'Demand for accelerated computing is exceptionally high': Ellerbroek on tech sector

Key Concepts

• Cloud Computing: The delivery of computing services over the internet, currently experiencing demand that exceeds supply.
• Accelerated Computing: Specialized hardware (chips) designed to handle high-performance tasks like AI workloads.
• Aftermarket Business: The secondary market for parts and services, characterized by high margins and long-term demand.
• Siloed Markets: Industry segments with limited competition due to specialized product requirements, common in aerospace and defense.
• Custom Accelerator Chips: Tailor-made semiconductors developed by companies (like Google, Meta, OpenAI) in partnership with manufacturers like Broadcom.

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1. Microsoft (MSFT) and the Software Sector

• Market Position: Jed Elebroek identifies Microsoft as an "attractively priced" stock, trading at just over 20 times earnings, which he considers low for the company.
• Growth Drivers:
  • Azure: The cloud computing unit is growing at approximately 40% annually, with momentum expected to accelerate.
  • AI Integration: Microsoft is successfully infusing AI tools into its software suite, increasing product relevance and customer stickiness.
• Perspective: Elebroek argues that fears regarding AI-driven software disruption are "unfounded." While some legacy software businesses may struggle, companies that integrate AI effectively will see enhanced growth.

2. Cloud Computing Dynamics

• Competitive Landscape: Despite concerns about new entrants (e.g., Meta potentially entering the cloud space), the "big three"—Amazon (AWS), Microsoft (Azure), and Google (GCP)—maintain an exceptionally strong competitive position.
• Supply vs. Demand: The market is currently characterized by demand that significantly outstrips supply. This is evidenced by "neo-clouds" and companies like SpaceX renting out AI factory capacity to firms like Anthropic.

3. TransDigm (TDG) and Aerospace/Defense

• Growth Drivers: The company is benefiting from growth across all customer segments:
  • Defense: The U.S. Department of Defense budget is growing at a high single-digit to low double-digit pace.
  • Commercial Aerospace: Both new equipment shipments (Boeing/Airbus) and the aftermarket business are seeing double-digit growth.
• Acquisition Strategy: TransDigm utilizes a "siloed" business model. By acquiring companies like Sierra, they secure aftermarket parts businesses where they are often the sole or one of two suppliers. This provides:
  • Pricing Power: Limited competition within specific product silos.
  • Predictability: The ability to project demand years in advance with high accuracy.

4. Broadcom (AVGO) and Semiconductor Outlook

• Custom Silicon: Broadcom is a primary supplier for Google’s Tensor Processing Unit (TPU) and is collaborating with Meta and OpenAI on custom accelerator chips.
• Earnings Outlook: Investors are focused on upcoming guidance, specifically regarding TPU ordering plans. The shift toward Google selling these chips directly to customers is expected to drive a significant step-up in demand.
• Valuation: Despite trading at an all-time high, Elebroek views Broadcom as reasonably priced, noting that it has lagged behind "racier" semiconductor and memory stocks, making it an attractive candidate for investment.

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Synthesis and Conclusion

The overarching theme of the discussion is that the AI and tech sectors are currently in an "all systems go" phase where demand for infrastructure and specialized software continues to exceed supply.

• Software: The "death of software" narrative is rejected; instead, a bifurcation is occurring where AI-adopting firms will thrive.
• Hardware/Infrastructure: Companies like Broadcom and the major cloud providers are positioned to benefit from the massive capital expenditure being poured into AI.
• Aerospace: Companies like TransDigm offer a defensive, high-moat alternative through consolidated, siloed aftermarket businesses that provide consistent, long-term growth independent of the volatility seen in pure-play tech.

Notable Quote: Regarding the competitive landscape of cloud computing, Elebroek noted: "It's a really big ocean... right now there's more demand than there is supply."