To The Moon

Hello everyone! Today i want to share some trading ideas with you!

1 AI is forcing Big Tech to do something it’s never done: Spend more than it earns, and Wall Street hates it

$Alphabet(GOOG)$ made history in two ways on Wednesday.

First, it had its most-profitable quarter in corporate history. Reporting $112 billion in profit, that's its first 12-figured quarterly profit in history. But 69% of that came from unrealized paper gains on its stakes in SpaceX and Anthropic, not the core business, and Wall Street looked straight through it.

Stripping that out, however, Google still ostensibly had an excellent quarter; its cloud computing business, now the core of the company, soared 82%. So why did investors punish Alphabet today, sending their shares down nearly 7%, the worst day since tariffs?

Because of the other record it set: for the first time in the company's history, it became cash flow negative, meaning less cash entered the company than left it last quarter. Management also warned that 2027 capital expenditures would be "significantly" higher, further deepening anxiety on the Street. The company's latest filing Thursday shows more than $800 billion in purchase commitments and other obligations, an eye-popping number that reveals some sneakier expenses like some $51 billion spent backstopping other companies' data centers.

At least six firms cut their price targets for Alphabet in response, including Piper Sandler (to $395), UBS (to $379) and D.A. Davidson, whose $350 target was one of the most bearish on the Street. Only Barclays raised its target. The damage was contagious, spreading outward to Microsoft, Amazon, Nvidia and the chip complex, and compounded this week by jitters over a new wave of powerful Chinese open-weight models. Tesla also reported a profit margin decline and high capital expenditure, sending its stock down 15%.

"The fact that we crossed over to negative cash flow was kind of a negative milestone, and people are reacting to that," Gil Luria, head of technology research at D.A. Davidson, told Fortune. "Maybe there was a sense that we'd never get to that point, and we just did."

Yet Luria, despite cutting his target, said the market was overreacting. His concern was never the spending but the valuation; earlier this year, with the stock near $400, "it was being valued as if it was the only winner." At around $320, he said, "Google's valuation is a lot more reasonable—because it's the valuation of a company that's a winner, as opposed to the winner." He expects Microsoft, Amazon and Alphabet all to profit from supplying AI compute for years.

The bullish case, he said, is hiding in plain sight: Google Cloud's "out of this world" growth. He estimated Alphabet will earn $15 billion to $20 billion this year directly from its compute buildout. "Nobody wants to hear that on a negative-milestone day where the CFO just told us it's going to get worse before it gets better."

Luria, however, worried about that tangle of investments which bind the AI giants to their own customers; the love triangle of Google, Amazon and Anthropic; Microsoft and OpenAI, Nvidia and CoreWeave. "This ecosystem is propping itself up," he said, and the off-balance-sheet backstops give him pause: "That term came into parlance around Enron, which is why I never like hearing it." But he drew a line at calling it circular. Consumers and businesses are now spending at a $120 billion annual rate on AI, he noted—"that number was zero two years ago." "That's real spend. There's nothing circular about that."

2 David Tepper Has 5% of His Portfolio in This Little-Known Energy Stock. Here's Why.

Billionaire David Tepper made the bulk of his fortune investing on Wall Street, so it's understandable that people would peek into his hedge fund's holdings to get a look at where he's placing his bets. As of the first quarter (Q1), Tepper's hedge fund, Appaloosa Management, had $5.93 billion in assets under management, with a surprising amount of that coming from a little-known energy company.$Vistra Energy Corp.(VST)$

What does Vistra do?

Vistra is an energy company that makes money in two main ways. The first is through retail, supplying power to around 5 million residential, commercial, and industrial customers.

The second is through power generation, which involves producing large amounts of electricity (about 44,000 megawatts) and selling it to major U.S. power grids. Its fleet is powered by natural gas, nuclear, coal, solar, and battery energy storage.

Tepper and Appaloosa likely increased their stake in Vistra because of its power generation business, and it (surprisingly) comes back to artificial intelligence (AI).

A different way to invest in AI

Except for Uber, the companies making up more of Appaloosa's portfolio than Vistra are all AI stocks, ranging from cloud to hardware to manufacturing. Vistra is not an AI stock, but it's positioned well to benefit from the ongoing AI boom.

Data centers house the infrastructure needed to run AI. However, it takes tons of power to keep them running 24/7, as they need to handle the workload. Many people would argue it takes too much power, but in Vistra's case, it has worked in its favor.

