The Future of Power and Industrial Growth

Today's Animal Spirits Talk Book is brought to you by Elger. Go to Elger. com to check out the Elder Concentrated Equity ETF ticker CN EQ that's Elger. com to learn more . Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealthagement. Man This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholt's Wealth Management may maintain positions in the securities discussed in this podcast. Welcome to Analyspirits with Michael and Ben. Today we spoke to Dr. Encore Crawford, portfolio manager at Algebra. We had Encore on the Competent Friends back in April and were blown away by breadth and depth of her knowledge and her ability to talk about her space. She worked at Intel. Not only is she a portfolio manager? She was an analyst, but she was in the field, right? She was in the field. It's so unique and important to talk to somebody that has actual boots on the ground experience because I think a lot of the discussion that's being framed around AI trade, the growth trade, the semi trade, whatever is fram ed through the lens of price. And I mean stock price. What does a stock price do when you make judgments, narratives based on whatever your opinion is? But to talk to somebody who understands the supply chain , the bottlenecks at such a granular level really opens your eyes as to why the prices are doing what they're doing. It's not just prices responding to the explosive earnings, which is obviously the case, but the backlog for as far as the eye can see , it's unique. It really is it's, you know, I've never seen anything like this. I mean, state the very obvious. We've talked in Ol Sirpits a lot about the downside case of AI, what could go wrong? I think her case is no, no, no, no, people are looking at this using the past as their guide. This is different and here's what could go right with A I . And so I mean, she has a very bullish take bull bullish outlook on everything , right? So I think this is, I think it's important to hear all sides of this debate . And I think it is worth we've been saying, have an open mind that like maybe this is one of those times that's different. And so she kind of lays the case out for it. And I like the discussion about the market making you feel right or wrong about these ideas and waiting for the mark et to like catch up with you or it's anyway, very interesting conversation. So here is our conversation with Dr. Andre Crawford from the Elder Concentrated Equity TF. Dr. Ankar Crawford , welcome to the show . Thanks for having me back , I suppose Backish. Okay, so we did have you on the Compendent Friends back in April . And part of the conversation was that I found so interesting was you thought you were wrong about the memory trade because the market wasn't confirming your suspicions and these were more than suspicions. You thought it was so obvious that these were going to work and they weren't. So you thought, hey, I must be wrong. The market like, right? Like you've been doing this a long time. You're humble enough to know that if you're mentally pounding the table but the market's disagreeing with you, it's usually the market that's right and not you. Okay, this was the outlier in which you were so right and April is it was two months ago. It was two months ago. That's it. Microphones was at four hundred and fifty four dollars a share give or take when we recorded. It's now at one thousand eighty . four hundred and fifty to one thousand eighty. It's up one hundred thirty five percent since that conversation . So now what signals are we taking from the market ? Gosh, you know, what I would say I think it was in the context of initially like I had thought that I was wrong in September when I had first Micron that I thought the Micron was telling me that the market was telling me that I was wrong on the thought process. But look, there's been a lot of movement in the market since April. And I would say back at the end of March, there were, you know, Nebius, I think, was at ninety five and Estero Labs was at ninety five and now Estera's close to four hundred . And what has happened is that people have , I think the market is coming to the realization that some of what is happening in the AI trade has duration. We have seen , for example, for the Neoclouds pricing, for the Neoclou d per GPU hour is rising because we are short compute . And you've seen anthropics numbers shoot through the roof. I think they started at thirty billion . Now we're looking at forty four or forty nine billion in AR. When growth investors are telling you that they've never seen anything like this , I think everyone needs to take heed because this is a different era. And we can stop calling it a bubble. We can stop calling it , you know , you know, one time and everyone just needs to pay attention to what's going on. It does seem like the bubble talk is getting a little exhausting It's when I looked. I wrote a blog post in twenty seventeen and people were talking about bubbles back then. It's been a long time coming. Do you think that people are just so reliant on history that like, listen, every time there's been a big CapEx boom and we've built out a big innovation like this , there's been a bubble. Is it just that people have too small of a sample size? Like what do you think that people get wrong about that idea? Because anyone who uses history as a guide says, listen, we've seen this checks all the boxes. So like what is it about I guess this that is completely different ? I think it's exactly that using history as a guide because we have never seen, there's no historical precedent for what is happening today in terms of how fast the innovation is occurring . I mean, just was it just last week that we were talking about like the Nom Brown tweet about how models will begin training themselves . And we've heard this before . And I had I said this a couple of years ago on CNBC, I think, where I said, you know, when software begins to write software , innovation becomes exponential . And we are at an exponential innovation curve. You know, we're not used to thinking exponentially . And when innovation, it's also this is digital innovation , right? So it's very easy to adapt and adopt it . So think about I mean, if the innovation came in the iPhone , right? Then we needed to have dispersed all the hardware and we needed to make sure everyone had an iPhone. And that penetration curve is a little bit different a digital penetration curve where everyone can adopt it immediately . I think that's what's happening right now where the digital penetration curve, there is no barrier to entry to adopt it and to start using it . The usefulness of the productivity of the AI tools has become incredibly clear . And therefore , there is no compute because everyone wants to get their hands on intelligence. So Encore, you're the manager of the Alger Concentrated Equity ETF, the ticker is CNEQ But you've managed this portfolio in what a mutual fund or SMA wrapper for quite a while . It's actually an ET F and mutual fund and an SNA wrapper. Okay . And you accepted about two years ago as an offshoot of some of the other funds. Okay. When you just said that it reminded me of like people when promote their podcast, wherever you listen to, right? Apple, Spotify, YouTube. You can get it in any flavor that you like, but if you want Encore's stocks, you can get them. You're a long term investor. You are not right. Like these are these are concentrated bets that you're making on these companies. How hard is it to ride these winners? Because you're right. We are linear thinkers. I wrote this a while ago, many a moon ago . Anybody could do six plus six plus six plus six plus six . But if you ask them to multiply six times six times six, I mean your brain will melt. We just we can't think that way. So as we're transitioning from linear to exponential growth, all right, Micron is up one hundred and thirty six percent, whatever. Went from four hundred to one thousand. Could it go to four thousand? I'm being silly, but like, how do you think about the long term prospects of a stock , we know that it's discounting something a lot, but like people have said, well, this is funny. Micron, or yeah, Micron is the largest stock in the Rosa one thousand value index. Like what? Because the market is probably rightfully putting a discounted multiple on it eight times because we know we've been through these cycles before . But the question is, is this cycle of memory ? What do you say? How do you think about this? Let's talk about this in terms of not just the memory cycle because I think that there is something much bigger going on than just the memory and memory is just kind of an example of what's happening. If you look across the supply chain for semiconductors, semis were kind of a forgotten child. I was a semiconductor analyst for Alger when I first started my career and it was kind of like we were the ugly stepchild ren to software because software had these beautiful business models. Like semis were cyclical, they didn't get any pricing power. They would like beat each other up every year on getting sockets . And I remember at some point thinking, well God, I used to work in a fab, right? In a bunny suit. Like it's really hard to make these things. Why is it that Sunny's getting respect? Wait hold on Cork, can you just don't clause over that for a second . So we're talking to somebody that prior to her career as an analyst and a portfolio manager, you literally worked inside of these buildings that you had to put a hazmat suit on. Yeah, well, it was a bunny suit. It wasn't a hazmat suit, but it was I did. And I did my PhD work at Intel and, you know, had to build my own wafers there. And so it was just like I had this like this appreciation for how hard it was to build this stuff. What happened? You know, semiconductors became kind of a GDP plus grower, plus plus grower to a GDP plus grower to basically almost a GDP grower as a group. As that entire supply chain became a proxy for GDP , it all consolidated . So across the supply chain, whether it's the PCB guys, whether it's the foundries , the memory guys , the semiconductors , they all as semicap equipment , it all consolidated between twenty ten and twenty twenty two ish. So what happens when you basically get a consolidated market for the entire supply chain and a demand signal