[00:00] Well, Fargo just turned bearish on stocks, which to me is almost a screaming buy signal, and one of the reasons we were really bullish this morning in the Alfa report, we increased our bear bull scale, we had purchase shoutouts on Talenteer and Tesla,
[00:17] but there's a rationale here, and it's almost inversing some of this caution, although they also have a point on hardware.
[00:29] Another thing you mentioned in the Alpha report this morning, that hardware is seeing this receding tide where software and obviously a catalyst-driven event like Tesla can actually really see a bull movement here.
[00:42] Let's analyze what they're saying here because they have a point about hardware and they give a warning and it's useful to listen to it and add some context. So let's get into it. Information processing equipment, so basically same as in hardware,
[00:58] That currently represents about 3% of total economy, which is already above the internet peak cycle. And we have that going up to close to 4%. And that's actually going to be above the railroad investment cycle back in the 1800s.
[01:13] So this is essentially the biggest investment cycle ever, almost. And our concern is that 2027 might be the peak CapEx year. I don't think CapEx is necessarily going to roll over after that.
[01:26] But even if it peaks almost like a dollar amount, I mean, we could potentially see like a little bit of growth in 2028. But if, say, CapEx grows at GDC plus in 2028, I don't think spending necessarily works from here.
[01:42] And I don't think anyone's really positioned for that in the market. So you're turning cautious. There is essentially an argument here by Wells Fargo that, hey, we're hitting peak CapEx
[01:54] because historically we peak out at certain levels of GDP. And I have a chart on exactly this. So this is adding color to what he just said.
[02:06] Take a look at this. Hyperscaler capex is considered late cycle measured at a macro level. This actually comes from Bank of America. Bank of America here is saying that sector capital expenditures
[02:21] as a percentage of U.S. GDP as represented through each cycle's speculative build, well, cycle, phase, they call it. And so on the far left, you can actually see the U.S. railroad spike,
[02:37] where we spiked up to just over about maybe 2.25% of GDP, capex to GDP. Then you had the oil and gas boom of the 70s to 80s. Then you had the telecom boom over here, which didn't quite get as aggressive.
[02:52] Then you had the oil and gas shale boom, the fracking boom. And now you've got the hyperscaler boom. And what they're arguing is that we're kind of getting to this sort of peak level here. Now, what's fascinating is that at the same time as you have folks like Chris Waller saying,
[03:09] hey, we could see a boom and not necessarily see prices go up because of the way supply and demand works as long as supply catches up, As long as they're both growing at the same rate, you don't actually see prices go up.
[03:21] What's crazy is you have estimates from companies like BlogCom that they're expecting a doubling and then another doubling. I have that. This was from our – I'll show a snippet from what was in our course member live stream this morning because we went pretty deep on some good insights.
[03:40] Which, obviously, you could join over at meetkevin.com. Use that coupon before it expires Friday. But look at this. Our demand actually exceeds the outlook that we will double AI revenue to approximately $115 billion.
[03:57] And they then say, for 2028, we expect this growth trajectory to continue. we have line of sight for fiscal 2028 semiconductor revenue growth to again double to $230 billion.
[04:15] So in other words, you have a company that's saying, hey guys, you know, we're about to see AI revenue go up to $50 billion, and that's cool and all, but it's actually going to go up to $115 billion in 2017,
[04:27] and then it's actually going to double again to about $230 in 2028. Now, how sustainable is that? Well, that's probably why the market is assigning some discount to a stock like Broadcom. Broadcom just reported earnings, and there's some nervousness that way.
[04:42] How is this sustainable? Broadcom's trading like a .9 peg ratio right now. Really cheap. They're paying off debt with their cash flows. I wouldn't be surprised if within the next six months, these guys end up being debt-free
[04:58] because they're just printing money with their 55% net margin. Well, the last quarter was a little bit lower. And some of those margins could end up getting hit by the more they sell XPUs to companies like Anthropic, Google, and Meta,
[05:11] the more their margins do get hit a little bit because margins are so great. The problem is you're just in cycles right now. Right now, there's a lot of bearishness going on around hardware. And that's what we're arguing in the alpha,
[05:24] is that hardware, while it's tempting to buy the dip, it's too soon. Instead, we literally said this this morning, instead of buying the dip on hardware, buy the dip on Palantir because it's sold down to our support level.
[05:38] And if you look at Palantir, for example, this is why I think a lot of people love being a part of the Alpha membership and getting their Alpha report every day. But if you actually jump over to Palantir, and this is what we based the Alpha on this morning, I like look folks we literally came within a buck and 40 cents of a 164 support line That is a bullish setup for today especially when you have a short squeeze going on on Snowflake
[06:03] Okay, we said that and made that call before the market opened. And literally, look at this. It's been the elevator up, like, all day long. Which is great. Obviously, I hope we can continue calls like that because they're really good.
