Jordan Wong

Okay. Hi, everyone. Welcome back to Tech Talk. My name is Jordan Wong. I'm a portfolio analyst on the Investment Products Advisory Group at RBC GAM. And as always, I'm joined by Marcello Montanari and Rob Cavallo, portfolio managers on our Toronto-based, RBC North American Equity team. For those new to the program, Marcello and Rob manage over $6 billion dollars. These assets are spread across a number of growth-oriented strategies. There are two flagship funds being RBC Life Science and Technology Fund and RBC Global Technology Fund. And we get together monthly to talk all things technology and healthcare related. These are two of the most innovative sectors in the S&P 500. And whether you're a unit holder in these strategies or not, we think it's just a great way to stay up to date with everything that's going on in these two sectors, on a monthly basis. So, gentlemen, thanks for your time today.

Marcello Montanari

Thank you.

Jordan Wong

Now for today's episode. As always, there are a number of things that I think are really relevant to talk about. It was only last month that we started talking about whether we're in an AI bubble. We jokingly, you know, talked about how this probably is the last time we're going to be talking about this. I didn't realize we'd be talking about this two episodes in a row, but I do think there have been a number of recent developments that are worth getting your insight on. In addition to that, we've seen a few big announcements on the e-commerce front, particularly, as it pertains to sort of integrating lens and AI onto those platforms. And then lastly, we've seen a jump up in health care stocks over the last little while. And so, Robert, I want to get your thoughts on that. Maybe just jumping right in, why don't we kind of go back and revisit this AI bubble question debate process?

More recently, since our last episode, there have been a few significant announcements around OpenAI. Investors are, I think understandably, growing a little bit anxious around sort of this circular revenue phenomenon. So for those less in the know, OpenAI has announced pretty big relationships with both NVIDIA and AMD. And so maybe we can start off, Marcelo, Rob, walk us through your views on these announcements. What do they mean? And what are the impacts going to be on supply chain and other big CapEx spenders?

Rob Cavallo

Sure. And maybe I'll start off there and, Marcelo, feel free to fill in any blanks. But like clearly from an optics perspective: when headlines are already “we're in a bubble,” and then you have these massive announcements of vendor financing that really spark even more of a reminiscence of what happened at the peak in 2000, clearly it's understandably why sentiment is up in arms about what this all means. But I think when you take a step back, it's not as egregious as it seems on the surface.

I think we've got to look at this from a number of different angles. Starting for OpenAI, I think what OpenAI has done is, you know, one has thrown the gauntlet down to the other hyperscalers saying, “Listen, we're all in. We're going to be bold in our ambitions. We're going to look to expand beyond just the hyperscalers. We're going to look to actually build out our own data center capacity, if need be, because we have these big, bold ambitions for where we think the industry is going in 2030 and beyond." And then basically to other hypersalers, "Are you willing to keep up in this race? We're a private company. We can burn cash. We don't have to answer to the whims of a quarterly reporting cycle.” So there are some advantages that they’re taking a hold of right now, before and if there's some sort of public liquidity event sometime in the next year or two, or whatever that might be.

I would say bigger picture, I don't know how much people believe the build-out plans that they're saying. I know we've seen some stock reactions. AMD probably more so than NVIDIA or Broadcom, because I think there's a little bit of apprehension of building in some of these bold ambitions. And I think what's important is what they're doing has no impact around the base-case scenario of what growth looks like for the next, let's say, two to three years from core spending from the big spenders like Meta, Google, sovereign governments, etc. What this does is it changes maybe what the bull-case scenario is in 2030.

But from a circular financing perspective, let's take a step back. They announced a 10-gigawatt plan with NVIDIA, a 10-gigawatt plan with Broadcom, and a six-gigawatt plan with AMD. This is going to be like $800 billion to $1 trillion dollars of spending if they actually do it. They need to look into all sorts of financing, and this is going to include parts of the supply chain. So NVIDIA, the first to go, basically committing to taking an equity stake in OpenAI for up to $100 billion. But it's contingent upon them rolling out the 10-gigawatt projects. For NVIDIA, basically, they're saying, “We have $60 billion dollars of cash in the balance sheet. At the end of 2027, if we hit where the street is at, we're going to have over $400 billion of cash in the balance sheet. We're not just going to buy back stock, we're going to take an opportunity to fund some of this massive financing that's going to be required to support this build out. That's going to be incremental to our plans. So, this is not a case where there's no demand there and where we need to basically flood the market with cash to ensure there's just purchase of our products.” This is supporting the potential uber bull-case scenario for what this build up will look like in the next five years. And if it doesn't happen, it doesn't change what the consensus forecasts are for the next few years. So, it’s not as egregious when you look under the surface from their perspective.

