Jordan Wong - Portfolio Specialist

Marcello Montanari, CFA - Managing Director & Senior Portfolio Manager, North American Equities

Robert Cavallo, CFA - Managing Director & Senior Portfolio Manager, North American Equities

Jordan Wong: Okay. Hi, everyone. Welcome back to Tech Talk - a monthly web series designed to keep you up to date and informed on all things technology and healthcare related. My name is Jordan Wong, and I have the pleasure of having Marcelo Montanari and Rob Cavallo on the program with me. Marcelo and Rob are both managing directors, senior portfolio managers on our North American Equity team. Marcelo and Rob manage a number of growth focused strategies. The two you're likely most familiar with would be RBC Life Science and Technology Fund and RBC Global Technology Fund. Rob, Marcelo, welcome back. It's good to see you.

Marcelo Montanari: Thanks. You too.

Rob Cavallo: Thanks.

Jordan Wong: Excellent. So I was thinking for this month's episode, there's plenty to talk about. We kind of have to pick and choose here, but a few things I was thinking would be really good to hit on. I think Nvidia's most recent earnings painted a really positive story, but the stock market didn't really think so. I'd like to better understand what drove the initial market reaction to Nvidia beating estimates. Of course, there's this Citrine research paper that paints out a pretty bleak potential future scenario with regards to AI in the economy. I think that's probably a really good starting place for this episode. There've been new deals between Nvidia, AMD, and Meta's announcement. Rob, we can get your thoughts on that, but Moderna has done incredibly well this year. It's not a stock we talk a lot about within the healthcare space, so I'm hoping to touch on that as well. To start us off, the big headline over the last few weeks has been this training research paper.

Folks that are watching this are likely familiar, at least at a headline level. This paper outlines, more or less, a fast forward to 2028 doomsday AI-induced Great Depression type scenario where effectively productivity soars, leading to mass layoffs and spiking unemployment across the global economy. Of course, that doesn't really benefit businesses if people can't buy your products and services. Now, we talk quite often, and I've never really gotten the sense that this is a scenario you place a ton of probability behind. But I'd love to get your thoughts and reaction to this research report. Let's start off with you, Marcelo.

Marcelo Montanari: Yeah, sure. I would argue with the description of this being a research report, it wasn't really research. It's more kind of like a scenario, like a prequel, like a pre mortem of trying to figure out, let's say, there's a really bad outcome. How did we get there? And so you kind of they drew out the path to get there. I mean you say that we don't think about these things and I would argue the opposite. We think about this quite a lot. We are always thinking about, what's in the range of outcomes, or I always call it the cone of uncertainty. There's all sorts of different outcomes. And so, this one is definitely something that we think about and we think it's a worthwhile discussion to have. And I'll get to that for a second. But like, even just as an organization like, we spend a lot of time thinking about, how AI is going to change our business and the way we do things. And, as we move closer and closer to being, the activity of human plus machine becomes more and more important. We're trying to figure out the best ways to incorporate some of this stuff to make us better at our jobs and our professions. And, you know, we spend a lot of time on that. Historically, technology revolutions, have always moved society forward, created new industries, new products, new services, new jobs and everything. And it's basically, kind of raised living standards, created wealth. It's all kind of part of Schumpeter's creative destruction where, you know, renewal comes from basically technological disruption.

Historically, history points us to the fact that this has been a positive over time. But in prior revolutions, it took it took time for the innovations to basically filter through and disseminate through the economy. You had ten, 20, 30, 40 years even to do this. That kind of aligned with contractive waves or at least 40 year cycles and stuff. They kind of like a line of, loosely they kind of line up with each other. But people are kind of looking at AI right now and saying, it looks like AI is going to filter through the economy at an accelerated pace. That kind of doesn't allow for that more orderly transition. Unfortunately, in some cases, we're going to see situations where companies that might be looking to get an ROI on their AI initiatives, they'll go for the easy button. And the easy button is like kind of like what we saw. What's his name at Block Pull this week, which is like, I'm going to I'm going to lay off 40% of my staff. That's a completely different story. I mean, he claims that it's all about AI, but there's other stories behind that, like the staff at that Block went from like 3800 to 13,000 from before Covid to after. And they initiated all sorts of new business initiatives, whether it was in crypto and banking and investing. And most of those things never came to fruition, but the people were there.

So I'm not entirely sure this was AI driven. There's rumors from inside the walls of Block that there was more to it than that. But, anyway, so the concern is that we won't have as much time to deal with that. And like I said, it's a worthy discretionary discussion to have. But I think what was really interesting was how the market reacted to this.

