Going on this morning: On its third day of trading, Cerebras Systems stock, which went public Thursday, is up 4% at $290.83 despite a down day for markets. Shares of cyber-security outfit Zscaler are also bucking the trend, up 7%, at $173.49, after B. Riley & Co.’s Erik Suppiger this morning raised his rating on the stock to Buy from Neutral, but actually cut his price target to $225 from $275 to reflect the general compression of valuation multiples in the group. There is “relatively little risk that Zscaler will get displaced by AI,” he writes, but he is mindful that investors are worried Palo Alto Networks, Cisco, and startups Netskope and Cato could take some market share from Zscaler. Shares of CoreWeave and Nebius, two of the more prominent “Neo-clouds,” are both trading down heavily after Davidson analyst Gil Luria took over coverage of the stocks from colleague Alex Pratt and reversed Pratt’s Buy rating to a Neutral rating, writing that upside is capped given how they trade relative to their respective backlog of business. Luria quips he’s “taking a breather.”

NVIDIA’S RESOURCEFULNESS

Let’s talk a bit about the stable bets in chips and AI.

A few names from the TL20 group of stocks to consider are reporting this week, and I see the relative stability of their respective businesses boosting all of them.

Despite the fact that Nvidia stock has ceased to have the kind of giant gains it had in prior years, it’s doing quite well this year, up 19% at a recent $221.68. 

The trade overnight is not good for young bets on the artificial intelligence build-out. 

Stand-out decliners this morning include Nano Nuclear Energy, the “pre-revenue” developer of “small modular reactors,” which is down 9% Friday morning following Thursday evening’s results.

Also trading lower is Innventure, the tech conglomerate that owns the liquid-cooling data center startupAccelsius, is lower by 4%, and Blaize Holdings, a small-cap competitor in AI chips, down 22%.

In comparison, a company that has a robust business in AI, such as chip equipment giant Applied Materials, are mostly holding up. Applied is down fractionally at $437.75.

The moral of the story is, stick with the stable names such as Applied rather than speculative bets like Nano Nuclear. Buy quality!

Update: Cerebras stock ended the day at $311.07, down quite a bit from the open of $350 but still 68% above where it priced. A very good day for the bankers and the company and some lucky insiders.

Earlier:

One of my favorite chip companies of all time, Cerebras Systems, went public just now at a price of $337, more than double  the offer price of $185. That makes the 30-million-share IPO worth $10 billion. Cerebras will get about $5.6 billion less five percent for the bankers’ in fees, or, $5.3 billion, leaving a lot of money on the table.

I would estimate Cerebras’s 12-month potential price appreciation at 67% based on a “target price” of $563.

That is, if the whole thing doesn’t just implode because of customer concentration.

Allow me to explain.

The artificial intelligence payoff for Cisco Systems that emerged back in November continues to gain steam, as the company Wednesday evening announced a big jump in product orders, up 35%, speeding up from 18% in the prior quarter and 13% the quarter before that. And the company raised its projection for revenue related to AI for this fiscal year ending in July from $3 billion to $4 billion. 

Cisco is seeing success selling into what’s called “scale-across,” connecting racks of equipment between data centers in different locations — the same thing that’s been happening for the fiber-optic equipment of Ciena. 

The AI “inflection,” if you will, is real: it’s boosting growth for Cisco. 

Wednesday is a rough day for software maker Dynatrace’s CEO, Rick McConnell, with the stock down 15% at $33.73, after the company’s earnings “Metrics,” the non-GAAP numbers people obsess over, didn’t wow enough.

“I'm better on days when the stock price is up than the stock price is down,” says McConnell in a chat via Zoom this afternoon.

Still, he’s very upbeat about what the company has achieved.

Among the achievements of the fiscal year that ended in March, he notes, is having “stabilized” the company’s “ARR,” its annualized recurring revenue, which is a non-GAAP number that people take as the leading indicator of future reported revenue. And for the first time in several years, the portion of that ARR that was added, known as “net-new,” rose by double digits in the year, 12%. “That was a huge positive,” he says.

Another vibrant morning of earnings reports, of which I’ll give you just a few of the highlights.

Shares of Dynatrace, which was one of four stocks I was optimistic about regarding the looming “token” disaster two weeks ago, is trading down by about 9% this morning. The results and outlook were stronger than expected, but the individual “metrics” are being put under a microscope.

As Eric Heath of KeyBanc Capital Markets, a bull on the stock, notes this morning, the company’s outlook for recurring revenue this year is fine, at 16.5% promised growth, but it’s the company having only beaten by a small amount with what is called “net-new annualized recurring revenue.”