Broadcom, very similar. I was actually on a call with the CEO last week. And he has a comp package that's basically kept him in at the company for the next five years. It's fully based on AI revenue generation. He's going to get paid out handsomely, if they can do, you know, $100 billion plus of AI revenues by 2030. And you know, he's uber, uber bullish. And this was even before their OpenAI announcement. Okay, AMD's the one where I'm a bit more concerned. You know, AMD had to basically give away 10% of the company to secure this project with OpenAI. And that's because clearly, they're a secondary player in the GPU market to NVIDIA. This is about a rack scale product that AMD doesn't even have yet. So, this is basically AMD saying, “We'll give you 10% of equity in our company if you believe that we will roll this out and support your build out over the next five-plus years.”

So from their perspective, it's much more riskier for what it means for them financially than it is for Broadcom or NVIDIA. But clearly, how these projects play out is going to impact sentiment. But again, I'm trying to be open-eyed about this and really step back and make sure I'm not missing the forest for the trees here. And I don't think this is like the "ring the bell top." I think this is creative financing to support something that's going to be a massively expensive build out if OpenAI can hit these numbers or can meet their objectives. But in the meantime, I actually think this might pull forth some other spending from the Google's and Meta's of the world, who are saying, “We've got the free cash flow on our balance sheet. Are we going to get bullied out of this market by OpenAI?” So if anything, I could see some pull forward, some acceleration in spend in the very near term.

So overall, it doesn't change my view. But clearly it raises the guard a little bit towards like, let's pay attention that we're not missing anything. But I still think we're relatively early in the build and this is not ringing the bell at the top yet.

Jordan Wong

A few follow up questions for you, Rob. What is the likelihood that we see other businesses try to make similar arrangements with OpenAI? Obviously NVIDIA and AMD, they're not really competitors to OpenAI. But a company like Meta would be. Does this kind of put a bit of pressure on Meta to maybe strike similar arrangements with these companies, or even OpenAI themselves?

Rob Cavallo

I don't know if it would mean a partnership with OpenAI. But it does make them have to rethink their own compute capacity expansion plans. So, another kind of fallout from all this is the Google's of the world, Amazon to a certain extent, Meta to a certain extent, are trying to build out their own custom chips to compete against NVIDIA to help lower their cost. NVIDIA is basically saying, “Okay, get in line. If you're not willing to commit to some degree, you might not get your allocation because the allocation might be secured elsewhere. And now you, Mr. Amazon, are you willing to make an existential bet on your business that you are going to build a better chip and have the compute capacity needs to compete with OpenAI?” So, like even from NVIDIA, it's also, “Let's keep the rest of our customers honest to a certain degree, and make sure that they're not going to fall too far out of line with how they think about their GPU order placements over the next two to five years.”

Jordan Wong

And maybe just one other follow up. Last episode, we did a lot of compare, contrast to the dot com bubble in the early 2000s. Is there a precedent for this type of vendor financing, circular revenue-type structure that we're seeing? Or is this kind of new?

Rob Cavallo

No, this not new. I mean, this happened in the dot com and the fiber build-out bubble. This happens even outside of bubbles in different parts of the industry. It's not uncommon. But clearly when your suspicions are already elevated that you know, are we in a bubble? And all of a sudden, vendor financing reenters the lexicon. It just makes you think about what Cisco and the others did back then. And it's like, oh, it's easy for the bear to say, here we go again. This is the top. Let's sell everything because it's just all a façade, and it's a house of cards ready to implode.

So it's not unique to the situation. But it clearly in certain cases, such as the 2000 bubble, does kind of bring back some, let’s say, unfond memories of the fallout from it. But every situation is different. We'll have to see in hindsight if this is actually different, or if I'm missing the bigger picture here. We'll have to see.

Marcello Montanari

It's an easy itch to scratch. There's a lot of vendor financing throughout the economy. Just think, what is the role of Ford Finance and General Motors Finance, right? There’s lots of vendor financing out there. So, it's not like it's just unique to this particular industry. But yeah, it certainly raises people's eyebrows and stuff like that.

Rob Cavallo

And just in just like comfort for the unit holders out there, is that we're not being blind to the situation. Like we're trying we're crossing our T's. We're looking at ways to protect portfolios. And we're not all in blindly. We're aware, we don't think we're there yet but we're cognizant of the risks.

Jordan Wong

That's great. Maybe shifting gears slightly, do you want to talk a little bit about sort of this e-commerce marriage with AI? Specifically, around some announcements pertaining to Shopify. How significant is this announcement that Shopify merchants are now going to be able to sell directly through ChatGPT? And if you could comment both from a Shopify perspective, but also from the broader e-commerce perspective?

