Transcript:

Caroline WoodsA new week, a new month. And after big tech earnings, investors are asking one question what’s next for the AI trade? Joining me now is Paul Meeks, managing director and head of technology research at Freedom Capital Markets. Paul, welcome to the show. So great to have you.

Paul MeeksWith the senior Caroline. Thanks for having me.

Caroline WoodsAll right. So we are looking at Green Arrows this morning. What do you think has the correction in tech run its course. Or do investors need to brace for another leg lower.

Paul MeeksYou know Caroline I think we’re mostly out of the woods. You know, we do have a couple of important quarterly earnings coming up even this week, particularly AMD. But I was actually surprised that despite pretty strong fundamentals with the I infrastructure builders, and most of them have reported their quarters and most of them have not only reiterated guidance but raise guidance.

Paul MeeksSo all is well. But what we have in this space over the last couple of years, ever since the development of ChatGPT in late 2022, is we swing as a group of investors, from the pessimist rain to the optimist rain. And so I expect that over time, people will come back to these names as far as can we immediately bounce back and can we sustain that bounce?

Paul MeeksBoy, I wish I do that.

Caroline WoodsSo now that we’ve heard from Big tech, aside from Nvidia ranked your top three Meg seven stocks today, Paul.

Paul MeeksI would say today, I’m a contrarian investor. I think over time, meta will indeed monetize its AI in one shape or form. I mean, this is a company that in the history of global business, perhaps no other company has monetized products better. And so I think with the, bludgeoning, which this stock got when it reported its earnings and probably, most bullish as a contrarian on meta.

Paul MeeksI also like what Google has to say and what Amazon has to say. You know, the stocks have run up a little bit, and maybe even Microsoft with its come back. But I would say my number one is probably meta is a concerning investor for the long term.

Caroline WoodsWhat’s number seven.

Paul MeeksOh wow. Tesla. You know I think Tesla is in, very deep trouble. And if you’re a SpaceX shareholder, if you like it or not, you will be forced, to own Tesla. And one of the things that despite the fact that Elon Musk is a genius, he does, very poorly performing assets into better assets. And so what we saw with Tesla recently is the EV business is not necessarily in decline.

Paul MeeksAs far as the number of units. The volumes were actually pretty good last quarter, but the profitability in the cash flow was nasty. And this is when these companies have to spend even more on their own capital expenditures. And so, I think Tesla shareholders that stock can go down more. I think SpaceX, even though it’s down a lot from the IPO, could go down more.

Paul MeeksAnd so those would be the number one on my hate list.

Caroline WoodsAnd we will hear from SpaceX this week with its first earnings report. Is there anything that Elon Musk could say that would make you bullish on SpaceX. Or is that, just going to be a stay away for now?

Paul MeeksWell, for me, it’s a stay away from now because I’m looking at the fundamentals. But we all know whether it’s Tesla or SpaceX or any company that, he’s involved in, you know, it’s more of a cult than a fundamental story. And I actually believe with the stock, coming down so steeply from its peak right after the IPO, given the fact that he will, spring his sprinkle as fairy dust on it, I bet the stock rallies.

Paul MeeksBut I actually think SpaceX is probably, worth 60 to $70 a share. So that tells you, even from this low price, that I think it could be cut in half again. But he will talk about the wonderful things in the future. I bet the stock actually rallies in the short term.

Caroline WoodsOkay. It’s rallying today. It’s trading around $112 and shares are still well off that IPO price. We haven’t talked about Apple yet. We’re kind of seeing a sea of green today in tech. But Apple is not participating. It’s it’s down only about 1% today. And I know you’ve been skeptical of Apple’s AI strategy. So what does Apple have to prove before you become more bullish there?

Paul MeeksYou know, we’ve all been waiting. Well I haven’t been bullish on the stock in quite a while. I bought it years ago and just hold it because I also know it’s not going to go down. We’re all waiting for show me what you got. And I write the monetization. Now it looks to me like, you know, they are going to leverage this trend through their iPhones and, you know, good for them, bad for them because they don’t have to spend the R&D.

Paul MeeksThey don’t have to spend the capital expenditures on compute. But on the other hand, they also lose control. And if all of their functionality is being delivered by somebody else’s R&D team, at some point, that side is going to demand all the economics. And I think, Apple will be in some trouble. Now. They start at the beginning of every day with over a billion units, right?

Paul MeeksThey have a very large installed base that’ll carry them for a while. But if you ever get a whiff that there is another device in addition to your iPhone that can bring you I in the future, and they lose their, walled garden status, that would be a lot of help pay. In the meantime, you know, their, quarter, last quarter, the services business was disappointing.

