 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. A rebound in semiconductor stocks has many investors asking if this is a harbinger of good news for the broader enterprise tech sector. Indeed, the SOX semiconductor index is up nearly 30% year-to-date as are leading indicators in that group like applied materials and LAM research. But Nvidia is up over 90% year-to-date and AMD up over 50%. Even the beleaguered Intel is up 22% year-to-date as of midday on the last trading day in March. But key enterprise software names have not yet rebounded and according to today's guests, the divergence between semis and B2B software is getting hard to ignore. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we examine the bifurcation between the performance of semis and broader enterprise tech. And we'll try to answer the question, is the performance of semiconductors an early indicator of a broader enterprise tech recovery or is this a false signal that warrants continued caution? To examine these issues, we welcome back Ivana Delefusca who's the founder and chief investment officer of Spear Invest, Ivana. Welcome back to the program, great to see you. Thanks for joining me, Dave. Okay, before we get into today's premise, when you last came on in September of 2021, we talked about your strategy of buying the dip for Koopa Snowflake and Zscaler. And that strategy worked great for a few months until the market shifted. Have you changed courses? I mean, you're outperforming those names in the past year. How would you characterize your current strategy in this market? Well, we haven't really changed courses. What we try to do throughout a downturn is keep adding risk slowly. So we've just kept adding to these names with the expectation that once the market settles, these are pretty high quality names, they will outperform. So similarly with the semi-stocks, we kept adding throughout the downturn. NVIDIA became one of our largest positions and as the market rebounded for semis, which are usually early cycle, that's been helpful to our portfolio. Okay, thanks for that. So I mean, what caught my attention is you posted on LinkedIn and have expectations for enterprise spend finally reset semis versus B2B software, really well done piece. Thanks for sharing that. So I really want to get into it. So in that note, you showed this chart, which is pretty self-explanatory. You have NVIDIA, AMD and the SOC significantly outperforming two names that you watch closely, Snowflake and Zscaler, I believe you still own both of those. And note, we've inserted a chart of the SOC's ETF just in the upper left to show how cyclical semiconductors are and have been for years. Sometimes we forget about that, but please share your premise of your recent research. That's right, David. So you're spot on in terms of the cyclicality of semis. Usually semiconductors are sold through the channel. So that's why you see these wild swings. Basically what ends up happening is the companies themselves have very limited visibility while the channel has a lot of inventory. So once you see small deterioration in demand, you're going to see an exacerbated impact to these companies revenue numbers. So going into the second quarter of 2022, we saw pretty significant downside, 40, 50% in terms of revenue declines in some segments for the semiconductors. And as we're coming out of it, we're seeing the opposite dynamic happen, right? So you're seeing the market stabilize, but the channel inventories are pretty low. So as those stabilizing need to be rebuilt, you're going to see an uptick in demand. So let's stay on semis for a minute. Obviously, open AI and generative models have exploded onto the scene. I wonder if you could comment how you see AI in large language models supporting the semiconductor resurgence. I love chat GPT. On the one hand, it's making me a better writer. On the other hand, I run some stuff and it gives me back complete junk. So, but I have this sort of love hate with it, but you've got all this innovation driving semiconductor demand. EVs have twice the semiconductor content as conventional vehicles. You've got geopolitical forces driving investment like the CHIPS Act. And this is a global trend. As semis peak toward the end of 2021, is this a cyclical rebound in your view or do you think it's a false positive? So semis usually have a cyclical and a secular component. So the secular component hasn't really changed since two years ago or even since five years ago. As we need more compute power, we need more hardware on the back end. So it's a pretty simple thesis. We believe that at this point in time, there is a cyclical upturn and the secular drivers are kicking in pretty strong driven by AI. So we believe AI will be a pretty significant driver and a lot of people are asking, well, is this just the hype and is it really showing into numbers? And the answer is, yes, it is already showing into numbers. And you can see that NVIDIA's data center segment is outperforming that other data center spend. So we're already seeing it not as strong as to justify the stock price move just yet, right? So we do need to see few more quarters of improving data center demand, but we are already seeing the early benefits of AI NVIDIA's numbers. Yeah, so you own NVIDIA obviously. Do you own Broadcom? We don't own Broadcom. We disclose all of our holdings on our website, just FYI, if people want to check it out. Yeah, okay. So other names that you like that you own that you're sort of adding to over the downturn other than NVIDIA? So the last name that