Google stock a ‘long-term play’ ahead of earnings report, economist says

Key Concepts AI bubble, attractive entry point, AI revolution, Return on Investment (ROI), memory chips, AI infrastructure, data center, cooling systems, electrical connectivity, chip foundry, onshoring, market share, forward multiple, daily active users, long-term play.

Current Market Dynamics and AI Pullback

The discussion begins by addressing the recent market pullback, where selling has spread from software to "almost anything associated AI," including utilities. This widespread selling has led to a "pretty good hit" across the AI chain. Kevin M., President and CIO of Henny and Walsh Asset Management, notes the "appropriate ticker" SMH (shaking my head) for the current situation. He suggests that some investors are "poking at the perceived AI bubble," hoping for it to burst. However, he argues that in many cases, this pullback is "unwarranted" and instead "creates attractive entry points" for investors.

Investment Strategy Amidst Volatility

Kevin M. emphasizes that the "AI revolution is going to be a very long and winding road filled with many potholes," acknowledging there will be "more losers than winners." His recommended strategy is to "invest right now in the areas where all the spending is taking place," rather than focusing on sectors like some software where "we may see ROI years down the road." This approach aims to identify robust long-term holdings amidst market fluctuations.

Specific Investment Opportunities

Micron Technology (Memory)

Despite a significant pullback, Micron Technology (MU) is highlighted as a strong hold. Kevin M. puts its performance in perspective, stating it's "still up over 40% year to date." He underscores its critical role, noting that "memory is a key component to the AI revolutions" and "the chip makers need memory," making Micron a go-to supplier. He views the recent dip as a "minor setback" and confirms they are "still holding our position."

AI Infrastructure Plays

The conversation shifts to "AI infrastructure plays," focusing on companies that build the foundational components for AI. A "data center in a box" concept is presented by combining three specific companies:

• Comfort Systems (FIX): A top performer this year, providing essential cooling systems for data centers.
• MCORD: Specializes in data center construction.
• IES (IESC): Focuses on electrical connectivity for data centers. Kevin M. notes that "many people don't know it" but advises to "check out the performance of their stock," which is "still trading at a reasonable forward multiple."

Taiwan Semiconductor Manufacturing Company (TSMC - TSM)

TSMC is presented as a crucial player, particularly in the context of "onshoring." Kevin M. highlights that TSMC is "now building chips for Nvidia on US soil in Phoenix, Arizona," with plans to "add five more sites in Phoenix, Arizona." TSMC already commands a "60% market share" and is the "largest dedicated chip foundry in the world." Despite its dominance, it's trading at "28 times Ford earnings," which is considered "not too rich" and "really is cheap." The speaker notes that in past AI challenges, it was often TSMC's numbers and projected guidance, rather than Nvidia, that "bailed them out."

Alphabet (Google) and its AI Position

Google (Alphabet - GOOGL) is discussed as a company with immense scale and potential, particularly in AI. It boasts "five units that do $30 billion or more" each, with each unit capable of being a "rock and roll company" on its own. These units include search, cloud, subscription, YouTube, and networking.

• Financial Performance: Alphabet has achieved a "second consecutive quarter of a hundred billion dollar plus in revenue."
• YouTube Segment: The YouTube segment is a standout, boasting "122 million daily active users" who "consume over a billion dollars worth of video content every day." This makes it an "advertisers paradise."
• AI Expectations: Google has been "deemed the AI winner," setting "very lofty expectations" for its performance. While there's a possibility they "may miss expectations" due to these high bars, Kevin M. advises to "hold the stock" and "don't worry if there's a near-term hiccup on it," emphasizing it's "absolutely a long-term play."

Conclusion/Main Takeaways

The current AI market pullback, while concerning to some, is viewed as an "attractive entry point" for strategic investors. The "AI revolution" is a long-term journey, necessitating a focus on companies providing essential infrastructure and components rather than speculative software plays. Key investment opportunities include memory providers like Micron, critical data center infrastructure companies (Comfort Systems, MCORD, IES), and the dominant chip foundry TSMC, which is also expanding its US presence. Alphabet (Google) remains a strong long-term hold, driven by its diverse, high-revenue units and its pivotal role in the AI landscape, despite potentially high short-term expectations. The overarching message is to invest for the long term in foundational AI enablers.