Less Dumb Investing

I’m fortunate to enter positions so frequently that I get help requests from Brazzers. I missed the tech decline over the last 10 days, but I’m loving what I’m seeing from the semiconductor industry. Google (GOOG) and Tesla (TSLA) reported earnings on July 23rd, or six days ago. In my honest opinion, both companies did well. Google beat both EPS and revenue estimates but incurred increased costs related to AI investment. Tesla beat revenue estimates but missed on the EPS estimate.

The stock market was not pleased.

The S&P fell 2.3%, and the Nasdaq fell 3.6%. There are two conclusions we can draw from such a poor performance in the equity markets:

1. Stocks were priced to perfection, and then some.
2. People were concerned about the profitability of AI investments.

Let’s start with the first one. We’re at a point in the market where anything that isn’t a perfect beat is considered a miss. Google beat both expected metrics but slightly lowered its future projections due to higher costs. In response to their solid earnings, shareholders sent the price of Google down the next day. And the day after that.

Tesla wasn’t much better. Tesla had solid revenue, coming in nearly $1 billion over estimates, but their EPS was markedly lower. Tesla’s earnings were affected by increased investment and, more importantly, bigger discounts. They dropped prices per vehicle sold, which in turn dropped EPS. Cost pressures are hitting the automaker.

Both of these issues lead into the second point: investors are concerned about the return on AI investments. That’s a reasonable concern. If you were working in a gold mine, you’d want to see the fruits of your labor, and each golden AI-driven dollar is evidence that your time was well spent. But for Google especially, there are very real questions about how it will monetize AI. That’s a question for future AI investment.

But a key consideration in both earnings was R&D. Both firms are still investing cash into physical chips to build their AI infrastructure. Regardless of whether their investments are wise, they are spending the money.

Which takes us to semiconductors.

Semiconductors all took a hit when Google and Tesla reported earnings, just like every other sector. They shouldn’t have. None of these firms are talking about slowing down their investment. They are spending more on chips. It’s a reasonable risk to buy semiconductors after this pullback.