we added to is AMD. It's another semiconductor manufacturer. We believe that as demand grows, NVIDIA is going to still remain with a market leading position, but the supply is going to get so tight. It's what we're already seeing from many companies, even Microsoft, it's having to prioritize their AI usage and projects that they're going to allocate compute power to. So we believe there is going to be broader benefit to GPU manufacture. So we like AMD as well in the same space. I don't know if you- Now in terms of new- Oh please, go ahead. In terms of new capital added, I believe this enterprise spend and the effect that it's had on some of these companies, especially in attractive areas like cybersecurity, cloud infrastructure, a lot of these names are still trading at their low. So in terms of new capital, I think those are the areas that we would look to add. And that's what I want to talk about next, but I don't know if you saw, I just wanted to tell the audience. So this week the CTO and Vidya came out and said, he kind of poo pooed crypto, even though they've made a lot of money on crypto and said they had been prioritizing a supply for AI potentially at the expense of crypto. So that was kind of an interesting little tidbit that I saw this week. That's right. So a lot of people don't know this about Nvidia, but they really made a big push into AI as of five plus years ago. So really what the development has been is not only on the chip side and the GPUs, but they developed this CUDA architecture, which on top of it has a lot of free frameworks that people can use and really easily built on them, built project, built functions and all of that is free and is available if you purchase Nvidia hardware. So that kind of gives them a pretty good mode here. And I think that's correct. They have been prioritizing this AI investments in order to capture the market early and develop use cases even. Okay, so now let's get to your next point. So one of the factors that's suppressing enterprise tech is cloud. Here's a chart that underscores that trend. You actually just published this. It's actually a tweet from ETR, which shows the change in net score. Net score is a measure of spending momentum. The blue line is quarter to quarter cloud spend and the orange line is the change in overall survey net score across about 1400 or so organizations. So cloud has essentially dragged down the entire industry because cloud spend is much, a much higher proportion of tech spend today than it was, let's say during the big downturn in 2008, 2009, the hyperscalers today, the big four probably account for about $200 billion annually. And back during the mortgage crisis, that figure was a rounding error because cloud is so much easier to not only dial up but you can dial it down. Cloud optimization has created a downdraft really pulled down enterprise tech. Now, Ivana, you point out in your piece that secular trends such as AI and accelerated computing with GPUs or driving demand, you just talked about that. We just talked about NVIDIA's CTO. So explain why you see AI as a catalyst for overall enterprise demand. So interestingly, AI requires a lot of data and what we believe is going to end up happening is that people are going to really, the compute power is going to become really expensive, right? So it's really going to be all about optimizing how you're doing the processes, where you're running the processes. So we really like companies like Snowflake, for example, that will help you choose where you want to run the compute, where you want to do the storage. So we believe it's anything with cybersecurity, right? As you introduce AI, especially in real world applications, like if you're remote monitoring a refinery or you're doing predictive maintenance on some of these large real world assets, cybersecurity is going to become crucial, right? So we believe these are really strong long-term drivers for both of these segments. And you don't really hear the CEOs talk about these trends on their conference call just because it's a little too early to see reflected in the numbers, but there is no question that this is going to be a long-term driver. So the other thing I want to share, you put some data in your piece, this chart right here in your post, it shows the 2023 forecast for the hyperscalers as a group growing at 20%, that I've got them at 21%, so very consistent there. Snowflake at 40%, all the high flyers, Cloudflare, CrowdStrike, et cetera, all the way down the list, averaging out at 28%. So lower expectations relative to 2020 and 2021, but there's still some momentum in these names. For example, we saw this with CrowdStrike, last earnings report, Palo Alto Networks as well, it's not shown on that chart, but in a surprise to the upside, I mean, even Cisco beat and raised. So it's mixed, I guess my question is, how much upside is there in this data because you have easier compares, you've got conservative guidance, is there sandbagging going on, do you think? And what are the catalysts for a rebound in your view? Well, we believe there is absolutely some level of conservatism built into these numbers. Enterprise spend, a lot of it is driven by sentiment, right? So if people are feeling good at the companies, they're going to decide to budget more for next year. If they're scared about the economy, they're not going to budget as much, right? So it's unlike, same is where it's driven by real demand, like if people are buying GPUs, you're going to see it in the numbers. Enterprise spend is a lot more sentiment driven. So