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: Hey everyone, welcome back to Tech Talk. Of course I'm joined by Marcello Montanari, Rob Cavallo, both managing directors, senior portfolio managers on our Toronto based North American equity team. I think this is going to be a really exciting episode. There's lots going on across the technology space today. I think the most notable thing right now, and the thing that everyone is talking about, is the upcoming space IPO scheduled for June 12th.

So this is the perfect time to at least have a preliminary discussion about that. I suspect we'll revisit this topic throughout the year, particularly after the IPO, and once everyone kind of sees how the dust settles. But gentlemen, thank you for making the time today. I know it is busy. Excluding this upcoming IPO, there's lots of work on your plates, but this sort of adds to it. So appreciate you taking the time today.

Rob: Thank you.

Marcello: Good to be here.

Jordan: Excellent. Why don't we. Why don't we jump right in? You know, there's only there is limited information on this intended IPO, but presumably you've had a chance or an opportunity to look through some of that S-1 filing, which is where all the information that everyone will have access to is found. So maybe we could just start off. Would love to get your first impressions, your initial thoughts on what you've been reading.

Marcello: Okay, maybe I'll get started. And just to just to be clear, I haven't like I've gone through like a very quick overview of the S-1 and plus I've, you know, talking to some analysts who were able to talk before they were part of the syndicate. You know, I've gotten a little bit of some, some insight from there.

Marcello: And on top of that, just kind of reading things either from, you know, in the press or, you know, I follow a whole bunch of people like on Substack and, you know, Twitter, some very smart people and knowledgeable people and like, where to start. I mean, it's just it's just it's such a gigantic IPO. Hence hence all the controversy around it, which is spanning so many different businesses.

Marcello: It's it's really hard. Like we could probably talk for a couple of hours about this if we really wanted to to do that. But I think, what if I had to say like what? What really stands out about this is. Well, number one, this is not something that you can kind of value using traditional metrics. There's you know, you have to you have to basically use a DCF and make a lot of assumptions.

Marcello: And once you're doing that, you know, all your valuation works basically on a foundation of jello, because all you have to do is change a few things. And and the numbers can, can vary quite widely. So the valuation is very high given on what we know today in terms of like revenues and stuff like that, because it's trading at like 100 times revenues.

Marcello: Most of those revenues are coming from the Starlink business. I think it's probably about probably about three quarters of the revenues are coming from there. So that's at the moment when you look at it, it's really and it might end up in the community. I believe it's going to end up in the communications sub subindex of the S&P and the various benchmarks, along with like Google and AT&T, Verizon, those type of names.

Marcello: So it's right at the moment it is within that segment of. Most of the most of the value is there. The launch business is probably it's probably the most exciting things because like who doesn't like rockets. So and let's be clear. I mean Elon has done a you know I have my issues with Elon here and there, but you can't deny some of the stuff that he's accomplished.

Marcello: And basically SpaceX has basically become kind of 75% of the non Russia non China launch capacity. And you know the amount of rockets are putting in space and by extension the amount of satellites they're putting up there is quite something. So that's impressive. But I think I think the most important thing is like when you when you go through the S-1, everything kind of boils down to like it builds up from the foundation of what is the total addressable market.

Marcello: And this is where the S-1 kind of gets into kind of I don't want to call it Fairytale Land, but it's the numbers that are in there are just so gigantic. Like we've never seen anything like this. I'm sorry. I hate to sound like Donald Trump. Never seen something like this before, but like, they're calling for a $28 trillion TAM.

Marcello: And most of it, I think 22 to 23 billion of it. Trillion is basically landing in the AI bucket. So as you know, we we're you know, we're covering just about every AI company that matters. We have although a lot of them are not public. We have a good sense of where they stand in terms, and I don't think any of them have ever put up these type of expectations.

Marcello: Looking forward. And a lot of these companies, to be quite frank, ChatGPT, anthropic, Microsoft, Google, you name them. Okay. They are much further along in their AI journeys than space or x AI. So to have to have like one of the smaller players basically point to this gigantic TAM and then have. So, so when you break the company down and you say, well, we kind of understand what a satellite business, satellite communications business looks like, it's basically, you know, our times time subscribers, they have like over 10 million subscribers.

