Meta jumps on reports of Metaverse budget cuts

Key Concepts

• Snowflake: A cloud-based data warehousing company.
• Product Revenue Growth: The increase in revenue generated from a company's products.
• Deceleration: A slowing down of growth.
• Consensus: The average expectation of analysts.
• AI Agents: Software programs that can perform tasks autonomously.
• Picks and Shovels: A metaphor for companies that provide the essential tools and infrastructure for a burgeoning industry.
• GPUs (Graphics Processing Units): Specialized processors designed for parallel processing, crucial for AI and machine learning.
• TPUs (Tensor Processing Units): Google's custom-designed hardware accelerators for machine learning.
• Nvidia: A leading company in the development of GPUs.
• Recommenders: AI models used to suggest products, content, or services to users.
• General Purpose Computing: Computing tasks that are not specialized for a particular application.
• Meta: A technology company, formerly Facebook, investing heavily in AI and the metaverse.
• Metaverse: A persistent, online 3D universe that combines multiple virtual spaces.
• Hopper Architecture: Nvidia's GPU architecture.
• Blackwell Architecture: The next generation of Nvidia's GPU architecture.
• Valuations: The process of determining the current worth of an asset or company.

Snowflake's Performance and Future Outlook

Snowflake exceeded third-quarter sales expectations but forecast slower product revenue growth for the fourth quarter, leading to an over 11% drop in its share price. Ivana Deka of Spear Invest suggests that investors are not entirely overreacting, as there has been a deceleration in product revenue growth quarter-over-quarter. While beating consensus is positive, investors in high-multiple stocks often seek acceleration.

Long-term Perspective: Deka believes Snowflake will significantly exceed analyst expectations on a two to three-year basis. However, the current benefit for companies like Snowflake is contingent on the broad adoption of concepts like AI agents, which are still in their early stages.

Current Beneficiaries: The immediate beneficiaries of the AI buildout are companies providing the "picks and shovels" – the infrastructure. Once this infrastructure is in place and the cost of usage decreases, Snowflake is expected to post more substantial beats.

"Picks and Shovels" in AI Infrastructure

Deka highlights the networking space as a key area for "picks and shovels" investments. This includes:

• Optical cables
• Electrical cables
• Components connecting GPUs

Examples of companies in this space:

• Asterolapse
• Credo Technology
• Marvell

Credo and Marvell have reported outstanding results with significant growth, both projected and in the current quarter, making them areas of focus for investors.

GPUs vs. TPUs: A Competitive Landscape

A new debate has emerged regarding Google's TPUs potentially gaining market share from Nvidia's GPUs.

TPU Capabilities and Limitations:

• Performance: TPUs perform very well.
• Optimization: They are optimized for recommender systems, such as those used by Google for ad recommendations.
• Potential Adoption: Meta is reportedly considering using TPUs, indicating their potential in recommender applications.

Nvidia's Dominance in General Purpose Computing:

• Lead: Nvidia maintains a strong lead in general-purpose computing.
• Ecosystem: They offer a wide array of free libraries and tools that enhance GPU functionality.
• Jensen Huang's Statement: Nvidia's CEO, Jensen Huang, suggested that even if competitors gave away their hardware for free, Nvidia would still have an advantage due to its software ecosystem.

Room for Multiple Players:

• Coexistence: Deka believes there is room for both TPUs and GPUs, and even multiple players in the market.
• Amazon's Tranium Chip: Amazon is also making inroads with its Tranium chip.
• Application-Specific GPUs: The future is likely to see application-specific GPUs tailored for large markets, such as robotics or other emerging sectors, offering cost savings by avoiding unnecessary tasks associated with general-purpose GPUs.
• Market Size: The overall market is substantial, suggesting concerns about a single winner are overblown.

Meta's Investment and Performance Expectations

Meta has been a significant underperformer this year. Deka emphasizes the need for Meta's massive AI investments to translate into tangible results in terms of profits and revenue growth.

Current Disappointment: Meta slightly exceeding or meeting consensus expectations, given its substantial investments, is considered disappointing.

Positive Signal: News of Meta scaling back metaverse investments is viewed positively by some, but Deka stresses the need to see these AI investments reflected in financial results.

Path to Improvement: Similar to Snowflake, Meta needs to establish its infrastructure before reaping the benefits of AI.

Desired Results: Deka looks for significant acceleration in Meta's revenue and profit growth. The company has not posted strong numbers this year, contributing to its stock underperformance.

Historical Context: In 2021, Meta faced headwinds in revenue growth but managed to turn it around with its first-generation chips like the Hopper architecture. The upcoming Blackwell architecture and potentially lower-cost TPUs could drive renewed revenue growth.

The AI Landscape Heading into 2026

Despite fears of a bubble, Deka is optimistic about the AI sector heading into 2026.

No Bubble: Spear Invest's "boots on the ground" research and conversations with companies provide visibility into significant investment over the next three years, leading them to believe it is not a bubble.

Valuation Perspective: Valuations are not considered excessively high. Companies like Nvidia are trading near the lower end of their 5-10 year valuation ranges.

Opportunity: Investors should not miss the next wave of AI investments.

Risk Mitigation: While opportunities are significant, there are always risks of companies overpromising and underdelivering. Therefore, fundamental research and careful company selection are crucial.

Conclusion

The AI sector is poised for significant growth, driven by infrastructure buildout and increasing adoption of AI technologies. While companies like Snowflake may experience short-term fluctuations due to growth deceleration, their long-term prospects remain strong. The "picks and shovels" companies in networking and hardware are currently well-positioned. The competition between GPUs and TPUs is expected to foster innovation and lead to application-specific solutions, with room for multiple players. For companies like Meta, the focus must shift from investment to demonstrable revenue and profit growth. Overall, the outlook for AI investments is positive, provided investors conduct thorough research and select companies with strong fundamentals.