Marcello Montanari

Yeah. I'm not 100% sure on how all of the plumbing is going to work here, but, the way to think about this is what is Shopify? Shopify is the infrastructure layer for merchants. And what we're seeing here is the potential for a platform shift, just like we went from desktop to mobile and stuff like that. So, we're getting the potential for another platform shift. And so, Shopify is there to basically serve its clients and to make sure that they are future proofed, going forward. And, what's interesting here is that there's a big change going on here in that, historically, the search market itself was basically very word-centric. You looked for a word like “jacket” or whatever. But now with AI and the and the abilities of LLMs, you can get a lot deeper and use a lot more different embeddings. You can now search for something like, “I'm looking for something that is warm, made of wool that is brown. That is not going to be itchy.” And basically, it can serve up a whole slew of products. And so, right now, Shopify is in the process of creating an entire new catalog that's going to be able to be searchable across a whole series of embeddings. And then they make it exposable to, whether it's ChatGPT, they're also talking to Perplexity and to Claude and, all those guys. And basically, they can make this visible through their platforms, through what's called MCP, which is basically an API application. It allows applications to talk to each other. It's basically the glue that makes things work together.

So, I think that this is really good for Shopify because already we've got this kind of weird inversion where, small companies actually have better e-commerce websites than a lot of large companies. It's just Shopify is working on this every single day. They've got all their people working on delivering the best experience. Shopify platform has better close rates than other sites. Now we're in a situation where we're bringing AI capabilities to this. And Shopify has got all hands on deck to make this happen. Whereas if you're just like a standalone large enterprise that has been running your own e-commerce site forever already, you've probably already fallen behind and now you're getting this new wave of, “Okay, this website needs to now do all of this, and we need to create a catalog that has multiple embeddings that is searchable through an LLM.” So, I think that this is going to be really positive for Shopify because they're one of the few guys who can do this.

As we move into the agentic world, these systems are going to have memory, and then they're going to know what you like. They're going to see what you've been interested in in the past. What's going to happen is that the agent will be able to kind of proactively suggest things for you. So again, that's going to open the TAM  (total addressable market) even further for e-commerce. So, I suspect that we're going to start to see more retail shift going from bricks and mortar, over towards e-commerce. So, I think all in all, this is starting to look even more bullish for e-commerce in general, and Shopify being where they're positioned already looks pretty good to me.

Jordan Wong

Might make Christmas shopping a little bit easier this year. We know Marcelo wants a brown sweater that doesn't itch. Maybe just to wrap up last few minutes here, Rob, we've seen health care tech higher in the last few weeks. A lot of that's been led by biopharma stocks. So maybe talk about what's driving that move, and how sustainable the Trump rally is.

Rob Cavallo

Yeah. In the interest of time, I'll try to be succinct here. But basically, health care valuations got to one of its lowest on history relative to the market, even though the fundamentals were not nearly as bad. Biotech started to move since Liberation Day at the beginning of April, and it's been a great area to own. Part of that is like a bit of a play on rates. So as sentiment around where the U.S. Fed is going to move rates over the next 12 months has been a positive for that group.

More recently, the larger-cap pharma and biotech stocks started to participate. And I think it's because the regulatory clouds started to sort of dissipate. And we talked about that, I think, on the last podcast, as something to think about for the sector. We saw deals from Pfizer and AstraZeneca already, basically, giving the Trump administration a bit of a win on pricing concessions and reshoring of investment into the U.S. and setting the blueprint for how the industry is going to manage around a lot of these pricing noise and tariff noise that that they've kind of faced since the changeover in administration earlier this year. So, I think it's the regulatory headwinds subsiding, numbers getting better broadly for the group, the earnings revisions inflecting on a positive way. Valuations like I said, were at a kind of historical low. Just really set this group up for a recovery.

And I think there's sustainability there. I think it's hard to make the argument that it's going to lead if we're still in a risk-on environment. But I think, first, as a hedge in our portfolio, it's a great hedge versus tech. But I think independently of that, there's still idiosyncratic factors as to why the sector could work even in a risk-on environment. And in addition to that, you have some of the defensive stability that it will try to provide as well. So, feeling much better than today about health care than we were three or six months ago.

Jordan Wong

Oh, that's great to hear. Well, this wraps up I'll all I have to talk about for this episode. So once again,  want to thank you guys for making the time each and every month. And, to those watching, if you'd like to learn more about strategies like RBC Life Science and Technology Fund or RBC Global Technology Fund, I encourage you to visit our website rbcgam.com. I will mention again, we are posting these videos to YouTube. So, if you prefer to watch these episodes on YouTube there should be a link somewhere down below on the web page here. Thanks again, everyone, for your interest and we will be back next month.

Rob Cavallo

Thank you.

Marcello Montanari

Great. Thanks.

Jordan Wong

Alright. Thanks everyone.