Gutmann Equities Brief

AI continues to dominate headlines in the stock market. However, the euphoria of recent quarters has given way to a more critical perspective. What has changed?

Each quarter, the market eagerly awaits the earnings reports from the four so-called hyperscalers: Amazon, Google, Meta, and Microsoft. As the largest operators of data centers, their investment plans currently have a significant impact on market sentiment like few other topics.
If their investments increase, it signals a strong order backlog for the beneficiaries of the data center boom: from chip manufacturers to semiconductor equipment producers and construction companies.

The hyperscalers did not disappoint. They are sticking to their high levels of investment in AI-powered data centers and are even increasing them in some cases.
The second important indicator of sentiment regarding technology stocks is Nvidia, the largest beneficiary of the hyperscalers' investment spending. Nvidia once again projected revenue growth in its quarterly report that significantly exceeded market expectations.
The market responded to this announcement with a rise in share price. Nevertheless, the euphoria of recent quarters has been replaced by greater caution.

Why?

First: Growth rates in the chip industry will eventually have to slow down. Simply put, because the base for growth is already very large, and trees cannot grow indefinitely towards the sky.
Second: The hyperscalers, which account for approximately half of Nvidia's data center revenue, are increasingly unable to fully finance their investments from their operating cash flow. They must issue bonds and find other financing structures. For example, Nvidia often steps in to provide financial backing. These sometimes circular financing structures and the rising cost of financing are making investors more cautious.
And third: The market is waiting for the IPOs of the most important players in the AI boom: Anthropic and OpenAI. They are the main customers of the hyperscalers and drive demand for computing power. While figures occasionally leak to the public, reliable statements about profitability and growth will only be possible with the stock prospectuses.

Realism is also returning to the software industry. The software companies that have been heavily written down recently surprised positively in the summer.
The latest quarterly results have also shown that companies like SAP, Salesforce, or Atlassian are continuing to grow and that the existential threat from AI has not yet materialized. Fears of a rapid AI-driven disruption have therefore diminished, leading to a significant recovery in software stock prices.

What does this mean for our portfolio?

The challenge remains to ensure a balanced positioning for our portfolio. On the one hand, the AI boom continues and offers opportunities that we can take advantage of. On the other hand, we are finding attractive opportunities in companies and industries that were previously overlooked during the AI hype, such as the software sector mentioned earlier.