at the moment you saw some weakness in the economy, CEOs and CEOs started cutting their budgets. So we believe there is some level of conservatism in these numbers. The bigger shock looking at that table is that a lot of these hyper growth companies with really interesting products are starting to show growth rates close to the cloud vendors, right? Which doesn't quite make sense. So we have a lot of mature companies as well that we're following and growing at 20% plus is really not that difficult if you have an innovative product. So I think that not only that these numbers are conservative, but the real problem here is that when people look at 20, 25% growth, is that going to be then stepping down to 15 and then down to 10? Because that's a big problem, right? So that's kind of what you're having priced into the stocks today. Or is that going to be something that we are seeing one year of weakness and then it resumes in the 30s in terms of percentages. So that's the big delta, I think between the bears and the bulls today, right? Like if you think this is the new level of growth and these hyper growth names grow at 20%, no, you can't even justify the valuations today, right? But if you believe this is a cyclical downturn, which is the camp that we are in and they can get back to a more normalized level of growth, then they look very attractive here. Let me follow up on that because you got, I mean, Amazon AWS is now 80, 90 billion dollar company growing at 20%. Azure's growing faster, Google's growing faster. But if you go back, Google, if you compare Google where they are today versus where Amazon was at this side, Amazon was growing much faster. So it's very possible that growth could accelerate there but such large numbers. Do you think the hyperscalers can actually accelerate growth? I mean, Microsoft has just cut the line from a business model perspective with generative AI. What do you think? Do you think we could see an accelerated growth amongst the hyperscalers, even the big ones? So we are a little less cautious on the hyperscalers, but there is no question that this is a cyclical downturn, right? So I think a lot of investors, what they miss about hyperscalers is that their business model is in a way taking risk away from the consumers and onto their balance sheet, right? So you are supposed to be seeing a cyclical slowdown because people do reduce consumption. So it's almost like the business model, the value proposition that they have for their customers is that they can scale up and scale down. So I do believe that we're going to see a cyclical re-acceleration from these levels. I don't think we're going to see 40, 50% growth, which I think some of the other names that are coming from smaller bases and smaller scale, I think they could return to those types of levels of growth. Yeah, and you'll probably see data bricks at some point go public. They, you know, from all accounts are growing, you know, very, very rapidly. So that's going to be one to watch. What about security? The sector's up here to date, but some names like Zscaler are lagging. They kind of reverted to the mean and then started, you know, moving again, but you got CrowdStrike and Palo Alto. We talked about those surprising to the upside. Security remains the number one priority of technology departments and zero trust is becoming a watch phrase that increasingly has meaning to companies. So do you think security could help lead the rebound in enterprise software more broadly? I don't know about leading the rebound, but I do absolutely believe that we're going to return to more rapid growth. Basically the big problem right now that we hear from our companies is that they're having trouble getting new customers to sign on. So this is why you see platforms like Palo Alto and CrowdStrike outperform because they already have a pretty large install base of customers that they can upsell products to rather than having to go out there and find new logos where a lot of the weaknesses. Okay, so last data slide I want to share, Ivana. I got permission from ETR to show this data. It's preliminary from the very latest ETR quarterly TSIS Technology Spending Intention Survey. It's still in the field, but it's almost complete. I mean, I'd say it's 90% there. And this is part of their macro drill down, which tracks expected spending from IT decision makers each quarter, ITDMs, we call them. Coming into January 2023, the expectation from these folks is, as you can see in the far right set of bars was for 4.6% increases in spend in 2023. That's the blue bar. That's now down to 3.7%. And the buyers have changed quite a bit in terms of techniques they're using to cut. Typically, it's been consolidating redundant vendors and optimizing cloud costs. Those were the top two, but Ivana, it looks like they've kind of squeezed that lemon pretty hard. And now they're accelerating other techniques. I can't share the specific data until ETR releases, but delaying or canceling new projects is now number one. Cutting staff and reducing hardware spend and spending less on consultants is right up there. They all take precedence over consolidating redundant vendors. So what this tells me is that we still have a ways to go because if buyers are canceling projects and cutting staff, to restart them is going to take a little bit of time and the cloud makes it easier, I know. And the narrative seems to have shifted from digital transformation as our priority in future to do more with less. That's sort of back in vogue. What do you think about it? How confident