[06:15] In addition to the call we made on Tesla. Freaking Tesla right now is up 6%. And we were bullish on it. We had a price target for two weeks on this, and this trajectory might end up exceeding it. But the point here is, you've got this bearish narrative happening by the suits,
[06:30] and it's happening at the same time as the market is being, sort of like, receding its enthusiasm on hardware. But I actually think that's just momentum. You know, you've got this, like, wave of momentum where, or I kind of like to use the sheep example.
[06:46] And the more you kind of think of the sheep example, sometimes the more it makes sense. And we'll go back to looking at the rest of that interview here. But think about the sheep example like this. So hardware, before the sucketing, all the sheeples are in hardware.
[07:02] And I'm like, guys, software's next. Q3, Q4, software bottom, baby, let's go. We're just going to have it publicly here. It's not a secret. it. I think you get a lot more context in the alpha membership, but we did say that
[07:15] publicly as well. And so now, all the sheeples are running over here. And so you've got this extreme bearishness over here. If possible, we actually have to get through a couple other sectors. But if these Broadcom growth numbers are accurate, we're probably going to see
[07:33] a hardware 2.0. We just don't know yet when that's going to be. My guess is probably after the nonprofit IPO and once we get some more profitability. But hardware is not fundamentally selling off right now. It is technically and momentum-based selling off
[07:48] because the sheeples are running over the software. It's fine. You just want to try to be ahead of the sheeples. The thing is, not all the sheeples are at software yet. It's actually still time. And I think that's why you keep seeing this red in hardware.
[08:01] Okay, going back to the Bloomberg interview, I think that was useful extra context that they didn't provide here. Let's keep listening. To do with the Federal Reserve, or is this just your math, the size of the economy versus the size of the amount of money they're looking to raise?
[08:15] Yeah, I mean, it's both. It's the size of the economy, but also everyone's trying to raise capital, right? Whether it's the private side or the public, but the government is hungry for capital as well.
[08:27] So I think everyone's really fighting for capital right now, and that's why we're seeing yields going higher. It's really because of the suckening. That's what he just said. He said everybody wants to suck.
[08:39] And that's fine. That's not necessarily a bad thing. What you have to take away from that is the initial reaction when you hear somebody say, everybody's trying to raise capital, is that they need money.
[08:52] Well, of course they need money, but they're investing in things that they see as good investments. It's profitable, right? But initially it sounds jaded, like, oh, are they going bankrupt? Are they, like, struggling? No, they're raising out of strength.
[09:06] which is great. Yes, it's circular in nature, but when you suck, there's less money for the public stock market. So, like, as an example, okay,
[09:18] if we're like, hey, you know, we've got really exciting projections for what we could do with our sales at my startup, reinvest, come invest, you know, in us or whatever.
[09:30] Let's just say, okay, we're not raising money right now. I'm just making an example. And then somebody's like, Kevin, I love this vision. I believe in this. I believe in the backing of the real estate. I believe in the software you guys are building. This is really exciting.
[09:42] You guys are trading for real estate valuations, and you're like a secret software company. I'm going to buy. Somebody takes, let's say, $100,000 and invests it. That's $100,000 that's not going into NVIDIA stock, potentially,
[09:57] or into Broadcom stock, right? Like, the money, if it moves to where the sucking is happening, then it's not in the public equity market. That's the takeaway there.
[10:09] And again, I want to be clear, dear SEC, your regulators, we're not raising money right now. This is not a pitch. It's an example for education purposes only. Because deficits as well as... Not forward guidance.
[10:22] Not a projection. Obviously. But in this environment, and the capital cost is only going higher for hyperscalers as well. Yes. That is a risk. That is a fair risk.
[10:34] That is a funding risk that, yes, it is more expensive to raise money today than it has been. Now, there are companies that can pay those higher prices.
[10:46] But at some point, you hit this wall where it's like, man, raise this high. There's a limit to how much debt we can raise off those prices, right? That makes sense. The difficulty is justified further investment beyond 2027.
[11:00] Right. The further you go at more expensive rates, the more you really have to have this insane bull case to argue we should raise even more. The ability for semiconductors to fall out of bed, to essentially see the valuations decline significantly, maybe see some of the hypercellar valuations come down even further, but have the rest of the market not fall out of bed, do okay, actually outperform?