Marcello: Incidentally, the ARPU has dropped from like $99 to 66 over the last two years. So that's not.

Jordan: To clarify what is ARPU.

Marcello: Sorry. Yeah, yeah. Average revenue per user okay. Of course. So the average revenue per user was like two years ago is like $99 and now it's at 66. So that's not exactly a great metric to show. But obviously they're doing that to basically. Well it could be one of two things or a combination of them. Number one, they're basically lowering price as they get more volume.

Marcello: You can advertise the fixed cost over a larger, larger group of customers. So you can basically bring your prices down to basically take share. That could be one element of it. But the other element of it is that could be that, you know, when it comes to internet broadband access, like most, most cities and suburbs are well covered by existing providers, whether it's your cable company or your telephone company and their wired connections.

Marcello: And they're typically very good. So so this is this has been more of a kind of rural service. And so over time, you're going to get your increasingly going to get more of a rural customer base. And you're going to be moving increasingly outside of the Western world and the United States, Canada. And you're going to go more into developing nations where the where basically the income per capita is lower and things like that.

Marcello: So it could be a combination of them or one like I haven't gotten deep enough to see if they pointed that out in the S-1. So, so a lot of anyway, so, so we can figure out how to, to kind of basically value that part of the business, the launch business. We can make assumptions. It's not growing like the launch business is.

Marcello: It's not at 20% growth business in terms of doing it for third parties. Most of the business that Starlink has been doing has actually been sorry that SpaceX has been doing has been for Starlink. So if you're just looking at what could this business be for third parties, that part of the market is growing slower. It's kind of like high single digits.

Marcello: So we can make assumptions about that. So we can kind of come up with some ideas of what something what the value of those two businesses would be. And when you do that, I don't want to get into like numbers. What ends up happening is a lot of the valuation is falling on x AI, which is the AI business.

Marcello: And. Yeah, so it's falling on the x AI and. Oh yeah. And it comes back down to the TAM. So you're looking at this TAM of $28.23 trillion for that part of the business. And that's kind of the foundation. So you need to do some smell, you know, some sniff test of whether or not you think that that makes sense.

Marcello: So, there's a lot of it writing on that part of the business. And I would just urge people to, you know, be, you know, you know, just sharpen your pencils and, and, you know. Look at it, you know, be careful with it, I guess, is what I would say because.

Marcello: On top of that, let's keep in mind that and I believe that. So, the frontier model that that space has, which is called grok comes from xAI. So what we saw recently was that an Elon even basically admitted it. It has not been performing up to the standards or up to the competitive standards that are out there today.

Marcello: So he basically said it needed to go back into the shop to be reworked. So again, you're basing the valuation on AI. Grok is a big piece of that. It doesn't seem to be working the way they thought. They need to bring it back into the shop to kind of rework it and retrain it, I guess. And at the same time, Elon has turned around and said, okay, we have these big data centres in Tennessee.

Marcello: We're going to rent them out to anthropic for $1.25 billion per month, which everyone is highlighting. What they tend not to highlight is that anthropic can basically, on 90 days notice, say, hey, we don't need that capacity anymore. So you got to keep that in mind as well. So those are like, if I had to say like the biggest things that stand out, it's like the valuation where the valuation is really concentrated on.

Marcello: And we've got to be careful about, you know, the, the, the operating performance of that particular piece more than anything else. And obviously, you know, you get into all sorts of. The S-1 goes into issues about becoming the data centre and space and, you know, putting up like hundreds of terawatts of power up there. And because the sunlight is is a lot more effective up in, in space.

Rob: I just I, I'm not I'm not sure that I'm prepared to underwrite that, but like I said, I've just started looking at it and I'm definitely going to be looking at it a lot closer. But those are my initial my initial takes on it. Sorry, it's a little longer.

Jordan: No, I think that's great. And I think it's safe to say, Marcello, I've heard you more excited about other things. So Rob, maybe I'd love to get your thoughts. Presumably you you're kind of swimming in the same direction as Marcello on this. What, like what's your big concern with basically what could happen June 12th onwards with this with this IPO?