Paul MeeksAnd the services business is where you need to see them grow, because that’s the higher margin business. The iPhone business, always about 50 to 60% of revenues will wax and wane, depending on product releases. But here’s a company that gets a enormous valuation even after the correction. And for many years, not recently, but for many years, it’s grown its top line and its bottom line at a much slower rate than just the S&P 500.

Paul MeeksSo I just don’t I get it.

Caroline WoodsLet’s shift to some of the names that you do like, aside from, Meta and Alphabet, maybe Microsoft. You recently upgraded several AI infrastructure names to buy after the selloff. What stocks are you talking about and what is Wall Street getting wrong?

Paul MeeksYeah. So I took advantage of this correction that you asked me about it. The, the top of the show, to go from hold to buy and a number of nio clouds and I colo companies. These are the folks that are building the data centers for the hyperscalers and others. Some of them, when I initiated coverage, went against the grain that had them in hold.

Paul MeeksSo I got a lot of heat because it wasn’t by, like everybody else. But they’ve come in recently. So think of companies like, core. We see our V, Iran, IRS in the US and BIS, these are the major neo clouds. And then you have companies that are I Kolos and these are companies that years ago built data centers to do Bitcoin mining, whether it was their own bitcoin mining or hosting for somebody else.

Paul MeeksNow as that business has plunged, they’re all transitioning their capacity to support AI workloads. And there’s a nice opportunity there. I’d say among that coverage list my favorite is Applied Digital Applied. I also very, very much like Flextronics Flex. This is a company that’s a contract manufacturer that’s been around, believe it or not, since 1969, but they’re spinning off in the first quarter of calendar 27, their I infrastructure business.

Paul MeeksAnd that will be a very exciting business indeed. In the meantime, flex has come way down in price. I’m really bullish on that one. And you know the streak typically follows momentum right. When stocks are going up they raise their price target. They love to talk about it. When stocks are going down they’re nowhere to be found. But I usually played the other end of the trade okay.

Caroline WoodsSo just in terms of timing I was taking a look at these names. Some have pretty significant year to date gains already, but well off the highs. So it looks like most of them are well off the highs that I checked. So still a buying opportunity today. Investors.

Paul MeeksOh yeah yeah. And a couple of them like I would say my favorites right now probably flex flex applied digital appealed and core. We see our AWP.

Caroline WoodsSo as we think about I infrastructure why buy those names instead of just an Nvidia?

Paul MeeksI like Nvidia too. I would buy Nvidia with both hands every time it got to about 190 to 195 share price. I actually think that when you take a look at the revenue backlogs now, when you have bookings, they’re great. But I guess they could be, even though they say their take or pay contracts, you know, they always could be, eliminated or even renegotiated.

Paul MeeksBut these companies, these nio clouds and I kolos, have very cheap valuations. They have revenue backlogs that will cover them for years. And all these companies are going from lower margins to much, much higher margins as they build out. And I expect a inflection revenue wise in these business. And I’m talking about most of these companies, their revenue tripling or quadrupling as we get out about 12 to 18 months from now.

Paul MeeksSo I see a bigger pop in these names versus Nvidia. But man, again, as I said, if you can buy Nvidia at 190 to 195, please do it.

Caroline WoodsYou mentioned some of the names that you don’t like, but as you think about some of the other AI winners that we’ve seen which look too crowded or maybe too vulnerable right now.

Paul MeeksYeah, I think some of the, same old, same old that people have crowded into now, I felt that way a couple of weeks ago, but they’ve all come down significantly, even though they’ve, rebounded late last week and then into this morning. But I would say, some of these software names. Now, what we’ve seen recently is a, rotation out of the hardware in semis.

Paul MeeksThat’s where I typically focus, and that’s where I’m still bullish into some of these software names. And no matter what these companies say in all their interviews, I’m not sure which software companies are just not disintermediation by AI. And so in the meantime, as we have this rotation from hardware and semi center software, you bid up the software names.

Paul MeeksI don’t know if that’s the right thing to do.

Caroline WoodsIs there a software name that you think is safe though?

Paul MeeksYou know, Microsoft is interesting to me. Why not? Because I care that much about office 365 but you know, Microsoft Azure, their cloud business benefits nicely from the AI boom. And they just showed a great quarter some acceleration. And so if you have a software business like Microsoft but you also have the benefit of the AI infrastructure building kicker that I’ve been talking about I like that edge.

Caroline WoodsSo as we bring it back to the question I posed at the intro, what’s next for the AI trade? You would say more gains in store?

Paul MeeksYeah, I think so. We’ll get, AMD’s up front. That won’t be much of a surprise there, because AMD just had their eye investor day a week or so ago. So this is sort of a fait accompli, but I think you’ll see as we get through earnings season that this major correction. And when I say major correction, some of these AI infrastructure builders went down 30, 40%.

Paul MeeksOnce people feel better as I do that, I infrastructure CapEx will continue not just into 2027 but into 2028. I think the next move would be these stocks to continue their rallies.

