Francisco Jose Ortiz @FranciscoOrtiz13: "AI remains one of the..."

Georgia

AI remains one of the most important long-term investment themes, but the market is not treating all AI-related companies the same way. Over the last few months, we have seen a clear divergence between the companies receiving AI infrastructure spending and the companies funding it. Memory, storage, and infrastructure names such as $MU (Micron Technology, Inc.), $WDC (Western Digital Corporation), $SNDK (Sandisk Corp/DE) and $STX have performed extremely well as investors reward the companies directly benefiting from hyperscaler capex. On the other side, several of the largest hyperscalers have come under pressure. $MSFT (Microsoft), $META (Meta Platforms Inc), $AMZN (Amazon.com Inc) and $GOOG (Alphabet) are spending aggressively on data centers, chips, energy, networking and AI infrastructure. The concern is not whether AI matters. The concern is whether this massive capex cycle will generate attractive returns on invested capital. That is the key question. In my view, the market may be becoming too pessimistic on some of these high-quality businesses. Microsoft is the clearest example. The stock now trades around 21x earnings, well below its 5-year median P/E of roughly 34x. Morningstar estimates fair value at $600 per share, compared with a recent price of around 353. That implies a price/fair value ratio of approximately 0.59x. Meta also looks interesting. The stock trades around 19.7x earnings, below its 5-year median P/E of roughly 26.1x. Morningstar estimates fair value at $850 per share, compared with a recent price around 542, implying a price/fair value ratio of approximately 0.64x. Amazon is also trading at a meaningful discount to its own historical valuation, although its free cash flow is currently under more pressure because capex is consuming a very large portion of operating cash flow. Google is a slightly different case. It is not especially cheap versus its own historical P/E, but Morningstar still estimates fair value at $433 per share, above the recent price around 342. The investment case depends more on the quality of its ecosystem: Search, YouTube, Google Cloud, TPUs, Gemini and long-term optionality such as Waymo. To be clear, this does not remove the risk. AI capex is huge. Monetization still needs to be proven. If these companies fail to earn attractive returns on this investment cycle, the market can continue to punish them. But these are not weak businesses chasing a trend. They are some of the most profitable and strategically important companies in the world, with wide moats, massive distribution, strong balance sheets, and decades of execution. The market is currently focused on the spending. I am focused on what these companies may be able to build with that spending over the next 5 to 10 years. This is why I have recently been adding mainly to Microsoft and, to a lesser extent, Meta. Not because I know where the bottom is. Nobody does. But because the relationship between business quality, valuation and long-term opportunity is becoming much more attractive. As always, this is not investment advice. It is simply how I am thinking about the current opportunity.

Not investment advice. The author may have financial interests in the mentioned instruments.