How to Navigate an Al Bull Market

Telis Demos: Hey everybody, Im Telis Demos back with another episode of WSJs Take On the Week.

Gunjan Banerji: And Im Gunjan Banerji.

Telis Demos: Weve got a great conversation coming up with a big investor in technology to talk about obviously the massive AI tech trade that continues to eat the market, the companies that dominate the SP 500. But before we get to that, we have an action-packed week coming up. Weve got Mag 7 earnings, Fed meeting, jobs report and Gunjan right up your alley.

Gunjan Banerji: The meme stocks are back.

Telis Demos: Meme stocks, theyre back.

Gunjan Banerji: Right, the 2021 again.

Telis Demos: Okay, Gunjan you would know better than anyone else, is the meme stock trade back?

Gunjan Banerji: So as the Journals meme stock correspondent, I can say that they are back.

Telis Demos: Is it an official title? Is it? Okay, great, cool. Okay, good, good.

Gunjan Banerji: It is. Its an official title. I have it on my business card. The meme stocks are back. But I think the factors that have led to this meme frenzy in 2021 have not really gone away. Theyve actually intensified in markets and I think people forget that. I mean, when you take a look at options activity, retail traders recently made up around a fifth of all options trading activity.

Telis Demos: Wow, wow, wow.

Gunjan Banerji: So thats above the levels we saw in 2021. Theyve been really active in stocks trading for under $5, theyre still really active in the stock market. So I think the gamblification of financial markets has gone up since 2021 and that leads to frenzies like this from time to time.

Telis Demos: This is so interesting to me because when I think about what drove meme stock mania back in 2021 was super low interest rates and working from home and people werent spending money on going out, they had money to burn, and those things are not happening today, right? Interest rates are higher, people are back in their office, they have to work for a living again, peoples budgets are tighter, inflation has eaten into their disposable income. So the fact that the meme stock thing is still happening tells me that maybe all those things we were talking about werent really the underlying cause and it sounds like its just something broader than that.

Gunjan Banerji: Yeah, I think speculating in financial markets is now a feature of our modern markets, not a bug. People want to place Yolo bets on stocks, and I think brokerages have made it easier to trade. Individual investors have more access to riskier trades than ever before on platforms like Webull can place bets on where the price of Bitcoin will be in just an hour from now. So theres been a trend towards shorter and shorter term trades and riskier trades in the financial market.

Telis Demos: And what stocks are we talking about here? I mean, the ones that Ive come across, big, huge kind of unexpected surges in names like OpenDoor, Kohls, Krispy Kreme, GoPro.

Gunjan Banerji: Right.

Telis Demos: Is there anything that unites these companies? What is it that makes it possible for a stock to be memed all of a sudden? Is there any formula that goes into it?

Gunjan Banerji: I think theres a few things. Lots of social buzz, typically high short interest people think that there might be short squeeze and some people say its like millennial nostalgia, these stocks that kind of-

Telis Demos: Oh, Kohls, American Eagle, thats another one that has boomed recently.

Gunjan Banerji: Right, or a few years ago it was, of course GameStop, and things like that. But it feels like the euphoria that weve seen in markets the past few weeks in part because of maybe the prospect of getting trade deals has really had a fever pitch recently and were seeing that with the meme stocks.

Telis Demos: Well, theres certainly plenty to look at with trade deals. This past week, of course, the big news was that there was a Japan deal. So the stage is that August 1st is the deadline that the President Trump has set for countries to either make a reciprocal trade deal or be hit with whatever the U.S. thinks is the appropriate level. So Japan negotiated, now its 15%, and then theres a few things that go into it. But one of the stipulations is that Japan will then invest something on the order of 500 billion plus into the U.S. as part of that deal. And now people are saying that 15% is maybe kind of the new global baseline. And look, 15% is a high level, right? For Japan, that would be the highest tariff level in decades, but its not 25%. Is that what the markets looking at here? Is it all relative? Is that why the market seems so optimistic?

