Worried about AI capex spenders outside of Google, says DCLA's Sarat Sethi
Speakers
Sarat Sethi
— Managing Partner, DCLA
Summary
Sarat Sethi, managing partner at DCLA, discusses big tech earnings and positioning. He favors Alphabet for its capex flexibility, prefers software over hardware as enterprise IT budgets shift, and highlights quality healthcare names Stryker, Thermo Fisher, and Johnson & Johnson as rotation beneficiaries. He also watches Microsoft for ROI on its R&D spend and is bullish on ServiceNow’s execution.
- Alphabet is a core holding because it can easily throttle capex across YouTube, Cloud, and Gemini.
- Enterprises are holding back on hardware purchases and continuing to spend on software and security.
- Hardware is seen as the biggest loser as IT budgets prioritize AI and software.
- Microsoft is liked but needs to show faster return on its large R&D investments.
- ServiceNow reported solid numbers with no softening, reinforcing software execution strength.
- A rotation is seen from momentum back into high-quality cash-flow healthcare names Stryker, Thermo Fisher, and J&J.
- He also holds Amazon, Qualcomm, and Nvidia but gave no elaborated thesis for those positions.
Ideas
Alphabet can flex capex, resilient holding
Alphabet is a core holding because it has multiple levers to toggle (Gemini, YouTube, Cloud) and can pull back capex if return on investment is not there or the market signals discipline, making it resilient relative to other big tech capex spenders.
Enterprise software spending remains strong
Companies are still spending on software and security while holding back on hardware because they need to allocate funds to AI, making software a beneficiary of current enterprise IT budgets.
Microsoft must prove ROI faster, watch
Microsoft is liked for its software-heavy model but is already down double digits this year and must show return on investment on its large R&D spend faster than peers, creating a wait-and-see setup.
ServiceNow executing strongly across board
ServiceNow hit its numbers, showed no back-end softening, is firing on all cylinders, and exemplifies software companies that are executing well, generating cash flow, and buying back shares.
Hardware underperforms as spending shifts
Hardware is the area that will lose the most as enterprises hold back on hardware purchases to prioritize AI and software spending, leading to underperformance in that segment.
Quality healthcare names attract rotation
Money is rotating back from momentum into high-quality growth at a reasonable price; Stryker, Thermo Fisher, and Johnson & Johnson are cash-flow-rich, with great balance sheets, and healthcare is the smallest sector in the S&P ever, offering upside.
