TTD - Does AI Translate To Risk-On Markets? With Andres Cardinal (The Data Driven Investor)
2023-05-18 10:00:00 ET
Summary
- Andres Cardinal, Founder of The Data Driven Investor, is the guest of this episode.
- Andres has been providing research on companies that are using AI the right way.
- We are bringing some of those names to you in this episode.
We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify .
This episode was recorded on May 17, 2023.
We're joined by Andres Cardinal, Founder of The Data Driven Investor. He has been providing research on companies he says are using AI the right way, and now we're bringing some of those names to you.
Relevant Links:
Timecodes:
(00:24) - Andres explains why he is liking risk-on stocks
(05:45) - Which risk-on stocks Andres finds favorable
(07:35) - Deeper take on AMD as an AI chip winner
(09:57) - Worries about Government Regulation around AI
(11:34) - Is it better to invest in the companies using the tools or the hardware companies
(13:13) - How is The Trade Desk using AI
(14:27) - Should companies that use AI be able to command higher price multiples
(15:59) - What are red flags that investors should be aware of in regard to AI
(17:30) - Where is Apple?
Transcript
Daniel Snyder: Hey, I'm Daniel Snyder. In this episode, we're joined by Andres Cardinal, founder of The Data Driven Investor. He has been providing research on the companies he says are using AI in the right way. And now we're bringing some of those names to you in this episode. But before we dive in, did you know the link to the investing groups of our guests can be found in the description of this podcast? Give it a click and check it out. Now, let's get to the interview.
Alright. This is exciting. Let's dive right in. We have to talk to you about the risk-on environment. What is going on in the macroeconomic world? You have positions I imagine in risk-on companies and stocks. What are you seeing?
Andres Cardinal: Well, I think, at this stage, the market is mostly gravitating towards large cap tech. But also I'm starting to see some rotation into mid-sized software companies. Semiconductors are strong, even biotech. So I started to see some under the surface rotation towards high-growth, high-risk investments, which doesn't really make sense when you look at most of the macroeconomic variables, when you look at for example the debt ceiling negotiations.
When you keep in mind that interest rates are still very high, the banking crisis, but the trick to all of this is that the market is a forward-looking mechanism, like everybody's pricing the market based on what they expect to happen in the future, not what is happening right now. So, if you look at the historical data, the market tends to bottom before the economy bottoms. So I think this is still probably, you know, the economy is going to start getting better maybe later this year or maybe early next year.
And if you wait until the economic recovery to be the headlines it's probably too late because prices are going to be much higher. The trick in the stock market is anticipating the anticipations of others, like I said. So you need to really try to look at the signs. And I think that we're seeing some encouraging signs in terms of risk appetite for investors. Not to the highest risk stocks, but large cap and mid cap's growth stocks, they tend to perform much better.
Daniel Snyder: Alright. So just to make sure that we're talking about, you see a risk-on environment coming down the pipeline. So, I can't help but wonder, does that put you in a interest rate cut group going forward or what's the catalyst here moving us back into the risk-on environment?
Andres Cardinal: Well, I think that first and foremost, probably interest rates have already dropped. I don't think that the Fed is going to cut interest rates in the short-term, but they will probably stop hiking. And the most important thing for the market is how trends are evolving. So, we come from the most aggressive tightening campaign in 20 years. And now we have more visibility.
Rates are probably not going to go much higher, and I think that the Fed is going to be cutting the rates maybe later this year, or maybe early next year. But we are ready on the other side of the economic cycle when it comes to interest rates. So, I don't think it's going to happen in the short-term, but the market will start anticipating these probably several months before it happens. So, I wouldn't be surprised if you have already seen the bottom of the stock market because the economy has clearly not bottomed.
I think that the economy is going to get worse. But the market is going to be looking into the future. And when I think about, for example, the probable scenario at the end of 2023, at the end of this year, the market is going to reprice these stocks based on expectations for 2024, 2025, 2026. And there's a big chance that expectations, at that time, are going to be much better than they are now simply because we're in a very bad situation right now.
