← Excess Returns 
Excess Returns
Disbelief Is the Real Risk: Gene Munster and Doug Clinton on Why the AI Bubble is Just Getting Started
00:59:36
Loading summary
Transcript110 lines
- [00:01]
Slackbot Advertiser
AI is incredible. It can teach you how to fry an egg and even write a poem, pirate style. But it knows nothing about your work. Slackbot is different. It doesn't just know the facts. It knows your schedule. It can turn a brainstorm into a brief. And it doesn't need to be taught. Because Slackbot isn't just another AI. It's AI that knows your work as well as you do. Visit slack.com meetslackbot to learn more.
- [00:31]
eBay Advertiser
This episode is brought to you by Ebay. On ebay, behind every car and part is a story waiting to be shared. I read about this guy who bought a nearly scrapped 2020 Porsche Cayman. He rebuilt the whole thing, all with parts he found on ebay. And now that Cayman is out tearing up the track. From Toyota to ash and Martins, eBay has thousands of cars and the largest online selection of vehicle parts and accessories. Ebay Things people love.
- [01:00]
Doug
You probably still have, I think another two or three years in this sort of AI bull market cycle before things get really insane. I know some people think things are already really insane. I think if you actually look at the numbers though, for the most part, a lot of these companies, they are supported by fundamentals.
- [01:17]
Gene Munster
We still believe we are earlier than most investors would would assess at this point that the probability that there is upside to some of these smaller companies because the numbers are smaller, the law of large numbers working in their favor when it comes to growth is higher.
- [01:35]
Doug
I think the downside to disbelieving in AI and having it play out if you're a mega cap is that the ones who believe and the ones who invest then win and you become relegated to probably not being a mega cap anymore.
- [01:46]
Gene Munster
It won't be a race to the bottom that they'll actually hold up some of their the pricing more than what I think people expect. Because at the end of the day, if there's value that's being created, we think there is a lot more value in thinking than there is in networking. It won't be as steep of a price decline as what many are anticipating.
- [02:07]
Experian Advertiser
Any discussion about Deepwater or Intelligent Alpha products and strategies is not a solicitation to buy or sell any securities and past performance is no guarantee of future returns. Additional information on both firms can be found at their websites deepwatermgmt.com and Intelligent.
- [02:19]
Jack
Alpha Co. Jean and Doug welcome back to Excess Returns.
- [02:23]
Gene Munster
Hello.
- [02:24]
Doug
Thanks for having us.
- [02:26]
Jack
Today we're going to work through the Deepwater 2026 predictions piece that you put out a little while ago. I believe. Gene, this marks the 10th annual prediction piece from you. So it's been a decade of kind of looking at the technology landscape and making these calls each year and sort of seeing how things play out. So I always love these types of pieces and discussions. One, they're really interesting to talk through because there's so much change happening. But two, you know, you can always go back 12 months from now and we can see how much we got right, how much we got wrong.
- [02:59]
Gene Munster
Transparency wins.
- [03:00]
Jack
Exactly. Yeah, yeah. And kind of realizing it kind of puts some humility into this business I think a lot of times. But right on. Yeah. So the conversation today, I mean, we'll, we'll kind of give our audience a chance to sort of scour the tech landscape with you guys to experts in the field. So you know a lot about AI, sort of the big CapEx build out Mag 7 and a bunch of other stuff. For those that haven't or for those that want to actually see the full piece, you can go to the gene site, it's genemonster.com and then also, you know, I'm a big fan of the research that Deepwater is consistently putting out and that's Deepwater Management or mgmt abbreviated dot com. And then lastly, I also want to support the intelligent alpha business and the ETF and strategies that, you know, Doug and his team are running there. So, you know, please go to these sites and support these guys and the.
- [03:56]
Gene Munster
World'S greatest ticker GPT.
- [03:59]
Jack
Yeah, nice.
- [04:00]
Justin
That is, that is an awesome ticker.
- [04:03]
Jack
Generated with ChatGPT, right Doug?
- [04:06]
Doug
That's right. Fully on brand.
- [04:09]
Jack
So yeah, so before we get into Gene, your prediction list and hear from Doug too, I wanted to go back and this is, this is very interesting. So I wanted to go back to Doug, a tweet that you put out at the end of 2023 and we'll put it up on the screen here, but let me just read it. So now keep in mind, this is, you know, basically more than two years ago you, you tweeted or wrote. My highest three to five year conviction idea is that AI will culminate in a bubble bigger than the dot com boom. It's the nature of major tech innovations to create bubbles. AI isn't close to a peak or in 1995. So I wanted to hear from you kind of has anything changed in your view and where do you think we are now in this evolution with AI?
- [04:58]
Doug
Not much has changed. I think is is the short answer in terms of just the structure of that thesis. So I still think we probably have, you know, now we're two years in, we probably still have, I think, another two or three years in this sort of AI bull market cycle before things get really insane. I know some people think things are already really insane. I think if you actually look at the numbers though, for the most part, a lot of these companies, they are supported by fundamentals, very rapid growth. Obviously the data center buildouts have supported the chip side. We're still kind of waiting in many cases on the software side for some of these companies to really apply AI. But yeah, I still think we have two to three years of a pretty strong AI powered bull run left in markets.
- [05:42]
Gene Munster
Yeah.
- [05:43]
Jack
So it's pretty amazing the amount of money that is kind of being plowed into this from every aspect of it. And so, yeah, that'll be, this is an interesting opportunity, I think, for investors. So it'll be interesting to see how this all plays out. All right, so getting to the prediction piece, let's, let's kind of dive into this and I'll just kind of throw these out there and then we'll riff on in a little bit. So the first one is. And you know, I was thinking about this. So the first one is the Nasdaq will end 2026 up more than 10%, driven by the AI trade. And what I was thinking about is I think if the Nasdaq generated a 10 return, a lot of investors might be actually disappointed just given how strong that index has been over the last, you know, five to 10 years. The, the annualized returns are crazy. But, but just talk us through, like how you think those conditions, the path that's needed for the Nasdaq to generate that return, how that might play out.
