Podcast Summary: The Compound and Friends Episode: Nick and Jessica on Tech Earnings, Mary Meeker’s AI Tour de Force, ARR Models
Release Date: June 10, 2025

Introduction

Downtown Josh Brown kicks off the episode by welcoming listeners to "The Compound and Friends." He introduces the returning guests, Nick and Jessica Rabe from Data Trek Research, highlighting their expertise in earnings analysis and market insights. Josh hints at the episode's focus on S&P 500 valuations, technology earnings, AI advancements, and Annual Recurring Revenue (ARR) models.

S&P 500 Valuations and Market Confidence

[03:52] Nick Kolis delves into S&P 500 valuations using a comprehensive chart that breaks down forward Price-to-Earnings (PE) multiples ranging from 14 to 24. He explains that current market pricing requires high confidence in future earnings to justify elevated multiples.

“Every upside scenario requires you to have maxed out confidence in corporate earnings, even just staying where we are.” – Nick Kolis [06:53]

[07:41] Josh Brown interprets the chart, emphasizing that for the S&P to avoid a 10% decline, investors must believe in PE multiples of 22 or higher, a level not seen since the late 1990s.

“If you want to believe the S&P really has a rip from here, 10, 20%, you've got to believe not only in very strong earnings next year, you’ve also got to believe the market's going to pay almost superhuman kind of multiples for that earnings power.” – Josh Brown [07:43]

Sector-Wide Valuation Premiums

[08:55] Jessica Rabe presents a FactSet chart comparing sector-level PE ratios against their 10-year averages. She highlights that the S&P 500 trades at a 16% premium to its historical average, driven not just by technology but by multiple sectors showing elevated valuations.

“Most S&P 500 sectors are trading 2 to nearly 6 points rich to their 10-year average PE ratio. The only exceptions are Real Estate, Energy, and Healthcare.” – Jessica Rabe [08:55]

[12:26] Nick Kolis agrees, explaining that the market values human ingenuity and innovation, primarily driven by technology and exceptional management, justifying higher multiples.

“The market's saying very strongly that only these companies or companies like them… are what these companies are, that's why the multiples are the way they are.” – Nick Kolis [42:05]

Historical Comparison: 1994 vs. 2025

[19:59] Jessica Rabe draws parallels between the current market environment and 1994, a year marked by aggressive Federal Reserve rate hikes and unpredictable policy changes. She notes that early peaking of the S&P in February usually leads to subdued annual returns, as seen in 1994.

“The lesson from our 1994 playbook is that trade negotiations need to go smoothly in order for US equities to rally from here.” – Jessica Rabe [27:44]

[28:01] Nick Kolis recounts firsthand experiences from 1994, emphasizing how unexpected Fed communications led to market volatility. He contrasts this with the current situation where policy shifts caused by trade tensions have similarly shaken investor confidence.

“The stock market turned and started rallying because the administration quickly changed policy by laying tariffs by 90 days.” – Nick Kolis [28:06]

Technology Sector Valuations and the MAG7

[36:30] Jessica Rabe discusses Mary Meeker’s extensive research on AI and its transformative impact on the technology sector. She emphasizes the rapid user adoption of AI technologies like ChatGPT, which has reached 800 million users within 17 months.

“If you really stop and just think that is breathtaking.” – Josh Brown [78:07]

[37:18] Nick Kolis introduces a critical analysis of the MAG7 (the seven largest tech companies) by illustrating that approximately 68% of their valuations are based on future earnings, significantly higher than the S&P 500 average.

“The market is saying very strongly that only these companies or companies like them… are what these companies are, that's why the multiples are the way they are.” – Nick Kolis [43:10]

AI Investment Trends and Capital Expenditure

[86:00] Michael Batnik shares insights from Mary Meeker’s 340-slide deck, highlighting the explosive growth in AI adoption and the corresponding surge in capital expenditures by major tech firms. He underscores that AI-driven growth is fueling massive investments in cloud infrastructure and data centers.

“AI and cloud data centers represent the next stage of industrialization.” – Michael Batnik [78:05]

[82:51] Michael Batnik points out that CapEx as a percentage of revenue for major cloud providers like AWS has skyrocketed from 4% to nearly 50%, indicating relentless investment in AI capabilities.