that feels exponential . It's really hard to bring on supply . And therefore, you have many different things that end up being fantastic , which is you get better margins, better pricing. All of a sudden the power has shifted back to semiconductors and this entire supply chain for semis, including the Foundries, TSMC, global foundries , you know, the semiconductors themselves, even like the networking equipment. So the entire supply chain is stretched right now. And this is just what's happening in memory, but it's happening happening across every other aspect of semiconductors and this AI build as well, including power. Now power didn't consolidate , but that power is also short. We're basically short , I would say soup to nuts, the entire supply chain or artificial intelligence. It is funny how the market sometimes tells you if you're right or wrong and that's kind of the ultimate scoreboard. I'm curious how many times that you've changed your mind since like the chat GPT moment back in twenty twenty two about who the winners and losers are going to be because obviously there's been a ton of different narratives. Have you been pretty down the fairway on this and pretty resolute or have you changed your mind a lot on how this is going to play out? Look, I think that there's some big picture things that I haven't changed my mind on. There's a paper that we wrote in early twenty three, probably March April of twenty three. It was called AI and the declining cost to create . And that talked about how software and any digital assets are at risk and value should accrete to the hardware and semiconductor supply chain. That big picture was something that we held on to . However, the components of that are a little trickier, i. e. when should you have sold software? We sold a lot of our software then, but there were kind of riproaring rallies like CRM went from one hundred and sixty to three hundred , right? There was a doubling because people thought it was an AI winner. There was definitively points in time where we would question the hypothesis However, we did stick to our guns on understanding that there are swaths of the market that you really don't want to be invested in. They could be trades but not investments. Individually in names inside of sectors , I think what we have seen is there's been not necessarily like TSM is something that we've owned for a very long time and have only gotten more convicted in part because you've gone from a seven player market from fifteen years ago to effectively a one and a half player market today . Maybe a two , I would say one and three quarters because Samsung and Intel right now are trying to find their find their sea legs . The compute shortage that everybody's talking about , is this the type of thing that Taiwan semi who actually manufactures these chips , are they being the responsible stewards of the entire ecosystem ? Or like or can they literally also not manufacture as fast as supply as fast as demand wants them to. Let's study that supply chain as well. TSM is not the holder of all equipment, right? So they need to ask ASML to make them equipment. They need to ask L AM research and AMAT and KLA Ten Corps for that equipment as well. So the equipment that goes into these buildings to actually that's right. So let's if you go across the supply chain for even TSM, even if TSM says, you know what? I'm going to add three x the capacity , which they never would do , that if they wanted to do that, the supply chain is going to limit that growth . Because even the Senic equipment manufacture rs cannot manufacture at that rate because their supply chain cannot manufacture at that rate. And here's the beautiful thing , right? Everyone is afraid that this is a bubble . Everyone is afraid that we're growing too fast . And what I'm telling you is that we are in fact rate limited by the supply chain , which is a really important aspect of what is happening. So we're almost capping the growth so we can't get into bubble territory right now. We can't spend as much as we may want to , but that gives you duration. What if somebody would say, but I'm just playing Devil's Advocate. Everybody knows that supply is constrained as far as the eye can see and therefore we're, going to up b theid prices of these stocks in anticipation of an endless runway . And of course, the impossible impossible part of this is well, when do prices outstrip future expectations of what can realistically grow into. And how do you know that I know again, I'm asking you a literally impossible question. So what would you even look to in anticipation of, okay , perhaps prices have outstripped what's reasonably what these companies can deliver on the fundamentals. Now what prices are you talking about? TSM prices ? Oh good question. Whatever. So I was thinking of my brain stock prices, but if there's like actual business prices, like wherever you want to take . The most common question that I get asked is, Oh my God, the valuations are so high. How can you invest in AI when the valuations are so high? In my response to that is on what metric are the valuations too high ? Because the first thing you need to get right when you