Daniel Snyder: In a previous episode here on the podcast, we talked to Eric Basmajian. He was recommending to a ton of people to stay defensive, and that includes the large mega cap tech stocks that we're all referring to. And then we also had conversation about the breadth of the market and the breadth not really being there right now. If we flip over to a risk-on environment, I mean, do you have any sort of price target or multiple that you're looking for for the overall market when the flows kind of change?
Andres Cardinal: I don't think I can have a multiple on the stock market, but I think that it's going to be an environment that's going to be favorable for growth stocks, because we have seen a massive rotation in the past several years. During the pandemic, the only thing that worked was growth stocks, software, tech, ecommerce and so forth.
Then we had a massive rotation out of those sectors because suddenly the energy stocks were booming, the banks were booming, all the companies have benefited from a strong economy and from the reopening, and now we're going back to an environment that was similar probably to the pre-pandemic period, slow economic growth, inflation is going to remain high, but declining, interest rates are going to be high, but declining.
So we're going to be in an environment that's very favorable to tech and growth again in my opinion, mostly because the market is going to be buying the companies that can grow revenue and profit in any kind of economic environment. They don't need a strong market to grow. And it's important to keep in mind that tech and growth already had a recession. You have seen all the big tech companies and even the small tech companies cutting jobs because they hired too much during the pandemic.
So, they're going to enjoy lower revenue and a more efficient cost and we're going to have AI playing a big role in cost optimization for the sector. So, I'm looking forward to seeing strong revenue - funding profit margins for technology stocks in the years ahead.
Daniel Snyder: Now, I do want to get your thoughts and opinions on AI and what you're seeing there in a moment. But first, let's stay with risk-on. Within these risk-on companies, these high growth companies, what kind of names come to mind to you that you're seeing as a favorable opportunity right now?
Andres Cardinal: Well,I think in the mega cap group, I think that Amazon ( AMZN ) and Alphabet ( GOOG , GOOGL ) are both still very reasonably priced. They have a lot of room to continue improving. In terms of cost efficiencies and accelerating revenue growth, Alphabet's now launching its Bard AI applications, and the market is starting to realize that the company has a very strong position because Alphabet has been investing in AI for a long time.
They have been talking about AI forever. It's not like they are just making the leap. And they have massive, massive amounts of data, they own YouTube, they own Google Maps, they own search, they own a lot of applications that give them massive, massive amounts of data, so they are in a very strong strategic position, and they have their financial resources to compete in that area.
So I think among mega caps, Amazon and Alphabet are my two favorites. I think in the semi sector, AMD is a great company, very well managed. It's going to make big bets in AI in the years ahead. And so probably in 2024, 2025 we want to see results in that area. And I think many pure software companies, like Datadog ( DDOG ), CrowdStrike ( CRWD ), The Trade Desk ( TTD ), all these companies, I kind of -- for example, CrowdStrike is an AI company in security and The Trade Desk is an AI company in advertising.
So there's a lot of potential for companies that you probably, we don't see them as pure plays, but they are actually making big cash flows, and they're investing aggressively in AI, and they're going to benefit substantially from those trends in the days ahead.
Daniel Snyder: So you mentioned a lot of names right there. Amazon, Google, AMD, CrowdStrike, Trade Desk. Let's go with AMD. Let's talk about AMD real quick because I think when a lot of people think about AI, they've been thinking about NVIDIA ( NVDA ) and the CUDA cores and the GPUs and those being the chips that are kind of running these large language models right now. What is the opportunity for AMD here? What do you see happening?
Andres Cardinal: Well, first of all there is a big difference. I think that NVIDIA is the king. It's an excellent company. But it's kind of expensive. I own shares of NVIDIA. I have not sold. But I am not buying anytime soon because I think that the valuation is kind of too aggressive. On the other hand, AMD is an excellent business, very well run, and they are betting on all the right trends. And I think that the market is still not pricing the complete opportunity for AMD in artificial intelligence over the coming years.