- [06:38]
Gene Munster
This year for starters, like, put the 10 into perspective. Understand that obviously we've had more, much more than that. If you look at the Nasdaq over the past year, up 23% year to date, we're up a half a percent. But as a general rule for a growth investor, better 7%, 6 to 7% is probably your, your benchmark. So like in the world of investing, I understand we've been spoiled. Like 100 basis.1% growth is considered like a standard deviation in terms of performance. And so like that statement, even though it may come across as feeling a little bit diluted, it's still a bold statement, just especially given where we've been. And the substance of it's pretty straightforward. It's just what Doug talked about, you know, the, from my perspective, you know, Doug says two to three year more years left before things get was the word insane or I still think we're, I'm probably even a little bit more bullish. But it'd be splitting hairs whether it's two to three or three to four years left. And I think that that's just hard for, for grounded investors to get their heads around and present company included. And so if in fact that does happen, we can talk about what's going on, on the fundamentals of these companies. But if in fact we are still have another two to three to four years left, it's highly likely that the NASDAQ does continues to have some strong double digit plus performance.
- [08:12]
Doug
If you think about it in the simplest construct, I think right now the Street's looking for the QS to grow earnings somewhere mid teens. And the qs trades around 26, 27 times forward earnings. And so if you just hold that multiple and that multiple, let's call it, it's a little bit elevated from historical sort of averages and norms. It's not excessively elevated. It's not even at levels that we saw back in the 2020 era. And so if you just kind of hold that multiple and you get mid teens growth in earnings, that, that sort of supports, you know, your, your plus 10% hurdle right there. I think, and it's always important, I think right now in the environment we're in to kind of address like what is the bear case or what is the skeptics counter argument to that. I think a skeptic would probably point to it and say, okay, well yeah, earnings are sort of inflated because they're not fully showing the effects of the CapEx build out, that depreciation is scaled there. And so if you look at it on a cash flow basis, things look a little bit tougher. But even on that basis you're still going to have cash flows growing kind of probably high single digits if I had to take a guess. And again, you get maybe just a tiny bit of multiple expansion and you still get your 10% hurdle. So I think no matter how you slice it, the numbers are there fundamentally to support it.
- [09:31]
Jack
One of the narratives that has kind of come more to the surface here is and to your point, Doug, that you know, there's so much spending on this Capex that some of these asset like companies, you know, have moved maybe to, they're more moving into like asset heavy and investors have kind of started to look at this a little bit more critically I think to some, to some extent. But where I want to go there is, you know, if that skepticism is sort of there in the market, is that sort of like a healthy thing sort of at this stage of where we are?
- [10:08]
Doug
I think it is. I think it, it keeps that sort of downward pressure, that realism in the market where not everybody is playing by the same playbook. And at Deepwater we kind of referenced this before in public comments we've made. But we've looked at the market through this lens of kind of a five part framework in terms of how far are we in a bubble, like how bubbly are we? And the bottom line is in that framework, we're not super bubbly. There's a couple of yellow lights, but there's no flashing red lights right now. If we look at some of the market mechanics in terms of leverage in the system is a big one, right? How many people are trading on margin? How much margin excitement is there? How correlated is everybody's thinking in terms of optimism in the market? Those are the things I think that are sort of held down by what you just described, Justin. People saying look, this is a wholesale shift in terms of some of these businesses. You need to start to think about them differently because they're not just these really high margin IP businesses anymore. So I think that does help us keep sanity, but it probably won't last forever. Like I said, I think we get a bubble eventually. So I think that those skeptics will largely fade away in time. And that's the nature of these bubbles is they just get beat up for so long when markets go up 10, 20, 30% a year, eventually they just get drowned out and nobody hears them anymore.
- [11:33]
Jack
So I think the second one here will be pleasure to many active managers sort of ears in the sense. And the number two prediction is small cap tech will outperform the broad larger sort of tech trade in 2026. So what are your thoughts on this view?
- [11:52]
Gene Munster
So there's three general pieces into it and predictions based more on numbers two and three, not number one. I'll say number one is like a mean reversion that typically when you've had outperformance that we've had of the Mag 7 over the past couple years, it's just natural that investors start to look for other, other pockets. I think that's a, that's not the justification that, that we have. Our belief is that continue maybe starting just with that growth piece. If you just look at the numbers and the growth rate of the companies that are smaller cap because their revenue is typically smaller since we still believe we are earlier than most investors would would assess at this point that the probability that there is upside to some of these smaller companies because the numbers are smaller, the law of large numbers working in their favor when it comes to growth is higher. So said another way is that our first prediction, which is basically rooted in a belief that we still have two to four years left of this AI trade should because of the law of large numbers should have an outsized benefit to what's going on with some of these small cap companies. So and we put small cap at sub 500 billion. I don't know in what kind of strange alien universe that is a small cap, but that's kind of how we think about it. Not the main, not the Mag 7. There's another piece to it that we thought about last December and it seems to be playing itself more out here. But is this idea of rate cuts and it's becoming more clear that we are going to get rate cuts this year independent of maybe what's going on with inflation. The last reading just recently got is inflation is remaining relatively steady, stable and the high twos think around 2.7 but still higher than where the Fed has talked about. So under normal circumstances you'd say that rates would remain. But of course there's a political dynamic to it that is likely going to cause rates to decline. And that comes back to this. This is like good old fashioned mechanics of how stocks work that declining risk free rate benefits both large and small companies. I mean both get a lift. I mean inflationary periods typically good for equities but the smaller ones tend to get more of a lift because they're historically more risky and because they're smaller businesses and so they tend to have a more, they tend to trade more on what goes on with inflation. So I realize that second piece isn't really like a hardcore tech view but I think it is something that is important and likely that we're going to get these rate cuts. And from our perspective, not a political statement, but I believe that we are going to see more inflation depending on the size of the rate cuts. But if we see that that's usually good for equities overall.
- [15:02]
Justin
So you're basically thinking it's going to be non mag7 tech will outperform mag7 tech when you make this. Is that basically the idea?
- [15:09]
Gene Munster
Thank you.
- [15:10]
Justin
And it's interesting too because like last year I believe two of the Mag 7 outperformed the S&P 500. So you're starting to see this a little bit already. I think five of them underperformed last year.