Rob: Yeah, I'm not concerned. But it's more something just to bear in mind. Like he's going to have, you know, substantial body control the company and he's going to be able to kind of do what he wants to, you know, not just dissimilar to like earlier Tesla days, is you really need to kind of buy into the Musk dream, the Musk vision to, to, you know, be supportive of an investment here.

Rob: You have to be aware of the fact that, like, you know, you have this again, this Starlink business, but then you have the space and you have the business centre cash drains that he's going to have kind of unlimited ability to kind of invest where it's necessarily easy to make the right decisions from a capital markets perspective. The same way that, you know, we look at some of the other major mag seven players that have high CapEx dollars, we get considerations like that, considerations like, you know, there's a lot of linkages between space and Tesla right now.

Rob: Actually betting markets have a 60% plus odds of a merger between those two companies before May 1st of next year. That's a big that's a big risk if you're a space shareholder and you're not going to have the voting control potentially to block a deal, you might be at the mercy of regulators. If that's not something you're supportive of.

Rob: There's a $60 billion. There's a there's a there's a stipulation with their partnership with cursor, which is a major vibe, coding, I guess, for lack of a better, better description company out there, a $60 billion price tag that SpaceX has the ability to execute on to acquire that company with SpaceX shares. Like there are these considerations and, you know, they might be good things.

Rob: They might turn out to be negative things. But, you know, my first takeaway is that it's messy because there is because of the voting control and because of the very different, all the different tentacles that are reaching out into different aspects of space, standalone, but also Tesla's as separate public entity that you really need to be aware of.

Rob: And, you know, it's just something that you need to be eyes wide open going into this. If you're planning to be an investor.

Marcello: Yeah, just, just just on that note, when it comes to governance, if you see the way it's been kind of structured, it's moving from Delaware to Texas. It's becoming like a controlled entity, which means that that that Elon doesn't have to have independent directors on the board on top of that, like a number of pension plans. I think the first one was a Danish one.

Marcello: But even like CalPERS in the New York City retirement system and New York State Common Retirement Fund, they've kind of called this out in terms of like on the government's on the governance front, because there's really little ability to have a say in the, in, in any of the activities or outcomes that that might be coming, coming shareholders ways with this name.

Marcello: So again it's just something to be careful of there.

Rob: Yeah. Sorry. One more point. I'd also like to just the structure is like a significant portion of the IPO share is going to be placed into the retail channel. So there is a there is a scenario. There is a world where the right retail holders get ahold of this and really bid this stock high coming out of the gate.

Rob: Like that's a risk if you're if you're not there. No, it's not going to hurt you necessarily out of the bat from like an index perspective. But you know, it's another consideration. Like how much will retail kind of influence the direction of the stock in the first, you know, the initial several months out of the gate, just given the percentage of ownership they'll have coming out of the IPO?

Jordan: Sure. And you know, I want to circle back just to an earlier point where you talked about the total addressable market is quoted at something $28 trillion. I was reading very briefly through this one. You know, they've reported sub 20 billion in revenue so far. So, you know, obviously there's a huge gap that needs to be filled for this valuation to be justified.

Jordan: Like has there ever. Is there any precedent for, you know, this this type of valuation being, you know, being met or these expectations being met or. Is there any way you can wrap your head around the valuation?

Rob: Can I jump in? Can I jump in with one? Yeah.

Marcello: Go ahead, I say. You look no further than Tesla. Like it's not dissimilar to like, the sell the dream long enough until you can actually deliver to some degree on the fundamentals to support the valuation. So there's an element of are you willing to buy that dream? And, you know, over a period of several years will they backfill like will Musk and space.

Rob: Be able to backfill onto those expectations? I think Tesla is a case study whether or not it plays out the same way or, you know, better or worse. I think that's a fairly easy analogy to think about with SpaceX.

Jordan: And maybe.

Marcello: Historically, historically, we've seen that Elon is capable of selling the dream, and he's done that over and over again.