Like I said, we've been thinking about it. We think most investors have thought about it. At the moment, I'd say those fears are a little exaggerated because we don't really know how this is all going to play out. Like, you can paint a scenario that's a lot more benign. And just by way of example, the one profession that is right in the crosshairs right now is basically software development. And instead of seeing job placements and hiring in the software space drop—okay, it's getting harder for new graduates to find jobs—actually, jobs for developers are rising. So it's kind of what we've always seen in these situations: you get this Jevons paradox, which is if you drop the price of something, off demand goes up. And we're actually seeing that in software development. The ability to code is becoming democratized, so you need more and more coders. Everyone’s arguing that, and I've actually done it myself. I've never coded in my life, but I developed one app on my own. I've done a few other little side things too. So it's making it available to more and more people. And as a result, like I said, the price is dropping. My point was that internally, the way we think about it is: how can we make people better at what they do? Everyone's got things they can't do because they don't have time. It would be nice to do this, but I don't really have time, you know? And we're now at a position where I can actually get a coder to do something that would have taken two weeks in two hours. And now I can be a lot more efficient by using this little piece of code that's been developed for me. So I think we're going to get a lot of that going forward. That's just an example of how we could actually see an increase in demand rather than this negative scenario.

Jordan Wong: That's really helpful. Thank you for clarifying, and I apologize—I didn't mean to misspeak. I wasn't suggesting that wasn't something you're considering, but merely that it wasn't really the base case scenario outlook for you and Rob. But you mentioned software, and so I'd like to dive a bit deeper into that. This report kind of puts software in the centre of its crosshairs. Software is in the midst of a pretty severe selloff so far this year. I think in the last episode we talked about the factors why, and you mentioned you were going to be doing some work on the sector, looking at ways to identify potential winners and losers over the medium to long term. Maybe you could talk to us a little bit about some of the work you've been doing within the space over the last few weeks.

Marcelo Montanari: Yeah, well, that's an interesting segue into AI capabilities in our work. So, like I said, we've kind of experienced this potentially throwing-out-the-baby-with-the-bathwater situation where, because of what we've seen in terms of the coding capabilities of these models, everyone's become concerned that software companies are at risk.

Rob Cavallo: Maybe I could just add a comment on the training piece as well. I think what's important is that it adds up like a plausible scenario, and that's what created a lot of fear in the market. But it's probably a low probability scenario because it basically front loads all the negatives with no upside from any of the benefits from AI deployment. It assumes that all companies will move at the speed of light and decide they're ready to go all in on massive labor force cuts, even without knowing for sure how to model out the longer term implications for their own business perspective, from just having the bodies necessary to run the business. So I think this scenario creates interesting guideposts for us to think about and watch over the next 2 or 3 years to see how the reality changes the probability of that scenario—whether it's margins, pricing levels across various industries. It's interesting from that point to kind of reinforce the warning signs to watch for in that kind of severe downside scenario. And importantly, as well, the software sector, as Marcelo is going to get back into, basically the day after that report released marked the bottom of the selloff. And at least we've seen a tactical bounce since then. So once you got past that first day of fear, it actually marked a bit of a bottom. Maybe some of that is because attention is now all about Iran and less about AI disruption. We'll probably revisit AI disruption at some point, but those are just a couple of points I'm throwing in there.

Jordan Wong: And maybe before we hand it back to Marcelo, Rob, are there any short-term catalysts that could get the market back to being pretty excited about AI? You know, this report just talks about headcount reduction and things of that nature. I think it's pretty likely that we might see businesses become leaner as a result of AI—sort of like a self-fulfilling prophecy, almost. What kind of information would we need to see for people to be back on board?

Rob Cavallo: I mean, so I think for either side of the tail—good or bad—of what AI deployment and potential disruption could mean, it's all based on market sentiment. If you're in a positive market, you probably take the data points and look through and say, "This is great for margins, blah, blah, blah," whatever the case may be. We're in a negative sentiment market, so we interpret everything as a loser. Anything related to AI is a loser. So I think it's a little bit just about broader market sentiment in terms of what flips it or acts as a catalyst. There's not like a specific catalyst. I think it's just going to be a matter of going through quarters after quarters without seeing mass layoffs called out as the reason why. It's going to take a more diverse set of businesses showing actual revenue upside from AI deployment, as opposed to the market really just focusing on the labor replacement side of the story. So I think it's singles and doubles like that. I don't know if there's one positive catalyst on the positive side. I think there's probably more case to say there's a negative headline catalyst because of how models advance and how that might be interpreted. But I think on the positive side, it's just going to be singles and doubles of quarterly revenue visibility—signs that this is not mass unemployment in the medium term. So unfortunately, it's not going to be one thing. Essentially, it's a number of things that compound on each other.