- [15:20]
Gene Munster
Yeah, we have at Deepwater we have an ETF been around since 2018, Loup last year up 42%. We don't, we're, we're in 500 billion and less in that ETF. So we saw some of that last year. I mean there is, and that's all tech and, And I think Mag 7 was probably up something an order of like 25% or I guess maybe you have to pull Tesla out of that. But it definitely we saw outperformance relative to the Mag seven, the small cap. So kind of a continuation of that.
- [15:55]
Jack
I know at Deepwater you guys are, you know, investing in both public and private companies, but just, and this might be, hopefully it's not too broad of a question, like when you're assessing a smaller cap tech company that clearly has different qualities than the mega cap tech companies do from a fundamental standpoint. You know, could you just spend a minute or two sort of describing how you go about analyzing the business from, you know, an opportunity risk standpoint? Do you look for moats? I mean, what are the things that you guys are looking for in small caps that might not necessarily be moat may not be one of them, but be there, you know, from, from large caps.
- [16:38]
Doug
I think the biggest thing, if you, if you think about the mega caps, Gene and I have spent our careers, you know, covering those stocks, investing in those stocks. The common trait sort of across the board with those is that they're all platforms, right? They enable a lot of the sub $500 billion companies. Gene just talked about small caps in tech, as we like to call them. They enable many of those companies. I mean, Uber is built on top of Apple and Google. You think of that Airbnb, in many ways, you could argue the same hundreds and hundreds and thousands of different vendors are built on top of Amazon. And so when we think about these, these small cap companies, the question we like to ask is what would have to happen, like what would have to be true for this company to become a mega cap company? Can they be a platform? Is usually what the question boils down to. And so as we think about those companies, we do invest obviously in public markets, but we also do a lot of investing in private markets. I think that that platform company is very important right now as we think about the AI era and some of the model builders, because those are the ones that most obviously I think could become platform type companies. There's going to be a lot of businesses built on top of ChatGPT, on top of Claude, on top of Gemini. And so you know that's, that's, so you need those companies that ultimately do prove to be platform companies because they can just compound year after year after year.
- [18:01]
Experian Advertiser
New Year, new me.
- [18:03]
Gene Munster
Cute.
- [18:04]
Experian Advertiser
But how about New Year, new money? With Experian, you can actually take control of your finances. Check your FICO score, find ways to save and get matched with credit card offers giving you time to power through those New Year's goals. You know you're going to crush start the year off right. Download the Experian app based on FICO scoring model offers an approval not guaranteed. Eligibility requirements and terms apply subject to credit check which may impact your credit scores. Offers not available in all states. See experian.com for details.
- [18:29]
Jack
Experian.
- [18:31]
Shopify Advertiser
Starting a business can seem like a daunting task unless you have a partner like Shopify. They have the tools you need to start and grow your business. From designing a website to marketing, to selling and beyond, Shopify can help with everything you need. There's a reason millions of companies like Mattel, Heinz and Allbirds continue to trust and use them. With Shopify on your side, turn your big business idea into sign up for your $1 per month trial@shopify.com specialoffer.
- [19:01]
Justin
So number three, it gets into something people have been talking about a lot which is this idea of all this AI capex spend. And I think people outside of the tech community are just saying regularly now this has to slow down, this has to slow down. It can't keep going. But you're taking the opposite side with your prediction. You're saying hyperscaler AI capex growth will be over 50%. So can you talk about that?
- [19:19]
Gene Munster
Yeah. And this kind of comes back to just culturally of Doug and I approach investing is to be grounded on what's going on and not take the bait when people are trying to like one up themselves. And there's a group around AI and investing, there's like this one upsmanship. I just want to be clear, like that's, that's a pretty bold prediction that we're going to see greater than 50% capex growth. The reason that comes from is we believe that essentially they're within the mega caps, at least the, they have to all kind of run capex at a similar pace as the one that's running the fastest. And there is a piece around that which is kind of, you know, if you're not spending appropriately, you may fall behind and that could have a very bad outcome for you. And if you do end up cutting, if you end up being right and and ended up not spending as much. The benefit isn't that great so you kind of need to run it whoever is running at the fastest. And right now that happens to be Meta. Now most of these companies haven't given guidance for calendar 26 but Meta's said more about 26 and based on their expectations it's going to be up just over 50% at least where it stands as of a few months ago is that 20, 26 the overall. So if we're going to take the four that give CapEx guidance, that would be Amazon, Meta, Microsoft and help me out Google those it it anticipates. Right now the Street's looking for around just over 30% so that's the delta. We're sitting ahead of them reporting December earnings at plus 30. We think that by the end of the year it will be plus 50 in part because of what's going on with Meta but also if we just look at what's going on with the broader build out and look at what Jensen WONG and their CFO's comments were at the JP Morgan fireside at CES last week is that they had this 500 billion Blackwell and Reuben cumulative revenue target for through the end of calendar 26 and they said at that event and that would basically imply around 50% capex growth that they said that they're going to exceed that number. Now some of that comes from China but in general they're saying they're going to exceed that target. So I think when you put all this together is like the two big, I think the two big factors, two big indicators that people investors look at is you know what's Nvidia saying? And then separately what are the hyper scalers saying about capex? And we think the commentary is going to continue to point to a measurably higher number than where current expectations are.
- [22:09]
Justin
Do you think these companies still see this as a winner take all type situation you're talking about? They're all going to match whoever the biggest spender is. Like do they see this as a situation where they have to spend with everybody else or they risk losing this whole thing?
- [22:21]
Doug
I think they do. We've kind of had this view where it's kind of a Pascalian wager. Blaise Pascal do you believe in God or not believe in God? And the so the example here is four box quadrant, right? Do you believe that AI is going to be huge or do you not believe that AI is going to be huge? And then AI is huge or AI is not huge. I think the downside to disbelieving in AI and having it play out if you're a mega cap, is that the ones who believe and the ones who invest then win and you become relegated to probably not being a mega cap anymore. You're probably one of those sub $500 billion small cap tech companies in that case. And so I think all these players realize that this is a moment where it is a potentially fundamentally earth changing technology. And so if that does turn out to be true, the investment dollars we're talking about, they're substantial, but they will look minuscule, they will look irrelevant in 5, 10 years if the bull case does play out and AI is as big as some of us think it could be.
