Weekly|Bifurcation will Continue, AMAT, APP/U, NET, DDOG, Space Launch Market, ALAB
In our last weekly report, we discussed the structural positioning adjustment among big US tech funds/long-only, from their asset-light holdings in software and internet to semi and hardware that used to be perceived as cyclical and asset-heavy. We encourage you to have a read if you haven’t yet.
Then, over the past week, the bifurcation in performance has become even more extreme, as the market is selling every asset-light business that appears threatened by AI. Jeffrey Favuzza at Jefferies has summed it up well with the table below -
To be honest, when logistics company CHRW was sent down 15% after a company named Algorhythm announced a new logistics platform using AI, which had a $6m market cap and was formerly in the karaoke business, it felt very much like a short-term narrative bottom in AI disruption. Notably, CHRW was crowned the AI winner last quarter, as it guided up margins, benefiting from internal AI usage efficiency gains. Nonetheless, this shows how uncomfortable the market is with any asset-light names. This kind of market movement is not healthy, and it has actually made us more cautious about the risk of a larger sell-off. With so many stocks blowing up, would any investors capitulate or even degrade their whole portfolios, leading to collateral damage in other names too? The setup is very dangerous and warrants more attention.
On the bright side, given volatility, we believe the core semi/hardware names would continue to see inflows and, as a result, re-rate out of their historical trading range. If internet/SaaS names traded at 50-100x PE at peak, why should we keep capping semi/hardware names at 20x PE, given their much stronger growth and higher sustainability?
Software used to command premium valuations largely because investors viewed its terminal value as more durable and were comfortable underwriting long-dated DCFs. Semis, by contrast, have historically traded at lower multiples because the market has always discounted their inherent cyclicality. But that terminal value certainty in software has faded, especially in a world where visibility beyond the next few years is limited. As a result, investors are refocusing on the cycle and near-term fundamentals as the primary valuation anchor.
Think about your memory, opticals, semicap and foundries...
This week’s reports
AMAT delivering upside - We previously deep-dived into the drivers underpinning AMAT’s robust outlook over the next few years, and the earnings validated our thesis. The company guided the semi system to grow >20% in CY26, and the underlying demand is higher than that, but constrained by cleanroom space expansion. We remain bullish in AMAT and the semicap space.
APP&U - Hard to defy gravity without perfect print. We were positive about gaming ads’ performance in the earnings, but both stocks were received poorly as other businesses took the upper hand. We still believe 2026 is a year of very strong gaming, but we acknowledged that both names would take time to work in this market environment.
NET - clear beneficiary of AI in software, but valuation is still high. NET continued to accelerate revenue growth, driven by strong demand across networking and security functions in this AI era. However, its still-stretched valuation would remain a key obstacle for the stock amid software de-rating.
DDOG - another re-acceleration(core) story buried by SaaS selloff.DDOG delivered a strong result, with the core cohort accelerating and showing strong momentum among AI-native customers ex-OpenAI. Post results, there is an increasing likelihood that infra software will perform relatively better than its peers.
Space - Deep dive of the launch market. Our latest report on the space economy focuses on the launch market, explaining everything you need to know about the segment.
Next week’s pipeline
CSP update
NVDA preview
PANW preview
CRM preview
