00:00 Speaker A
Tom, I’d like to kick off the the conversation with you because it seems like investors’ mindset here has really sort of changed from bubble risk to sort of uh to sort of this this fear of being obsolete, this disruption fear. Now,
00:23 Speaker A
you said in your note that it’s also outweighing hopes of productivity as well, and you’re watching one key ETF. Break this down for us and how this has sort of changed from this this sort of disruption fear and now a Doomsday scenario.
00:46 Speaker B
Good morning, Brooke. Thank you very much for having us on. It’s it’s really a uh quite a breathtaking evolution we’re seeing. So the whole AI enthusiasm, AI bull bull market has been driven on the idea that AI is going to make companies much more productive, right? Which means better margins and more earnings. But now, the thought is going beyond that. It’s saying, wait, it’s going to become so productive that we’re actually not even going to need all of these industries. And there won’t be jobs for people.
01:29 Speaker B
And that thought has really taken hold, right? And the reality is this, there’s there’s the the the Citron research or Citrini research piece was just, it was a thought experiment, right? It’s it was written as a letter in the future back to us in the past. Right? And and sure, is it possible? I I’m sure it’s possible, but I’m I guarantee you there were similar thought experiments about the industrial revolution and all the other things that we have seen occur over the past several hundred years. In the reality, we we don’t know.
02:07 Speaker B
In the near term, right now for us as investors, we have to deal with soured sentiment on AI. And just like we could argue that AI was irrationally bullish maybe six months ago. We’re starting to venture into sort of irrationally bearish territory as well, because seemingly every announcement now is just assumed to be negative like we saw from Anthropic last night. And so I think that for investors, we got to step back, we have to realize we’re going to have more volatility, but we have to start sifting through some of these fears.
02:37 Speaker B
uh because while they are sensational and and sort of uh interesting reading, they’re not bounded in actual fact.
02:44 Speaker A
Jared, I I do want to stick with that that reaction from investors because following the announcement from Anthropic that they plan or said Claude uh Claude can modernize legacy code. We did see that sell-off when it came to IBM. Where are we at at the open and what is sort of the ripple effect that this has had on software stocks just this week alone?
03:15 Speaker C
Sure, let’s take a look at IBM’s stock first today. It’s up 1.41%, but I’m going to give you the two-day view and you can see it’s still down 11, 12%. By the way, yesterday was the worst day for IBM since the year 2000 and this coincided. So this wasn’t a result of the Citrini report, although I think that had spillover effect. There was some comments um by the by the cloud Anthropic founder about basically uh the structure of the ATMs and how they
03:52 Speaker C
how they use COBOL as part of their programming. IBM happens to run a lot of the main frames that run these ATMs. And by the way, COBOL is an ancient language. I remember taking classes in the mid 90s and professors talking about it. I thought that was old then. Um, but it’s still around. The notion that an AI agent, an LLM can generate code and then it’s going to be adopted immediately and then put on the cloud and it’s going to displace these IBM servers.
04:31 Speaker C
It’s just kind of ridiculous because that’s going to take years to play out. There’s tons of regulatory risk with a lot of these companies and so this actually ties into the Citrini report too, why I think it was a bit overblown. Um, it’s just it takes too much time for these things to happen. I think slow adoption with AI is a good thing. I mean, if companies were to replace service now or SAP, and I’m just using those as arbitrary targets, you know, you replace your entire human resources platform with something that was generated in house in a few weeks.
05:07 Speaker C
That’s just not going to happen because there’s too much liability there. So I think AI adoption going slow is actually a good thing for humanity. We’re incredibly resilient as a species, uh but the the there are limits to this. and I think this thought experiment really pushed the limits and I think things got a little bit overdone. And if we’re still on the interactive here, I’ll just give you a one-year view. Um so this takes IBM. It’s basically been trending sideways here, but let’s give a max chart because IBM broke out a few years ago around the early pandemic
05:41 Speaker C
and it’s had a really nice run. And um so this is just kind of a backtrack. A lot of stocks in software are looking like this that over the short term, they look extremely depressed and IBM isn’t even a pure play software company. Uh but, you know, they’re holding their long-term trend lines, a lot of them that have been around for a while. and I agree with Tom is that things have got got irrationally bearish and I think a little bit overblown at this point. So sentiment and time will wash these things out and we’ll find a bottom, but that could take a little bit more time.
06:03 Speaker C
People have to grow impatient.
06:06 Speaker A
It’s been so interesting to watch sort of this this acronym emerge as FOBO, this fear of being obsolete acronym emerge. I do want to point out as well that we also did reach out to IBM as I mentioned at the top, and they did say that while new tools emerge every week, including our own, what they do not change is the fundamental engineering challenge of running mission critical workloads at scale. And they went on to say that that is a problem IBM has spent decades learning to solve and AI is the most powerful tool we ever had
06:40 Speaker A
uh to do it. And and so it’s just interesting to see IBM sort of positioning itself that it will make it through this rut, through this fear of investors. But with that being said, we have lots of earnings on deck this week. We’re getting earnings from Work Day today, Salesforce as well as Dell on Thursday. And Ines, I want to bring you into the conversation because what are analysts looking for within these reports this week?
07:11 Speaker D
Brooke, analysts are expecting these companies to be able to defend their margins, to be able to defend those margins and their pricing models when it comes to some of these software companies. Uh take a look at Workday for example that as you mentioned is going to be reporting today after the close. And you’ve had analysts that have been lowering their expectations on uh this stock, um their price target. You’ve got Morgan Stanley, which recently lowered its price target from 280 to 200.
07:51 Speaker D
uh Jeffries has a hold on uh Workday and with a price target of 150. And then you’ve got Wells Fargo that still has an overweight, but they still also lowered their price target to 255. In the case of Salesforce, what the street is wanting to see is that agent force, their agentic AI software that that will be able to drive growth. You also have analysts that have that that have also been lowering their price target on Salesforce.
08:24 Speaker D
You’ve got an overweight from Morgan Stanley at 287. You also have Wells Fargo and Oppenheimer that have also lowered their price target. And UBS analysts also recently had talked about that they have spoken to customers of Salesforce and that those customers are not looking to swap out their software, but they are seeing that there’s no real signs that their backlog or their revenue growth rates are really uh gaining traction. So there is some caution in the street about this AI uncertainty.
08:58 Speaker D
Uh and there’s also this sort of rerating. You’ve got this expectation because if you take a look at year to date, some of these stocks are down more than 30% year to date.