Dell Rises After CEO Teases 'AI Factory' for Musk's xAI

You actually got into Dell following earnings May 30th and there was kind of a mixed reception to earnings. You know, there's a growth story there about AI infrastructure and there were some near term concerns. But let's start with why you looked at Dell and thought, OK, this is the move I'm going to make. Well, Ed, thank you for having me. A couple of reasons. I mean, we were late to the party and that will happen from time to time. We've been late to other parties. But the point is that you get there and we saw it as an opportunity to step in, not, not just on the data center side of the business, but the PC upgrade cycle part of the business. And so if you look at the hyperscalers, they, they are, they are spending or spent about $200 million, two 100 billion sorry dollars in on AI in their budgets. And so we, we think the use cases are real, the technology's real, the monetization is real. And so this was an area we were underweight hardware in our tech exposure and this was an area where we could, we could jump in. So you do not hold NVIDIA, which is really interesting. The the big story we're talking about this morning is what played out on social media Wednesday that Michael Dell posted. They're building an AI factory for X AI to power Grok. And Musk responds and says, well, actually Supermicro is involved as well. So let's do some math, which actually my colleagues at Bloomberg Intelligence kindly walked me through this morning. If this deal is for Grok 3, Musk has said in the past he'll need 100,000 H, one hundreds for that. And if you assume the average price of a rack, a server rack's about $1,000,000. There are 36 NVIDIA GPU's in each rack. You'll need 2700 racks. That could mean $1.5 billion in bookings for both Dell and SM or Supermicro if BI is right about the $3 billion deal value. So you don't hold NVIDIA, but you kind of do indirectly through Dell. Is that fair? Yes, I'm going to take that because, you know, it's, it seems silly to not be in NVIDIA. We have very strict valuation metrics. And so I'm waiting for the hedges to go to the Hamptons and then hoping we'll get a pull back in NVIDIA. But yeah, I think, I think that is the important thing to be thinking about that, that the investment cycle as the large language models become larger, the, the power needed to, to generate the, the, the, the, the metrics around that, that that is going to auger well, not just for NVIDIA, but for Dell and for Broadcom, which is we own the poor man's NVIDIA, which is, which is Broadcom. And I'm pretty happy with that holding. It's up 65% year to date or 70. But you know, that's, that pales in comparison to Nvidia's 170% on the valuation question when last I checked and I don't have it in front of me now, but I think NVIDIA trades it's something like 45 times, yes, 12 month forward earnings, something like that. And so, so it's a rules based issue for you. You, you just called Broadcom the the poor man's NVIDIA 'cause you just extrapolate a bit. Why, why you'd say that? Well, it's, I mean, it's certainly not as much in the sweet spot, but Hawk Tan, who by the way is the highest paid CEO in corporate America, he is a master operator of the business. So they've already made, you know, VM Ware has been on the books for 1/4. It's a creative, it smooths out the, the hardware cycle. And they will be facing some competition, certainly from NVIDIA in the networking side of their business. But we just think it's, it's a company that it has paid. I mean, we've owned it for a long time. It's a member of our 12 Best Ideas portfolio and we continue to like it here. It's the cheapest of the group. And and I love these old economy or old technology names like Broadcom, Oracle, Dell, who have remade themselves. And that's thanks to strong management teams who pivoted when they should have pivoted just like Satya Nadella did at Microsoft, which is another 12 best ideas name for us. One of the other top top stories on Bloomberg today is this research note from City. And they argue that AI is going to displace more jobs in the banking sector than any other sector. And I was looking across your your portfolio and you have this 12 best ideas portfolio, which includes Goldman Sachs. So if we stick with the AI theme, what do you make of that City call that that it's going to be in banking where an impact to the workforce is most felt from AI? Yeah, I don't think it's going to be the Goldman side of banking. You know, I've been in this business for 40 years ad and I've heard all sorts of prognostications about what will happen. That never happens. I think in artificial intelligence will augment work at workers and particularly the kind of workers, professional workers that Goldman employees. So I, I don't think it's a bank teller robocall, you know, side of the business that that will be potentially impacted. But that's not Goldman, at least not anymore when since they've exited retail banking. And we think the M&A activity is certainly going to accelerate. So we, we still like it here. It's still very cheap based on our work. And so you, you know, I'm, I'm not worried about that. Henry Wren, who covers China tech for us, was just on talking about the Chinese consumer and how many of the big Chinese technology names are doing heavy incentive this week. If there's one thing that keeps Nancy Tangler up at night, I think I'm right in saying that it's the consumer broadly, but that I guess principally in this country. What why is it such a concern to you, the state of the consumer? Well, so, so I think there's two consumers. There's there's the baby boom consumer, which I'm a member of who who has half of the country's net worth. And so they're spending, they're retired, generally speaking, and, and they're not being impacted by this. They have big stock portfolios, but it's the low end consumer that's just getting crushed by, you know, sticky inflation, which is still with us. You know, only on Wall Street do we say, oh, inflation's declining because the rate of rate of change is going up less fast than it was previously. So I think it's wearing on them. The interest expense, the access to credit, all of this is declined. And then we know that, you know, full time jobs declined in March year over year by 275,000 hours work declined wages in terms of our average hourly earnings decline. So this, this is a, this is a problem spot for the economy. And you know, the low end of the consumer is and mass much greater in numbers than the baby boomers. So I think we have to watch this the retail sales numbers, so they're not comprehensive. We're disappointing and the revision's down. We're also disappointing. Earnings season is once again around the corner. It's silly to say. Take that concern and, and, and give me your expectations for technology earnings in particular. Oh, I think tech is going to continue to shine. And just for the record, we've been advocating overweighting tech since the fall of 2022 when everyone wrote it off once again, as, as not the place you wanted to be that the tech trade was over, that higher interest rates were going to hurt technology companies because that was an old, you know, old school view of the world. But in fact, most of the mega cap tech names have benefited from higher interest rates. So we think earnings is going to continue to be a bright spot through this year and into next. And, and so we want to own, you know, the, the, the hyperscalers, we want to own the hardware companies. And, you know, they wrote off software a few weeks ago. But just wait a few weeks and I think the hedge fund guys will be back in buying software. So there's my cynical view of the way this world works.