The Landlord to Artificial Intelligence

Before we talk about everyone’s favorite two letters lets address the elephant in the room - I missed my second post last week.. so much for a weekly newsletter Sneh. I blame my nephew for being too cute and distracting me all week, that boy drools too much..

This week I didn’t pay much attention to the markets on a day-to-day basis, we’re playing the waiting game right now as the $SPX is just hanging out in a range, be patient there’s no need to rush a buy on anything, in my opinion save your money for Christmas gifts.. or student loan payments.. or both.

Briefly had my eyes on the economic data that was released on Wednesday and Thursday (CPI, and PPI) and both were relatively pretty muted - price action wise. Remember we can use the Trading Economics website to view all of the economic data releases as they are printed. A really helpful tool for anyone wondering what happened in the markets or what these datasets mean.

What else happened lets see.. we closed Wednesday after hours pretty much at the top candle of the data release an hour before the bell that morning.. not a very exciting market if you ask me. A real nail biter for those of you who like to gamble on CPI day. Yes, I said it gamble, it’s a complete guess you can be close but you can never know for sure. This market and it’s participants seem to really granulize these data releases so you never can be too sure whether or not good data is actually good data or if bad data is good data.

What the hell happened on Friday?

Quad Witching: Quad Witching is a significant stock market event that happens 4 times a year on the 3rd Friday of March, June, September, and December. These days, four major derivative contracts – Stock Options, Stock Futures, Stock-Index Options, and Stock Index Futures – expire simultaneously.

So if you checked your portfolio at any point on Friday and wondered “Wtf is going on??", now you know. Weird things happen on options expiry day… somewhere I know David Frost is slow clapping. If you know who that is you’re ahead of the curve.

UAW Strike: The folks at the UAW early Friday morning began a limited strike by 12,700 workers that could expand to the maximum 145,000 UAW workers if talks remain bogged down. The UAW has demanded a 40% wage increase over four years — an amount that union officials said matches the raises the top executives at the three companies have received over the last four years. A classic showcase of “Eat the Rich” in my opinion but we move on.. A new analysis by consulting firm Anderson Economic Group (AEG) estimates that a strike on all three automakers by 143,000 United Auto Workers (UAW) members could result in a total economic loss of more than $5 billion after 10 full days.

The Pipelines of Data

I’m not sure why but I am starting to compare data centers to the pipelines and the midstream companies in the energy sector.

💡 What’s midstream? What’s upstream? Upstream, Midstream, and Downstream

I’ve recently been dipping my toes into reading more into midstream companies in the energy sector as the $XLE is thriving since the dollar bottomed recently in early July. For people looking for Alpha - look no further then this chart. If you want to pad your gains I don’t see why this is not a breakout to keep an eye on, people last year on the street were saying that $90 crude was laughable this year and look where we are now..

The Striking Similarities

Just like midstream companies build and maintain infrastructure for the transportation of oil and natural gas. Similarly data centers provide the infrastructure for the storage and transmission of digital data. They are a critical intermediary between the hyperscalers and the end users, the hyperscalers being the drillers/upstream companies in the energy sector and the end user being us the consumer. Another aspect similar to the likes of $ET, $EPD, $ENB (more on those, in another week's segment), is centralized operations, making it easier to manage and protect valuable information and then distribute it.

According to Aritzon’s latest research report, the worldwide data center market will grow at a CAGR of 5% during 2022-2028. In 2022, the global data center market witnessed investments of over $215.73 billion owing to investments from colocation operators, such as Equinix, Digital Realty, Vantage Data Centers, STACK Infrastructure, Iron Mountain, QTS Realty Trust, NTT Global Data Centers, DataBank, and ST Telemedia Global Data Centres. * Hyperscalers, such as Meta (Facebook), Microsoft, Amazon Web Services (AWS), and Google, also aid the market with investments. These companies expand their global presence, focusing on emerging locations across Europe and APAC.

Like cloud computing was - AI brings new technological innovation that is delivering real world business outcomes. It will live in a data center.

The computing industry has undergone not one but two transformative waves, each reshaping the way we harness computational power and manage data. The first wave witnessed the evolution from bulky mainframes to more versatile x86-based server computers. Now, the second wave is usher in profound innovation of datacenter infrastructure, custom tailored to cater to the insatiable demands of AI workloads and unparalleled compute power. :

Back to Nvidia.. err I mean AI.. same thing? I’m not sure anyone knows.. let’s talk inertia.

You don't simply grow 78% in a quarter and then simply stop, the customers are still ordering and a flurry of orders will be coming in throughout the year and the next year. I think these GPU orders will continue to come in and there is even a tailwind of Chinese gpu purchases. Although I suspect geopolitics gets involved and in the way of a lot of this, both parties involved (US & China) want the most H100 chips out of Nvidia. If it is the peak growth of Nvidia and all of their future earnings are now priced in then what about the upkeep, the maintenance, getting systems in place and then having recurring revenue on those.

The Big Idea:

From time to time I’d like to think that I have some interesting ideas and I am generally a trend follower, the trend is always your friend but when the trend has a 106 P/E ratio and is trading close to 40x sales over the last 12 months… I have to look elsewhere for the fresh Alpha.