AI Trade Faces a Reality Check 10/14/26

Oracle

Across the shows: 11 speakers in other episodes, 0 bullish and 10 bearish calls, past 30 days

• Jackson Ader · KeyBanc Capital MarketsBullish

  Oracle is bullish below $150 because its OCI cloud business or software is heavily discounted

  Ader says Oracle now trades like a neocloud, with longer duration and higher rate sensitivity, and no longer tracks software stocks, since its correlation with a software ETF has collapsed over 90 days. He argues the fundamentals are improving: Oracle Cloud Infrastructure (OCI) should be about half of company revenue by the end of fiscal 2027, up from a fraction a year or two ago. Negative free cash flow for many years raises financing needs through leases and debt, which increases rate sensitivity. He tells investors that below $150 they get either OCI or the traditional software and database business at a steep discount. He thinks OCI is the more discounted piece now because concerns about traditional software have eased compared with six months ago.

  “So what we are telling investors is, at least in terms of Oracle stock, if the stock price is below a $150, we feel like you're getting either the OCI business or their traditional software, their application and database business, for a steep discount.”at 8:02

Eli Lilly and Company

Across the shows: 2 speakers in other episodes, 2 bullish and 0 bearish calls, past 30 days

• Jared Holz · Mizuho SecuritiesBullish

  Eli Lilly looks best positioned over the next five years on its accomplishments and pipeline

  Holz says the sector grapples with how long the patents on major drugs last, which determines loss-of-exclusivity exposure. Most of the street thinks Lilly is in the best shape over the next five years, given what the company has accomplished and its pipeline. Holz names Lilly first among the large caps whose drugs face the least exposure from patent expirations.

  “I think most around the street think that Eli Lilly is in the best shape over the next five years just given what they've been able to accomplish and and the pipeline.”at 30:39

Johnson & Johnson

Across the shows: 5 speakers in other episodes, 6 bullish and 0 bearish calls, past 30 days

• Jared Holz · Mizuho SecuritiesBullish

  Johnson & Johnson's pharma business looks like one of the best in large-cap pharma despite device issues

  Holz says J&J stock fell sharply the previous day because of problems in its medical devices business. He says its pharmaceutical business looks to be one of the best in large-cap pharma, and it is among the handful of names best positioned to deal with patent exposure. He rates AbbVie, Biogen and Vertex as the next tier, and says most major players have some patent issue, depending on whether it hits in 2027-2028 or closer to 2030.

  “J and J, even though the stock was down a lot yesterday because of issues they're having in medical devices, that pharma business within J and J looks to be one of the best.”at 30:55

Venture Global

Across the shows: 1 speaker in other episodes, past 30 days

• Eli Horton · TCWBullish

  Venture Global benefits as energy security pushes Europe and Asia toward North American LNG supply.

  Horton says TCW owns Venture Global and sees it as a company that embodies the importance of energy security. Around 20% of the Middle East's largest gas exporter's capacity has been taken offline since March through bomb damage. Over the same period, European gas prices have risen about fourfold. Companies in Europe and Asia are therefore seeking more resilient energy supply, which means North American exporters. The spread these exporters earn on exported gas is widening sharply, and Horton argues this will flow back to them. He says the company is not really related to the AI trade.

  “These are two companies that I think really epitomize the importance of energy security globally. ... Europe gas prices have gone up four x in that time period, and companies in Europe and in Asia are looking for more resilient ways to get energy supply, power supply. That means North American exporters.”at 43:17

Cheniere Energy

Across the shows: 2 speakers in other episodes, 2 bullish and 0 bearish calls, past 30 days

• Eli Horton · TCWBullish

  Cheniere benefits as energy security pushes Europe and Asia toward North American LNG supply.

  Horton says TCW owns Cheniere alongside Venture Global and sees both as embodying the importance of energy security. Roughly 20% of the Middle East's largest gas exporter's facilities have been knocked offline since March by bomb damage, and European gas prices have risen about fourfold in that period. Europe and Asia are turning to more resilient supply, which means North American exporters such as Cheniere. The spread they earn on exported gas is blowing out, and Horton expects this to come back to them. He says the company is not really related to the AI trade.

  “These are two companies that I think really epitomize the importance of energy security globally. ... Europe gas prices have gone up four x in that time period, and companies in Europe and in Asia are looking for more resilient ways to get energy supply, power supply. That means North American exporters.”at 43:17

Private equity

• Jeffrey Perlman · Warburg Pincus

  Investors fleeing mega-cap concentration will favor private equity, which has much less exposure to a few stocks

  Perlman says investors around the world see the public market as one large correlated bet, with about 10 companies making up half the S&P 500. They are looking to diversify. Private assets, especially private equity, have much less exposure to that concentration, and investors aren't paying Warburg Pincus to find the next large language model. Instead, they want help implementing AI in more traditional businesses. He argues that if concentration persists, it will be net additive to private assets. He also says the private market is not over-indexed to software, just as public-market concentration is no longer the only issue.

