IPO fever had set in among investors at the Baird Conference in New York, held just before SpaceX went public in mid-June.
Investors from all around America and the world had flown in to meet scores of mostly mid-cap company management teams to kick the tyres, reassess some ideas and discover new ones. Much of the coffee chat was about developments outside the conference centre, however. With the $75 billion SpaceX IPO looming, many investors I spoke with lamented the smaller companies they were selling to make room for an allocation to the newest hyperscaler to join the public markets herd.
The attitude in the room seemed to align with the wider feelings about the largest-ever stock raise. Launching on 12 June, it attracted more than $350bn of investor orders, almost five times oversubscribed. After the initial raise, investment bank underwriters were able to sell an extra $11bn of shares using overallotment rights.
Initially issued at $135 a share, SpaceX has had a wild flight so far. It initially opened at $150, closed the first day at $161, and breached $200 two days later. It’s down almost 25% since then, and back in the low-$150s. So up from first issue but down from its initial listing price.
The wider S&P 500 has accompanied SpaceX’s share price descent – albeit not in a parabolic manner. This has led some to posit that it is the cause of the wider market’s wobble. But I think the real reason is much more mundane: you just have to follow the money.
Everyone has chips with everything, and the chips are running out
For the past few months, signs of a shortage in all-important memory chips have been accumulating. That has come to a head in the past couple of weeks.
Forget SpaceX and its mind-bending size. Instead, think of all the investment – all the capital expenditure – that is currently being spent on the AI buildout. Many investors have decided to sell the companies that are doing the spending and buy the companies that are standing in front of the money hose. That means the Magnificent Seven and many of the AI model owners have generally fallen, while those supplying the chips or the means to make them are going stratospheric.
Micron, a US manufacturer of mission-critical memory chips used in everything from smartphones to Xboxes, announced quarterly profits that were 15 times higher than expected. Sales were almost 350% higher than the same quarter a year earlier. Despite the already mammoth investments in US data centres, this week Alphabet has capped the use of its Gemini AI model by Meta (its largest customer) because it doesn’t have enough computing power to go around. The rationing of AI, in a sense, has already started (at the corporate level, at least).
SpaceX makes roughly $2bn a month selling compute to other hyperscalers, but these are predominantly fixed-price contracts. Meanwhile, if chips are harder to get hold of, SpaceX’s ability to expand its compute to sell will be hampered.
As long as this massive mismatch between chip supply and demand remains, the environment looks exceptionally good for chip makers and their suppliers. Yet this isn’t without risk – this industry is infamous for its turbo-charged cyclicality. Such phenomenal profits will entice rivals and lead incumbents to build more factories, which, in time, will end with oversupply and cratering prices. It’s tough to know whether that will be in six months or six years – that’s where the price you pay becomes crucial.
When everyone’s chasing chips, look for the picks and shovels
One thing that brings me confidence is that the US economy is showing little sign of weakness. There’s lots of creative destruction, to be sure – there are a lot of hefty redundancies being announced and many markets are moving wildly – yet the overall levels of employment, spending and investment are still very strong.
Going back to my time in America in early June, this vibe was reinforced by speaking to taxi drivers, waiters and bellhops. As soon as they heard that I was a fund manager, many of them had too many stock tips to share before it was time for me to tip them. The economy is doing really well. And so’s the stock market – although it’s very heavily concentrated right now, which is tough. It could also make the market more unstable, and any downdraughts could be as vertiginous as they have been on the way up.
For the largest and hottest stocks at the top of the indices, that is. Here, you have to pay up very handsomely indeed. And for good reason – in lots of cases, there’s a lot of opportunity there and much of it is backed up by extraordinarily good earnings growth. Yet as I said earlier, the price paid in these buzzy areas is one of the most important investment decisions you make.
So with markets getting a little heady and all eyes – from taxi drivers to professional investors – laser-focused on the very largest AI businesses, it’s creating very interesting opportunities off the beaten track for adding balance to portfolios. The smaller businesses that aren’t as whizzy or well known.
And the most ironic thing is that many of these companies are so exciting because of the AI tools they’re rapidly integrating. This is making them more efficient, more sustainable and more profitable than in the past. Many of them, too, are getting a boost from the AI and data centre boom. Many of them are businesses that deliver small but vital parts and services that make this AI and cloud-based infrastructure run. Or that keeps it ventilated and cool. Or that delivers the power so it can run at all.
The AI gold rush is leaving plenty in the shade
The busiest rooms at the Baird conference were those dedicated to AI. And while there’s no doubt that this is one of the most exciting technologies created in most people’s lifetimes, the market is poring over this space with a million-watt spotlight.
We have many investments in AI suppliers – companies like European chip fabrication equipment suppliers AMSL and ASM International, cabling and sensor provider Amphenol, and Quanta, which is helping upgrade the ageing US power network to cope with the explosion in demand. But we’re also looking for diversification in case of a shock or unwind that no one sees coming.
We’re finding those opportunities a bit further from the red-hot attention. They’re certainly much more keenly priced and have different industries and factors driving their performance. I saw lots of these businesses at the conference, and came away with several new ideas for our fund.
