting to know or most curious about?

AK: That’s a really good question. That’s a really good question. Well, the first thing I’d say is we’re absolutely blessed with just a brilliant community. We’ve run the service on Seeking Alpha for some years now. We’re one of the top services on the Seeking Alpha platform, I’m thrilled to say.

And from the off, we sort of tried to build the community differently. So we have a number of really simple rules of chat, we call them. So #1, keep it clean. It’s a family show, right? There’s – you’ve got the whole Internet to behave badly, but we want people to be civil and sensible and focused on investing matters and respect and all that stuff that people talk about, but don’t really do. We’ve done that really successfully. I’m really proud of it.

Rule two, leave your politics at the door. Politics drives markets, it drives stocks, but no one cares about anyone’s personal politics here. This is about business. And so we’re interested in what people have got to say and ask about stocks and investing, not personal political opinion. And that’s been a great thing too.

And the third thing is, and this is really important, no such thing as a dumb question. We have all sorts in the community from multiple decade professional investors and traders to people who have just got started.

And so the most common questions are things like, when you get a day like yesterday or three days on the top of NVIDIA falling, people going, is that it? Is that the top? Not just the top for NVIDIA, but is that the top for the market? And how do we work out if that’s the top?

The other thing people are looking at is, there is a number of fallen stars from 2021 that have not really recovered. Unity Software (U), a gaming software business is one; Fastly (FSLY), content acceleration business is another; Twilio (TWLO), communication services business is another; and lots of people bought those stocks in 2020 and ’21 and still hold some positions.

And so people are looking at, well, are these laggards ever going to catch up? The bull market’s been in place for almost two years now. These things are still look and feel like they’re on the floor. Is that ever going to improve? So people are, I would say, anxious to not miss the top in the big names that have moved up, and wondering whether those laggards will ever catch up.

And over and above that, we get really great questions about sector rotation, for instance, that we cover. So it’s a growth service, but we cover all the different sector ETFs, energy, industrials, finance, and so on.

So how does sector rotation drive the market? What’s happening with bonds like the (TLT) and (TMF) ETFs, that sort of thing and we cover all those. We run a live webinar every week. And my favorite part of that is extensive Q&A that we get. And again, we run it on a no dumb questions basis.

I’ve worked in investing my whole career. And for that whole time, all of the best questions that anyone’s ever asked in any room I’ve ever been in are all prefaced by, this is probably a dumb question, but the people who think they know everything don’t. And the people who showboat usually know nothing because they’ve never taken the time to learn things or to listen.

The smart people that go, I don’t know if I understand this, but how does this sound? They’re always the killer questions. And so the thing I love about the community is personally I run those webinars myself every week and I’m often sat back going, that’s a brilliant question. I don’t know. Hang on. And we have to think about it and we work through it together. So it’s a really great community. I’m thrilled to host it.

So I would say that you asked what are people focused on? When is the top and how do I not miss it? Can these big names keep running up? And what about the stocks that have been left behind? So I would say it’s the two ends of the spectrum. That’s the common focus.

RS: And the importance of leading with humility, love that, love that. So…

AK: Well, that’s easy, isn’t it? You just have to be in investing for long enough. And if you don’t have any humility, the market will hand you some.

RS: Much like life itself.

AK: Yeah, precisely.

RS: So I’d love to get your take on ETFs because I think profound and expert opinions on ETFs are sorely missing. So I’d love to hear how you’re thinking about ETFs.

Any ones you want to highlight that are reflective of how you’re thinking about things, happy to hear that.

AK: Yeah. Well, first of all, don’t tell anyone because we run a stock picking service, but I really like ETFs. I think ETFs are, as a category, a terrific thing, because with the increasing popularity of them, if you pick the right ones, they give you the ability to just take a step back from single stock risk.

So if a stock that you own just hits an earnings crater or a regulatory problem or one of those things that you just couldn’t see coming. If you’re long, heavily long a single stock, that can really hurt you. But owning ETFs just obviously means you smooth all of that stuff out. They’re increasingly institutionally traded.

