Tim Seymour: Markets still have concerns around circular AI investments

Key Concepts

• Market Volatility: Significant intraday swings in stock market indices.
• Tech Valuations: Concerns about the high prices of technology company stocks relative to their earnings.
• Nvidia: Discussed as an "AI infrastructure story" with a valuation that is not a primary concern for the speaker.
• Mag Sevens: A group of large-cap technology stocks, with Meta mentioned as potentially having interesting value.
• Circular Investments: A concern about investments that are not generating tangible returns.
• S&P 500 Laggards: Robin Hood (down >7%) and Interactive Brokers (down >2%) are identified as underperforming.
• S&P 500 Leader: Walmart (up 5.8%) is highlighted as a top performer.
• Walmart's Earnings Report: Described as "blockbuster" with consistent comparable store sales improvement.
• Walmart's Valuation: Noted as "hardly cheap" at 36 times forward earnings, but with a "best of both worlds" dynamic.
• Walmart's Strategy: Focus on technology and AI investment, e-commerce efficiencies, and a shift towards profit over revenue.
• Walmart's Market Share: The company is seen as gaining market share.
• Walmart's Move to Nasdaq 100: Signifies the company's self-perception and potential investor base tracking the Nasdaq 100.
• Consumer Demographics: Walmart's positioning across lower and higher-income consumers is a key factor.
• Growth Scare: A potential market downturn triggered by concerns about economic growth.
• Walmart's Investments: Significant investments in technology, logistics, ERP, and its brick-and-mortar infrastructure.

Market Volatility and Tech Valuations

The market experienced significant volatility, with the index being up over 700 points at its high, down nearly 400 points at its low, and currently trading roughly flat, down about 100 points. Tim Seymour, CIO of Seymour Asset Management, notes that these moves are "not for the faint of heart." A key concern remains "tech valuations," although Nvidia's valuation is not seen as problematic. The speaker suggests that for some of the "Mag Sevens," like Meta, there might be "interesting" value. The underlying issue is uncertainty about "what we're paying for and what it's going to deliver now as opposed to out there." There's also a sense of concern around "circular investments." While Nvidia is viewed as an "AI infrastructure story" on top of its core business, which has likely worked for the company, the speaker implies that this may not be the case for the broader market. The analyst community has had a chance to dissect recent information, and the buy-side likely anticipated the results, leading to some sell-off.

S&P 500 Performance: Laggards and Leaders

Within the S&P 500, Robin Hood is identified as a laggard, down more than 7%, with Interactive Brokers also down more than 2%. In contrast, Walmart is leading the S&P 500 as a gainer, up 5.8%.

Walmart's Blockbuster Earnings and Strategic Shift

The discussion then shifts to Walmart's "blockbuster earnings report" and its "quarter after quarter of comp improvement." Seymour points out that companies like Robin Hood and others in the "digital economy" are not considered "strong hands" in terms of investor groups. Bringing the focus back to Walmart, the speaker acknowledges that the stock is "hardly cheap" at 36 times forward earnings, especially if the market is worried about valuations. However, Walmart presents a "best of both worlds" dynamic. The company is investing in technology and potentially AI, but more importantly, its e-commerce and efficiencies have "paid off." While the gross margin was "a little weaker here," the company is seeing improvements "category by category." Walmart is "taking market share" and, crucially, appears to be "more focused on profit than revenue," which is described as "crazy for the world's biggest retailer."

Walmart's Nasdaq 100 Move and Valuation Paradox

The move of Walmart from the New York Stock Exchange to the Nasdaq 100 is highlighted as a significant indicator of where Walmart "sees themselves as a company." This move is also expected to help attract investors tracking the Nasdaq 100. It's considered "fascinating" that Walmart is performing well "in the face of a market that's concerned about valuations," especially when Walmart has "never been more expensive relative to itself, and even relative to its peer group other than Costco." This makes Walmart "much more like a tech company right now than is this is Walmart."

Risk Assessment for Walmart at Current Prices

When asked if Walmart is a "risky bet at these prices," Seymour suggests that a sell-off could occur if the "two pillars of the story here" falter. These pillars are the "demographic story," encompassing both the "lower income consumer and the higher income consumer," and the "broader merchandise mix." If there's any "kind of a growth scare," which the market might be anticipating, it could lead to "a lot of pain across markets." However, until such a scare materializes, Walmart is considered "very well positioned." This positioning is attributed to its "massive investments into technology," logistics, ERP systems, and its established "brick and mortar" presence.

Synthesis/Conclusion

The market is currently characterized by significant volatility, driven by ongoing concerns about technology stock valuations. While some tech giants like Nvidia are seen as solid "AI infrastructure stories," broader market sentiment is cautious. Walmart, despite its elevated valuation, is demonstrating strong performance due to a strategic focus on profit over revenue, successful e-commerce integration, and significant investments in technology and logistics. Its move to the Nasdaq 100 signals a shift in its corporate identity and appeal to a tech-oriented investor base. The company's ability to cater to diverse consumer demographics and its robust operational infrastructure position it favorably, though a broader economic "growth scare" remains a potential risk factor.