In opening the week lower as it announces a $15 billion common stock offering Wall Street is rethinking the AICPE boom while nually AI revenue has surged past $175 billion.
Now estimates do show hyper scalers must generate up to $650 billion annually to deliver a sustainable return on trillions and cumulative infra spending.
And as big tech shifts from share buybacks to debt issuance to fund data centers, investors.
Facing a critical question and that is can revenue growth translate into durable operating margins or will supply chain bottlenecks, power shortages, and stretch accounting depreciation maneuvers erode shareholder returns while here to break it all down is Jeff Getman, managing director of Gitterman asset management.
Jeff, great to have you here.
Thank you so much for joining me.
Well, another day and another announcement when it comes to that issue and so what do you make of what we're seeing right now and for the layperson who's trying to make. details of what's happening.
Break it down for us.
It's interesting because share buybacks reduces the stock price quicker.
Now they're moving from share buybacks on these hyper scales to more debt issuance, and debt issuance in this interest rate environment is tough.
It certainly depends on what the Fed is going to do.
Is the Fed going to raise rates, or do the jobs numbers from last week allow the Fed to pause for a little while longer?
Most estimates are there will be at least 0.25 or 2.25% raises before the end of the year.
That's going to.
Profitability on debt issuance, so it's a tough stretch right now.
There's also a lot of accounting games being played because they're pushing out depreciation on chips that for all intents and purposes they've only been using a lot of these chips for 2 years maximum before new chips are brought in to replace them.
So when you put a 6 year depreciation on a chip that you're only keeping for 2 years, and then buying a new one, at some point that false depreciation catches up and could affect the stock price.
So there's It's like a race.
Can the revenue catch up to the debt issuance and the costs and the money that they're laying out quick enough?
That's anybody's guess right now.
Yes, and Jeff, while we're talking about these accounting maneuvers as well as this revenue gap, how can you assess the buildout and what are the opportunities?
You know, the buildout seems to be unstoppable.
As much as we saw this week that a lot of the AI agentics of some of these companies have hacked their way out of the system.
It doesn't seem to be enough to scare anyone into stopping.
The race still seems to be.
Full on, so we do think that ultimately these blips of not being able to catch up to revenue will be eased out over time and these companies will become revenue positive, but the market will certainly suffer some ups and downs as we see some of these earnings have been great, but there was just a slight miss and the stock got crushed.
So we think there's going to be a big volatility over the next couple of months, even over the next 2 years before revenues really catch up.
So it's a little scary to deploy a lot of money at these valuations for the average investor.
We keep going back to hold a neutral weight to these hyperscalers and network developers and power providers, but start adding to the picks and shovel side because where they're going to have problems is resource constraints.
A lot of companies, the video has talked about this a number of times, they say that they are going to continue to face.
Resource constraints over time.
So start investing in some of those resource constrained materials.
Look at water.
Look at infrastructure.
Look at power.
Those three things are your picks and shovels for the old analogy of don't buy a gold mine, buy the picks and shovels and sell it to the gold miners.
That applies here, I think in spades.
I think it's a much safer play right now because if we're not stopping, those companies are going to go up and down. volatility, but we're going to still be pushing a lot on those resource constraints and trying to get more materials to these hyper scales.
And finally, Jeff, before I let you go, which specific players within the physical supply chain are you paying attention to right now?
Why we look at KBI, who has been doing sustainable infrastructure in Europe for 25, 30 years.
They have a great history and great track record of providing this additional power that's We look at water asset management, which has been also for 25 years looking at where is water resource constrained, where can they come in, make investments that makes more water available to the local communities and to data centers and other players, and we're certainly now looking continuously, as you know, at the companies that are looking at climate adaptation because the more energy, the more power, the more warming, the more fires, the more.
Storms, companies that are coming to the market with solutions around those problems are really solving it.
Grid infrastructure is a great way to play it.
So there's a number of ways of playing it.
SDEM resource constraint is, you know, buying the actual resource miners to play that side of it as well.
Well, Jeff, a lot of moving parts here, so I appreciate you breaking it down and simplifying it for our viewers today.
Thank you so much for joining us.
Thank you.
Thank you.