So, you're getting AMD for a very reasonable valuation, a company that's -- they are suffering from the network fluctuations in the - looking at the most recent earnings reports that the worst is probably over in terms of gaming demand and network applications. So, we're going to have a very reasonably priced company with strong cash flows, with strong potential, and plenty of optionality in AI. So you're kind of making a cheap bet on a semiconductor company with potential in artificial intelligence.
Daniel Snyder: For AMD, do you know of any products that are maybe their next catalyst coming within the next year or two? Is that the kind of research that you've been doing?
Andres Cardinal: Oh, yeah. They are making big bets on GPUs for - specifically targeted to AI for 2024. If you look at the most recent press conference, they're going to start shipping these products later this year, and they expect to see some revenue contributions in 2024. So it's far too early to know if they're going to have a real impact, because you have to see how the market takes them and so forth. But AMD has a very strong track record of execution.
So at least, I would give them a chance, and I think you know, the optionality has to be considered. I wouldn't consider them already winners. They have to prove that they can deliver. But I think that they have a strong track record, so for the very least, I think you have to watch them and keep that in mind as a possibility.
Daniel Snyder: Now, this week the leader of OpenAI has been in Washington talking about what kind of regulation might be needed for AI. Do you have any worries about the government stepping in and kind of hindering this innovation that's happening?
Andres Cardinal: Well, I think, that's a double-edged sword because on one hand it's going to be important to -- for the big players in AI to keep the safety in mind and to keep the necessary reg works. But at the same time, you cannot afford -- the US cannot afford to go too much behind China, and China's going to be very aggressive in AI. So, I think that the work -- the way this is going to work is like the big companies, the one that's have already proven that they know how to deal with this, for example, Palantir ( in defense.
They're going to be playing a major role because there's going to be regulation, but that regulation is not going to be too tight in order to avoid innovation and to avoid growth because the alternative would be much worse, you know, unregulated AI for the US could be a problem, but losing the competition versus China would be even worse. So, I think that at the end of the day, there's going to be a lot of talk about regulations.
There's going to be a lot of concern and going to have backs and forth. But the degree of regulation on the industry is not going to be too heavy, and I think that most of the big players, the ones that are already in the industry and already making inroads, are going to benefit from these substantially.
Daniel Snyder: Andre, let me ask you this. Do you believe that it is better for an investor that's looking into starting and investing in AI, is it better to invest in companies trying to use the tools or to invest in the companies that are the hardware and the background and what is fueling the shovels and the picks for everybody else.
Andres Cardinal: That's a very interesting question. I think it depends very much on each specific company. For example, NVIDIA is kind of -- it's clearly a great beneficiary from AI, but it's too expensive, so I would say, would you buy NVIDIA aggressively right now? No, because of the valuation. Now, would you buy companies like Datadog, or CrowdStrike, or The Trade Desk, which are using the tools, making money from artificial intelligence?
Yes, I would, because I think that those companies have never been cheap. They are always priced at a premium versus the market. But I think that the valuation is still very justified based on the future cash flow generation, so I think that there are good opportunities there. And even I would say, if you want to make some riskier bets, you can consider companies like Palantir, companies like UiPath, which are kind of, you know, much riskier, and they are not for everyone, but they have like a pure exposure to AI, and they are small.
So if they win, they are going to win very big. In those kind of companies, you need to keep your position size moderate because the risk is so, so much higher, but I think that the upside potential can justify the risk.
Daniel Snyder: How is a company like The Trade Desk actually using AI?
Andres Cardinal: The Trade Desk is basically programmatic advertising. So, in real time, multiple companies can compare advertising products, and return on investment and so forth. So, basically, The Trade Desk has since forever used AI to maximize who is advertising where and what kind of returns they are getting to get the best price and to get the higher return on investment. Even you know ecommerce companies such as Amazon is making a profits in AI and advertising, so is MercadoLibre ( MELI ) in Latin America.