Gunjan Banerji: Yeah. Investors Im chatting with dont seem that concerned about tariffs right now. I think theyve acknowledged that tariffs are going to be higher than we thought say in December, but not quite as high as we initially thought, and I think people are expecting the economy to hold up through all of this.

Telis Demos: Well, look, maybe the macro trade has played out to an extent, right? People have gotten used to this, theyve moved on, theyre looking at other things. But from a sort of more micro stock-specific sector trade, I think autos are going to be pretty sensitive to whats happening with Canada and Mexico. Because, for example, when the Japan deal was struck, U.S. automakers didnt really like that deal because they feel like, okay, so if youre exporting a car from Japan, you pay a 15% tariff, but youre not paying higher input costs on anything that doesnt come from the U.S. potentially, right? Whereas a U.S. automaker who, by the way imports a lot of parts, might manufacture that car in Canada or Mexico. So if those Canada and Mexico tariffs arent lowered, you might have a situation where even a car thats sort of made in the United States is more expensive than a car made in Japan. You just see a lot of stock volatility with automakers. I was even seeing the bonds of automakers have been-

Gunjan Banerji: Oh, interesting.

Telis Demos: ... more volatile than other sectors. So I think thats going to be critically important to watch in the week as we lead up to that August 1st date.

Gunjan Banerji: We also have a Fed meeting coming up, the monthly jobs report. I mean, theres just so much from an economic data standpoint, what are you watching the most?

Telis Demos: Whats happening around the Fed with the Presidents sort of quite upset with the fact that they havent lowered rates yet is kind of more of the show. I dont think the market is not expecting the Fed to make a rate move at this upcoming weeks meeting, so there might not be much there and then we have a jobs report.

Gunjan Banerji: We also have big tech earnings coming up and I really enjoyed my chat with Imran Khan at Proem Asset Management, and he made some really interesting points about how we talk about hurting and kind of cult-like behavior among individual investors, but that also exists among institutional investors who kind of pile into some of the same stocks, maybe AI stocks.

Telis Demos: Yeah, I think that we talk about macro, but I think the market is pretty micro-focused at this particular moment. I think that itll be the Mag 7 earnings that continue next week like Microsoft, Meta, Amazon. So I think hearing about what a big tech investor is thinking about ahead of those earnings is maybe the biggest kind of piece of news that investors should be thinking about as they get ready for the week ahead.

Gunjan Banerji: And just one quick note for our listeners and viewers. Proem currently has positions in Nvidia, Alphabet, Meta, Microsoft and Amazon, and Imran personally has a position in Snap.

Telis Demos: So after the break, that conversation with Gunjan and Imran Khan.

Gunjan Banerji: So the artificial intelligence trade has really powered the market this year and investors cant seem to get enough of big tech. Imran, I thought you were the perfect person to dive into this with today. You were the chief strategy officer at Snap and helped take the company public with Evan Spiegel, and now you are the founder of Proem Asset Management, overseeing a really big portfolio of technology stocks.

Imran Khan: Yeah. Thank you for having me. I appreciate it.

Gunjan Banerji: Yeah, yeah. Thank you for joining me today. So Nvidia just hit this $4 trillion valuation, right? And Im wondering, and I think a lot of people are wondering, how much bigger can this trade get, right? Like how much bigger can this AI trade that already looms so large over our market really get? Are you still bullish on this sector?

Imran Khan: Yeah, I think our AI is probably, were still very, very early days of AI. And I think if you look at AI, where we are now still in the beginning of building infrastructure and its building data center, it building chips, its building all the GPUs and things like that. So its still very early of AI. And if you want to achieve that vision, that infrastructure you want to build, Nvidia has, obviously, significant lead on that. So if you believe in AI, if you believe that this infrastructure need to be built, they are the biggest player in the town.

Gunjan Banerji: How are you investing in that specifically?