And so I think there’s a view four or five years ago that said, oh, you can’t do technical analysis on ETFs. Well, it might be true for some of the more high-end things, niche things, but you certainly can on the big liquid ones like (SPY) and (QQQ) and the big sector ones like (SOXX) and (SMH) and those sorts of things.

And so I really like the use of ETFs. And personally, in my own investing, I’ve gravitated to fewer single name stock holdings and more ETF holdings for that reason.

I like to approach them by sector. So I think that owning the index ETFs, so the unlevered ones, SPY, QQQ, (DIA) for the Dow, (IWM) for the Russell, I think they’re great instruments. They’re liquid, they’re investable, they’re tradable. And then if you dig into sectors, the SPDR series, for instance, the XL series of (XLE) for energy, (XLK) for tech, and so on, again, highly liquid, lots of assets under management, that they’re institutionally traded.

So you can have some degree of predictability to their movements if you are reasonably good at technical analysis. And you can also use them to track sector rotation to the market. So it’s possible that energy right now is under institutional accumulation, for instance, if you look at all the big stocks in energy.

So Occidental Petroleum (OXY), Exxon Mobil (XOM), Chevron (CVX), (EQT), (USO), the oil fund, they all have sort of the same chart, which is a little bit sideways, a high-volume range band for the last 18 months, two years. That might be selling by institutions. You can never tell until it breaks out. But it’s probably accumulation.

And if you use the ETFs, XLE is a great example, then you can take a position in the sector. When you have this sideways range about action, then it’s a great way to position yourself for a breakout in the sector as capital flows into it, whilst also protecting yourself with approximate stop loss.

You can do that in ETFs because they’re not as volatile as single name stocks. If you have a stop-loss in, I don’t know, Diamondback Energy (FANG), something bad happens to that stock, your stop-loss can trip, trigger a loss, and then the stock can reverse upward rapidly and leave you behind. And that just doesn’t happen as much if you run ETFs and you again do your chart analysis correctly.

The other thing that I find very productive with ETFs is the ability to use the leveraged ETFs and to hedge them. So, again, just in the indices, things like (TQQQ) and (SQQQ), we’ve written articles in Seeking Alpha recently about how to use those two as a hedge pair effectively. My colleague, Frank Ellis, put an article out on the Cestrian banner this week about the long-short S&P 500 level ETFs. That’s the one he wrote about where (UPRO) and (SPXU).

And so, if you again can get good at technical analysis and learn the art of hedging, then ETFs can be enormously productive, deliver you great returns, and give you the ability to protect profit and dig yourself out of the hole if you’re positioned in the wrong direction as well.

So, I’m a big fan and we cover ETFs extensively in our work, some in our Growth Investor Pro service, some in our wider work, but we cover them extensively. And again, personally, I’m a big fan and I own many of them.

I personally tend to favor the leveraged versions, at least the ones where they can be hedged with an inverse because you get the amplification that the leverage brings you, but if you’re wrong, and obviously one is always wrong frequently, then you can correct for being wrong with the hedge pair.

RS: So what stocks do you think are worth talking about when it comes to the tech space and in terms of understanding what’s going on for investors, what do you think is best to highlight right now?

AK: Well, I think two things really. I suspect where we are in the market cycle, and we could, you know you can construct a scenario technically and fundamentally where the market’s going to go up for the next 10 years. I mean, it’s possible to construct that argument and that might happen, but that’s not a very useful plan.

So, let’s say that we’re in the later stages of this bull phase, which I suspect we probably are. And if you sit back and think about, well, what’s likely to happen next?

I think what’s going to happen next is, you’re going to see some late money arrive. Again, long money should have been in tech 18 to 24 months ago. And if it wasn’t, you have to ask yourself, well, if it’s going to come in now, and this is both institutional and advised money and individual retail money, where is it going to go?