Jordan: So. Well, you know, it makes me wonder. Rob, you talked about the there's a larger than usual block of this IPO that'll be allocated to to the retail investor. And you know to what extent they seem to be the demographic that buys the dream a lot, a lot easier than the fundamental or the institutional manager. You know, kind of kind of thoughts on that.

Jordan: Do you think that's intentional or do you think that, you know, this is just a trend that we'll see more and more of?

Rob: I think it's more intentional here. I like, will we see a trend of maybe a little bit more allocation into retail hands going forward in certain IPOs? For sure. I think 11I think is a sizable dollar amount. So like clearly like they need to raise $75 billion. And I imagine they could do it institutionally. But like having a sizable retail involvement as well would be helpful there.

Rob: But too I mean, retail has historically been a very strong supporter of Elon, the true believers there. So I think there's some intentionality there to like, you know, get that crowd excited and bid the stock up in the early days and, and allow for whether it's follow-ons down the road as secondaries or however, you know, float increases over time.

Rob: Like having that support I think is quite intentional.

Marcello: I think it's important to point out and Rob alluded to it. So just the xAI piece is competing with some of the most well capitalized and best performing companies on the planet, whether it's Google or Microsoft, Facebook. Sorry, meta. They have they have ample cash flow coming in to help, you know, to help fund their AI initiatives. This like space X doesn't have that.

Marcello: It's still kind of in capital. It's it's consuming an immense amount of capital. And just from this raise of $75 billion, a considerable amount of that is going to pay past debts. Even like it appears to me that it's paying past debts that were used to help Elon fund the acquisition of Twitter, for example, and debts that were used to help fund the construction of the Colossus.

Marcello: So like big chunk of this IPO is going for to pay off past expenditures rather than than expenditures going forward, and the rest of the businesses are quite capital intensive.

Jordan: So that's extremely insightful. Rob, I know you have to jet to a meeting in a few minutes. So I do want to work through some of the other headlines. If there was anything else kind of on this topic that you think is worthy discussion all year, but if not, maybe we can move on to Dell.

Jordan: Yeah, that's a pretty.

Rob: Yeah, I.

Jordan: Know, I mean segue if you ask me, but yeah.

Rob: Yeah, for sure. And I mean, the only other things I'm thinking about here is like, you know, the the data center space thing is important. And like, I can see how there is a path there over time. And part of it is going to be like getting the launch costs down and whatever. That's a whole nother discussion. But I think tariffs is a big thing.

Rob: And like that's basically space is pursued to basically build their own massive semiconductor manufacturing facility. Now I had been hesitant about it, but as a public company and given us background like I think that's another thing that maybe gets a little bit lost in, like whether those ambitions are able to be delivered on and like there's real material considerations of what it means for the whole space if that were to come to pass.

Rob: But I think besides that, it's really just, again, as Marcello said, really framing, you know, really thinking about thinking through the scenario where this could work or not or not work. And I think a lot of it comes down to your confidence level on how they can deliver on their AI ambition, both as a proprietary model company but also as a as a potential hyperscalers for other other organizations to enterprise, etc..

Rob: So I'd say those are some of the main considerations that we talked to. And like I said, in the interest time, it's probably best to move on.

Jordan: Well, we will, I'm sure, talk about this quite a bit throughout the rest of the year, particularly once it does IPO. We'll know a lot more then for sure. And now for the the transition of the century. I'd like to talk about Dell. You know, I think this has been a bit of a theme all year. Stocks are either highly disrupted by AI or they're taking off because of these compute bottlenecks.

Jordan: And so we've seen this consistently across the memory space throughout all of 2026. Dell I think, is the most recent, you know, stock to kind of go parabolic, similar to the memory names. I find this interesting because from my perspective, Dell is like the PC that you don't buy if you have budget for anything else. Of course, the stock price isn't really a function of the quality of their of their PCs, but maybe you could just give us some background on why the stock all of a sudden has really taken off.

Marcello: Rob do you want me to start or.

Rob: Yeah, sure. Go for it.

Marcello: I think so, Dell. Dell lands firmly in the infrastructure layer of the whole AI stack at on top of the original computing stack to begin with. But, you know, we're still we're still very heavily into the deployment phase of the infrastructure for AI. And Dell plays an important role in this. Dell's role is different than others because Dell is has traditionally been a vendor to enterprise.

