Transcript:
Caroline Woods
Becoming a member of me now, Dan Niles, Founder and Portfolio Supervisor at Niles Funding Administration. Dan, thanks a lot for being right here.
Dan Niles
My pleasure, Caroline.
Caroline Woods
So, Dan, we’re kicking off the primary full buying and selling week of the yr. We now have what I spending fed coverage, geopolitics, midterm elections all in play this yr. How ought to buyers be enthusiastic about each danger and alternative as we head into the brand new yr?
Dan Niles
Properly, I imply, I believe this yr goes to be extremely uneven. I believe what we noticed within the final two months of the yr, is sort of indicative of what all of 2026 goes to seem like, within the sense that you just noticed a variety of extra discernment across the AI commerce. Folks began to query you recognize, is OpenAI going to have the ability to give you the 1.4 trillion in commitments that they’ve over the subsequent eight years? And if they do not, then who’s going to get impacted by it? And so I believe you noticed a variety of volatility clearly in names like Oracle or Core. We the place you decide your favourite. And I believe that is going to proceed in 2026 as a result of I believe buyers are determining not all people goes to win. And the marketplace for the final three years since ChatGPT was launched, assumed that the second huge driver past AI for the final three years has clearly been straightforward cash. And you recognize, the fed stopped mountaineering clearly three years in the past. And so they’ve been slicing for the final two years. And the S&P is up over 80% during the last three calendar years on account of that. And the fed went into quantitative, easing QE lite, if you wish to name it buying 40 billion in Treasury payments beginning in December, you are going to get a brand new fed chairman in Might. Solely means he’ll get appointed is that if he desires to chop charges by a minimum of one other 100 bips. And in order that straightforward cash that is been actually powering the markets for the final three years, you recognize, that is in all probability going to proceed. And so you could have this push pull between extra discernment and AI and simple cash on the opposite facet.
Caroline Woods
You are anticipating an unimaginable quantity of choppiness. However would you say that it is a market that is extra fragile or extra resilient proper now?
Dan Niles
I believe it is somewhat little bit of each. As I mentioned the final two months, you noticed that, proper? You noticed oracles and core waves getting killed. However you noticed the general market with the ability to hold in there. And so for me, I am coping with the market that is sitting proper in entrance of me. I am not making an attempt to forecast out a full yr. I am kind of taking a look at, effectively, how is the market reacting to information? As a result of it is by no means the information. It is at all times a response to the information. And we’re in yr 4 of this AI CapEx buildout. And as we talked about earlier, all people’s not going to win. If you happen to return to the web bubble, whenever you when that lastly broke, Nasdaq went down 78%. I do not suppose we’re there. I believe we have got one other 1 to 2 years of fairly sturdy CapEx spending in AI. However I additionally do suppose someday this yr you are going to have one among these extra marginal gamers not be capable of get the funding that they want and that when that day occurs, you are going to have a giant drawback on this AI commerce. Having mentioned that, straightforward cash helps drive the complete market exterior of that. And for those who have a look at The Magnificent Seven for instance, 5 out of the seven names in that group truly underperformed the S&P this yr, which buyers will not be conscious of as a result of Google was up a lot, up over 60%, and Nvidia was up fairly properly as effectively. It sort of masked a variety of that. So for me, I believe the market’s each fragile due to the AI commerce getting extra discernment but additionally extra resilient as a result of you are going to you could have all of this straightforward cash coming into the market. And so even when you’ve got a problem inside that AI house the place some names are persevering with to get hit, I believe the remainder of the market may very well do okay, simply because you could have simpler cash being jammed into the market, which in and of itself inflating a bubble additional, whenever you’ve received valuations at document ranges by some measures, like enterprise worth to gross sales for the S&P or market cap to GDP or value to money movement, there’s a variety of metrics which might be even greater than they had been in 2000. And in order that introduces a variety of fragility. If you happen to do have a selloff that begins.
Caroline Woods
Okay. So you’ve got been speaking about this discernment across the AI commerce and who truly goes to win. Who do you suppose goes to win?
Dan Niles
Properly, I believe it is to me it is clear Google goes to be the long run winner. Now, that does not imply that when open AI lastly begins to place advertisements on their platform, which they need to do proper. That is the one means they are going to have the ability to make these income forecasts they’ve. You are going to see individuals go, effectively, clearly that is going to harm Google and Meta as effectively, as a result of these two are the duopoly actually in internet advertising. And so a few of that cash goes to return out of that as advertisers look to place within the open AI. However over the long run, for those who have a look at Google, clearly they’ve, you recognize, virtually 5 billion customers that use the product. You’ve got received a strategy to monetize all of that by means of their advertisements. You’ve got received gadgets with Android. After which clearly what they’re doing with their pixel telephones to assist, you recognize, cede the market and you have got the most effective quantity of coaching information on the earth as a result of they have over, I believe, seven merchandise with over a billion customers every. And so you place all of that collectively, mixed with large quantities of money movement, to have the ability to fund their efforts, they will be the long run winner in shopper AI. And for those who have a look at company AI, anthropic has about 75% of their revenues popping out of company, the place OpenAI, 70 over 75% popping out of shopper anthropic, seems like they will be clearly a robust participant of the personal ones and company. After which, after all, you’ve got received Microsoft, which just about each company has. That is going to do effectively due to their hammerlock by means of workplace. After which Oracle’s an attention-grabbing one as a result of clearly most fortune fortune 100 firms have an Oracle database, however then they’ve additionally hitched their wagon to OpenAI. And in order that one turns into loads trickier.