The minute rate cuts start, and I’m assuming they do, then I think a whole lot of money is going to come out of money market funds as you start to get lower rates on your cash. People start to think about, well, I’ve noticed the market’s going up, my cash rates are coming down, I think I’ll get back in the market.

And I think that alone tells you we’re probably in the later stages of this current bull phase. And again, I can argue against that, but just as a cautious plan, let’s say that’s true.

Where’s the money going to go? My own view is the first place it’s going to go is, Apple (AAPL). That’s not a very exciting idea. It’s not an under-covered stock. It’s not a microcap that’s going to explode 10x tomorrow. It’s not NVIDIA. It’s not any of those things. But for that reason, I’m pretty bullish on Apple. I own the stock personally.

I think that technically, if you look at the chart for Apple, again, it’s been under institutional accumulation for some time, I think. And I think that’s because if you were a large account player whose job it is to walk a little bit ahead of everyone else and see what’s going on, you could have seen Apple’s engagement with AI and late entry into AI, but probably very effective entry because as is the phrase used by everybody now it could be the on-ramp for most people onto AI services.

And of course, as well as being the on-ramp with the new phone, and of course you’re going to have to buy an expensive new phone to access that, there’s myriad services that Apple can layer on that will get sold with an AI sticker. In addition, the stock isn’t expensive on fundamentals. And who doesn’t feel comfortable owning Apple?

If you are a big, leading-edge tech investor, you’ll go, oh, boring, but if you are a typical institutional or individual investor, you don’t mind owning Apple because it’s known to be a well-managed stock.

They’re careful financially, bulletproof balance sheet, share repurchases, ticks all those boxes. And so, I think Apple will be a beneficiary of rate cuts, but not necessarily in the way people think about it, not because suddenly P/Es are going to explode, but because I think as money comes out of cash and late into the equities market, I think Apple can be a major beneficiary. So that’s one thing. I’m long stock personally. I’m also long, back to the point of leveraged ETFs, I’m long (AAPB), which is a 2x long Apple ETF.

The other category I think is worth watching is, semiconductor in general and NVIDIA has hogged money, as everybody knows, for the last year. It’s not a controversial statement. And it’s hogged money not just away from other sectors, which is why I think things like energy might be worth watching. It’s also hogged money from other parts of tech.

So, if you look at enterprise software, for instance, enterprise software peaked in around February this year. Pretty much all of the leading stocks in big software did the same thing. They absolutely mooned from the October 22 low, kept moving up, spiked in February this year, and then have sold off fairly substantially since. There are exceptions, CrowdStrike’s (CRWD) an exception, but for the most part, they’ve done that.

So, if you look at names like Salesforce, (CRM) is the ticker. If you look at names like MongoDB, (MDB); Zscaler, (ZS), they all have more or less the same chart, some more extreme than others, more or less the same chart. And I suspect that enterprise software is due to see some capital rotate into it for a number of reasons. One, it’s been left behind. So, on fundamentals, the stocks are becoming more attractive than they were.

Growth starting to return to some of those names that I’ve mentioned. So, if you look at the, pretty much all those companies saw declining growth – revenue growth rates through 2022 and 2023.

And as the comparisons, the prior year comparisons get easier, the growth rates have started to bottom out one or two, literally just one or two, have started to see growth accelerate as if the quarter just reported was a higher rate of growth versus prior year than was the most recent quarter reported before that.

So, just starting to turn around. That’s not true of the category, but it’s starting to be true of one or two names in it. Okta (OKTA) is an example of that.

And so, I think that a little bit of excitement is going to return to enterprise software. And I think that will see some money flow in. Again, they’re safe companies, people understand them, they have a subscription revenue model, they don’t really tend to miss earnings very badly very often. They’re very cash generative.

They have an order book, which you’ll often see referred to as remaining performance obligations in the SEC reports, big fat order books that are typically large numbers, compared to the last 12 months of revenue.

So again, investors feel safe owning them, but I think that the dump in enterprise software since February this year, I think is bottoming out and I think we’ll start to catch a bit.