Marcello: So whereas some of the hyperscalers are basically working with, with EMS providers to, to build kind of like, let's call it white box gear, not so much GPUs, but like, like Google has its TPU systems and it's working with others with to build and construct. Dell tends to basically deliver a fully functioning system that they've pieced together, use working with predominantly on the GPU side within vedere.

Marcello: And so what we see that is eventually going to happen here. And we're starting to most of Dell's AI business right now is going with the neo clouds. So that's the and the core weaves and guys like that. So.

Marcello: Dallas is selling into that. And as we can see the demand for the equipment is through the roof. Every time CapEx gets raised, that puts more pressure to raise capacity, whether it's at the hyperscalers or it's at the neo clouds. And so that's helping to drive all this. On top of that, it's also feeding over into the CPU, the traditional computing side also.

Marcello: By the way, this is all about servers and AI servers. It's not about the Dell PC. So all the upsides coming from servers. I should have said that at the beginning. So so now what you're also seeing is that there's kind of a like a tag along where the AI infrastructure also needs to bring in, like traditional server sales as well.

Marcello: So you're starting to see the traditional servers that are based on CPUs and x86 type architectures. They're getting pulled into all of this to go kind of side by side. It's not like 1 to 1, but there's a ratio there. And so Dell is also benefiting from server sales in the traditional computing side of the business. And they also have a storage business going forward.

Marcello: I think the part of the excitement around Dell is that, and it was a couple of quarters ago, Jensen Wang had when he was asked on one of the conference calls, like, what do you expect to be a bigger a bigger business for, you know, for, for GPU sales and systems? It will it be the hyperscalers or will it be enterprise?

Marcello: And without batting an eye, he said enterprise. And so Dell has been the traditional one of the big traditional vendors into enterprise. So if you think about, you know, here at Royal Bank, maybe we're going to work with hyperscalers for some of our AI needs. But for some of our needs we might decide that we need because of data privacy issues and things like that.

Marcello: And security. We might decide to run some models internally on our own equipment here. So that's when we might be bringing in something like, like systems from Dell to help us do this on prem rather than have it going out. So, so all of these things are kind of just kind of building up on each other. And I think that that's really kind of at the heart of the excitement around Dell and a bunch of the other equipment providers like HP and stuff.

Jordan: And.

Rob: Okay.

Jordan: Okay, Rob, maybe, maybe we can wrap up with a thought from you, Rob, particularly around, you know, the durability behind this enthusiasm. Does this kind of fundamentally change the outlook for Dell, or is this just like a right place, right time? And then once, once compute demands met, it kind of goes back to kind of the story.

Rob: My guess is that the Dell and the other, the other server companies are benefiting from the fact that we're in a shortage. Absolutely. I think, you know, there's going to be some reversion to the mean over time, but I think that could still be years away. It's not going to be in 26. It's not going to be in 27.

Rob: And the only other point I would bring up is that Dell has also been fitting for the fact that they've managed their supply chain much better. So they actually, in a peer where memory shortage is hurting everybody, they're able to get more supply and they're able to gain share and pass on pricing. So they're actually able to protect margins while they're also growing share.

Rob: And they've just managed the situation much better. So in addition to tapping into enterprise and the neo clouds, the supply chain management is also a big driver of this recent quarter. And the strong performance we've seen from the stock over the last several quarters.

Jordan: That's great. That's excellent. Thank you both. We went a bit long today. So we'll wrap things up here. Really appreciate your timely thoughts and insights. And I suspect like I said earlier, we'll probably talk about this space thing a few more times throughout the course of the year. So stay tuned for that. For those that are listening, if you would like to learn more about some of the products and strategies that Marcello and Rob manage, strategies like the RBC, Life Science and Technology Fund and the BC Global Technology Fund, we do encourage you to visit our website.

Jordan: www.rbcgam.com. Looking forward to our discussion next month.

Rob: Thank you.

Jordan: All right guys. Take care. Thanks everyone. Okay.