- [23:25]
Justin
How do you guys think about this idea that the people doing the building will be the beneficiaries? You know, it's easy for people to point right now to something like the fiber build out and say, well all the companies that built that didn't do well, but the companies beneath them that took, took advantage of did really well. And I wonder if that's overly simplistic looking at this like, because these are obviously way better companies. They're not, they're less debt written, they have huge cash flow. Like how do you think about the beneficiaries here relative to the people building it and then the people that ultimately sit downstream from them.
- [23:51]
Gene Munster
That's pretty well traveled. Or that's the kind of the well traveled view about why this isn't sustainable, that this is profitless prosperity. That when Sam Altman talks about token pricing going down 100x per year, I mean it's like just defines remarkable in terms of the amount of pricing pressure. I think it all leads to this idea that these models will become commoditized and how can these companies ultimately have some form of return? There is a dynamic where. And this is, is it the Jevons paradox? A UK economist had a theory that when the price of coal in the late 1800s was dropping dramatically, that the usage would go up more than enough to offset the decline in price and it would be ultimately good for coal producers. In fact that happened and that's something that Sundar from Google has talked about. A year ago when Deep Seat came out that this reality that, that the usage will increase. I think from one perspective we're going to see more use. Case and Doug and I have talked a lot about this. I know Doug, you've been a believer that it won't necessarily for like the most advanced thinking of these models. It's not, it won't be a race to the bottom that they'll actually hold up some of their the pricing more than what I think people expect. Because at the end of the day, if there's value that's being created, we think there is a lot more value in thinking than there is in networking. Going back to your fiber example, they think there's more value in thinking that the pricing, even though some tokens could go down 100x that in aggregate it won't be as steep of a price decline as what many are anticipating.
- [25:40]
Justin
How do you guys view the Mag 7 in light of this? You know one of the things that was great about these companies is they were very asset light companies, they had strong cash flows. Do you, when you look to like what they become now, does it change the way you view them? I mean do you view them as completely different companies than you did before? And I know it's on a case by case basis but I'm just wondering like this has been such a quick change in the types of companies these companies are. I'm wondering like for people inside the tech landscape like you guys, how are you viewing them now relative to how you viewed them before?
- [26:07]
Doug
There's this, it's going to sound like a weird start to my answer, but there's this poet named David White and he's written a handful of books. He's kind of like a modern philosopher I think you could say. And his books aren't really necessarily poetry, they're really explorations about things he's learned about human nature. And one of his ideas that has stuck with me as I've read some of his books is this idea of like the seasons of life. And one of the most important things about humans is do you know what season of life you're in and sort of matching your actions to the season of life. I think the same concept of seasons is true in investing, it's true in companies. I think we just went through this season really for 20, 30 years probably where asset light building on top of the Internet. You just mentioned the fiber providers who created all the infrastructure that the Googles and the Amazons of the world took advantage of to build these for the most part very high margin businesses. I think we're in a different season now where there's a lot more value in the current season to owning the infrastructure because to the extent you can own the infrastructure and Google's kind of proven this out I think to some degree with TPUs, to the degree that you can own the infrastructure and customize it to your particular use case you might be able to lower your cost of delivery in a way that you couldn't do if you were relying on third party infrastructure. And so that to me is the new season. And so yes, it is a different regime than we're used to over the past 20, 30 years. But I think the companies that get that right and figure out how to extract maximal economic value and I feel pretty comfortable that the Mag 7 are experts at that. I think those will be the companies that continue to do well.
- [27:50]
Gene Munster
Are you saying Doug, that there's more value to good old fashioned infrastructure today than there was 15 years ago?
- [27:59]
Doug
I think that's absolutely true, yeah. Because I think the application of cost of intelligence, application and cost of intelligence is not purely commoditized. Whereas you know, bits running through the Internet was largely a commodity.
- [28:14]
Gene Munster
Yep, the networking piece was commoditized. But I mean we kind of saw it this week with the Google Apple announcement. Google Apple traded off a little bit, kind of more or less in line with the nasdaq. But you see Google trading up after being up I think 38% over the last three months. Traded up a percent and a half day one a percent and a half because their cloud business is going to get a boost from providing results to Siri. So that may be I guess exhibit one, your honor.
- [28:50]
Justin
So this next one, and I know you wrote this last year and one statement from one company can completely change this as we were talking about before we recorded. But you had said top private AI companies will stay private through 2026. So how are you thinking about that right now?
- [29:04]
Gene Munster
Well, I mean talking about humility here, I'm pretty sure I'm going to be wrong on that at this point. Me too. I thought it was going to be SpaceX and then we'd see kind of a flood in 2027. But that, that one comment was, was, was from OpenAI that they're looking for a person who has experience with the other mega caps, the other Mag7 to run their investor relations, which probably puts an IPO is somewhere this year, early next year. And Doug, maybe you can talk a little bit about why that in itself changes the whole speed around which other companies want to move.
- [29:45]
Doug
Well, I would say there's that aspect, right. There's value in some cases of being first, particularly if there's comp companies coming out that are very similar doing what you do. I mean Gene and I back in the way back in the day when we were on the sell side. That was something that you would tell potential banking clients to think about. You know, Right. If your biggest competitor is thinking about going out, there's value in getting out before them because you get to tell your story first, you get to talk to investors first. And that's useful. The, the other thing, though, I would say, though, if you think about what's going on, the structure, why are some of these companies staying private for so long and maybe what are we seeing? Because Gene and I do spend a lot of time investing in these later stage private companies. There's been just a massive amount of private capital available to these big AI winners, you know, companies like OpenAI, Databricks, XAI. And I do think, I mean, this is just kind of a gut sense in terms of just what we're feeling from the market. Nothing in particular. But gut sense is I think we are probably getting to some limits for some of these companies in terms of how much appetite there is for private capital to invest in these companies. You know, tens and tens of billions of dollars in many cases have been invested in these companies. And so I think some of these companies are getting close to maybe tapping as much as they can in that part of the market. And the next logical place for them to go, of course, is the public markets.