Marcelo Montanari: You know, when you think of a software company or any company, the way I think about it is quite simple. The value of a company is the present value of its existing business plus the present value of its growth opportunities. And so what's happened to software is that.

Rob Cavallo: Yeah, so firstly on the earnings, yes, it was about as perfect a quarter as you can get. They beat by the regular cadence on revenue, beat on margins. Their guide for next quarter was above even the buy side whisper number. So it was a very good quarter. But the problem with the story—there are a few things. One, the stock ran almost 50% from its low in early February to when it reported in late February. So there's probably a little bit of positioning reflection there. But secondly, Nvidia is not really about next quarter or the quarter after numbers. It's the market getting comfort in 2027 and probably even more so 2028 cap expansion across the industry, but specifically with the hyperscalers, given the raise in capital spending for 2026 that was recently announced and how those stocks reacted to that increase in spending.

So, the market's saying, yeah, that was great—better than our expectations—but we're not willing to pay for it because you can't give us enough visibility yet on 2027–2028 revenue expectations or revenue growth potential. I think that starts to get addressed starting next week. They host their annual Nvidia GTC conference, so we'll get some ideas around next gen and what the pipeline looks like. I bet you they'll start talking and putting some more qualitative thoughts around the Meta announcement that you highlighted. And what that was is basically re-upping the partnership.

Meta is already one of the top two GPU buyers, I believe, as it is today. So nothing's really changing there. They're going to be buying more CPUs. CPUs have been kind of the whole thing—everyone focuses on the accelerators and how that works in the market, but CPUs are still sort of the brain. It seems like they're going to be using a bit more CPU as part of it, but there's a lot of development going forward and really more entrenchment of Nvidia's place within Meta's roadmap for how they're thinking about their models going forward. Subsequently, Meta also made an announcement with AMD to deploy up to six gigawatts of AMD-based GPU systems.

So we're still in this position where nobody can get enough compute, and everyone's just trying to lock in as much compute supply as they possibly can. That's what both of these announcements really signify. For us, it was very good for AMD, given there were some question marks about the Nvidia announcement and Meta's aspirations with custom products like the TPU type thing they can do through Google or similar chips they can buy through Broadcom. So this is more positive from AMD's perspective. But it really just signifies how everyone is still starved for any kind of compute.

Jordan Wong: Oh, that's excellent. Thank you. Now, Rob, sticking with you before we sign off. Moderna: best performing stock in the healthcare sector, up around 75% on the year. It's a stock we haven't talked much about since the pandemic era. Maybe talk to us about what's going on with that stock, your thoughts, and outlook for the name as well.

Rob Cavallo: Yeah, and I'll be honest, this is something I've missed this year. We haven't owned this for quite a while—pretty much since the early Covid days. Basically, this was a stock that had severely underperformed for a couple of years. It's just been a downward trajectory since '21, '22 for this stock. So it had a very high short position, I think, and exited last year very underowned. What happened so far in 2026 is some of the anti-vax rhetoric and stance within the FDA has kind of subsided, which is helpful for the stock, given that vaccines are still an important part of the near-term revenue makeup of the company.

That was one thing that went well. And what that has led to is a lot of short covering. Some of those technical dynamics created a bit of an unwind and started seeing the stock go higher because of that. And then they had a few other things go right. They're making good progress with their flu vaccine and with a cancer vaccine partnered with Merck. So they had some small incremental things go their way. They had a settlement around a key patent very recently that also went in their favor. And it's just been great for the stock—up 70, 80% year to date. But we're still not there. We think the story from here is about the cancer vaccine, and we need to see more details about it. We think it's probably priced in pretty well here, and we have exposure through Merck already. I mean, we're open to changing our mind. We'd just like to see a bit more confidence around the next 2 or 3 indications for that cancer vaccine beyond its initial indication in melanoma. So good for the stock, but we're still on the sidelines here despite this move.

Jordan: No, that's great. Thank you, guys. Well, that's all I had on the agenda for this month, so maybe it's a good place to wrap the episode up. As always, I really appreciate your time and insights, and I'm looking forward to catching up next month. For those of you watching, if you'd like to learn more about strategies like RBC Life Science and Technology Fund or RBC Global Technology Fund, we encourage you to visit our website at rbcgam.com. Thanks, guys, and we'll talk again.