As AI hyperscalers (companies that own the infrastructure) collectively spend hundreds of billions building out data centers, they're locking in with companies like Vistra to ensure they have the power to supply them. Just earlier this year, Vistra and Meta Platforms announced a 20-year power purchase agreement. It's hard not to think that helped Tepper's decision to double down on the stock.

Is now the time to invest in Vistra?

Over the past 12 months, Vistra's stock has been down around 12% (as of July 22), so it hasn't experienced the AI-fueled growth that many other AI-adjacent stocks have. However, this could be Tepper getting ahead of the curve.

Last year, in Q1, Vistra operated with a $268 million loss. That same quarter this year, its net income was $1.03 billion. It's not the $1.84 billion it generated in Q3 2024, but it shows promise that it can head back in that direction.

VST Net Income (Quarterly) Chart

VST Net Income (Quarterly) data by YCharts

Vistra hasn't necessarily reaped all the benefits from the AI windfall just yet, but I like the position it's currently in. However, the stock's volatility isn't for everyone. I wouldn't touch it if you're risk-averse.

3 2 Vanguard ETFs Built to Thrive as Big Tech Loses Its Market Grip

Big tech and artificial intelligence (AI) stocks have been the driving force behind the magnificent ongoing bull market that's been charging for the past three-plus years.

But in recent months, big tech stocks have sputtered as investors have grown wary of historically high large-cap valuations and concerns about whether the massive investment in AI infrastructure will actually pay off.

While the Nasdaq-100 is up a solid 14% year to date, over the past month and a half, the large-cap, tech-heavy benchmark is down about 5%.

On the other hand, investors are rotating into other investments, like value stocks and small caps. The Russell 2000 Index is up about 2% while the Russell 1000 Value Index has gained about 4% since June 1.

Image source: Getty Images.

This trend is expected to continue as large-cap valuations remain high, but also because AI is expanding beyond large technology companies to different sectors and smaller companies.

Here are two Vanguard exchange-traded funds that should benefit from this rotation out of big tech.

1. $Vanguard Value ETF(VTV)$

The Vanguard Value ETF (NYSEMKT: VTV) has been a direct beneficiary of the rotation of big tech into big value for a few reasons. As mentioned, investors are seeking out cheaper, reasonably valued stocks. But also, some big tech stocks, like Micron, are in such high demand that their price has not caught up to their earnings, and they are considered value stocks.

That is the case with the Vanguard Value ETF, which tracks the CRSP US Large Cap Value Index. While Micron stock is up a staggering 238% year to date, it is trading at just 21 times earnings and 6 times forward earnings. So it has been classified by CRSP as a value stock, not a growth stock.

The larger point is that the Vanguard Value ETF is capturing some of the big tech and AI stocks that are actually reasonably valued, not overvalued, and benefiting from their growth.

Micron is VTV's largest holding, followed by JPMorgan Chase and Berkshire Hathaway.

Since about June 1, the Vanguard Value ETF is up about 4%, while its counterpart, the Vanguard Growth ETF, is down about 5%. Year to date, Vanguard Value has returned about 15% while Vanguard Growth is up 5%.

2. $Vanguard Small-Cap Value ETF(VBR)$

The Vanguard Small-Cap Value ETF (NYSEMKT: VBR) has also been on a good run this year. The ETF is up about 15% year to date, and it has gained nearly 4% since June 1. On the other end of the spectrum, the Vanguard S&P 500 ETF is up about 8% year to date and has dipped about 2% since June 1.

The Vanguard Small-Cap Value Index tracks the CRSP US Small Cap Value Index, which is not quite as broad as the Russell 2000 and includes some slightly larger stocks, which might otherwise be classified as small mid caps.

The three largest stocks in VBR's portfolio are manufacturing and supply chain services company Jabil, NRG Energy, and luxury fashion company Tapestry.

But it is positioned to benefit from two broader trends in the market: the movement toward both value stocks and small caps. And many strategists, including those at Vanguard, believe that over the next 10 years or so, both value and small-cap stocks will outperform U.S. large caps.

The ETF has averaged about a 12% return over the past three years, and, on an annualized basis, has gained 8% per year over the past five- and 10-year periods.

These returns have paled in comparison to the S&P 500 and Nasdaq-100, but many experts believe the next five and 10 years will be more about value than growth.

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