Ever since Intel split its business two years ago into two separate profit and loss statements for the microprocessor and the chip foundry business, investors have been anxious to know when Intel will win some clients for the contract manufacturing side. 

The foundry loses about ten billion dollars annually so it has to find a way to cover its costs. And with so many companies now designing their own chips, it seems like there should be a lot of customers looking to Intel as an alternative to Taiwan Semiconductor Manufacturing. 

There have been plenty of rumors but no big wins so far. There is a vague deal with Elon Musk’s xAI. The latest was an article last week in The Wall Street Journal by Robbie Whelan and Rolfe Winkler stating that Intel has reached a preliminary agreement with Apple to make chips for Apple devices, based on unnamed sources. 

In the quest to find the next gem in data centers, the Street will seize upon glimmers of something.

Such is the case with the upgrade Monday of Austrian chip maker ams-Osram, based in Premstaetten, Austria, and which is best known for selling light-emitting diodes used in electric vehicles.

Jefferies & Co. European semiconductor analyst Jenardan Menon on Monday raised his rating from Hold to Buy, and raised his price target on the ordinary shares traded on the Swiss exchange to 21 Swiss Francs, above Monday’s open of 18.02, after concluding that the company may be able to get revenue as a supplier of components for “AI photonics” at some unspecified point in time. (There is also a U.S.-listed depository share.)

The week that ended May 8th saw stocks rise on more positive earnings reports, and the TL20 group of stocks to consider was up 11%, one of its best weekly performances ever.

The TL20 continues its parabolic rise, now up 48% in the month of April alone, for a total gain of 485% since inception through May 8th.

The TL20 has handily beaten all its benchmarks, including the Russell 1000 Value index and Cathie Wood’s Ark Innovation ETF.

Standout gainers this past week continued to be AI-linked hardware names, with Micron Technology and SanDisk up 30% and 24% for the week.

However, we’re seeing what appears to be a software renaissance, with a select group of stocks seeing tremendous gains this past week.

Datadog, DigitalOcean, and Innodata all soared following earnings reports that showed they have a hand in helping with AI’s problems in production.

For many decades, Gary Smith, the CEO of fiber-optic giant Ciena, has pursued a hobby that requires a special kind of dedication and patience. 

Trained in the use of large-format plate photography, he travels the world on his off time doing beautiful black and white pictures, austere and highly detailed. Although he shoots with a digital Hasselblad camera, Smith follows the same painstaking steps setting up each shot that he was taught in early days. “I'm setting the aperture, I'm setting the speed, I'm setting the light balance — I'm doing all that manually because I'm thinking about what I want to convey,” Smith told me this week in an interview via Zoom.

Smith says the hobby is a nice break from the day to day of running a company, something that “makes me look around and get in the moment.”

To my mind, his patience for the craft is rather emblematic of his tenure at the company. 

Smith celebrated twenty-five years as CEO of Ciena on May 1st, an astounding track record in an industry that tends to churn CEOs quite a bit.

The most remarkable part is that after the DotCom collapse that devastated the fiber-optic business, Smith made sure Ciena was a survivor via focus, focus and focus: selling the fastest optical switches.

I’m going to try to summarize for few in a short span of time what’s been happening overnight because there have been a ton of earnings — fifty companies reporting after market close on Thursday, counting just the ones I tend to follow.

The biggest story to my mind is the 93% jump in shares of Innodata, which is another one of the companies that I had flagged on Saturday as a potential beneficiary of what I’m calling the “token crisis” or “potential token disaster” of AI, the likelihood that costs could spiral out of control. 

As mentioned in my March interview with CEO Jack Abuhoff, Innodata is very much on top of the issues that can make training and deployment of AI problematic. Investors are coming around to that, and after the shares having trended down by ten percent since the beginning of the year, the stock is playing catch-up in a big way.

Innodata’s surge cements what is to my mind an amazing rejuvenation for software stocks this week, following a jump of over 30% for Datadog on Thursday and a jump of over 30% for DigitalOcean on Tuesday, and a rise for Twilio last Friday of 24%. 

Shares of Datadog, one of two software makers I had discussed over the weekend as potential beneficiaries of the coming sticker shock in agentic artificial intelligence, are up almost 30% in pre-market trading at $184.97 after the company beat expectations as usual but also stunned with a big increase in its full-year revenue outlook.

The company now sees revenue of $4.3 to $4.34 billion, which is an increase of $240 million to $280 million versus what the company said in February. That is a 5% increase, which is a significant step up from the pattern of raising forecasts by just one or two percent in the last few years — it’s back to a level last seen in the COVID-19 years, when Datadog constantly dazzled the Street.