And then finally, there’s a slew of things that, assuming the AI boom, and I think it is a real boom. I don’t think it’s just a figment in the mind of investors. I think it’s a real CapEx boom amongst data center operators and end user customers. If that continues, then as I think we talked about last time we did this, that’s not a single stock boom. It’s not a collective insanity, tulip bubble blah, that people think it is.

That’s not correct. It’s a CapEx refresh in tech.

And that happens every 10 years or so. It happened in the mid-to-late ’90s, catalyzed by the Netscape IPO in ’95. It happened in the mid-to-late 2000s, catalyzed by this. So, Internet 2.0, it was called at the time when the internet actually started to work for people. It happened when cloud, multi-tenant database, widespread compute load migration from the basement to a data center, it happened when that came along in the late 2010s, And it’s happening now in AI.

So, if you walk around any hyperscaler type data center, it’s not just GPU you have to spend your money on, you have to spend your money on power supplies, cooling, memory.

And so, Micron (MU) just started to move up a great deal as soon as people started to realize that, oh, right, well, if you’ve got a lot more processing power, you need a lot of memory to keep up with it. And in Micron’s case, high average selling price versions of their memory as well.

And I think downstream from that, it’s not really kept pace. So, you’re going to need more communication hardware. So, there’s a reason that Broadcom, AVGO is also on fire, which is common semiconductor on hardware that also will see a big boom in demand.

Power is going to require a big boom in demand. I suspect that part of the move up in energy stocks, which I think are just starting to move up, in part, that’s a dawning of, oh, well, data center power consumption is only going to go in one direction. And by the way, you can’t fill all that with solar, so there’s going to be some more usage of oil and gas and these things.

So, I think there’s a whole downstream set of examples of things that AI will touch. And I don’t think you have to be a genius to work out what they are. You don’t have to be a computer scientist. You just have to think about, well, if more compute, if more data center load, then what? And that CapEx refresh will end – will spread all the way to the consumer. So, I think the new iPhone refresh cycle will be a very successful one because AI.

And I think there will be a notebook refresh cycle that follows, a desktop refresh cycle that follows. So, I think this is a tech value chain CapEx refresh that’s started with GPU and will flow downhill from there. And so, I think there are many names that can benefit from that still. I don’t think it’s late in the AI boom at all. I think it’s early, but there are just various parts of that value chain that have yet to benefit.

RS: This is a two-pronged question. When it comes to Apple, what are some of the bearish notes on Apple that you find most compelling or that you think about the most?

And when it comes to the development of AI, do you have your eyes towards – because every so often something comes along that I don’t know if somebody like you, but somebody like me reads the headlines that are surprising.

Are there things that you’re looking at out of left field that might be coming in terms of who might benefit the most out of AI? Any thoughts on those two points?

AK: Yeah, it’s a good question. I mean, the bear case on Apple is pretty simple, I think, which is it’s not growing. It doesn’t innovate. I mean, and yes, it has a ton of money, but all it does is it buys back its own stock at elevated levels. What’s exciting about that? And those are all facts.

The most recent quarter for Apple growth declined, it didn’t accelerate. So, I don’t have it in front of me, the December quarter saw an acceleration in growth, but the March quarter saw a decline.

So, a critic of Apple would go, you’re dreaming. You can’t turn around growth by saying you’re going to sell somebody else’s services on a new iPhone that happens to have a fancy camera. That’s not a turnaround story.

And in any event, Tim Cook might be a terrific corporate manager, but innovator, he isn’t. And so, you’re never going to get an elevation in P/E. Apple is just not going to boom. You just can’t say it’s the next NVIDIA. And I would say that’s a pretty good critique.

My view would be many of those things could be true, but the stocks don’t go up or down according to the fundamentals of the company. They go up or down according to demand and supply of the stock. And so, my own view is, I suspect there’s going to be more demand for the AI phone refresh than is expected, but I’m no expert on that. And we don’t really model that thing.

