U.S. banking crisis has ‘led to flight to safety’ for tech, equities, analyst says

Constellation Research Principal Analyst & Founder R “Ray” Wang joins Yahoo Finance Live to discuss the tech sector, the U.S. banking crisis, the return of Alibaba’s Jack Ma, Meta’s valuation, and the outlook for MATANA stocks.

Video transcript

- Well, let's continue the conversation on China's tech sector with a look at its sometimes testy relationship with the Chinese government. Jack Ma back in the spotlight for his return visit to China. This, even as he keeps a distance from business after disappearing from public view.

Joining us now, Ray Wang, Constellation Research principal analyst and founder. Good to see you, Ray. So I first want to start with Jack Ma's return here. What does that signal? We know that China wants more private business on board.

RAY WANG: Well, they've had to have Jack back. Without Jack in the area, I think a lot of people were wondering if the private enterprises were going to be supported. And having the biggest and most popular figure out in Japan hiding out for the last year or so was not a good image.

- Indeed. I mean, but when you look at where tech is headed, especially when we look at that B of A survey, a lot of people overweighed in cash, really pulling away, though, from tech and some of these US equities. Give us the lay of the land and what's happening with tech sentiment right now.

RAY WANG: I think it's actually a little bit different. I saw the fund manager report you put up there, but tech has gone through a reset. Interest rates have gone up. We've seen that affect valuations. The valuations basically then drove in to see what was happening with earnings. Earnings were down and everybody decided to put in the job cuts because they had over-hired.

But even when we look from 2019 to where we are today, most of the tech companies are still up 20% to 25% in hiring but they had really over-hired, over-anticipating where the market was. And then there's been cuts in R&D. But what's been going on with the banking crisis, it's basically led to a flight to safety.

And so startups are under a cash crunch massively. The IPO market is pretty much dead. The banking crisis basically put liquidity on hold, and the VC liquidity is also another issue. But what's going on is there's a flight to MATANA stocks. Why? Because there's large cap, high volume, safe, and consistent double-digit growth rates. They've got strong cash balances on sheets and of course, there's a big revolution in the AI space where data going forward, the companies that have the data, that has the networks are going to be in a good position.

And so if you look at the NASDAQ, it's up, right? We're talking about a pretty healthy up case where we're looking at somewhere, it's up about 14%. I don't know where the market is now but it looks pretty flat. And that's about a $7.8 billion market cap for the top six stocks.

- And so for people who aren't familiar, MATANA includes Microsoft, Apple, Tesla, Amazon, Nvidia, and Alphabet. And we know that you replaced-- that was the replacement for FANG stocks. Can Meta get any love though in this environment, the F that was in the FANG stocks?

RAY WANG: The Meta may come back. I think what we have to see at Meta are a couple of things. If you look at their valuations, it's below a billion, right? That's been a huge cut. And it's mostly because of the investment towards the Metaverse and the lack of growth on subscribers and ad revenue. But maybe Meta will come back.

But they are in a good pace, especially if you're looking at a rebound in terms of where they are but not as a index where the MATANA stocks come into play.

- And obviously, we've been hearing a lot about generative AI and this sort of race to be first and to be best, even though obviously still a lot of glitches to work out. But you noted that Microsoft, Google, and Amazon are using generative AI to lift their cloud business. What are the expectations there?

RAY WANG: Well, there's a lot of anticipation that this boom in AI is going to use a lot of compute power. And that means anyone that's in that space requires more compute power for AI to happen and for the storage of data. Microsoft, Google, and Amazon are the three biggest in terms of the public clouds, but there are also other winners.

Nvidia with their GPU chips play a big role in terms of where AI is headed. And there are other companies that have done really well in terms of building very good Cloud Infrastructure. Like Oracle, for example, has done a good job. Their applications in the world of C3 AI, that's done a good job. And even Adobe, if you look at what they're able to do, not just in their creative cloud business but also in their experience, cloud and digital experiences overall. And so those are companies that are poised to do well in this AI boom. Those companies that don't have an AI play are going to be left out in the cold in this next round.

- And you mentioned Nvidia. Obviously, a lot of talk here about what happens with the US and China in terms of tech competition. Their chipmakers under some pressure. We saw that the commerce department recently announced some of these guardrails. That if you're receiving some of this funding, it does limit your ability to expand into China, your capacity out there. What is the smart approach here then if you're a chips investor but you're sort of stuck in the middle between what the US and China might do?

RAY WANG: I think you have to bet on the fact that AI is going to create demand. Nvidia, AMD are going to be in good spots. TSMC, given the plants that they're building. That's diversification. If our chips are going to be built, it's going to play a big role in the future expansion. You're not going to see that right now in this cycle but in the next chip boom cycle, you'll see that as AI consumption is up, that means data centers are going to buy more chips, and that means other companies are going to need much more compute capacity.

- And Ray, I always watch you on Twitter. You're always at all the conventions getting really a pulse of what investors are doing and what founders are doing. What are some of the top three themes that you're seeing as you go about your travels?

RAY WANG: Yeah, so one of the most interesting things that's been going on is as we were talking about GPT and what's happening with AI, we're starting to realize how much data we need and how much compute power that's going to be required. There's a lot of interest right now. We're in the beginning of that hype cycle. But what we're going to see over time is that data sets become important, and companies will start hoarding data sets or creating unique data sets.

We often joke, right? Topgolf was bought by Callaway. And potentially, what could be happening is Callaway now has the biggest collection of really bad swing data. Now, what could you do with that swing data? You can make better golf balls and better golf clubs. And that kind of unique data sets are going to be there. And that's an exponential advantage compared to other companies. These are companies that we call data inc businesses. And you're going to see more and more of these data inc type businesses pop up.

The second thing is really around automation and where we're going to head. And we're going to see a lot of human augmentation for quite some time because there's a lot of information that actually has to be processed. And what that means is we're going to get to error rates of about 99%, 3%, 2%. And so a 98% accuracy is great when you're not doing anything that impacts humans or causes health care issues. And we're going to be searching for that last piece. And that human training with machine data is going to come-- it's going to be very, very important.

And then the last piece, I think, that we keep seeing across the board is really the need for some level of AI ethics. Where ethics, where we can actually see the algorithms, that they're transparent, we can explain bias when it happens, and we can prevent it and reverse it when it's not supposed to happen. And of course, we're going to have more human training. And if you want to actually make sure everything's OK, you start with a human and you end with a human so that the machines don't take over.

- The machines don't take over. That is always that ultimate fear next to movies like "Terminator." Well, thank you very much. Ray Wang there, Constellation Research principal analyst and founder. Always good to see you. Thank you for your time.