- [31:13]
Justin
Do you guys ever think tech will fix the ipo? Because I'm just thinking like the IPO is such an inefficient thing. Wall street makes tons of money on it. Like, I know they've tried direct listings and stuff like that, but it would think like the world, I would think the world of tech would eventually figure this out in a way to get these companies public without, you know, paying all those fees to Wall Street.
- [31:28]
Gene Munster
I thought, I thought Google. Was Google going to be a Dutch auction or.
- [31:33]
Doug
Yeah, they did. They did.
- [31:34]
Gene Munster
Dutch auction.
- [31:35]
Doug
Yeah.
- [31:35]
Gene Munster
And then that was going to be the piece that kind of fundamentally ruined the world of investment banking. But then, like, it never happened after that. Right, Doug? That was kind of it.
- [31:46]
Doug
I think there's a couple other companies that use the Dutch auction, but yeah, no, no, big tech companies. Yeah, yeah, it's tough, Jack, because I think there's a concept called the Lindy effect we've talked about a lot at Deep Potter. It's one of our favorite concepts, but just the idea that the longer something sort of persists in the world, the stronger it is and sort of the more antifragile it is in a way. And so even though it feels like the traditional IPO process Is inefficient, broken.
- [32:18]
Gene Munster
Right.
- [32:18]
Doug
Whatever. It still persists and that and just the actions of the world sort of tell you that maybe it's closer to the efficient maximum than maybe it seems.
- [32:30]
Gene Munster
Let me play. I mean you agree the Lindy effect, but there's other. You gotta get. You could have said that like how people booked vacations and did travel was you had your trusted person that you went to and that's just the time tested way to do with it. So there is disruption. I wonder if this like relationship piece, maybe that's saying the same thing as you at the Lindy effect. But when it comes to like the, the nuances of a company going public is that there's probably with one of these large IPOs there's going to be probably 20 investors that really matter in terms of getting it done. And they've got relationships at investment banks. They want to, they have to pay the investment banks for research. There's this dynamic of like it was a Dutch auction and there was no money going on. I remember when you and I worked in research Doug, our department at least how he's told us we lost money. Maybe that was like just a conversation on our bonuses that our department loses money. But the, you know I think that investment banking banks more broadly are dependent on these fees and they're not motivated. It's a small group, 5, 10 investment banks that are faced with this dilemma. And you also have on the buy side like they want to keep those banks to have success because there are resources that those banks do bring them access to companies and non deal roadshows and investment research and things like that. So like the, the tissue around it, it's not just like a tech change of like there's a better, more efficient way to do this. Its relationships and that Lindy effect that I think it makes it difficult to change.
- [34:16]
Justin
So this, this next one gets into something I've been thinking about a lot because I'm walking around with this thing all day. It basically has everything, it knows everything about me. And yet Siri can't figure out how to take that and do something with it. And it seems like that's going to be a killer app when they get that right. So you think your, your thing here was Apple will launch a new well received Siri before April 30, 2026. So what are you thinking with that?
- [34:37]
Gene Munster
Like the probability has been inching up if, if there was going to be, you know they've said first half of 26 which probably that gets us to WWDC, which is June, is probably like the latest. And Mark Gurman who kind of sets the tone in terms of everything Apple from Bloomberg, you know, he's saying he thinks it's March. I'm thinking more around April. They have a shareholder day. There's a birthday for them around that time. There's some other reasons for April, but the big picture is that this recent announcement around Google now powering the new Siri is an opportunity for Apple to have, if they weren't on track to get this out, for them to reset the bar. Yesterday I went and watched an interview with Greg, Josiah Cook Vanarini and Joanna Stern from Wall Street Journal that they did the day after WWDC in 2025. They talked about the expectations about what the new Siri could do. And the simple takeaway is that they set a high bar, that this is something, if they deliver on it, it's something that people are going to want to use. Now currently most people don't want to use Siri. I can tell you. Yesterday, five people at Deepwater went to lunch. There were three of the five and these are all tech nerds. Don't use Siri. And so I just, you know, the really, the bold part of this is that it's well received and I think that that's generally not in consensus. The what is. I just want to define what well received is well received and is. When you use the new Siri, you're going to tell a friend about it and that's an incredibly high bar. If, if they deliver on that, Apple shares are going up and if they don't, the stock's going down. It's pretty straightforward.
- [36:25]
State Farm Advertiser
This episode is brought to you by State Farm. Checking off the boxes on your to do list is a great feeling. And when it comes to checking off coverage, a State Farm agent can help you choose an option that's right for you. Whether you prefer talking in person on the phone or using the award winning app, it's nice knowing you have help finding coverage that best fits your needs. Like a good neighbor stick. State Farm is there.
- [36:51]
Doug
New year, same extra value meals at McDonald's. So now get two snack wraps plus fries and a medium soft drink for just $8 for a limited time only.
- [37:01]
eBay Advertiser
Prices and participation may vary.
- [37:03]
Doug
Prices may be higher in Hawaii, Alaska and California. And for delivery. And what's kind of fun too, Jack, by the way, is as we're recording this today, Google just put out an announcement for a new product that they're launching called Personal Assistant, which is baked into Gemini. It has access to your Gmail and so it's going to be part of Android. So there's sort of. It's. It's really ironic because they just announced this deal with Apple and now they're announcing essentially like their version of probably what Apple will ultimately create. So it's going to be interesting to see what that sort of looks like and what bar they set kind of to Genes Point, because that will be what Apple has to at least meet, I think. If not B. Yeah, I wonder how.
- [37:46]
Justin
Much of an advantage Apple has because they have the phone. Like, I know a lot of people are going to try these personal assistant things, but Apple seems to have data on me that other people aren't going to have. So it seems like if they get this right, they have an opportunity. Everybody's been bashing them for not being good on AI, but it seems like if they get this right, they have an opportunity to make a big leap because of just what they have. They have their device in everybody's hand all the time.