Imran Khan: So the way to, I think, think about it is that at the end of the day, what drive a valuation out a stock? Its the companys ability to generate cashflow over the next three to five years. So you really have to think about it is that how much investment all of the AI customers of Nvidia has to make, and what are the profit that Nvidia can generate over at least foreseeable future? I think that looks obviously very bullish. I think one area that I dont think anybody has clarity how long it will last and how it will continue after everybody builds out the infrastructure. But the reality is the inference, which going to continue to grow and growing at a rapid pace, and you need Nvidia GPU for that as well.

Gunjan Banerji: It feels like people are afraid to bet against it.

Imran Khan: The AI trend is very real and its very exciting and I think its very important for the U.S. dominance in the global economy. So I think thats going to happen. The question always becomes how long, how fast, and how the optimization going to happen.

Gunjan Banerji: I mean, some of the numbers and projections I see out there are just wild, right? Like venture capitalist Vinod Khosla recently said that almost, certainly within the next five years, any economically valuable job humans can do, AI will be able to do 80% of. I mean, that just seems huge, doesnt it? Thats a big projection.

Imran Khan: I want to be very skeptical about putting a timing on it. Obviously, that 80% will happen at some point. I think what I found in my investment career in last 25 years, people throw those numbers and there is no consequences. But as an investor, CFP, thoughtful about it, what I learned that it takes longer than people realize to things to happen. Even today, if you look at companies like Google or Meta or Amazon who are spending a lot of money on AI, we havent seen a massive ROI or revenue boost from that yet. I dont know if its going to happen or five years or not. But I think saying those kinds of statements, I think its hard to back it up.

Gunjan Banerji: Are you expecting that spending to continue? We have earnings from some of those tech giants in just a few days, do you think that CapEx continues?

Imran Khan: We have not seen any sign of slowdown on the CapEx-

Gunjan Banerji: Or any signs of returns on the CapEx, right?

Imran Khan: Not meaningful enough, but it will happen. I think its a fair to assume that you will see pretty significant improvement in ROI. Good things happens, but it takes time, it takes a lot of work, it takes a lot of iteration and when theres this kind of platform shift happens, its uncharted territory in a lot of tech companies. Tech companies disrupted our traditional industries. In many way, AI will disrupt the tech industry. So I think its really important that when tech industry going to disrupt themselves first with AI, who is going to win and who is going to lose? From an investor perspective, I think you need to have a very clear, open mind and you have to be very flexible and see how the data comes in and who is winning. The other thing I would say that somebody investing a lot of money doesnt necessarily make them a winner. If the capital was the only way to win, then companies like Google would never come out, Facebook would not win against other players when theyre startup-

Gunjan Banerji: Sure.

Imran Khan: ... or Snap would not become a teen favorite or TikTok would not come. Yeah, so I think it takes a lot to win, not only the capital.

Gunjan Banerji: Is there a risk that these companies lose their charm? You own some of them, some of the Magnificent 7?

Imran Khan: Yeah, theres absolutely risk to it. So I cannot emphasize more to be a good technology investors, you have to be very open-minded and you have to have some sort of imagination. If you just have the imagination but youre not open-minded that your imagination might be wrong or altered, you will not be a good investors. But combination of a good imaginations and combination of an open mind and pragmatic is very important to be a good technology investor.

Gunjan Banerji: So theres all these big ideas out there about AI. How are you specifically investing in your portfolio? Are there specific sectors or stocks that youre particularly bullish on right now?

Imran Khan: If you look at what we saw in the last cycles, its the infrastructure you first you have to build, but then is the companies that take a very boring industry because ultimately its all about a function of GDP. A cool technology doesnt do anything, it has to create profit and has to create profit, it has to take shares, some part of the economy or accelerate the overall economic pie, right? So the first question is to ask everyone, Is this company going to take share from somebody or it will increase the overall pie of the economy? If it doesnt, its really a cool technology, but its not going to create economic value. So what Im looking at it is that if you look at the last three cycles where those kind of values got created, you used to call your travel agent, to book your plane tickets and hotels, now you use online travel agent website.

