00:03:30 · Tracy Alloway, Alex Altmann, Joe Weisenthal
[00:03:30] S0: Yeah. [00:03:31] S1: I'm not going to say we're at kind of this bubbles popped. I know there's commentary out there that actually has said that, but I definitely, if you were to sort of juxtapose those two narratives, we're in the denial phase right now because everyone is still extremely bullish. [00:03:43] S2: Yeah. [00:03:45] S1: You got guys saying like, oh, semiconductors, you got Hynix or whatever, or some of these Korean memory stocks, they're on three times earnings. I'm like, you can look up three times earnings on a Bloomberg terminal. That requires no work at all. [00:03:56] S2: Right. [00:03:57] S1: So everyone is out there. [00:03:58] S0: Thank you for plugging the utility of the Bloomberg terminal, by the way. [00:04:01] S2: What do you mean there are 3X earnings? [00:04:05] S1: There are memory stocks that are. [00:04:07] S2: They're traded with an EPS, not an EPS, a PE of three. Correct. Because people there is. And because the perception is that we're at such a peak and we know how cyclical of an industry it is that when the earnings are this good, you're not going to pay up for them. Exactly. [00:04:26] S1: The old mantra is you don't buy cyclical companies, especially ones as historically cyclical as semiconductors, when they're at peak earnings. [00:04:35] S2: I didn't realize they were that low. Okay. So let's put some pieces together. So we have the fact that the P.E. is actually quite low. People do not expect exponential growth from the memory companies in terms of their EPS anytime soon as implied by the P.E. [00:04:51] S1: Ratios.
00:04:51 · Alex Altmann, Joe Weisenthal, Tracy Alloway
[00:04:51] S1: Ratios. [00:04:51] S2: What is going on with the neoclouds? Why is it that despite, as you say, the consensus is bullish, still everyone wants to be long, the AI trade, suddenly there's all this anxiety about, you know, people are quoting CoreWeave CDS charts. [00:05:06] S0: Sure. [00:05:06] S2: All right. [00:05:07] S1: So let's take a step back for a second, right? Because I want to talk about neoclouds in the context of the broader AI ecosystem. So obviously neoclouds are a group of businesses that are effectively in some way, shape or form mandated to build compute, which they will then sell to predetermined customers, some of which predetermined, some of them will be speculative. Regardless of what you may believe in that business model or not, these are tip of the spear. These businesses don't have operating cash flow today or minimal operating cash flow today in many cases. And so they represent the riskier part of the financing aspect of the AI spectrum. [00:05:48] S0: Right. [00:05:48] S1: And I think that's, that's an irrefutable fact. You know, people can talk about, well, actually they're REITs in disguise and actually they're not, they're nowhere near as risky as people think they are. [00:05:57] S0: Sure.
00:05:57 · Tracy Alloway, Alex Altmann, Joe Weisenthal
[00:05:57] S0: Sure. [00:05:57] S1: Let's have that debate. But compared to say the hyperscalers, whether it's, you know, the Googles and the Amazons who have got huge, I mean, they're cash volcano businesses. They are different, different sort of category. And the reason I want to make that distinction is because if you think of neoclouds as periphery and hyperscalers as core. [00:06:15] S0: Yeah. [00:06:16] S1: And I want you to draw a parallel, not directly, cause I'm not trying to make some sensationalist statement here, but draw a parallel to the GFC. Right. The problem doesn't didn't start with GC banks. [00:06:29] S0: Right. [00:06:29] S1: It started with subprime vehicles, 12, 18, 24 months beforehand. [00:06:34] S0: Right. [00:06:35] S1: And so what's I find most interesting is that there is evidently a financing problem within Neo clouds, right? That is evident Cipher try to, they did their convert. nuked their own share price in doing so because they clearly couldn't tap the debt markets directly. [00:06:50] S2: I don't even know who. Cipher? [00:06:51] S1: It's another neocloud. Exactly. A company that you've never heard of. And yet the reason why CoreWeave bonds sold off was not because of CoreWeave. They didn't say anything that week. It was because Cipher, another neocloud, tried to tap financing. And in doing so, materially hurt their own share price. And then all of a sudden, a bunch of investors, quick off the mark, put two and two together. [00:07:16] S0: Right.