- [38:06]
Gene Munster
The story like below the surface about what's going on on devices is remarkable. And so at one level, Apple has more time. Like I said, the stock's going to go on it. It will go down if Siri disappoints, but it will come back because there's still no AI first device. There's still nothing out there that is going to cause people to switch off of Apple until there is like a formable, until Android really shows that they can do something with your personal context that Apple's falling down on and people switch over, then the franchise, the flywheel, remains intact. So I think that that's one piece that gets lost in this conversation, is this intensity around what the next series is going to look like. The second piece to it is what's going on on devices and wearables. And you mentioned we do public and private. And Doug, I know you spent a ton of time on what's going on on the wearable piece. Maybe you can talk about some of the investments we've made more recently. Safe to say that even though the. Safe to say there's a lot of excitement today around hardware and AI that didn't have. That didn't wasn't there for the last 10, 15 years since the smartphone came out. And so I think that if you look at a company that's well positioned for that, that of course is Apple. And you think about the story behind the story here. And I can't go into anything beyond I'VE talked with people close to Apple on this. Not currently at Apple, but close to Apple that this shift from away from OpenAI was largely a political shift that when Jony I've went over there and that changed how Altman talked about Apple is now OpenAI's biggest competitor. That shift made it really difficult for Apple to, to want to embrace that. And so I think that, you know, what does all this mean below the surface? There's just a shifting competitive dynamic, more Apple vs OpenAI. What's going to happen in devices. And I think there's just a big opportunity over the next decade for just a whole spectrum of devices to get smart around us.
- [40:23]
Justin
So this next one picks up on Apple which is you think Apple will be the top performing Magnificent Seven stock of the first half of 2026. And is that related to what we've been talking about in terms of expect being low and they're going to, they're going to beat those expectations? Is that, is that kind of the way you're thinking about it?
- [40:36]
Gene Munster
Yeah. I mean it's pretty straightforward. It's just multiple expansion. If they show that's what Google. Google's up 40% over the last three months because of Nano Banana and the fact that they have. They did a code red from OpenAI saying that the new Gemini was so competent. It basically was an endorsement. It wasn't as much about the search numbers being good. It's more about investors saying Google gets it and they're going to be successful in AI. That is still an open ended question for Apple. And so if they can show and by the way, the new Siri that is code for does Apple have competence in AI? If they land 9 or 10 out of 10 with a new Siri that should be a multiple expander. Should also have some positive impact on device sales. But that's why. But no. 2 like I, I was clear like this is first half of the year I wanted to make a distinction that there's kind of a surge and then there's probably a little bit of kind of back to reality in the back half of the year with Apple.
- [41:39]
Justin
So your next one was. This is interesting too because it was the best performing mag7 stock this year or last year as well. You think Alphabet will again be the best performing stock of 2026. So what are you seeing with them?
- [41:49]
Gene Munster
Yeah, so this is kind of a fun topic. I'd like Doug to weigh in. I know Doug is leaning more towards Amazon and I guess it's the Gene Munster blog. So I Guess I got to pull this one through. But at the end of the day is if you look at the search numbers for calendar 26, street's looking for I think 11 and a half percent, it's going to be a higher number. We got some research coming out the next day. We've done work on the number, the ad percentage of sponsored ads in AI overviews and now in AI mode. And the simple takeaway is they're ramping that pretty fast and that should have a positive impact on earnings this year. Yeah.
- [42:27]
Doug
And I think for me. So one thing we do, jack at Intelligent Alpha is we use large language models to do all of our stock analysis there, our portfolio management and we also do predictions. And so Amazon was the one that sort of flagged for us. I think that call is probably a little bit more like versus the Apple call first half of the year. I actually think the Google call does probably make a lot of sense in the context of the AI bull market for the full year. But the case for Amazon is super simple. I mean it was the worst performing of the Mag 6 last year. Really, the stock did almost nothing. They've never really had a super strong AI story. I think that their AWS number, which showed acceleration or about 20% growth in Q3, surprised investors. And if they can keep that momentum and they can sign some deals. I know they've been talking about maybe making an investment in OpenAI. They're bringing OpenAI into their infrastructure as well. And if they can keep up that momentum, I think the stock probably works in the first half on that.
- [43:28]
Justin
So the battle's going to be gene versus the AI for the 2026 predictions.
- [43:33]
Gene Munster
I don't like going up against AI, I'll tell you that.
- [43:36]
Justin
We'll see how it plays out.
- [43:38]
Gene Munster
I want to ask you guys too.
- [43:39]
Justin
About cost with these because it's interesting to me if I think about the successful tech companies we've seen in the past decade, like the Apples of the world, like the iPhone didn't win because it was cheap. And it seems like maybe with this AI thing, cost is going to come in more and it seems like Google is probably the low cost provider right now. So I'm just wondering, like, how do you guys think about that? Like as these companies build out and they build the bigger infrastructures and whatever it is they look at, the cost per token continues to fall. Like does being the low cost provider, is it a big thing with these, with these model builders?
- [44:08]
Doug
I think it is a big thing. There's a few ways to think about it, right, From a consumer perspective, I should say from a buyer perspective because there's, there's really two different kinds of buyers. There's a consumer buyer, there's an enterprise buyer. I think for the most part consumer buyers are going to be expecting some sort of a, you know, a flat monthly sort of subscription. That's the way that we've navigated that Every, every player basically at this point does have some form and usually multiple tiers of their subscriptions that give you more access to more advanced models. Right. More token usage essentially. And so being a low cost provider essentially is just what enables your margin and enables how much. You know, your tier at twenty dollars versus a hundred versus two hundred might compete against your, your competitors. The low cost provider though for the enterprise side is a little bit different where you are paying for tokens. Right. And so then it's, it's very much more usage based than dynamic in that case versus kind of the flat rate relative to very different use numbers for the consumer. So I'm giving a very long answer, but I think you have to think about kind of the context of the industry and how people will pay for this product to understand why this cost per token does matter. And that ultimately to me is why it does matter. It's essentially going to be what provides margin and also provides what maybe one product or one tier might be able to offer versus some of their competitors in terms of intelligence.
- [45:41]
Justin
I was also thinking on the consumer side too, if whoever the low cost provider ends up being, does it give an advantage in terms of lowering maybe that monthly price? And one of the things I know people have talked about and I don't know if you guys think they'll ever attempt it, but could someone like Google, who is the strongest company I think of these model companies probably by a good amount right now, like could they attempt a free or really cheap strategy here? I know in like the previous Internet companies they did try things like this. You know, companies lost money at the beginning to get a huge audience and then took advantage of that. Like could Google ever try something like that here where they basically give their best models away for free or for, for a lot less?