are you of this tech rebound? Sounds like you're pulling the trigger now cautiously, adding risk as the market goes down. How are you thinking about this in the next three to six months? Well, I do think a lot of this data is based on companies which are still pretty cautious, right? So it's a lot of it is sentiment driven. It's going to be very different industry by industry. I just met with over 50 industrial companies with pretty broad end markets and sub sectors ranging from aerospace, housing, broad industrials, mining. And all those end markets are doing really well, right? So all of those companies are going to now reaccelerate spending, even though they were cautious maybe three months ago. So I think it's going to really depend industry by industry. Banks obviously are now in focus and are not doing well. So a lot of people are asking, well, is that really the next shoot to drop here, right? For companies like Snowflake, banking and financial services, industry, the pretty big end market. But I do believe it all goes back to the economy. And if you start seeing the consumer doing a little better and industrial economy reaccelerating, all of these other sectors will just have to follow. So we do quite a bit of channel checks to get a framework of where things stand. And things are actually a lot more optimistic than what you hear on TV. Okay, so the customer's, you're right. It's kind of a lagging indicator in a way. And last week, Ivana, we published, our audience knows we published which tech firms are most exposed to the banking crisis. Snowflake wasn't overly exposed. They were kind of middling. Databricks was exposed, but in a very positive way. It shocked us. The ETR net score for Databricks in financial services was off the charts high. It was amazing. So obviously we're keeping an eye on that. But I want to end with the areas that you see as providing potential upside. And we've listed them on this chart. This is from your post. Platforms beat point products. Tech companies are getting more disciplined. And that could drive operating leverage if and when revenue growth accelerates. And prioritizing must-haves over nice-haves. So I want to unpack these a little bit, Ivana, starting with platforms. I mean, these aren't really mutually exclusive. My guess is you're looking for companies that sort of fit in all three, but explain your thinking here. And maybe we can talk at the end about which names you think will benefit. Maybe start at the top. Yeah, sounds great. So basically these are trends that we're seeing already today. And companies like Crowd Stripe, we would consider them as a platform where basically the company started as an endpoint leader. They gained pretty significant market share. So they got to a point where if you analyze it, you're like, where is the upside going to come from? Well, now they've expanded into several different areas that could be providing pretty significant total addressable market expansion. And they're in addition, expanding to small and medium businesses. They just announced a partnership with Dell where you can have CrowdStrike available when you purchase your computer, which is a pretty big deal. So it's really all about finding products where they can use the same infrastructure and sell more products and more services. Great, okay. And then the second point on that slide is cost cutting by tech vendors. You feel it hasn't fully kicked in yet. And you've had a comment about those that cut less than 10% and more than 10%. The more than 10% could have been a warning sign, although you said it could have been a strategic move. You mentioned Metta and some others. And so there's potential silver lining there, but maybe you could talk to the second point. Well, yeah, I think that's a great point. Basically, there is a bifurcation. If somebody is cutting 10% of cost of workforce, it usually means that their products are still working, demand is still there, they're just optimizing. So that's usually like the area that you'd wanna focus on because you can get some pretty low hanging fruit. And even as the market continues to recover, they will continue to benefit from the great products that they have. So HubSpot is an example here. They really are not seeing, obviously seeing some slowness compared to history, but they're still growing at pretty attractive rates. So now once they optimize their cost structure over time, that's gonna be pretty meaningful for margins. Where we are more cautious on our companies that are cutting more than 20% of their workforce. And this is usually a sign of something really bad going on, right? Like you're either thought you had a business, but that business is no longer viable, right? So here you can still find some good opportunities if somebody is able to turn around what they're doing. And Meta is I think one that could fall into this category, we're not involved, but you could see them may be able to successfully transition to a lower cost structure. But it is a red flag for many others, like Upstart or Open Door also had a pretty big, pretty big late workforce cut. Carvana I think was also as well over 10%. In these cases, there may be a business model challenge, right? And you don't wanna be stuck with these ideas where you get up top in the first year, right? When they actually do show margin improvement, but if their business model is not there, how are you gonna generate the returns in the longterm? So we prefer to stick to the ones that are considered to be quality and the cost cut just enables them to have