Not Interested in Apple or Amazon: I/O Fund’s Kindig

Key Concepts:

• AI at the Edge: Moving AI processing closer to the data source, rather than relying solely on cloud-based processing.
• Valuation Justification: Determining if a company's stock price accurately reflects its financial performance, growth potential, and competitive position.
• Royalty Rates: Percentage of revenue paid to a company for the right to use its intellectual property (e.g., ARM's architecture).
• Enterprise AI: AI solutions and services targeted at businesses and organizations, rather than individual consumers.
• Azure AI Contribution: The specific revenue generated by AI-related services within Microsoft's Azure cloud platform.
• Superintelligence: A hypothetical form of AI that surpasses human intelligence in all aspects.

Qualcomm and the Mobile Market

The speaker believes Qualcomm is currently too focused on the mobile market, which isn't the primary growth area for AI. While Qualcomm is a significant player in mobile, its future potential lies more in the automotive sector, particularly as AI processing shifts towards the edge. The speaker suggests monitoring Qualcomm more closely in the second half of the decade (2025-2030) as edge AI becomes more prevalent.

ARM Valuation and Royalty Rates

The speaker questions ARM's current valuation, arguing that it's not justified by its royalty rates, which have doubled with the V9 architecture. They prefer investing directly in design companies like Nvidia or Broadcom, which are gaining market share, rather than paying a royalty rate (around 4%) to ARM. The speaker uses the analogy of the mobile era, stating they would have preferred owning Apple over ARM, even if ARM were a private company. This suggests a preference for companies that directly benefit from a technology's success rather than those that simply license it.

Microsoft's AI Strategy and Azure

The speaker highlights Microsoft as a leader in enterprise AI, particularly due to its transparent reporting on AI's contribution to Azure's growth. They estimate that Azure could reach a $40 billion contribution from AI by 2026. This rapid growth and the specific disclosure of AI-related revenue differentiate Microsoft from its peers, such as Alphabet and Meta, which are less forthcoming with such details.

Competitive Ranking: Meta vs. Microsoft

When asked to rank Meta and Microsoft as direct competitors in AI, the speaker places Microsoft first due to its tangible revenue in the public markets. Meta is ranked second, despite its focus on superintelligence, because its valuation is considered historically high and not justified by its current performance. Amazon and Alphabet are ranked lower than Meta.

Apple and Amazon: A Lack of Current Interest

The speaker expresses a lack of interest in Apple and Amazon as investments at this time. They believe these companies need to demonstrate more progress in AI. Similar to Qualcomm, Apple is seen as heavily reliant on the smartphone market, and its potential in edge AI is not yet realized.

Synthesis/Conclusion:

The speaker's main takeaways are:

1. Qualcomm's future is tied to the growth of AI at the edge, particularly in the automotive sector.
2. ARM's valuation is questionable due to its royalty-based business model.
3. Microsoft is a leader in enterprise AI, driven by the rapid growth of AI-related services in Azure.
4. Meta's valuation is too high, despite its focus on AI.
5. Apple and Amazon need to demonstrate more progress in AI to become attractive investments.