- [46:12]
Gene Munster
They're kind of doing it in a way. If you look at the, I don't know what the Wall Street Journal data is, but they did a story in the first week in January that talked about kind of the improvements in Google and talked about just some of the image gen products that they've had and that the number of total Gemini subs So that's free and paid went from 450 million in July to 650 million in October. And so they're kind of, you know, they've, you know, the free products are pretty good and they meter them. So if you keep using them, you have to pay. I still believe that $20 a month for these agents, these bots is, it's like my return on investment is like infinite. And so now I'm in a slightly different world than most people, but I suspect that, I don't know if they, they are in some ways subsidizing it today, but I don't see a big reason for them, a big motivation to come off of that $20 a month number.
- [47:21]
Jack
Before we move off of the AI thing, I want to ask you guys about, I mean, clearly there is a thirst for energy and sources of, of power and I think Meta now has become one of the largest purchasers of, of nuclear power in the country. And I just, I, I want to ask you like, the opportunity there, I mean, I think, and you know, to some extent funding some of these more innovative, you know, different nuclear energy designs for the future. So do you guys have any like, thoughts around what that opportunity could look like? And is there any, is there any, you don't need to name any names, but any, anything that like gets you really excited about, you know, the nuclear energy space and what's to come there?
- [48:10]
Doug
I would say at the highest level, we, we're not experts in nuclear. And so what our sort of belief has been is that nuclear is going to be a huge part of the energy solution going forward. But it's hard for us, not being experts there to sort of pick what's the right one. You know, is it going to be small modular reactors? It's going to be big companies like Vistra who just did this deal with Meta that you're alluding to, you know, Constellation, right. There's big players that are already sort of relevant there. My sense is that if you want to play the energy piece of it, probably taking a basket approach and having varied exposure to several of those different themes is the best way to do it. It is actually a theme at Intelligent Alpha that we have in our, our GPT etf. The infrastructure has been something that AI has liked for a while. Vistra is one of the stocks that it has, it has liked. So that's kind of how I would think about it. Very high level. I do also think though, you know, nuclear, there's, there's the regulatory question that will they Always last longer than you think they will, even under favorable regimes. So I do think that natural gas too, people shouldn't forget about that. And I think that that is going to still be a big part of how data centers get powered for the near term. How?
- [49:24]
Gene Munster
It just seems so weird to me. Natural gas powering AI. I don't know why I think that's so funny.
- [49:30]
Justin
I think they're going to use whatever they get at this point, right? It seems like whatever, if it works, it'll power it.
- [49:34]
Doug
They're going to diesel generators. Yeah.
- [49:36]
Gene Munster
Use whatever we're investing in company Redwood Materials, founded by Tesla founder JB Stroho. They've found ways to reapply batteries. This is kind of on the concept of data centers and energy and it's not a source of a big powerful source of energy, but essentially you can use renewables to help fill some of that gap. And these old car batteries, I mean, it's a brilliant shift from their perspective. And I think you're going to see more these old Toyota Prius and soon to be 2018 model three batteries showing up in the backyard of a data center near you.
- [50:21]
Jack
Interesting. So these last few are around autonomous driving. Tesla, Waymo and Jack, feel free to chime in here. You know, I always hate, I've never ridden in one of these, so me asking questions around them is feel a little bit like. But you know, they're based on your predictions, Gene, so I guess, I guess it's an all fair game. But number eight is Tesla will have a fully autonomous robo taxi operation in five cities. So just I thought with this one maybe, you know, you hear a lot about this. Give us an update as to where sort of Tesla is now on this and where you think they'll be by the end of this year.
- [51:00]
Gene Munster
So they're currently in two cities, they're in Austin and kind of, they say the Bay Area. There's been comments from Elon that has made some people believe that they could be exiting the year at like 12 cities. So that part of the prediction is to suggest that they're not going to hit as many cities as I think people who are the most optimistic on this, that that reality of missing that target isn't, shouldn't be misunderstood as that this is still would be a positive for Tesla in terms of the number of vehicles they have. It's probably in the order of a few hundred right now. And so when you kind of compare that to, you know, a few thousand that Waymo has, it's still relatively Small. So the big picture is that calendar 26 is not a breakout year for autonomy in Tesla, but a nice growth year. And I do believe it's a function of time before they do hit a breakout. I think that this market is going to be won by, by Tesla and, and Waymo. And if you have a different view of that, where other car companies are, are thinking, just ask Ford about how they think about the future. And it seems like a very 1970s type of a future that they're, they're thinking about.
- [52:24]
Justin
When do you think these things are everywhere? Like I live in like Connecticut, so I'm not like in a major city, but do you think it's like 27, 28 where this is going to be somewhere when most of the countries you can get all these things?
- [52:36]
Gene Munster
I think by 28 you're going to see the majority of Tesla users finding some way, you know, they just, Elon just announced that it might have been today or yesterday, that they're not going to sell full self driving as a standalone. It's only going to be the $100 a month subscription and that probably needs to come down to $50 a month. And I suspect that that will happen. But I think, you know that you will see at least autonomy. That's not your question. You're talking about robo taxis being everywhere. Here's kind of a fun, fun little fact. If you assume that the number of autonomous robo taxi miles doubles in calendar 26 over 25, that would imply 1.3% of total ride share miles. That's between Lyft and Uber in the US would be autonomous. And so like this gets a lot of attention, but we're talking, I mean just defines scratching the surface. So by that measure everywhere, we're probably like 2035.
- [53:41]
Jack
This next one is around Tesla still. And it was the thought that Tesla misses its delivery expectations in 2026. But maybe before we get there, I'm just curious, like, I don't know if you remember, like it was a couple of years ago. Rob Arnott from Research Affiliates wrote this piece around Tesla's valuation, kind of making the point that there was, it was almost inconceivable that they would ever be able to kind of grow into that valuation. Now I don't think that argument has been right so far because I think if you go back to the time that article was published, I have to pull it. You know, I think Tesla is up and it might be up a lot, but I'm just wondering in general, like you have the, you know, the, I guess the, the negative case or the bear case on Tesla, which would be maybe the, the R and off valuation. Then you have people like Ron Baron who are like, you know, all in. It's, it's their biggest investment. Plus he owns SpaceX. So I'm just wondering like where are you on Tesla from an investment standpoint? Are you more positive, would you say, or are you more negative?