Caroline Woods
Though I used to be looking at your high 5 inventory picks for 2026. And one identify that you just did not point out that is on that checklist is Apple. So is {that a} wager that Apple will lastly pull by means of with a wiser Siri?
Dan Niles
Properly, bear in mind, Apple would not have their very own AI, proper? They will find yourself partnering with in all probability Google. Possibly OpenAI pays sufficient the place they get to be the default search engine. However Apple to a point, as a result of they’ve, you recognize, been woefully behind of their AI efforts. They get to sort of profit from the truth that all people desires to get entry to their 1.4 billion put in base of iPhone customers and a pair of.4 billion put in base of Apple gadgets general. And they also sort of profit in the truth that they have been so horrible in AI to a point. And that is one of many causes it is a high decide. The opposite huge one, although, is the truth that type issue modifications previously have pushed large improve cycles. So that you return to the iPhone six, the place you went from a 4 inch display to a 5.5in display and revenues accelerated from being up 7% yr over yr in fiscal 14, up 28% in fiscal 15. And I believe the foldable telephones you are getting and bear in mind, Samsung’s had one since 2019. Your Apple’s simply getting there with this subsequent yr’s iteration. I believe that is going to drive a giant improve cycle.
Caroline Woods
Cisco can also be in your high 2026 inventory decide checklist. Inform us why.
Dan Niles
Properly, it was on my 2025 checklist and the inventory was up over 30% this previous calendar yr. And the rationale I put it on the checklist a yr in the past was as a result of my thought was, look, individuals have given this firm up for useless. It is received a mid-teens a number of. I believe they really will do effectively by way of gaining some share with AI infrastructure gamers. And that is what they did final yr. And for those who have a look at this yr developing, I believe you are going to see companies actually beginning to improve their networks since you’ve received all this AI site visitors on the networks. The inventory’s buying and selling at you recognize, 19 instances 20 instances. You’ve got received the S&P buying and selling at about 26 instances 25 instances trailing. And so you’ve got received some potential for the a number of to maintain increasing. And I believe whenever you have a look at AI infrastructure revenues after rising a few billion the final fiscal yr, I believe you are going to see that going to about 3 billion this fiscal yr. And revenues, which for 5 years had grown at 1% a yr for 5 years. Final yr, fiscal yr grew at 5%. And I believe this yr you are going to see that transfer up into the excessive single digits pushed by AI, which can assist the a number of proceed to develop. So in a surroundings the place, as I mentioned, I believe it should be very uneven for AI names. I believe it is a strategy to get some offense with development accelerating and a few protection, as a result of the a number of is so low and nonetheless take part in AI. And as I mentioned earlier than, the Magnificent Seven as a bunch had been up, I believe 22% final yr. Cisco is up over three.
Caroline Woods
Okay. Additionally in your checklist Boeing which had a very good 2025. So it sounds such as you count on that energy to proceed. And pinch one other winner from 2025. However one which’s in your checklist. That was not a winner final yr is Nike. So that you’re anticipating a rebound story there.
Dan Niles
Yeah I imply I believe for those who have a look at the model the model continues to be fairly sturdy. It had gotten to quantity ten globally. Then whenever you had the brand new CEO are available in or the previous CEO, I ought to say are available in from eBay. He went forward and tried to alter the corporate to a direct to shopper firm. After which the model actually began to fall off as a result of he alienated a variety of his channel companions like, you recognize, Foot Locker or Dick’s Sporting Items. And he allowed different firms, like on our Hoka to get a foothold out there. A few yr in the past, a 32 yr Nike veteran, Elliot Hill, received introduced again in. He took Nike sort of again to its roots, which is concentrated on sports activities. It is targeted on distribution. And I believe and innovation and what you are seeing within the US, which is US revenues went from being down 11% yr over yr. Two quarters in the past. This most up-to-date quarter, they had been up 9%. I believe you are going to see that turnaround begin to work in different markets. And the model continues to be very sturdy. After which from a defensive viewpoint, on an enterprise worth to gross sales foundation, the multiples on the lowest ranges in a decade exterior of the observe, you recognize, the tariff pushed ranges you noticed in April. So you’ve got received some protection with that a number of. And offense, if the enterprise continues to show round and the development within the U.S., you begin to see in areas like China the place revenues had been down 17% yr over yr. And I believe that is the massive alternative.
Caroline Woods
No crime. And Nike shares up about 2.5% immediately. I assume Google searches for Maduros tracksuit have reportedly surged since President Trump posted the photograph of him in a tracksuit in custody. I do need to simply wrap up by asking if what is going on on in Venezuela has modified your market outlook, your financial outlook in any respect markets appears to be shrugging it off immediately. You mentioned it is actually the response to the information that issues most. What does this response inform you?
Dan Niles
Properly I imply the market needs to be up. So I am undecided why anyone would suppose it will be down as a result of Venezuela, since you’ve got had kind of a socialist take over their oil manufacturing is down, I believe 80%. And so if that effectively, manufacturing begins to enhance, which it is going to over time. That ought to drive oil costs decrease. And that is one of many greatest fuels for the worldwide economic system there’s. As a result of as a lot as all of us like to speak about inexperienced power, on the finish of the day, oil powers the markets and it is the gasoline for world markets, particularly not the primary world international locations, however the second third world international locations. So for those who’ve received cheaper power provide that lowers inflation. That is clearly superb. It helps the rising markets much more so than the developed markets just like the US. And in order that’s an actual huge constructive. If power costs drop.
Caroline Woods
All proper. We’ll go away it there Dan Niles Founder and portfolio supervisor Niles Funding Administration. Thanks a lot for sharing your insights.
Dan Niles
My pleasure. Caroline.