think about valuation is the E . Only then can you come up with a PE ? So if the numbers keep moving up because we are in a supply chain shortage through the end of the decade , then what is the right earnings ? Now I will give you an example. There is a stock. It's called GEV. I remember looking at GEV and this was, I don't know, a year ago. There was a certain thesis around GEV. They make turbines for utilities and for CCGT plants , which are required for electricity, which is required for data centers. There's only three companies that companies that make CCG turbines. GEV is one of them. They have got a third of the market . And their pricing has gone from like twelve fifty per megawatt to something like two thousand five hundred inside of the last year . That's insane. Yes. And it's continuing. Like I was just looking at the numbers the other day, and this is happening across all of these AI stocks . I mean there are stocks that on twenty eight trade at a low double digit earnings multiple . Because our numbers might be quite differentiated from the street . But , if you stop thinking linearly and thinking about the exponential , then you have to figure out what the right earnings is . Then we can talk about what the right PE is . But I would say this is happening across the supply chain , where the numbers are just too low. Before you mention, like, hey, there's going to be some trades here too and some investments. When you creating your portfolio, which is concentrated, I think what is it, thirty names or something , are these all longer term investments? Do you look to any trades in this space that you try to get too cute on? Or no, these are like, I don't know, you tell me the number three, five, seven year hold, like, what is your holding period when you're trying to buy these stocks ? I mean, ideally , you're looking at things that you can hold for three years . So I always think about in three years, will this be a triple? Could this double in three years? Kind of that's the mentality. Occasionally there might be a trade in there that it usually is on a pretty short leash . One of the things that you just said that I would totally agree with is that I maybe I'm projecting, maybe I'm making this up. I don't think I am. That a lot of investors are asking the questions as I did. I started the show with this. Like is it too far, too fast? Are the valuations too high? Blah blah blah . There's still , again, this is like anecdotal, but there's still a lot more disbelief. I do think that investors continue to just be stunned by and they're talking they're looking at the stock. You were looking at the business. So you have a to say that you have a better hand le on what's actually happening is comical. But you also are talking to investors and you're hearing disbelief and you're probably saying like these people have no idea. They have no idea what's happening. Yeah, honestly, Michael, I love the skepticism because if everyone was not a skeptic , then you know, everyone would be on the same side as us. Right. And so I love the skepticism and I love the debate because again, it makes me question my own, like it keeps me keeps me grounded as well and makes me question my own thesis over and over again to come back to what I'm telling you. There's nothing really that's deterring me from my viewpoint that and look, you see it, look, the most basic thing, I think at some point today, you asked me, what do you look for? One of the things that we've been looking at is we own this company called Nebius . And Nebius is a I don't even want to call it Amyocloud because it's progressed so much beyond that. I would say it's like the first AI hyperscaler , AI native hyperscalar that is that has been formed in this in this era . Their pricing for their old chips is up thirty to forty percent . So that's their pricing for like hoppers . The hopper is the first generation of AI Nvidia AI chips. They were supposed to be going down fifteen percent, twenty percent, as soon as you got the next generation. As soon as Blackwells and Race Blackwells came in, hopper pricing was supposed to go down . Yet pricing is up thirty percent to forty percent. What that tells you is that there is simply not enough supply . For now , for now , the thing that people keep coming back to is well , let's see what ROI the buyers are going to see. And when I think when what they mean is the hyperscalers . So does that all rest on the shoulders of hyperscalers or are these orders broadening out? I think what you have to do is look at the supply chain of AI. So we started the conversation talking about anthropic. Anthropic's revenues are or their ARR is approaching almost fifty billion dollars. The rumor is that they're actually profitable in Q two . And if you take a look at , again, I'm just talking about the publicly available information, if the rumors that they are they are profitable in Q two , then this whole idea of, oh my gosh, no one can ever make a profit is out the window because clearly the leader in the space is making a profit. And I think if you take it just back to fundamentals , the hyperscalas are a bit more confusing in part because some of the