“They started at 27% in 2013 and got all the way down to 4% towards the tail end of this build-out in 2018. And look at that ramp. They're now spending 49% of AWS revenue on CapEx.” – Michael Batnik [83:15]

Individual Stock Highlights: Tesla and Apple

Tesla's Volatility: The discussion shifts to Tesla's volatile stock performance influenced by Elon Musk’s public interactions and company strategies. Despite significant short-term fluctuations, investors remain optimistic about Tesla's long-term AI and robotics initiatives.

“Absurd to have as part of the portfolio because you’re betting on the founder’s behavior more than the earnings.” – Josh Brown [55:38]

Apple’s Developments: The conversation covers Apple’s recent Worldwide Developers Conference, where progress on AI was seen as incremental. Despite integrating OpenAI’s ChatGPT for image recognition, analysts expressed disappointment over the lack of groundbreaking AI advancements.

“AI features were more incremental in our view and already available through competitor applications.” – David Vogt, UBS Analyst [66:07]

Annual Recurring Revenue (ARR) Models

[105:25] Josh Brown introduces his theory that the upward drift in market multiples is significantly driven by companies adopting ARR models. He explains that transforming transactional businesses into subscription-based models ensures predictable and reliable cash flows, enhancing investor confidence and justifying higher valuations.

“Converting traditional transaction-based businesses into subscriptions or ARR revenue models has been one of the keys to why the stock market has risen so relentlessly in the last 10 years.” – Josh Brown [105:23]

[107:38] Michael Batnik reinforces this idea, noting that companies with ARR models, such as CrowdStrike and Google Cloud, demonstrate robust and predictable revenue streams, making them attractive to investors.

“AI adjacent job postings have increased by 448% since 2018 versus regular IT.” – Michael Batnik [86:00]

Market Insights and Additional Topics

Starwood Real Estate Income Trust (S-REIT): The podcast touches on issues facing S-REITs, particularly redemption pressures and the challenges of maintaining liquidity in commercial real estate funds. This segment highlights the risks associated with semi-liquid investment vehicles and the impact on investors and financial advisors.

“Investor dissatisfaction and redemption requests have overwhelmed Starwood’s real estate fund.” – Downtown Josh Brown [71:00]

Wealth Growth and Investment Behavior: Michael Batnik shares statistics on the rapid creation of new millionaires in the U.S., attributing much of the growth to stock market performance. He also discusses asset allocation trends among high-net-worth individuals, emphasizing a significant shift towards alternative investments, including cryptocurrencies.

“The US led the world in the growth of its millionaire population, adding 562,000.” – Downtown Josh Brown [96:29]

Individual Stock Recommendations and Analyses: The hosts discuss specific stocks like Disney and McDonald’s, analyzing recent downgrades and performance trends. They caution listeners about the volatility of individual stocks and the importance of focusing on companies with strong ARR models.

Conclusion

Downtown Josh Brown wraps up the episode by encouraging listeners to follow Nick and Jessica’s YouTube channel for more in-depth analyses. He reiterates the importance of understanding market valuations, the impact of AI on technology investments, and the value of ARR models in driving long-term market growth.

“The key to the market right now is finding companies that are converting from transactional businesses to ARR models.” – Josh Brown [112:58]

Notable Quotes

• Nick Kolis: “The market is saying very strongly that only these companies or companies like them… are what these companies are, that's why the multiples are the way they are.” [43:10]
• Jessica Rabe: “Most S&P 500 sectors are trading 2 to nearly 6 points rich to their 10-year average PE ratio.” [08:55]
• Josh Brown: “Converting traditional transaction-based businesses into subscriptions or ARR revenue models has been one of the keys to why the stock market has risen so relentlessly in the last 10 years.” [105:23]

Final Thoughts

This episode provides a comprehensive analysis of current market valuations, the pivotal role of technology and AI in driving growth, and the significance of ARR models in modern business strategies. Nick and Jessica's insights, coupled with Josh's perspectives, offer listeners a nuanced understanding of the factors influencing today's investment landscape.

For more insights and detailed analyses, visit Data Trek Research's YouTube Channel and subscribe to their Morning Briefing newsletter.