“I was the man in the moon when time was!1” Stephano said as he lorded over Caliban in Shakepeare’s The Tempest, not realizing the primitive islander’s acumen was far greater than he suspected. After the characters were shipwrecked on an island inhabited only by Caliban and a tree spirit, Caliban meets the drunken duo of the starry-eyed butler, Stephano and his jester-friend Trinculo. They were washed ashore on a beach, and had found and enjoyed a butt of liquor, which had also landed nearby. Caliban, inspired by a fierce love of the island that his mother bred in him, plots to recruit Stephano and Trinculo to murder Prospero, who had enslaved him earlier in the play, to ultimately drive out the invaders of his paradise.
The more I read about how the big tech firms are building huge data centers on 1,200 acres of farmland in Indiana2 (Amazon to support their AI-model Anthropic) or about how the Gouldsboro Data Center will rise up over 1,000 acres in Northeast Pennsylvania or how xAI is erecting a 285-acre AI supercomputing campus in Memphis, the more I feel like Caliban, watching my paradise invaded by unknown, sophisticated masters that may one day treat us humans as simpletons (or enslave us as Caliban was by Prospero??).
These AI data centers are absolutely massive and are popping up all over rural, agricultural areas of the country as the AI spend rate reaches a frenetic pace. They require additional power infrastructure including electrical substations and high-voltage transmission lines, significant amounts of water for their processes, cooling equipment and new mini-nuclear power plants – and like your favorite beer company they sometimes sell those by the six-pack. My mind flutters to the computer-run world of The Matrix Revolutions when Neo finally goes up topside to see what the real world had become.
Our stock market has become more dependent on the results of the Mega cap tech companies, As of October 21st, the Magnificent 7 stocks weigh more heavily than ever in the S&P 500. Their combined market cap is now $20.8 trillion out of the $56.9 trillion total market cap of the index – good for 37%3. As their piggy banks swell so does their power in Washington, D.C. and their reach around the world.
This week just happens to be Mega-cap reporting week in the market. Meta Platforms (Facebook) reported huge capital expenditures as the company aggressively prepares for superintelligence. Despite strong 3rd-quarter results their stock dropped 12% on the news of the capital outlay. Increased spending projections took a chunk out of Microsoft’s stock, though much more measured at down 2.3%. This reaction by market participants is a microcosm of the problems of increasingly bloated valuations. Microsoft reported 40% growth in their Azure cloud business. 40%!! And yet, because they disclosed a higher projected capex growth in 2026, they were dinged. Expectations for these firms are high and many a 401(k) and IRA depend upon them, so when all doesn’t go exactly to plan there is some risk here for investors. All this happened, of course, within a couple of weeks that saw both Microsoft’s Azure cloud and Amazon’s AWS cloud puff away in a digital wind for a few hours.
As I write this, enter the narrative twist … I discover an earthquake emanating out of San Francisco, reported by Reuters this morning, that will create tidal waves in the tech industry. Privately held AI juggernaut OpenAI is reportedly preparing for an IPO that is projected to be valued at up to $1 Trillion, which would count as the 2nd largest in history after oil giant Saudi Aramco4. Part of the reason for Microsoft’s hit this morning may be a reason for a possible ascension in stock price in the years to come. Yesterday, Microsoft reported a $3.1 billion hit to net income from its investment in OpenAI and clarified its relationship with OpenAI’s new for-profit arm (as it was organized as a nonprofit initially). Here is the text straight from the CNBC article5:
“On Tuesday, OpenAI announced it has completed its restructuring and formally outlined Microsoft’s stake in the company. Under the new structure, OpenAI’s nonprofit will hold a 26% stake in its for-profit arm, worth about $130 billion. Microsoft will hold a 27% stake worth about $135 billion, and current and former employees and investors will own the remaining 47%.” We have known for some time about Microsoft’s involvement with OpenAi, but OpenAi could have remained private and not until today did we know there were rumblings of it going public. It may never happen, but it sure looks increasingly likely as they open themselves up to more investment dollars.
We are very sensitive to the risks that our clients are taking and so there are certain markets in which we are unwilling to participate in as the risks are too high. One of these areas we won’t tread is the private company space, where actual negotiations happen between buyer and seller, and another is the IPO space, where fortunes very quickly change hands as the sorting of a businesses value on the open market is so highly volatile at the beginning and so often, new buyers are left holding the bag with deep, deep losses. However, we have another way to take advantage of this news for our clients, and today, despite convening yesterday, our WTA Investment Committee met quickly when this news came out. We investigated the source, agreed unanimously that Microsoft, with its 27% stake of OpenAI for-profit arm could potentially benefit quite a bit from OpenAI’s emergence in the open waters of the stock market, and then moved to greatly increase the allocation in our WTA Growth strategy from 3% to 8%. The casualty in this change is that our allocation to restaurant technology company Toast is now toast as at relates to our mainstream Growth portfolio.
Writing can be such a malleable thing, as it’s ever subject to the slings and arrows of outrageous fortune. Here I began with one idea about AI, suffered an unforeseen narrative twist as I wrote and finished by reporting to you the climax and denouement, that we are investing more into the growing space, even as seems the invasion of AI ramps up across our beloved isle. But perhaps Shakespeare, through his volatile, yet deep-hearted Caliban, can better express the dreams and hopes of a future peace with abundance:
“Be not afeard. The isle is full of noises,
Sounds and sweet airs that give delight and hurt not.
Sometimes a thousand twangling instruments
Will hum about mine ears, and sometimes voices
That, if I then had waked after long sleep,
Will make me sleep again; and then, in dreaming,
The clouds methought would open, and show riches
Ready to drop upon me, that when I waked
I cried to dream again.”
Let me now explain today’s literary infusion. My son, Landen, is trying out for Caliban at his school and has a callback today, so they are both much on my mind.
If you do but hear noises in the dark and wish to hie to the high ground, to spy the path you must take’st through the wood; be not afeard … cry out and hum about our ears. If you listen to us, we’ll change your financial world …
Sincerely,
Scott Wright
Portfolio Manager
The Wealth Training Academy
Sources:
1The Tempest – Entire Play | Folger Shakespeare Library
2Amazon opens $11 billion AI data center Project Rainier in Indiana
4Exclusive: OpenAI lays groundwork for juggernaut IPO at up to $1 trillion valuation | Reuters