[11:27] Yeah, so I think the S&P at the index level is going to be okay. And I do think we're a little early on this call. But I don't think we're too early by like a year. I think we
[11:39] might be a little too early by like a month or two. And if you look into 20- By a month or two So they basically saying hardware is about to dump in the next 60 days basically before midterms So it like he basically saying avoid this sector before midterms
[11:58] Crash incoming. I think the view is going to be, is this really the peak ethics year? And what about 2028? And looking at how San Diego is trading these days, especially after earnings, posting good numbers,
[12:11] saying you're not trading on 2027 and EPS revision anymore. It's really about the sustainability of this traffic cycle and increasingly about 2028.
[12:23] And you don't really feel good about 2028. If you're saying it's unsustainable, I'm really stuck with the thing how the index held up. When you're saying so much of this... Correct. Correct. Remember, there is a problem with the S&P
[12:36] in terms of how much of the S&P is exposed to this whole AI trade. It's like, I think it's like 38% or something ridiculous. It's a really high percentage of the S&P 500. You should look it up.
[12:48] Or, you know, we'll just Google it real quick. Exposure, S&P 500 exposure to AI and tech. Let's just see. And then, I mean, if you include the financials that are benefiting as well, it's crazy.
[13:01] The top 10 companies make up 40% of the index. So that's Amazon, Alphabet, Meta, right? So there's that 37% to 40%. If you then include financials, you're over 50%.
[13:15] Why do you include financials? Well, because remember all the suckening that's happening? Those are commissions for Morgan Stanley and Deutsche Bank, baby. Come on, man.
[13:29] The right through the stock market. I've had so many people come on the program this year and say the whole thing feels like one trade. Where's the support coming from? Yeah, so, I mean, think about it this way. So if you look at the S&P at the index level, you wouldn't know what happened in July when
[13:46] savings were down 20%. So there's this offsetting factor, you know, software outperforms, hyperscalers outperforms. But financials again, so it's not going to be on trade too. Yeah, so I think savings are going to get hit first from what we were talking about.
[14:01] I don't think the index at the S&P, at the index level, will pick it up until later in 2027. so I think so he actually gets bearish S&P 500 later
[14:13] 2027 now in fairness I personally have made the argument that we are more likely I've got too much going on here I've made the argument that the end of 2026
[14:26] especially post midterms sees the highest increase in stock prices and that things in 2027 actually get a little bit harder so I do think we have more resistance, if you will,
[14:40] in 27. Now, I'm not calling for a sell-off like this, but I do think it gets harder in 27. You know, I think it makes a lot of sense to reduce beta from here and start owning quality. I think software still looks
[14:54] interesting, but I don't think a lot of cash flow generating businesses... Wait, wait, wait, wait, wait, wait, wait, wait. We need to, like, play that back, baby. Did he just say software looks interesting? I think he did.
[15:07] So he said reduce bingo. So bingo is basically, you know, what is your movement when the S&P 500 goes up 1%? How much is your stock moving? So as an example, if Tesla has a beta of 2, the S&P 500 is up 1%, Tesla would be expected to be up 2%, just as an example.
[15:29] So I can actually pull up the historical beta right now for Tesla. So this is going to be relative to the S&P 500. It has a raw beta of about 1.8 and an adjusted beta of about 1.5.
[15:41] Adjusted is attempting to look forward. So basically, beta has actually fallen. So it's trading a little bit more in line with the S&P 500. You could also change that beta.
[15:53] You could change it to, let's just say, the NASDAQ. So if I change it relative to the NASDAQ, I would guess it should be closer to 1. Yes, the adjusted beta is about 1.37. So beta is an interesting measure.
[16:05] So when you hear beta, you think, first of all, second to the alpha report. And then think relative movement to an underlying index.
[16:18] Generally to the S&P 500. But it could be to the Dow, it could be to the Q's, it could be beta to anything, technically. You could do it to another stock, to NVIDIA. Anyway, that just... The point, though, is he's basically saying reduce risk outside of the index.
[16:36] And one way you could do that is with mega cash flow generating businesses. One of the reasons we bought Salesforce at $163 was because at the time they had like literally a 13% free cash flow yield,
[16:52] which is insane to think about that they could make that much money in free cash flow. Let's go look really quick. So if I just go to our stock tab for course members.
[17:04] So if I go to Salesforce, this is in the Meet Kevin app. The momentum's been crazy. I've still got this at a $4.58. I think it could potentially get up to $500 on upside.
[17:16] But let me see here. If I go into my cash flow notes for this company, it really goes back to July. It's got to find it. But it was somewhere around a 13% free cash flow yield, which was really remarkable.
