00:37:18 · Molly O'Shea
[00:37:18] S1: In our interview with Thomas, he was talking about the bank teller and how that actually evolved. It didn't really actually decrease any jobs. There were just more jobs spread out. That's always a hot topic. So in talking about market dynamics, you have this framework of sellers of shortage versus buyers of shortage. Can you break that down, who's winning and what's kind of the explanation?
00:37:42 · Jaimin Rangwalla
[00:37:42] S0: Yeah, so we try to simplify sellers and buyers of shortage in the concept of you have semiconductor companies, you have power, you have memory infrastructure, everything where you have a fixed amount of capacity and you have greater demand. And that greater demand is driving price increases, margin expansion, and when price is the main lever of your revenue growth and you have fixed costs, your operating profit actually go up multiples of what your price increases or your revenue is growing at. And so we've seen companies that have been able to increase their earnings three, four, five, six, 7x just in a matter of a year or two, companies that would have been plus or minus a certain range for ten, twenty years. And so these shortages, are critical to AI, whether it's memory, hard drives, there's a shortage to kind of the development of AI, have driven significant earnings power. And the market is rewarding that set of earnings. What the market is not rewarding and not rewarding as much is the companies that are buying that shortage. And so that would be the companies that are putting the CapEx into the ground. And so if you look at the multiples of Microsoft, of Amazon, of Meta, they've actually all compressed in the last couple of years because their CapEx is going up. And if you just think about it, if memory pricing goes up 100% and Microsoft has to spend two units instead of one, they're not actually getting two units of benefit. They're still getting the same benefit they would have gotten if they spent the previous price because it's not like the memory is always different. Right now you're just seeing like for like price increase go up so much. And so I think that the market is, for the moment punishing that the ROI on that dollar is a little bit less because it's just cost inflation versus actually new technology driving the higher price.
00:39:23 · Jaimin Rangwalla
And so the stocks that are working and the part of the market that everyone is really excited about, optical, power infrastructure, even labor stocks, because labor is in shortage, you're seeing rates rise in labor, memory, CPUs, GPUs, even TSMC, which is one of our largest holdings, they're taking price too because they just like, we have a finite amount of capacity, and so we have to try to figure out how are we going to make sure that we're generating enough profits and knowing that if we're going to reinvest in more capacity that we're getting the right pricing and the right margins and the right return on investment. So those are the types of companies that are winning. Now, I don't think that I actually think Amazon and Google are an unusual camp, those are the two companies that we really like because they are also a bit of a hybrid in that Google has TPUs that they sell and Amazon has talked about selling Tranium or at least openly discussed like what the value of Tranium is. And so maybe there's room for them as well because they would be buyers of the shortage, but they could also be sellers of the shortage. And you know, Google has been a great stock and they have their own bottle. So there's a lot of other things that they're vertically integrated in, which makes them great. But I think that that's a little bit how we're thinking about the market today. There's the buyers and then there's the sellers. The buyers are being punished because their CapEx is so high that their near term cash flow is gone. And that transfer is happening directly to the pockets of the sellers of the shortage. And so those are the ones that are being rewarded at the moment.
00:40:54 · Molly O'Shea, Jaimin Rangwalla
[00:40:54] S1: Have there been any surprising breakouts? [00:40:58] S0: Yeah, I mean, you know, an area that I think has done really well is optical. Optical for years was viewed as just an area that had constant oversupply, undersupply, oversupply, undersupply. Now I think it's becoming more of a critical part of the infrastructure of the future. And I think that that is the one that probably surprised me the most. We'd been following memory. We'd been following CPUs, GPUs, accelerators, all of these, but optical is the one that I think surprised me the most. [00:41:27] S1: And where are the biggest bottlenecks?
00:41:27 · Molly O'Shea, Jaimin Rangwalla
[00:41:27] S1: And where are the biggest bottlenecks? [00:41:30] S0: So some people would say memory, some people would say power. I think there's so many bottlenecks actually. It's like the big bottleneck is the fact that there's so many bottlenecks. Think it's not any individual bottleneck. It's the fact that you can talk to so many different people across different areas. It's like power generation is a bottleneck, transmission and distribution is a bottleneck, NAND is a bottleneck, DRAM is a bottleneck, optical components are a bottleneck, labor to put all the data centers up is a bottleneck. I mean, I've never seen so many bottlenecks at the same time, and I think that is what makes it so hard because if it's just one vertical slice that's the bottleneck, you can say, okay, well, if they put enough dollars in, they'll be able to solve the bottleneck. But the problem is, even if, let's say, memory solves their bottleneck, that doesn't solve the power bottleneck, that doesn't solve the optical bottleneck, that doesn't solve all these. So I think that the real bottleneck is that there's so many bottlenecks.
00:42:20 · S2
[00:42:20] S2: And so I think that right now, this is one of my favorite charts too, you can see that the market is really rewarding the sellers of the shortage, but it is not rewarding the buyers of the shortage, because the profits are so high that the market is really focused on grabbing those short term profits. And that's fine, but I would say that at one point there will be a power that shifts the other way, and we need to be extremely, extremely aware and well prepared to do that. And we'll speak about what we're trying to do that.