Dan Niles: Market strength is getting back to where AI capex is being spent, not the spenders
Speakers
Dan Niles
— Founder & Portfolio Manager, Niles Investment Management
Summary
Dan Niles sees market strength rotating to where AI capex is being spent, favoring semiconductor stocks over the hyperscalers that are funding the spending. He highlights NVIDIA as a compelling value opportunity and expects SpaceX to rally on near-term index inclusion flows. He believes the semiconductor run has room to continue until the anniversary of agentic AI demand forces a capacity check.
- Hyperscalers (Amazon, Google, Microsoft, Meta, Oracle) face selling pressure from heavy AI capex and cash flow concerns.
- Semiconductor stocks are the biggest beneficiaries of AI capex spending.
- NVIDIA trades at a slight market premium with 80% revenue growth, making it an attractive long.
- SpaceX should benefit from coming index inclusions (Russell, MSCI, NASDAQ 100) and be hard to short until the NASDAQ 100 add.
- The chip stock rally could continue until early next year when the anniversary of the agentic AI capacity ramp-up occurs.
- Semiconductor valuations remain reasonable relative to high revenue growth in the space.
Ideas
Buy semiconductors on AI capex spending.
The AI capex spending is flowing to semiconductor companies, not the hyperscalers. Hyperscalers like Amazon, Google, Microsoft, Meta, and Oracle are spending heavily on AI but face cash flow concerns and capital-raising risk, making them unattractive. Investors should go to where the money is being spent, which is the semiconductor sector.
Sell hyperscalers on cash flow concerns.
Amazon, Google, Microsoft, Meta, and Oracle are spending billions on AI capex, which is creating cash flow concerns and a potential need to raise capital. These hyperscalers were down last week while the market was up, signaling selling pressure. They are the spenders of AI capex, and that spending is hurting their attractiveness.
SpaceX will be added to the Russell indices on June 26th, followed by MSCI in about ten trading days and the NASDAQ 100 about 15 days after the IPO. Until the NASDAQ 100 addition, it will be hard to be negative on the name due to index inclusion flows. After that, valuation will matter, but near-term the setup favors upside.
Buy NVIDIA on reasonable valuation, 80% growth.
NVIDIA trades at just above a market multiple while growing revenues at 80%, making it attractively valued on the semiconductor side. This offers a reasonable valuation entry in a high-growth AI beneficiary.
