Deepwater's Gene Munster gives his read on the Big Tech trade post-earnings

Key Concepts

• Scaling Laws (in AI)
• AI Infrastructure
• CapEx (Capital Expenditure)
• Tariffs
• AI Brain (referring to AI model size and complexity)
• European Policies and Regulations Impact
• AI Diffusion Rule (potential impact on demand outside the US)
• Pastiche (in the context of earnings reports)

Microsoft Earnings Call Update (Gene Munster's Perspective)

• Scaling Laws: Satya Nadella emphasized the importance of scaling laws holding true in the context of AI. This is seen as a positive sign for companies building AI infrastructure, specifically Nvidia.
• CFO Commentary: Amy Hood, Microsoft's CFO, was about to provide guidance during the call.

Meta (Facebook) Earnings Call Analysis

• CapEx Expansion: Susan Li, Meta's CFO, indicated that the company's CapEx expansion was partly driven by higher costs related to tariffs. This diluted the positive impact of increased CapEx spending on AI infrastructure.
• AI Brain Expansion: Meta is expanding the size and complexity of its "AI brain," contributing to the CapEx increase.
• European Regulations: Meta acknowledged that European policies and regulations could negatively impact the company's performance in the latter half of the year.
• Market Reaction: Investors initially shrugged off the concerns about tariffs and regulations, but Meta's stock dipped slightly in the 20 minutes prior to the discussion.
• Overall Sentiment: Despite the concerns, the overall sentiment surrounding Meta's quarter remained positive.

CapEx Asterisk and Return on Investment

• Non-Return Bearing CapEx: An asterisk was added to the CapEx increase, indicating that some of the spending would not generate a direct return. This is viewed negatively, as these dollars are simply higher costs.
• AI Investment Justification: Facebook (Meta) and Walmart are seen as companies that have successfully leveraged AI investments to generate returns, justifying their spending.

AI Diffusion Rule

• May 15th Implementation: An "AI diffusion rule" is scheduled to come into effect on May 15th.
• Potential Demand Impact: This rule could negatively impact demand for AI-related products and services outside the United States.
• Q2 Earnings Calls: The impact of the AI diffusion rule is expected to be discussed in more detail during the Q2 earnings calls.

Market Momentum and Sentiment

• Market Rally: The market has experienced a rally, with six or seven days of gains and an 8% increase in the last seven days.
• Q's Performance: The Q's (Nasdaq 100 futures) were up by approximately 0.8% in after-hours trading.
• Alleviated Fears: The market's performance has alleviated some of the fears within the marketplace.
• Continuation of Rally: The current market momentum suggests that the rally is likely to continue.

Pastiche vs. Mosaic

• Pastiche in Earnings Reports: The term "pastiche" was used to describe the nature of earnings reports.
• Underutilized Word: The speaker noted that "pastiche" is an underutilized word, especially on the show.

Conclusion

The discussion covered key takeaways from Microsoft and Meta's earnings calls, focusing on AI-related investments, CapEx spending, and regulatory challenges. While both companies presented positive results, concerns were raised about the impact of tariffs, European regulations, and the upcoming AI diffusion rule. The market's recent rally and positive sentiment suggest continued momentum, but investors should remain aware of these potential headwinds.