[17:34] And I even wrote that they don't do buybacks yet, but their balance sheet and cash flow is so strong that I made this case in our course number calls that they probably going to see a surge of buybacks coming We just don know when yet Looking at some more of my notes here
[17:54] sale four, sale four, as we talked about them borrowing $27 billion to buy $25 billion of their stock, which is crazy. You can actually see that right here. And here's their cash flow.
[18:07] So I literally had them, this is a note in our course member sheets here. Look at what I wrote. This was written July 1st, okay?
[18:19] Look at this right here. I write, the Mark Benioff, and this is sort of my paraphrase of him, the Mark Benioff, quote, I'm going to borrow to buy my stocks dip.
[18:31] Could be the biggest big ball move ever or he's a full tard. and I wrote, I lean towards big balls. Honestly, the guy has like an average purchase price right now of $191.
[18:44] We got in at like $165. We're like, this is ridiculous. And, you know, now it's trading for like $265. So the guy's way up on the dip buy of his own stock and the cash flow is insane.
[18:59] Now, don't annualize the cash flow. That's actually a mistake. I did make a note. you do not annualize the cash flow for Salesforce because they have lumpy cash flow. But their cash flow is expected to be somewhere around $15 billion.
[19:12] So if you take $15 billion for fiscal year cash flow and you look at Salesforce, that's now trading for, or yeah, here at 264, it's a $217 billion company.
[19:24] Their free cash flow yield right now is about 6.9%. That's a great number. But if you go back to where they were when they were trading for $165, divided by 265, they were trading 38% lower.
[19:38] So 217, yeah, 217 times .62, it's about a $134 billion valuation. 15 divided by 134, well, on this calculation,
[19:52] I've got them at about an 11% free cash flow yield, is where they used to sit. And they're still at 6.9%. Now, even though, like, I'm bullish Palantir, I just want to be clear, Palantir's free cash flow yield is like 1%.
[20:04] Broadcom is like 3%. 6.9% at Salesforce. That's insane. And then you look at a CrowdStrike, which I'm bullish on as well, but the valuation is really high.
[20:16] You have to have really like sky-high growth estimates for this to make sense. You know, their cash flow yield is like 0.9%. So I think there's a point in what this Wells Fargo guy is saying. is like, yeah, you know, people might like having some of that safety
[20:31] of strong free cash flow yields. So I completely agree. Let's keep listening. And we're in with the industrialists. And we do like maintaining some of our effects exposure.
[20:43] Somebody in the chat is like, he's a court member. Maybe. For more through sectors that are correlated with semis, for real lower beta, such as capital groups. So think about power, things like that. And hardware.
[20:56] So those are some of the areas that we lean more into. What magnitude of declines are you talking about in the semi-space? I think we could see another 10% decline. I mean, if you're right and we actually...
[21:09] Another 10% isn't actually that bearish, but he's essentially saying the Philadelphia Semiconductor Index, as an example, could go down another 10%. I mean, yeah, if the Philly Semi goes down 10%, that probably works out to like 20% for like an AMD or Broadcom or whatever.
[21:26] right? So on an index level, 10%, 10% on itself doesn't sound like a lot, but he doesn't mean each individual stock. He means that more than the index level, I believe. The 2020 cap that's potentially being at risk, I don't think anyone's really predictable
[21:42] about it. Frank Lee's coming up with HSCC. I think Frank's going to have some thoughts. That's roughly the end here. They kind of start talking about another analyst. So he that 2028 is the risk.
[21:55] So remember what we saw from Broadcom. And I want you to remember who Broadcom is selling to. Broadcom is selling to Google and Meta and
[22:07] Antelope. We know that Google and Meta make lots of money. Big pee-pee. Big pee-pee. Like, hallelujah money. The anthropic question, I think, is what's creating a lot of fear for people.
[22:26] It's like, all right, man, you know, but what if anthropic can't afford to keep buying these chips? And that's a very fair question, which actually makes the anthropic IPO vital for the future of CapEx spend.
[22:41] And so Broadcom, with their projections of a doubling and then a doubling, could actually, honestly, keep growing. should we, what's it called,
[22:53] should we see Anthropic do well and maintain a profit and kind of become almost like a software play. We'll see. That's where there'll be some nervousness until we actually get that S1. But that gives a lot of color to what's happening in markets now.
[23:09] So, with that, make sure to join us over at Meet Kevin. Get that coupon code at meetkevin.com before that extension expires tomorrow at 11.59 p.m. That's it.
[23:21] No other extensions. I'm reading about advertising. These things that you told us here, I feel like nobody else knows about this. We'll try a little advertising and see how it goes. Congratulations, man. You have done so much. People love you. People looked up to you. Care good pass left there.
[23:33] Bye. Nice to run this. And you too, bud. Meet Kevin. Always great to get your take.