I think the most obvious answer for this jump upward is that Datadog’s most prominent customers, OpenAI and Anthropic, have suddenly decided to spend more with the company.

It is, of course, yet another day of AI-related earnings reports. Herewith, some of the highlights.

Even though Advanced Micro Devices has been a star performer this year, up 66%, the stock is up another 19% in early trading at $427.30. The upbeat report ties into the same theme as Intel’s big surge two weeks ago: CPUs are newly relevant for AI.

Bernstein analyst Stacy Rasgon, who I can’t remember ever having anything better than a Neutral rating on AMD stock, this morning raises his rating to Outperform, with the excuse “well, we were always late bloomers.” Rasgon gives the stock a target price of $525, representing a forward P/E of 35 times, way up from the 20 times P/E he had been using before.

Rasgon notes that “many stocks have been climbing
strictly on vibes lately” and that AMD, in contrast, “deserves significant credit for a fundamental story that
increasingly is looking real.” He’s especially encouraged by AMD having OpenAI and Meta both as customers for its GPUs.

Palantir shares are slumping by five percent Tuesday morning at $141.56 despite another very upbeat quarter from the company Monday evening. This is simply a slow reversion to the mean: the stock is beginning to reset to trade more like other software stocks despite big growth.

I was early in predicting difficulty for Palantir in January of last year, but I think my skeptical view of the valuation is now the norm.

Palantir still has amazing “metrics,” such as “Rule of 145,” the combination of revenue and profit, but those metrics no longer dazzle quite the way they did a year go.

The proximate cause, of course, of this mean-reversion is OpenAI and even more so, Anthropic, which every investor now suspects are the more likely AI champions, thus robbing Palantir of its crown.

The following table offers an update on where the TL20 group of stocks to consider stand as far as valuations, as of close of trading on May 1st.

Most but not all of them have seen their P/E multiples and their price-to-sales multiples surge with the 36% gain of the group this year.

There are a few discounts, which I’ve marked in red in the table. The most amazing item is Nvidia at twelve times projected sales, down from eighteen times six months ago. Nvidia is also one of the weaker performers this year, up only 6%, below the Nasdaq’s 8% rise.

A very big week of earnings reports drove stocks higher, the Nasdaq Composite Index and the Standard & Poor’s 500 Index closing up 1% for the week, and the TL20 group of stocks to consider up 3% for the week. 

This week’s gain brings the TL20 to a gain of 428% since inception in July of 2022.

The biggest item from the earnings reports was the confluence of four reports on Wednesday evening from Alphabet, Amazon, Meta and Microsoft. 

As I had predicted when I went on The Schwab Network on Tuesday, Alphabet and Amazon showed up the best of the four that night, while Meta and Microsoft sold off. 

I think Alphabet’s Google and Amazon are simply better prepared for the epoch we are in of tight chip supply because they both began their AI chip efforts a decade ago or more, while Meta and Microsoft were wasting time on things such as “The Metaverse.”

The artificial intelligence stuff that everyone is so crazy about, the stuff they are spending hundreds of billions on, has a number of problems. Some are very widely publicized, such as the notorious “hallucinations,” which are more properly called “confabulations.” And the newer versions of AI, called “agents,” can go rogue, causing tremendous damage to computer systems.

But the biggest unreported risk is the potentially skyrocketing cost for every task such agents perform. That is a potential disaster not too far down the road. I expect lots of frustration and disappointment in enterprises as that unfolds. I also expect some interesting opportunities for public stock investors which I’ll come to in a moment.

The artificial intelligence stuff that everyone is so crazy about, the stuff they are spending hundreds of billions on, has a number of problems. Some are very widely publicized, such as the notorious “hallucinations,” which are more properly called “confabulations.” And the newer versions of AI, called “agents,” can go rogue, causing tremendous damage to computer systems.

But the biggest unreported risk is the potentially skyrocketing cost for every task such agents perform. That is a potential disaster not too far down the road. I expect lots of frustration and disappointment in enterprises as that unfolds. I also expect some interesting opportunities for public stock investors which I’ll come to in a moment.

THE LOOMING TOKEN NIGHTMARE

Agents are intended to automate some of the work of humans by doing things such as looking up information in a customer database or processing an inbound invoice.

A new report from the University of Michigan and collaborators, titled, “How do AI agents spend your money,”  makes clear that the cost can quickly get out of control, and that the cost bears no relation to the quality of work done, and that there is no reliable way to anticipate those costs.