So I think that the potential, you know, data driven advertising is like a big thing because you want to measure the return of your investment. So in advertising, I see a lot of companies that are going to make, you know, big inroads into the industry, also because programmatic advertising is going to take cash away. It's going to steal mega share away from traditional advertising. You know, connected TV is going to take money away from traditional TV, and from other, you know, traditional advertising methods.
And it's going to work much better. It's going to be more profitable, so I think that the opportunities for AI in the advertising industry is huge.
Daniel Snyder: So let me ask you this. Should companies that are going down this path of utilizing AI, should they be able to command higher PE multiples for the stock at this time because I feel like investors don't really know how to value what is possible with this technology?
Andres Cardinal: I think just like AI is like a massive opportunity, very powerful technology, there's also a lot of smoke, lot of sudden, lot of experts in AI, and there's lot of better avoid that and the sector, and it's risky to overpay. So I would think that the best thing to do is just to focus on the companies that make real earnings and real cash flows, and value them based on how much you think that those cash flows are going to grow. And you don't just value the AI alone.
You say, oh, how well is this company going to grow cash flows? And you keep in mind that AI is going to allow them to expand margins to being profitable, and to innovate and to provide value to customers, but you're only paying for AI companies to the degree in which you see that these AI technologies have been translated into cash flows. Because if not, it's going to be very dangerous to just value things because they are popular in AI, and they're trying to say management is pumping their AI opportunities, and you want to really make a difference, words don't make cash flows, you have to look at the cash flows.
Daniel Snyder: Now, you've done a lot of research on these companies over in your investing group Data Driven Investor. Just kind of curious, do you have anything that investors should know about that could be, like, red flags. Is there anything that makes you cautious that you can share with investors that they should also be looking out for?
Andres Cardinal: Yeah, I think, you know, for the most part, you know, all companies are mentioning AI all the time in their press conferences right now. And I don't like it when they talk too much about how much money they're going to make, and they don't show you how they are actually using the AI in their products like what kind of material improvements they are seeing in the products or in the -- or for example reducing expenses. How is it tangible?
I don't want to see like big statements on AI. I want to see actual products, actual deliverance, actual improvements on the business model, and you can touch, and you can see in the company, as opposed to big statements, because everybody's making statements, and all CEOs these days they want to be -- to be seen as big AI plays, but it's going to be very important to pay attention to the ones who are actually using those technologies and making improvements for the company and for the company's clients with this technology.
Daniel Snyder: So a lot of people have been asking me, and I'm going to turn around and ask you, we're talking about all these big tech companies that are innovating with AI, yet Apple ( AAPL ) has actually been pretty silent in this matter. We know there's little bit within the Apple Watch, for instance, that there's AI, but there hasn't been anything really over the top big groundbreaking kind of features. Are you expecting something to come from Apple or you think they're caught offsides?
Andres Cardinal: I'm sure they're not caught offside, and I'm sure that Apple is working on this. And I'm looking forward to see what Apple can bring to the table because it seems to me that they are letting other companies run with it, I know what they can do, what they cannot do, and they're probably working on something - some big improvements, maybe health care, maybe not is ready to the user.
But at this stage, you know, I won't be buying based on rumors. I want to see what they can deliver. Apple is a great company. It's not growing very rapidly right now, and it's not cheap either. This quality is pretty high quality. So I will never be bearish on Apple, but I don't see Apple like the most profitable bet to make on high growth right now. It's mostly like a highly defensive tech stock, great company, great management team, great quality, outstanding brand power, very solid, but I want to see what they can deliver on AI to consider the company like a big play in that.
Daniel Snyder: Just a reminder, anything you hear on this podcast should not be considered investment advice. At times myself or the guests might own position in the securities mentioned. But this is for entertainment purposes only and you should seek advice from a licensed professional before investing. And just a reminder, you can find the link to the investing group service in the description or show notes page on Seeking Alpha. And we'll see you next episode.
We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify .
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Does AI Translate To Risk-On Markets? With Andres Cardinal (The Data Driven Investor)