Caroline WoodsIs there a data point or an earnings miss that would tell you that the AI thesis is actually weakening?

Paul MeeksYou know what, I’d be looking forward. I think we’re in the clear because most of the heavy spenders on AI infrastructure, the hyperscalers have reported at this point. But when you have companies lowering their guidance for capital expenditures, that would be a problem. Because even if they lowered from 60% growth to still really vibrant growth, 3,040% people will see through and what we call the second derivative argument.

Paul MeeksAnd then they’ll start to say, oh my goodness, we got to get out before that. Growth doesn’t go from growth, but it goes to shrinkage. And so I think that would be what I’m looking for, what these major hyperscalers start to rein in their CapEx. But I don’t see that until we potentially get out to 2020. And I believe they’re not okay.

Caroline WoodsAll right. So it could be a few more years of of bullish activity. But let’s make it practical to wrap it up. If I’m a retail investor with a portfolio full of Meg seven stocks, or maybe even just an S&P 500 index fund, what should I be doing today?

Paul MeeksSo today I would continue to, buy within the mag seven. Some of the leaders that have come down in price, I have highlighted, Google and Amazon. And please, as a retail investor, don’t be short term oriented, but be long term oriented. And meta will indeed monetize. I at some point. No company has ever monetize stuff like they do.

Paul MeeksI would buy meta and be a contrarian investor and take advantage. Then even though they’re smaller caps are not within the mag seven. Look for continued rallies in some of these AI infrastructure builders. And again there I’ve highlighted core. We’ve Flextronics applied digital.

Caroline WoodsOkay. I think this is a great time to pivot to a rapid fire game of this year that it’s your first time playing. So it’s quick questions, quick answers, no hedging. Are you ready Paul.

Paul MeeksYes.

Caroline WoodsHere we go. Tech bottom in. We’re still coming.

Paul MeeksIn.

Caroline WoodsBigger mistake buying tech too early or waiting too long to get back in.

Paul MeeksWaiting too long to get back in. At this point.

Caroline WoodsHyperscalers or chipmakers?

Paul MeeksChipmakers.

Caroline WoodsSemiconductors or software?

Paul MeeksDefinitely semiconductors.

Caroline WoodsNvidia or AMD.

Paul MeeksNvidia one video money five by 11.

Caroline WoodsNvidia or TSMC.

Paul MeeksNvidia.

Caroline WoodsPalantir or Cloudflare ahead of earnings.

Caroline WoodsPalantir SpaceX after earnings higher or lower?

Paul MeeksHigher. Not that I like it, but I think, Musk will give a little boost to the shares.

Caroline WoodsSo SpaceX here via avoid.

Paul MeeksAvoid.

Caroline WoodsMicron or Western digital.

Paul MeeksMicron.

Caroline WoodsNebula score.

Paul MeeksWe’ve got a we’ve.

Caroline WoodsApple more than 10% off the highs opportunity or trap.

Caroline WoodsTrap Apple or Netflix.

Paul MeeksNetflix.

Caroline WoodsOpenAI Ise IPO overhyped or under hyped.

Paul MeeksOverhyped and delayed into 2027. Yeah.

Caroline WoodsSame with anthropic.

Paul MeeksAnthropic. Well, probably go public in the fall. I’m much a bigger fan of anthropic than OpenAI.

Caroline WoodsName a stock that’s still a great company, but no longer a good investment.

Paul MeeksService. Now, you know, I’m worried about, software and enterprise resource planning software. I think service has always been the best. But, Caroline, as I told you before, I wouldn’t chase them because I don’t know how much they will really be intimidated by AI in the end.

Caroline WoodsWhat’s a tech stock you think will surprise investors over the next year?

Paul MeeksI would go with, Flux Trading now at, 114. I think it goes to one 4150. Easy. Particularly in the fall. They will have a meeting to talk about the skin of their eye infrastructure business, which will be super exciting into a separate public company. That’ll happen. Caroline, in the first quarter of calendar 27.

Caroline WoodsYour highest conviction name for the rest of 2026.

Paul MeeksProbably core. We’ve.

Caroline WoodsAnd described this market in one word.

Paul MeeksWrong heart attack.

Caroline WoodsHahahahaha. Part two Managing Director. We will ignore the space there for me.

Paul MeeksMaybe I assume.

Caroline WoodsDirector, Head of Technology Research, Freedom Capital Markets. We’ll put that hyphen in there. Thanks so much. Really appreciate you playing along and thank you so much for all of your picks.

Paul MeeksBest wishes Caroline.

Caroline WoodsIf you enjoyed this free talk, check out our full interview with Filled one. Cardo. He says investors should use any pullback to buy quality stocks with both hands full of cash and gives his top picks.