Shares of Twilio are up 18% in early trading Friday morning at $174.96, after the company topped expectations Thursday evening with profit and revenue and forecast higher as well. It was one of the best reports in a big night for software that included Atlassian, Reddit, and Roblox.

Atlassian shares are up 18%, Reddit is up 9%, and Roblox is down 24%.

I had a chance to speak with Twilio CEO Khozema Shipchandler Thursday about the results and his take on the change in Twilio’s profile that he has been engineering for the past eighteen months or so.

“We had one of the strongest quarters in the hisotry of the company,” said Shipchandler. “Fundamentally, we’ve transformed the company.”

Readers who’ve followed the five prior interviews I’ve done with Shipchandler (see box at right) know that Shipchandler has been working to lift the company’s level of sales growth and to expand profit margins.

Wednesday night’s reports from Alphabet and Amazon had a more positive effect for those two companies’ stocks than did the reports of Meta Platforms and Microsoft, which I would say was consistent with my preview early in the day outlining better prospects for the former two.

And most interesting to me was that we got more detail on both Alphabet and Amazon as competitors to Microsoft. 

The stock movements this morning show the disparity: Alphabet shares are higher by 8% in early trading Thursday morning at $376.36; Amazon stock is up 3% $269.70; Meta shares are down 9% at $606.36; and Microsoft is down 2% at $416.20.

Heading into tonight’s Big Four set of reports from Alphabet, Amazon, Meta and Microsoft, one fact stands out more than any other: preparation.

Alphabet’s Google and Amazon’s AWS have been preparing for the AI epoch for a decade or more; Meta and Microsoft have not.

I cannot tell you if that means Alphabet and Amazon stocks will pop and Meta and Microsoft shares will sag tonight. But preparation makes the former two the better general AI bets on any given day than the latter two.

Alphabet began over a decade ago developing the world’s first large-scale project for a custom AI processor, what was eventually introduced in 2016 as the “Tensor Processing Unit,” or TPU. That chip was specialized for AI work inside  Google’s cloud, a distinction from the “general purpose” GPU chips that Nvidia sells to the world.

The entire AI trade is weaker on Tuesday, in no small part because of the article this morning by Berber Jin in The Wall Street Journal, OpenAI misses key revenue, user targets in high-stakes sprint toward IPO.

Jin, citing multiple unnamed sources, writes that Sarah Friar has told management that the company “might not be able to pay for future computing contracts if revenue doesn’t grow fast enough,” and that there is an effort to control costs at the company.

Jin cites a “joint statement” from Friar and CEO Sam Altman stating, “We are totally aligned on buying as much compute as we can and working hard on it together every day.”

It’s an important story because it’s a preview of what happens when OpenAI comes public. Everything changes once a company is public.

Earnings reports are seeing a lot of red Tuesday morning, as of the companies reporting overnight are trading down in early trading, including two TL20 names, Corning and Celestica, down 10% and 14%, respectively, and also chip-design software maker Cadence Design Systems, down two points.

Surprisingly weak are shares of semiconductor packaging firm Amkor following a strong report given that chip packaging is one of the hot areas these days.

I attribute the sell-off of Celestica, Corning and Amkor to elevated expectations and elevated stock prices. The results were fine, however, the shares of Corning were up 92% heading into this report, and the same for Amkor, and Celestica is up 43% since the start of the year.

There’s been some discussion about press reports last week that Elon Musk’s SpaceX has an option to purchase AI coding startup Cursor for $60 billion. Cursor makes a tool that lets software programmers use the AI from Anthropic, OpenAI and others to automatically write software instructions.

Bloomberg’s Edward Ludlow Monday morning writes that if Musk gets control of Cursor, it could be a big problem for Nvidia CEO Jensen Huang, as his firm is also an investor in Cursor. Entrepreneur Chamath Palihapitiya wrote in his newsletter Sunday that a deal could give Cursor access to much more compute power from Musk’s xAI, and give xAI an entrée into enterprise computing, being a “win-win” for the two.

I think a lot of this is much ado about nothing. I suspect Cursor may end up being a footnote.

The week ending April 24th was another strong one for tech, the Nasdaq Composite Index up 2% and the TL20 group of stocks to consider up 5%. That brings the TL20 to a return of 32% since the start of the year, and 415% since inception in July of 2022.

The week’s returns were dominated by positive earnings reports from semiconductors companies Texas Instruments, STMicroelectronics, BE Semiconductor, Lam Research, and MaxLinear.

They're all benefiting from what I have called the semiconductor renaissance, which is the continued importance of the cutting edge of computer chip development, and how it is powering all of what we're seeing with the AI trade.

