AI Costs Temper Growth Excitement Amidst Broader Economic Pressures

Key Quotes

"Worries about spending in debt if you dig into the results a little bit so looking at oracle's cloud revenues it's up 34 in the most recent earnings report software revenue is down about 3 but then if you look at expenses operating expenses for the cloud software segment were up 45 so continuation of the theme we've been seeing where there was a lot of ai related excitement around a lot of these companies in the wake of announcing new deals getting the orders for the ai products that they're providing but then a realization among investors of the costs associated with building out that infrastructure"

Brian Stewart explains that Oracle's cloud revenue increased, but its operating expenses for cloud software rose even faster. This highlights a recurring theme where excitement for AI-related deals is tempered by investor realization of the significant costs involved in building the necessary infrastructure. Stewart points out that this cost-to-revenue equation is a challenge for many companies.

"Broadcom's a very similar story it rose initially as earnings were released it had pretty strong results and a strong forecast however in the conference call following the earnings report management warned of margin pressures they attributed this to a higher mix of ai revenue and now as we start recording the stock is down about 10 on friday so you have another situation where strong headline results are being undercut by worries about costs"

Brian Stewart notes that Broadcom experienced a similar pattern to Oracle, with strong initial earnings and forecasts followed by warnings of margin pressures during the conference call. Stewart attributes these pressures to a higher proportion of AI revenue, leading to a stock decline. This illustrates how even positive financial results can be overshadowed by concerns about the underlying costs of doing business.

"AutoZone's a an auto parts retailer when you see cars getting more expensive you see people trying to keep their cars on the road longer avoid buying new cars and so to a certain extent you'd expect AutoZone to see a boost in murky economic times as people try to get the most out of whatever they got in the driveway now but you're seeing them unable to sort of capitalize on that situation because their costs are going up and so I think this is a broad just even beyond ai even beyond tech I think you're seeing a lot of companies struggle with the the cost to revenue equation"

Brian Stewart uses AutoZone as an example to show that the struggle with rising costs is not limited to the tech sector. Stewart explains that despite the economic conditions that should benefit an auto parts retailer, AutoZone's margins were negatively impacted by inflation and higher costs. This demonstrates a widespread challenge across industries in balancing revenue with increasing expenses.

"A large chunk of it is just a relief rally after the government shutdown ended you see the the jets etf which covers the airline sector is up 14 since the end of the shutdown you know these stocks were going into thanksgiving with a shutdown happening the likelihood of having to cut back flights dramatically you know this is the key time for a lot of these airlines to to book some revenue during the holiday travel part of the year being able to resolve that before you hit the crisis point towards the end of the year gave a a huge boost to these"

Brian Stewart attributes the recent gains in airline stocks primarily to a relief rally following the end of the government shutdown. Stewart explains that the resolution of the shutdown before the critical holiday travel season allowed airlines to avoid potential flight cutbacks and secure necessary revenue. This indicates that the market reacted positively to the removal of a significant operational and financial uncertainty for the sector.

"I think it's really this this kind of uniformity that you're seeing I think it's just the way investors are metabolizing these results I think there's just kind of a nice word for group think but you know there's a there's a kind of a broad consensus that has been shifting between excitement for the prospects for ai and then an understanding that there's you know you have to kind of buy those buy that opportunity with the build out of the infrastructure here"

Brian Stewart suggests that the uniformity in market reactions to results can be attributed to how investors process information, describing it as a form of "group think." Stewart explains that there is a prevailing consensus that oscillates between enthusiasm for AI's potential and the acknowledgment of the substantial infrastructure costs required. This dynamic influences how investors collectively interpret and respond to company earnings.

"I would just say I think this is one of the most uncertain times in terms of fed policy that I can remember except during sort of an emergency situation like covid but even even in a situation like covid you can kind of predict what the the fed's going to do but in in this situation we had three dissents for the the vote that eventually cut rates and of those dissents two wanted no cut and one wanted a 50 basis point cut so even among the dissents there's not a consensus of where"

Brian Stewart highlights the current uncertainty surrounding Federal Reserve policy, noting it as one of the most unpredictable periods he can recall, even compared to the COVID-19 emergency. Stewart points to the three dissents in the recent rate cut vote, with varying opinions among them, as evidence that there is no clear consensus within the Fed. This lack of internal agreement makes it difficult for investors to forecast future interest rate movements.