- [54:46]
Gene Munster
I mean it's like a religious question. Like if you say something positive about Tesla you have to like be drinking the Kool Aid and if you say something negative you're a hater and just want to like that's not what we're trying to accomplish here. Big picture is that, you know, we predicted they're going to miss the delivery numbers and based on the December for calendar 26, based on what happened in the December quarter, down 16% versus what the original expectations were, down 10. They've already missed the numbers. They haven't come down to the level 0 to plus 5% that we think. But that's clearly the EV side is something that it just needs to stabilize to your bigger question, how does this, we'll call it a trillion and a half dollar company ultimately get to be a much bigger company? And I think it's as simple as a belief question. There is a belief question is do you believe physical AI is going to be something that's real? And physical AI generally takes the form of using your camera and your phone, which Tesla's not going to participate in, to autonomous driving and full self driving systems and then robots. And so to those three, they're arguably the leader in and I mean this is like such a simplistic way. I'm embarrassed of, you know, the 20 years that Doug and I have invested and done research on these companies. But at the most basic level I believe that a company that is a leader in physical AI, it should be greater than a trillion and a half dollar market cap. And I'm basing that on how disruptive the $4 trillion market caps are today. So where do I stand? I'm still very optimistic. Still a belief, love or hate them, don't bet against them when it comes to Elon. And I think that's going to yield a higher share price in the future.
- [56:37]
Jack
And the last one, the number 10 kind of shifts from Tesla to Waymo and that prediction is Waymo reaches 1 million weekly paid rides by the end of 2026. So just give us an overview of that business and kind of what that means in terms of size, where it operates and scale for them.
- [56:57]
Gene Munster
So I'm not looking at the notes, but I think that kind of implies around 100% growth as I mentioned, is that 1.3% market share. The vast majority of that 1.1, 1.2% of that is going to be from Waymo. And so just credit Waymo for really going after it the way I described it. If you're going to say this is a basketball game and we're finishing the first quarter and it's Waymo versus Robo Taxi, I think Waymo is up 50 to 2 right now. And but the team Robo Taxi has a very tall, strong player on the sidelines that hasn't entered the game and as a chance to just totally dominate. That of course is their install base, their hardware cost advantage. And so it is a little bit of a head fake to overemphasize the success that Waymo has had relative to Robotaxi. I think what you can conclude is that the rest of the players and even the autonomous companies that are trying to, that are like Zeus, that are making actual progress Pony, for example, like byd. I think the most important part, at least for the US market that this is going to be largely determined by these two companies. I would be very surprised and would love to come back on your pod if I'm wrong that there's some third party that comes in and surprises and becomes a player outside of Waymo and Robo Taxi.
- [58:36]
Justin
I'm wondering do you guys think I have a 6 year old kid right now? Do you think he will drive a car? Do you think he will ever get a car? Like I remember when I turned 16, I got this horrible Volkswagen Rabbit, like a stick ship that had like, didn't have floor mats and like metal on the floor and like it was like a rite of passage for me to like learn to drive the car and everything. And I'm wondering like what he's going to go through. I mean if he's going to be sitting there with a nap when he's 16, like hitting a button and a car is going to come get him and like he's never going to go through any of that. Like how do you think about that?
- [59:03]
Gene Munster
If you've got money and I would say money is defined as the means to afford a $50,000 car. It's unlikely that a six year old is going to drive most parents. Let me rephrase that. All parents want their kids to be, have fun and be healthy and safe. And when you look at the probability of an accident, even with the Systems today, it's 1/7 that of a human. It just doesn't. If you get again, if you have the means, I think any rational parent would be out trading in that Volkswagen and reluctantly paying another $40,000 and, and getting a autonomous vehicle because they'll just tell their kids, keep it in full self driving. Now they may try to take it out of full self driving as soon as they exit the driveway, but I think that there's just no reason. It is one of the, I think one of the saddest commentaries about what's going on in tech versus policy is that 40,000 plus people still lose their lives in the US in car accidents every year. That number's been growing with driver attentiveness declining. And it's something that number should be more like five or six thousand a year. And so I think from when it comes to parents especially and that uncomfortable feeling about a 16 year old, oh my goodness, can't believe how old they are. And on top of that, I can't believe they actually have a license to drive. There's an easy answer to that if you've got the means to pay for a $50,000 car. And I'm wondering too if we're going.
- [60:44]
Justin
To even own the car like in 10 years, like, or is it going to be he's going to have a Tesla app and it's going to be a Tesla owned car. He's going to be hitting buttons for it.
- [60:50]
Gene Munster
Will. I mean there's going to be some of that going on. But what we found, and I've been on the other side of this thinking that the number of cars over time would decline because of car usage, utilization will increase. But it turns out people are pretty particular about their cars, about the message that their car sends. It's a reflection of a personal brand and separately is you got a lot of junk that ends up sitting in your car. And so like taking that stuff in and out is kind of a hassle.
- [61:20]
Jack
All right guys, thank you very much. This is going to be fun to look back 12 months from now. Hopefully you guys will come back and join us again. You're always welcome. And look back at the, the accuracy here.
- [61:31]
Gene Munster
Yeah, I can't wait to see the machine versus the Munster. That's going to be my most fun part of this conversation.
- [61:38]
Justin
That'll be my YouTube title for this video. It'll be Monster vs. Machine.
- [61:42]
Jack
You might get a lot of clicks with that. All right, guys, good stuff.
- [61:46]
Gene Munster
Thanks for having me thank you. Bye Bye.
- [61:49]
Jack
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@xcessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast.
- [62:09]
Gene Munster
Should be construed as investment advice. Securities discussed in the podcast may be.
- [62:14]
Experian Advertiser
Holdings of the firms of the hosts or their clients.