Investors are favoring large banks like Goldman Sachs (GS) and Morgan Stanley (MS) for exposure to the strong M&A market, while avoiding private equity firms like Blackstone (BX) due to concerns over private credit. For a stable AI infrastructure investment, consider Cisco (CSCO), but for higher growth potential in the same sector, competitor Arista (ANET) is growing earnings at a much faster rate. In media, the market prefers the simpler, pure-play streaming growth of Netflix (NFLX) over Disney (DIS), which is struggling with its declining legacy business. Be cautious of major AI stocks like Meta (META) and Google (GOOGL), as famed investor Michael Burry argues their earnings are artificially inflated, with more details expected on November 25th. Recent high-growth IPOs like Circle and CoreWeave are proving highly volatile, dropping on minor concerns despite strong results, highlighting the risks of their very high valuations.

AI Sector & Michael Burry's Short Thesis

• Famed investor Michael Burry (of "The Big Short") has taken an option short position against several AI companies.
• Burry's Thesis: He argues that major tech companies (hyperscalers) are artificially inflating their earnings by changing their accounting methods.
  • Companies mentioned: Meta (META), Google (GOOGL), Oracle (ORCL), Microsoft (MSFT), and Amazon (AMZN).
  • The change involves extending the "useful life" for their network computing equipment from 3-5 years to 5-6 years.
  • This accounting change spreads the cost (depreciation) of massive AI investments over a longer period, making current-year earnings appear higher than they would be under the old schedule.
  • Burry claims this will overstate Meta's earnings by 21% by 2028 and Oracle's by 27% by 2028.
• Steve Eisman's Counterpoint: Eisman believes these accounting concerns don't matter much.
  • He states the most important question is what the actual returns and cost savings from these massive AI investments will be.
  • The answer to that question will determine the ultimate success of these companies' AI strategies, not their depreciation schedules.

Takeaways

• Be aware of the bearish argument against major AI stocks, which suggests their current earnings may be artificially inflated due to accounting changes.
• The long-term success of AI investments in companies like Meta, Google, and Microsoft depends on the future return on investment (ROI), which is still unknown.
• Investors should watch for further analysis from Michael Burry, who is expected to release more information on November 25th.

Financial Sector: Banks vs. Private Equity

• A major trend this year is the outperformance of big banks over private equity firms.
• Goldman Sachs (GS) and Morgan Stanley (MS) both reached new all-time highs.
  • GS is up approximately 47% for the year.
  • MS is up approximately 35% for the year.
• In contrast, major private equity firms are down for the year.
  • Blackstone (BX) is down 16%.
  • Apollo (APO) is down 20%.
• Reasoning: Investors are choosing to invest in the strong M&A (Mergers & Acquisitions) and IPO (Initial Public Offering) markets by buying bank stocks. They are simultaneously avoiding private equity firms due to worries about the rapid growth and potential risks in private credit.

Takeaways

• Investors looking for exposure to a strong M&A and IPO cycle may find traditional banks like Goldman Sachs and Morgan Stanley to be a more direct play, according to the current market sentiment.
• The underperformance of Blackstone and Apollo reflects market anxiety about the private credit space. Investors should be cautious and aware of these perceived risks.

CoreWeave (New AI IPO)

• CoreWeave is a recently public AI data center builder and manager.
• The company reported strong Q3 results, with both revenue and operating income beating expectations and a revenue backlog increase of roughly 85%.
• Despite the strong results, the stock fell 16% after the report.
  • Reason: Management reduced guidance for the next quarter because one data center project is behind schedule.
  • Confusion on the earnings call, where management was unclear about the source of the delay, also hurt investor confidence.
• Valuation & Growth:
  • The company is growing extremely fast, with Q3 revenue up 134% year-over-year.
  • However, it carries a very high valuation. Before the stock drop, it was trading at 47 times its expected 2027 earnings. The consensus is that the company will not be profitable until 2027.
• Risk Factor: While demand for AI data centers is very strong, so is competition. Many competitors are private and have significant financial backing. If demand ever slows, it could lead to a "market share food fight."

Takeaways

• CoreWeave is a high-growth, high-risk play on the AI infrastructure boom.
• The stock's sharp drop after a minor guidance change shows that at its high valuation, the company cannot afford any disappointments.
• Investors should monitor the competitive landscape, as increased competition could pressure margins and market share in the future.

Cisco (CSCO)

• Cisco is considered an AI play because it sells routers and other networking equipment essential for AI infrastructure. Its main competitor is Arista (ANET).
• The company reported a good quarter, beating analyst expectations for both earnings per share ($1.00 vs. $0.98 consensus) and revenue.
• Cisco raised its financial guidance for the next quarter and the full fiscal year, citing strong demand for its AI-related products.
• Slower Growth Profile: Even with the raised guidance, Cisco's expected earnings growth is 9%. This is significantly slower than its competitor Arista, which is projected to grow earnings by around 20%.
  • Reason: Cisco's large, traditional enterprise businesses are growing more slowly and weighing on the company's overall growth rate.

Takeaways

• Cisco is a beneficiary of the AI spending boom, which is helping accelerate its growth.
• For investors seeking a more stable, established company with AI exposure, Cisco could be an option.
• However, for those seeking higher growth within the same sector, competitor Arista (ANET) appears to be growing at a much faster rate.

Disney (DIS)

• Disney reported mixed results that the host described as "just not great," with no overall growth.
• Earnings: EPS was $1.11, down 3% year-over-year but slightly beating expectations. Revenue of $22.5 billion was down slightly and missed expectations.
• The Yin and Yang of Disney:
  • Positive: The streaming business is showing strength, with operating income up 39%.
  • Negative: The legacy media business (Linear Networks) continues to decline, with income dropping 21%.
• Investor Sentiment: The market prefers Netflix (NFLX), which is seen as a "simpler, cleaner story" focused purely on streaming growth. Investors are willing to pay a high premium for Netflix (over 40 times earnings) because of this clarity.

Takeaways

• Disney remains a company in transition. While its streaming segment is growing, it is not yet enough to offset the decline in its legacy businesses.
• Investors should monitor if the growth in streaming can accelerate and eventually outweigh the drag from the traditional media assets.
• The stock may continue to underperform pure-play streaming companies like Netflix until it can demonstrate a clear path to total company growth.

Circle (New Fintech/Crypto IPO)

• Circle is the company behind the USDC stablecoin and went public in June.
• The company reported very strong Q3 results.
  • It posted a surprise profit of $0.64 per share when a loss was expected.
  • Revenue grew an impressive 66% year-over-year.
  • Circulation of its USDC stablecoin more than doubled from a year ago to $74 billion.
• Despite the great results, the stock fell 12%.
  • Reason 1: The company increased its forecast for future expenses.
  • Reason 2: A "lock-up" period is expiring, meaning 200 million shares held by insiders can now be sold, creating potential selling pressure.
• Valuation: The stock trades at a very high valuation of around 70 times its projected 2026 earnings.

Takeaways

• Circle is a high-growth company in the "hot" stablecoin space, but it comes with a very high valuation and significant volatility.
• The stock's negative reaction to a strong earnings report highlights the market's current sensitivity. For high-flying stocks, any negative news (like higher expenses or potential insider selling) can overshadow positive results.
• The key long-term question for Circle is whether it can establish dominant market share in the competitive stablecoin industry.