00:07:16 · Tracy Alloway, Alex Altmann, Joe Weisenthal
[00:07:16] S0: Right. [00:07:16] S1: And then it spilled over, but like, quite frankly, if you look at the data center bonds in isolation, whether like the beignets of this. [00:07:22] S2: World, you know, the meta one, exactly. [00:07:25] S0: Yeah. [00:07:25] S1: These had already been widening. For months prior to that. [00:07:29] S0: Right. [00:07:29] S1: And we'd seen a creep in IG hyperscale is one of. [00:07:32] S2: These ones that pivoted from Bitcoin mining to getting into AI. [00:07:36] S0: Yeah. Yeah. All right. [00:07:37] S1: So I guess the point I'm trying to make is, is that there's ripple effects in financing that start in. in the periphery, and we're seeing that. So what I find amazing, back to the original point in terms of you asked what's going on, are people bullish or bearish, and we literally just conducted a survey with a group of investors. [00:07:55] S0: Fantastic. [00:07:56] S1: Yeah. And the only, I mean, you could make this argument, this is a high number, but from the responses that we've got so far, around about 60% of investors, we asked them a question, do you think financing is going to be a problem? AI financing is going to be a problem for the foreseeable future. [00:08:10] S2: Only 60% said yes. [00:08:12] S1: By definition, what's happened over the past couple of weeks means the answer should be 100%, right? And yet, let's just call it just over half think or just under half think there is no financing issue, but there is. So what's happening in AI to me is evidence of like almost a denial of a reality that's already here.
00:08:12 · Alex Altmann, Tracy Alloway, Joe Weisenthal
[00:08:12] S1: By definition, what's happened over the past couple of weeks means the answer should be 100%, right? And yet, let's just call it just over half think or just under half think there is no financing issue, but there is. So what's happening in AI to me is evidence of like almost a denial of a reality that's already here. [00:08:33] S0: To be fair, one of the reasons CoreWeave started selling off was because Brannin McBee gave an interview to the FT where he was talking literally about unlimited amounts of borrowing, which I think ties into what you're discussing when it comes to capital concerns. So on the financing side, I mean, we've seen some differentiation in terms of lending money to different AI entities out there. Is the overarching point that we've been in a period where it seemed like there was in fact unlimited money and people could tap the IG markets or the loan markets for as much as they needed. And now we're moving to a period where things are more selective and not everyone is going to be able to get the type of funding that they were tapping before. [00:09:21] S2: That is exactly it.
00:09:21 · Joe Weisenthal, Alex Altmann
[00:09:21] S2: That is exactly it. [00:09:22] S1: Right. Because, you know, part of the job that my team does is we travel the world. We talk to a lot of different investors and, We ask questions, we collate the kind of feedback that informs our decisions. And there was this almost universal view that, and you guys would have heard it as well, AI was immune to high interest rates. Evidently is not true, right? And so there is a spectrum. And even, I think that's where I think the meta results were pretty instructive in the 14C, in the sense that they highlighted the fact that financing does constrain, financing does have limitations. And we wrote a load of, we did a load of work on this in the summer where we were looking, not specifically at AI, we were just looking at the holistic net issuance profile of the market. And maybe you guys saw this. And we looked at just the entire corporate market, so IG high yield. We looked at treasuries and we looked at, equity. And we went back to about 1995, collated all the data, and looked at each market, the amount of net issuance in any given year as a percentage of each market's market cap in that given year. And then we plotted it over time. And what we found was there was, unsurprisingly, a very strong relationship. When interest rates went down, overall issuance went up, and vice versa, as you'd expect. [00:10:40] S2: The laws of the economy still exist. [00:10:42] S1: Well, apparently not so much in 2025 and 2026. [00:10:45] S2: Yeah, here's the punchline.