  “in the public markets, have 10 companies that essentially represent 50% of the S and P 500. They're looking for ways to diversify. And actually in private assets and especially private equity, there is a lot less exposure.”at 22:00

• Jeffrey Perlman · Warburg Pincus

  Today's higher rates are still modest historically; buyout math works and sellers should lower prices

  Perlman says Warburg Pincus is in a structurally higher-rate environment, but by historical standards current rates are not that high. Investors who want a return to very low rates are wrong to expect it. He says the current environment is more constructive and a better investing environment, with sellers likely to revise price expectations. Higher prices for the businesses are not the problem; what matters is what the firm does with them after investing, which requires a scaled platform.

  “we are in a structurally higher rate environment. But by historical standards, this is not that high... We think this is a better investing environment in terms of likely, you know, revised price expectations from sellers.”at 24:26

AI infrastructure & data centers

• Jackson Ader · KeyBanc Capital Markets

  Neoclouds carrying the most debt are underperforming; falling customer prepayments would hurt the whole neocloud trade

  Large customer prepayments have been a key financing mechanism for big neocloud deals. Ader says investors worry those prepayments could slow or stop, forcing neoclouds to raise financing on their own. He says that would hurt the fringes of the neocloud trade and its core. He notes the neoclouds taking on the most debt are seeing the worst stock performance. Oracle is comparatively creative on financing, using bring-your-own-chip leases rather than owned infrastructure and new debt. He hasn't seen the Gartner forecast that over 80% of neoclouds will stop operating independently by 2030 and says he can't judge its accuracy.

  “And that's why I think the companies that are taking on the most debt in the neo cloud trade are seeing the worst performance in their stock price.”at 10:26

IPOs, M&A & deal activity

• Jeffrey Perlman · Warburg Pincus

  The IPO exit route for private equity is structurally broken; strategic sales are the preferred path

  Perlman says the IPO market for private equity sponsors is more structurally broken than many realize. There are 60% fewer public companies than a decade ago, so underwriting an IPO as the base case is a high bar. Most of Warburg Pincus's sales over the last four to five years have gone to strategic buyers. Public markets expect 30-40% IPO discounts, and sponsors then take three to four years to sell down their stakes. Passive money's role also weighs on trading six months after a listing. Taken together, the IPO is a less preferred exit route for private equity.

  “I think the IPO market, especially for private equity and sponsors, as we've been saying for a long time, that market's actually probably more structurally broken. You have 60% fewer public companies than you did a decade ago.”at 20:17

Software & SaaS

• Jeffrey Perlman · Warburg Pincus

  System-of-record software is outperforming post-SaaSpocalypse; slower-growth, AI-exposed software is the weak part

  Perlman says the SaaSpocalypse is in the past. Faster-growing system-of-record businesses are trading higher than before it, while slower-growth businesses are the more AI-exposed group. He argues software should still be part of investors' portfolios, but probably not the 30-40% it once was. Warburg Pincus has always emphasized diversification by geography, sector, vintage and number of investments.

  “The faster growing business is the ones that were system of record. Those are trading higher today than they did before SaaSpocalypse. It's really the slower growth businesses that are more AI exposed.”at 22:49

Enterprise AI adoption & AI software

• Jeffrey Perlman · Warburg Pincus

  AI implementation across portfolio companies is Warburg Pincus's biggest investment, boosting revenue and cutting costs

  Warburg Pincus has more than 200 portfolio companies, and they are trying to pass through price increases to offset inflation pressure. Perlman says the bigger lever is cost. AI can be revenue-enhancing but is more likely to help the bottom line through costs. For the firm, the single biggest investment it has made is in AI implementation across its portfolio.

  “the companies we've been working with, they absolutely are trying to pass through price increases... And that's where AI is, especially as they look to implement it, it can be both revenue enhancing, but even more so, it's gonna help the bottom line on the cost side.”at 23:55

US elections & politics

• Jared Holz · Mizuho Securities

  A split Congress is typically good for healthcare; a Democratic sweep could still help hospitals and devices

  Holz says the upcoming midterm election may be the most important factor beyond earnings for healthcare. A split Congress is typically very good for the sector, because little change is viewed as positive. Even if Democrats win both the House and Senate, some healthcare verticals that are more levered to utilization could benefit, such as hospitals and medical devices. Political and regulatory undercurrents mean healthcare doesn't always act as defensively as investors want.

  “I think the thing that's maybe the most important consideration other than earnings is this upcoming midterm election and what it could mean. I think if you've got a split Congress, it's typically very good for health care because little change is viewed as positive.”at 29:28

Power demand & the grid

• Eli Horton · TCW

  Electrification and grid investment are structurally growing, with backlogs strong but needing skeptical checks.

  Horton argues the market is too narrowly focused on the AI trade. AI is one component of a broader energy transformation built on three pillars: energy security, electrification and efficiency. US electricity demand was essentially flat for two decades and grid investment was absent, so the cyclical headwinds that held back industrial companies, including China undercutting costs and manufacturing moving offshore, are now being made up for. Reshoring, energy security and grid resilience are now priorities. Many of these companies are sold out into the end of the decade, but Horton says investors should be skeptical of such backlogs and verify that the cash flows arrive.

  “These businesses grew at GDP plus for decades. ... Electricity demand was essentially flat for two decades. There was no investment in the grid, and all of those cyclical headwinds are now needing to be, you know, made up for.”at 41:52