Gunjan Banerji: Sure.

Imran Khan: Massive productivity improvement. That created a lot of economic value, created companies like Booking.com, which is a hundred billion plus market cap. So I think that six big area that Im really focused on, digital workforce, I think ultimately were all going to have an agentic AI.

Gunjan Banerji: Like an AI assistant? Sounds nice.

Imran Khan: AI assistant, and doing a lot of the work of AI and just making yourself more productive. Second would be defense. I think the way the war has been fought last 2, 300 years will dramatically change, were already seeing that. Transportation, how we commute and do all those things, AI will play a pretty big role. FinTech, financials, thats including stablecoin, cryptos and lending, how does the AI lendings and RF lending that works. Healthcare delivery, how we get healthcare services, that is a massive opportunity, healthcare diagnosis and things like that. So I think those are some big areas that were going to continue to see pretty significant changes on AI and in terms of shorter term, what Im looking at it, what takes you to be successful of AI company? You need a lot of data. AI means nothing without data. Data is the oxygen of AI. So Im looking at companies that have a lot of data. And then second thing Im looking at the companies that have the ability, do they have the talent pool and the capital to leverage those data?

Gunjan Banerji: So all this excitement about AI has also fueled concerns that the speculation out there in markets is getting out of hand, right? Like, IPOs are back in a big way, options volumes through the roof, right? People have really embraced risky bets in a big way. Does that concern you?

Imran Khan: Yeah, it does concern me. I think one of the things to understand that theres a lot of new market participants that we didnt have. 30 years ago, investment business was a club business, right? You had to go to certain school to get a job at Wall Street during the-

Gunjan Banerji: An exclusive club.

Imran Khan: It was an exclusive club. But I think what changed over the last 30 years, one regulatory front Reg FD make, I think, (inaudible) with the SEC document now you can easily find. The second thing that happened also, internet. And with AI, I think itll only going to accelerate that it commoditize a lot of those exclusive knowledge, you can find out about all this investment thing. And then the third is theres the newer kind of companies, the younger generation also understand better. So you take those three things, combination, bundle that we are seeing a generational wealth transfer as the baby boomers are getting older and theyre transferring the money, all of those things, I think this retail is a very large part of the market and I think theyre here to stay. And I dont think somebody should be dismissive of this group of people and I think its very unfair to be dismissive of these people, and I think dismissing them is youre ignoring a large chunk. The other interesting thing is that in social media, if you are going and talking about a stock, in many cases your ideas get challenged. So its not like you are saying something and nobodys challenging you. And thats one of the most interesting thing about social media, that there is a lot of people who are supporting you and a lot of people who are hating you. So its actually a great conversational platform.

Gunjan Banerji: And I also think two things can happen. I think theres communities online where you can join a herd and there can become a cult-like mentality around certain stocks where youre not being challenged. And then theres communities where yes, people are certainly challenging your views on a particular stock or sector.

Imran Khan: The key thing is if you look at the hard mentality, you see that among the hedge fund managers too, and theyre supposed to be all smart, many of them invested massively in a private market in 2021. What happened to some of those companies?

Gunjan Banerji: What did you make of the move in OpenDoor Technologies recently? So this was a stock, its trading under $10 and out of the blue its soared more than a hundred percent trading one day and was halted in trading, reminded a lot of people about the meme stocks.

Imran Khan: Yeah, I think weve seen a couple of other meme stocks out there also. And I think that is going back to this whole theres a new group of investors and they have a lot of capital to deploy and they can move the stock very, very fast. And so we will see how it plays out.

Gunjan Banerji: So speculation in markets, is it a feature of the modern markets rather than a bug?