Kudos to HSBC’s Frank Lee, who on Monday raised his rating on Intel shares to Buy from Hold just two days before the quarterly report, which turns out to have been “stellar,” as one analyst put it. Revenue beat expectations by nine percent, the most in years, and profit of 29 cents crushed the consensus of two cents.

The stock is up 22% on Friday at $81.71, for a gain this year of 123%.

The stock has gotten three upgrades this morning, from Citigroup, Roth Capital, and Evercore ISI.

The main takeaway from the report and the call with CEO Lip-Bu Tan is that data center chip sales — the Xeon server business — is going to end up much better than expected, as Lee predicted.

Things that happened Thursday: Shares of chip equipment giant Lam Research sold off by three points to close at $258.56 despite a very strong report Wednesday evening that drove price targets as high as $385, and even the bulls on the stock concede that the valuation has gotten “rich,” which for the moment is deterring additional buyers (though, as I’ve written, some stocks are pricey for good reason); in the latest sign that the private market has gotten lost its discipline with respect to AI valuations, Reuters’s Juby Babu relates that Elon Musk’s SpaceX has said it has an option to purchase AI coding startup Cursor for $60 billion, an incredibly high valuation for a startup that probably doesn’t yet have a billion dollars in annual revenue (and which I expect may end up being obsoleted by Anthropic); shares of BE Semiconductor rose almost four percent following better than expected results and outlook, and management said all three big memory-producers, Micron, Samsung, and SK Hynix, are evaluating the company’s “hybrid bonding” tools for making “high-bandwidth memory,” HBM, somewhat relieving worries that popped up in March, and prompting Needham & Co.’s Charles Shi to declare that “the debate on ‘if’ HBM is happening or not should be settled.”

CEREBRAS FILES FOR IPO‍ ‍

One of my favorite private chip companies, Cerebras Systems, on Thursday filed its S-1 prospectus for an initial public offering after having filed back in 2024 only to withdraw the filing.

I wrote in 2024 that memory chips, DRAM and NAND flash, in particular, are key to artificial intelligence because of the enormous amount of bits and bytes that need to be processed. That structural change in computing keeps showing up again and again.

The latest piece of evidence is the report early Thursday morning of SK Hynix, the South Korean manufacturer of DRAM and NAND that competes with Micron Technology and Samsung Electronics, forming the Big Three of memory technologies.

SK Hynix shares rose fractionally in Seoul trading while Micron stock is down a point in early trading in the U.S.

Hynix’s revenue and profit easily topped consensus, but what was most interesting were remarks by Kim Woohyun regarding the “spot” price of memory chips. The spot price is the price on the open market, what someone pays when they spontaneously go to buy the chips rather than buy at a price established via contract.

Another quarter, another win for semiconductors, and another big disappointment for software.

Shares of Texas Instruments are up eleven percent in late trading Wednesday evening at $262.99 after the biggest quarterly upside in four years, and fellow analog chip makers are rallying sharply, with ON Semiconductor and Microchip Technology up five percent, and Analog Devices up almost as much.

Shares of ServiceNow, however, are down thirteen percent  at $88.90 despite the company raising its outlook for revenue this year linked to artificial intelligence. Just one metric, “current portion of remaining performance obligation,” or, cRPO, came in a tad light. That just shows how little patience software investors have these days! Price targets are dropping sharply on ServiceNow, as low as $85.

Things going on this morning: Shares of energy technology giant Vertiv are down 3% Wednesday after the company’s earnings report in the morning offered a quarterly revenue outlook below consensus (stock is up almost 90% since the start of the year); Seagate shares are up a couple points at $573.31 as Barclays analyst Tom O’Malley upgraded the stock to Overweight from Equal Weight just a day before Seagate’s earnings call, with a $625 price target, declaring “We think drives are the most interesting play in the storage/ memory hierarchy” (he also likes Micron Technology, which is cheap at a P/E of four times) — note Seagate stock is up 109% this year;

GOOD IS NOT GOOD ENOUGH FOR SOFTWARE

Software maker Twilio continues a rising tide of approval as Merrill Lynch’s Koji Ikeda on Wednesday becomes the latest fan, raising his rating on the shares to Buy from Underperform as part of a broad review of “infrastructure” software.

The week that ended April 17th saw the indices and also the TL20 group of stocks to consider “go parabolic,” meaning, a sharp upward movement in a very compressed period of time.

‍That’s nice, but also a point of concern given that some stocks are at elevated valuations, and given the fragility of the “AI trade.”

A few weeks back, the TL20 had erased all its gains for the year, but then it came roaring back since the start of April. The TL20 is now up 26% for the year and up 391% from inception through April 17th.