But I think there’s going to be more demand for the stock than people expect because people feel comfortable owning Apple for all the reasons that a critic will be negative about it. Your average fund manager and your average individual investor feels very, very at home owning it. And I think they have under owned it for the last year or so. And so, I think that demand for the stock is going to rise as long as fundamentals aren’t too bad.

So, I think the – where bearish commentary on Apple gets a bit, sort of falls over its own feet, is that it’s correct very often in what it says about the company, but of course, the company and the stock aren’t the same thing.

And if one is to be critical of the company, you can lob 100 rocks at Apple successfully, but that doesn’t necessarily mean the stock isn’t going to go up. And so, I think people confuse the company and the stock very often.

And sometimes those two trajectories coincide, but very often in stocks, as you know, stocks move independently of company performance. And usually the stock is right.

Usually the stock moves ahead of what the company is going to do. Usually if a stock starts to dump, something bad is coming down the line in real life. And if the stock starts to accelerate, something good is going to happen. Because again, large account investors, the people who move markets, it’s their job to know things that are going to happen in the future.

And I don’t mean by breaking any rule. I mean by being out in the market, by talking to distribution channels, by talking to suppliers, by doing all those things that is perfectly legitimate due diligence, you can expect large account managers to be doing that a bit better than a hobbyist.

And so, when big liquid stocks like Apple start to move, usually it means that good things are going to happen to the company. They just haven’t hit the news yet.

So, again, just to finish off on Apple, I think it’s easy to criticize the company. I think a lot of the criticism is correct of the business, but I think the stock’s going to go up anyway.

And I’m sorry, what was your second question, Rena?

RS: In terms of the development of AI and what you’re focused on now, are there things that you’re looking at out of left field that might be coming down?

AK: Honestly, no, but that’s because of the slightly weird way in which we do our work. So, if I look at the peripheral stocks that we’ve covered and or that I own that I thought would benefit, one that we covered until the acquisition was announced was Matterport, (MTTR).

So, this is, I suppose you’d call it more virtual reality really, but this is a company which provides digitization and digital modeling of the built environment. So, it’s a real value to realtors and building owners and so forth. That company was just acquired by CoStar (CSGP), which is a real estate business.

So, I think you can find names to the side like this. And if one is skilled at doing that, you can obviously make great returns. I mean, that’s the venture capital model, isn’t it? Which is go and find a large number of promising smaller companies, and some of them will be huge successes and some won’t.

If I’m absolutely honest, we don’t really work like that. We focus more on, okay, well, of the big liquid names, and down to companies of the below, let’s say, 10 billion enterprise value, they start to get a bit less interesting because technical analysis doesn’t work so well with the smaller caps because the stocks are a bit less predictable.

They’re more susceptible to single stock earnings risk. We tend to focus on the, I would say, large and mid-cap companies. We tend to look at, well, what does the stock chart, what is the price telling you about the future of the company?

We tend to come at it from price. We don’t come at it from the company. And that could be right or wrong, but it works for us. So, I don’t really have a list of here’s 10 great ideas for AI, but what I would say is, if anyone is listening to this and wants to do that analysis, I would start with, well, just imagine you in a data center and imagine that the GPU upgrades are done, what next?

So again, power supply, cooling, communication architecture, wide area network communication, power into that wide area network, end user devices, home Wi-Fi networks. I mean, it’s endless. And so, if I were to be going bottom up from the companies, I’d be looking at, well, when that CapEx refresh wave washes through tech, where hasn’t it reached yet?

So, I don’t follow these companies at all, but pretty much everybody’s in a need to upgrade their home network in the next 5 years because it just won’t work with this stuff. So, if I followed the companies that do that, I’d be looking closely at them and seeing which of those stocks are starting to move.

So, I would basically follow the money, meaning I would look at where has the CapEx got to in the AI refresh and where has it not got to yet. And if the CapEx has not got there yet, but the stock is starting to move, then you might have a breakout there. That’s the way I would do that. That’s the way I would do that work.

RS: What are your thoughts on Microsoft (MSFT) as an AI play, but also just in general?