CapEx that they're spend ing is for their own internal means . And it's hard to deconvolve how much is being used internally versus how much is being used to lease or to rent out to other people. I'm curious, what would cause you actual concern though, for the people that keep just shouting from the rooftops? This is a bubble, this is a bubble, this is a bubble. They don't seem to quantify anything. They just kind of say, evaluations are high and stock prices are up. Like what would be actually a cause for concern for you to say, all right, we've overdone it here. Okay, if I could magically wave a wand and we could spend three trillion dollars in CapEx and place it in the ground , I think that would that would cause me to worry . If I saw some sort of an al gorithmic change of such that we could do a lot more with less , that would cause me to question. Although I think one of the other misnomers in this market is that we all remember DeepSeak, right? Deep Seak Monday. And the fear was, oh my gosh that this Chinese model is doing so much and they can spend CapEx . And I think what you know, the conclusion I have come to over the last I guess the year since that's happened is that the business model for an open sourced model is going to be quite different than the business model for a frontier model where the value is going to reside in different places. So for frontier model, the value resides actually with the model holder because they are actually adding value by providing incredible intelligence . So they should hold the value . On the open source side, I think the value actually accretes to the infrastructure layer because the open source models, I believe, are all going to converge upon one another and become highly competitive . So I do actually think that there's this interesting like , you know, also misunderstanding in the market about open models and closed models and this idea that the open models are going to take all the profit from the closed models. But I am watching for if any of these open model suppliers can cross the chasm with something super innovative because look , I would say that right now you have to be willing to survey the market all the time and change your mind because the innovation curves are just so fast that you can't count anyone out . All right, so Encore, we've spent we've spent this entire entire the ty of this conversation talking about the mega trend where your bread is buttered on the on the AI infrastructures , supply constrained soup to nuts story . But this is there's more going on here . This is not like a replacement for SMH in your portfolio. This is broader than just the AI stuff. So this is a large cap growth strategy. How are advisors and clients thinking about it, asking you where does it go ? What's your response to that? Look, I think that we are at a very interesting time in our own histories, such that the overall economy is going to move from a consumer led economy an industrial led economy . And you're starting to see it already where the economic growth is going to be dictated by reshoring and CapEx growth . And all of that has a long tail in the broader economy, which is why like if you look at the portfolio, there's companies like QXO in the portfolio which are which is a building products company or Hyko, which is an airplane parts manufacturer . So it is, I mean, I would like to remind everyone that this is actually very much a large cap growth strategy . However, we're leaning into the biggest change factor in our economy right now , which is artificial intelligence, which touches almost every aspect of the market . So Encore, we're in the year twenty thirty one and we're looking back to twenty twenty six as this incredible moment of time. With hindsight being twenty twenty, what do you think is the one area of the AI ecosystem that investors will have wished they paid more attention to? I think power in the industrial ecosystem because the same thing that's happening across the AI supply chain is happening in power . And that's capacity that's even harder to bring on. So if you look at the IP's, which are the independent power producers . Today they are trading at kind of low teens multiples , which , you know, in the broader, I mean again, you know, and that's low teens multiples on like twenty seven, twenty eight numbers . It's not like we're looking out to twenty thirty two to justify the valuations. One thing that is very clear is that we don't have enough power for the eventual reshoring of a lot of industry and a lot of capacity back to the US , they are just long term beneficiaries of this AI supercycle. Encore , this was amazing. Thank you so much for taking the time to do this. For people that want to learn more about your concentrated equity strategy, take risk CN EQ , where do they find more about the strategy? Just go on to our website alger dot com forward slash CNEQ . Perfect. Thank you so much. Thank you to Anchor check out Elger. com to learn more, email us animal spirits at the compound news. com Before investing, carefully consider the fund's investment objective , risks, charges and exp,ens es . 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