an efficient operating model going forward. Great, thank you. And then let's talk about the must haves versus the nice to haves, the third point on this chart. I was on a call with a CIO of a very large company yesterday and she said, look, we always have a priority list. And what we do in situations like this is we pull from the bottom and we take resources in the bottom and we throw them at the top and very practical. But maybe you could double click on the must haves versus nice to haves. I think your spot on, you summarized it pretty well. Basically cybersecurity is an area that is a must have. So even if you push out a project or you split it into different pieces, eventually you're gonna have to do it. Similar with cloud spending. Optimization, yes, pretty meaningful, significant negative driver to results, but there's only so much you can do. So those areas also are very difficult to cut beyond just optimizing. But there are a lot of small tools that are supposed to be improving productivity that are not in that must haves camp. So they do need to prove out their business model and maybe they're not gonna get a chance in this type of a market. So a lot of this we see in DevOps, basically where you're providing useful tools, but the question is, does the CEO really understand what the ROI on that is? Is there even an ROI, right? Some of them may not really be offering the productivity improvement that you think you're getting. So we do prefer the must haves. I think that's a really good way to manage risk, right? Where these companies are still gonna provide a lot of upside if the market turns, but in the meantime, they do generate free cash flow and they do fall into this more defensive camp. So cybersecurity, I mean, analytics, you mentioned Snowflake would be good examples, you're saying. Yeah. Okay, I want to close by asking you what the risks are to the scenario. I mean, you have the banking crisis, looming liquidity crunch. Could the semis potentially retrace 10 to 20% given the big run up? Are they extended? Is chasing the broader tech fool's gold at this point? All these things, CrowdStrike, big, big quarter in small business. If you got a liquidity crunch and rising interest rates, does that hurt small business and hurt them? How are you looking at the risks here in the next, say, six months or so? Well, your spot on the biggest risk or something we're closely watching is small businesses because if you see a liquidity crunch, that's where you're gonna see it. Large enterprises, interestingly, like a lot of the large companies I met with over the past week, they're not having any cash flow problems. So liquidity wasn't even a question for companies like Airbus, Boeing, a lot of the large industrial. So if you do see weakness from the liquidity problem, it is gonna be in the small businesses. However, one thing I would say is that the real liquidity crunch, in my opinion, happened a year ago, right? So that's when you saw rates going from close to zero to 4% plus. So a lot of this negativity or a lot of the downside has already been priced into demand and the market. So that's why we're a little bit more optimistic than most here and we don't think that the liquidity problem is gonna be as big as people think. Same as, yes, they've run up, they could easily pull back 10%. The fundamentals for Semi are pretty strong because the next leg up could be China. China has been just demolished. I don't think people realize the impact that that's had on Semi's. Basically, if you look at TSMC, China has gone from 20% of the business to a little over 10%. So basically China demand is cut in half. So as China recovers, and this is one of the things we learned from the conference I just attended, it sounded like the China recovery is going a little better. So this is the driver that we look for Semi specifically that we think is gonna drive the next leg up. But yeah, for sure, 10 to 20%, easily they can pull back at any time from this level given the volatility in the market. And I'd say the biggest risk, sorry to interrupt you, the biggest risk that we see is just the recovery being more muted than most other recoveries we've seen because you still are gonna have high rates. So there is not gonna be booming demand and that's something that people should keep in mind. Yeah, it could take some time to come back. But I think I like you and a long-term optimist. I think generative AI could be a huge catalyst. When we saw it, it was like a Netscape moment to us. All right, Ivana, we got to leave it there. I want to thank you so much, Ivana Delvesca for coming on theCUBE, spear invest. You've got great insights and you do your homework. I really appreciate your contribution to this episode. Thank you. Thank you. All right, thanks to Alex Meyerson who's on production, he manages the podcast. Ken Schiffman as well. Kristen Martin and Cheryl Knight, they helped get the word out on social media and our newsletters and Rob Hoef is our editor-in-chief over at SiliconANGLE. Does some great work for us. Remember, all these episodes are available as podcasts. Wherever you listen, just search Breaking Analysis Podcast. I publish each week on wikibon.com and siliconangle.com. Don't forget to check out all the videos, thecube.net. You can email me directly, davidotvolante at siliconangle.com or dmme at dvolante. Comment on LinkedIn. And please do check out etr.ai. They got great survey data. They keep it up to date. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching. We'll see you next time on Breaking Analysis.