Imran Khan: I think the market was always speculative, right? Because in 1998, long-term capital management almost took down the entire market,

Gunjan Banerji: But that was a hedge fund. These are individual investors. Isnt speculation and gambling in markets more widespread than it was in the past?

Imran Khan: Yeah because the knowledge got commoditized, so now people can do it. It used to be a bunch of exclusive people. You can argue that Bear Stearn and Lehman was speculating the mortgage market-

Gunjan Banerji: Of course.

Imran Khan: ... and completely took down the entire economy. So we get all upset on individuals who is actually is the-

Gunjan Banerji: Im not upset with them.

Imran Khan: I know youre not. But Im just saying that we all get upset about an individual who hopefully its their own money and speculating and they have right to do so. But then big banks like Bear Stearns and Lehman took the entire country down, all Im trying to-

Gunjan Banerji: A hedge fund manager of the people.

Imran Khan: No, Im just trying to be objective and I think the speculation is always part of investment world. And as an investor you have to be very, very careful when theres a lot of speculation happens, how to protect your capital. And by the way, you can argue that there is a lot of speculation happening among institutional investors right now.

Gunjan Banerji: How are you thinking about the private markets right now?

Imran Khan: I think private markets is overvalued and I think-

Gunjan Banerji: So OpenAI, SpaceX?

Imran Khan: Yeah, look, these are great businesses, but lets take SpaceX, right? I have no (inaudible) with SpaceX, its a great company. But Im just asking a question. If youre investing in SpaceX, are you investing in a company that has peak market share with the peak multiple, right? That is the problem, right? Because I just cant imagine a world that a decade from now that every country in the world have this kind of concentration risk with one company. In B2B industry, you never see monopoly. Itll be crazy for all the world government to put all their chips in one company, even if you love Elon-

Gunjan Banerji: Sure.

Imran Khan: ... its just that risk management from a business perspective.

Gunjan Banerji: So you think theres more opportunity in the public markets than the private markets right now?

Imran Khan: I think you are seeing new kind of companies in a private market, but you are paying for such a high price for that. Do you really pay 25 times reported revenue multiple for OpenAI or do you pay 25 to 30 times earnings multiple for Nvidia? Just asking the question. So it feels like relative value for these hot companies, public market, in my opinion, feels like a better place to invest.

Gunjan Banerji: Weve got one more question for Imran Khan, thats after the break. What in your view is the biggest risk to the AI trade right

Imran Khan: Now? I think the biggest risk is its going to take longer than people think. I really do so because people are saying that in five years, entire white collar industry going to go away, 80% of the job will be done. Those kind of expectations, because the thing is that even if you have a technology, human takes longer to change their behavior,

Gunjan Banerji: Right? Theres political dynamics at play,

Imran Khan: The political dynamics of that, theres a fear of making mistakes and an unknown is always unknown. So you dont know what can happen if you reduce the number of headcount dramatically. And so I always think that things takes longer, even if you get the right about the future, but it might take longer. So I think the biggest risk is that people get disappointed that it takes longer than people realize to get the ROI and all these kind of things from it.

Gunjan Banerji: Imran, this has been great. Thank you so much.

Imran Khan: Thank you for having me. I appreciate it. Its a lot of fun.

Gunjan Banerji: If youre enjoying the show, please make sure you give us a follow on YouTube and thats all for this week. This show is produced by Anthony Bansi, Jessica Fenton and Michael LaValle. Additional support from Coleman Standifer. Michael LaValle and Jessica Fenton are our sound designers. Michael also wrote our theme music. Aisha Al-Muslim is our development producer, Scott Salloway and Chris Dinsley are the deputy editors. And Philana Patterson the head of news audio for the Wall Street Journal. For even more head to Wsj.com. Im Gunjan Banerji.

Telis Demos: And Im Telis Demos. Until next time.

Imran Khan: The market feels a little bit of 21 vibe-ish, 2021 vibe-ish.

Gunjan Banerji: Yeah, we have to talk about that, the 2021 vibes.