AK: Well, I think it’s a beast. I think that Satya Nadella is just an incredibly strong CEO. I think he has this unique component, well, not unique, but when you see a CEO that has a technical background and has learned business, then that’s just a brilliant combination in a tech business. It’s always better in my experience than someone who has purely commercial experience, but lacks the technology side. So, Tim Cook would be the obvious candidate there. Terrific corporate manager, but did not come up the development route.

And I also think Nadella has been exceptionally cute in how he has managed all of the threats to Microsoft since he came along. I mean, from the shift to subscription pricing, which started in 2014, 2015, once he first got the big office to AI.

I mean, this is a lumbering giant of a business with pretty old products for the most part, products that everybody uses, but old products that are hard to change and slow to change and all the rest of it. And yet the stock is absolutely on fire.

The investment in open AI has been just genius, frankly. So, I think Microsoft is all about Nadella. And for as long as Nadella is CEO, I think that it’s a great stock to own. I think at the point where he retires, which I mean, he’s done the job for a lot, 10 years now so he’s going to come to an end of that sometime.

At that point, personally, I’d probably be out and sit back and see what happens because I think Microsoft’s progress since, I mean, it was something like, what, $50 or $60 bucks a share when he took over something like that.

And it’s just done unbelievably well, but I think it’s a Satya Nadella show. And at the point where he steps up to Chairman, but not CEO, that sort thing, that’s the time to worry, I think. Until then, I think it’s a rock solid business, a rock solid stock.

RS: Alex, anything else to say about tech stocks, how investors should be thinking or understanding about things happy for you to give whatever you want in the last few minutes?

AK: Yeah, I think the main thing I would say is, I don’t think this AI thing is a crazy tulip bubble. I also don’t think it’s a gift from the gods that will keep on giving. So, I think the smart thing I think investors should be doing is just thinking sensibly about stocks and companies and not getting stressed out about two letters, A and I. You almost ignore them. Look at the things that is important to look at. Look at the price and volume action on a stock chart. Look at the fundamentals every quarter when they’re printed.

Don’t get distracted by hype, but just focus on those things. Price on the chart, numbers on the spreadsheet, and just stay calm. And if you do those things, then you can do your analysis correctly. If you understand that AI is important because it’s driving, again, a CapEx refresh in tech, then that can help you make calm decisions about what are good things to own and what are good things to not own.

If you understand that stocks are rising as a backdrop because macro is holding up better than the narrative. So, as you can tell, I’m not an American citizen. I’m not American by birth. And I’m constantly surprised about the negative narrative you get about the U.S. economy from people who live and work in it and were born in it. America continues to be the land of milk and honey, and the economy continues to be incredibly strong. And any amount of social narratives, social media narratives, don’t change that.

So, I think if you just stay calm in a time which is becoming a bit heated, becoming a bit, it’s not euphoric yet, but it’s getting a bit that way, and my view on tech stocks will be the same as any stocks, which is just take a breath, just calm down, think about the overall external environment, but look at numbers, not the narrative.

Numbers are good in macro. Look at the company fundamentals. Many company fundamentals are good and improving. And then look at price action on the stock chart and volume action on the stock chart.

And for anyone who thinks that investing is all about fundamentals, it’s not – that’s not enough. You have to learn technicals. And technicals aren’t difficult if you put your mind to it. If you accept that they are a thing, they do drive stocks, learn technical analysis. It’s really not difficult. And if you invest purely on technicals, that’s not enough. Learn fundamentals. Also, it’s not difficult.

If you can add up, you can do fundamentals. And if you know up from down, you can do technicals. So, I would say just stay calm, focus, take a breath, ignore the narrative and just focus on what’s in front of you. And if you do that, then one can always be successful in investing and in trading.

RS: Yeah, stay humble, stay calm. Alex King, always appreciate talking to you. For those who are interested in your content that’s free on Seeking Alpha, look for Cestrian Capital Research. For those wanting a deeper dive and to perhaps follow Alex’s advice in getting more educated, look at Growth Investor Pro.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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