New Podcast Dropped Yesterday
Big Picture
💡 Real wages positive, jobs stable, and the VIX regime is one of the strongest setups for forward returns.
So this week was filled with AI, earnings, inflation, jobs, and some data we analyzed heading into midterms.
The truth is we saw all of these come together, which is very different from just 6-12 months ago when these themes were competing. For example, names we own like Okta, Salesforce, and Zoom all put up numbers showing AI is starting to drive real usage and ROI, and Nvidia’s report help to confirm the whole ecosystem is leaning on them harder, not less. AI and software were not playing well together 6-12 months ago. It was, what’s good for AI is bad for software and vice versa.
Now we’re separating winners and losers. Not only in software, but also in AI where not all AI natives win. (woo!) All of this is very healthy.
We’re also monitoring real-time inflation data that still points lower. Jobs stayed stable (see charts below). And the VIX is sitting in the historical sweet spot for forward returns. There are still two forces we’re watching, one being midterm path risk and the other being what Iran does between now and November, but the current setup is more coherent than it’s been all year. See below.
Lets get into it all!
[1] Software and AI are finally working together.
For the last year, software and AI looked like they were pulling apart. AI was eating into legacy demand, and software names were caught in the middle. This quarter that started to flip.
Okta posted cRPO growth of 14% and RPO growth of 17%, both comfortably above the 11% revenue line, which is the shape you want to see for a steady-growth name.
For reference, cRPO is current remaining performance obligations and RPO is total remaining performance obligations. It’s essentially the contracted revenue a company has already signed but has not yet recognized as revenue. So a good leading indicator.
Backlog is running nicely ahead of recognized demand. Something we’ve been talking about for years now, but this is the first quarter it actually reaccelerated instead of staying in the range. Below is our chart of Okta.
[2] Zoom is starting to monetize AI at the enterprise level.
Zoom put up a record number of 7-figure ZCX deals, ZVA customers grew more than 250% year over year, and 9 of the top 10 ZCX deals in the quarter involved paid AI.
For reference, ZCX = Zoom Customer Experience and ZVA = Zoom Virtual Agent. They’re related, but ZVA is a product inside the broader ZCX platform.
High double-digit ARR growth on this side. This is what I would say monetized AI looks like when it’s actually working, not a demo or a pilot. Zoom also got named a leader in IDC’s MarketScape for agentic contact center platforms, which validates the direction.
Not to mention their Anthropic stake is now $3-4B, pre the IPO, which is said to be valued at up to $2-3T. That would send this stake to $5-6-7B, or 30-40% of Zoom’s market cap. Combined with $7-8B of cash and accelerating enterprise growth, this remains a conviction play for us.
[3] Nvidia continues to dominate the ecosystem.
Nvidia reported $96.2B in Q2 revenue, of which $59.7B fell through to net income.
That’s a 62% net margin on a business now scaled to nearly $100B a quarter. Data Center is 92% of the mix at +117% year over year. The 6 to 18 months of ecosystem investments they’ve made are showing up in demand security, and there’s no obvious replacement in sight. Nvidia still must execute as labs, hyperscalers, and sovereigns are all focused on creating their own purposed built chips. So moral of Nvidia story, do not stay still.
The main thing in the quarter was that they said next year could grow at 70%, which took the stock from negative after the report to positive.
Market sees this as demand that continues.
Now on the same day software stocks rose, which is great news and shows a market that is starting to actually act more rational… The main thing to monitor if you are a Nvidia bull is they guided to low 70% gross margins, this was near 80% a year ago. We think cycle median will sit in the 60% range.
[4] Codex is catching Claude Code. Kind of.
Now switching topics a little bit as this is very interesting… the AI application layer is showing another change of the guard.
Codex from OpenAI is closing on Anthropic’s Claude Code, which is another sign that leadership at the app layer is still being fought over. There’s also chatter that Anthropic may go public late September or early October. If that happens, it’s a boon for the whole AI landscape. More capital in, more build-out, more downstream demand for the names above. Our view remains these labs will have to continue to verticalize. Their own chips, some sort of model orchestrator, and either moving deeper into the infrastructure layer or attempt to go to the top of the stack.
Either way this data shows the growth of Codex at 550% vs 205%. The base is lower so growth is expected, but one is growing and accelerating and the other is decelerating. Both growing fast tho.
[5] Real wages are still positive, and it depends on which inflation you believe.
Now to the macro side. The government’s inflation figures keep getting headline attention, but when you look at real wages using real-time inflation measures, the picture is more constructive. Nominal AHE (wages) at +3.2%.
Real wages using BLS Core CPI: +0.7%. Real wages using real-time Core: +1.4%. Both measures positive, and neither has gone negative through this cycle. Hmm.
The “real wages are negative” narrative is on headline CPI, which is being juiced by energy prices.
[6] Oil futures are still pointing down and to the right.
WTI is $82.84 front month, $70.78 twelve months out. That’s a -14.6% discount to spot at the one-year mark. Not a perfect signal, but the slope keeps saying the market either sees ample supply or doesn’t believe the demand story that’s been used to argue for higher prices.
Either way, the curve suggests the inflation impulse continues to moderate, assuming this holds. This would help the headline CPI, which would improve sentiment on consumers.
[7] The consumer is not levering up.
NOW this one is important.
Household debt as a share of disposable personal income is sitting near multi-decade lows. Not many talking about this…
Despite all the “consumer is cracking” takes, the leverage story just isn’t showing up in the data. Combined with real wages holding positive, the setup on the consumer side is more stable than the headlines keep suggesting.
[8] Jobs stayed stable, and the ADP weekly pulse ticked up three weeks in a row.
The ADP weekly pulse posted three consecutive weekly hiring increases. Not a rip-your-face-off number, but the direction is right and it lines up with a labor market that’s cooled without breaking. Takeaway here is more of the same for us… jobs stable ENOUGH.
[9] Initial claims are running 10.7% below the 8-year average.
Then we got initial claims for the latest week, which came in at 206K, which is 10.7% below the 8-year average at this point in the year. Continuing claims are behaving similarly.
If layoffs were the real risk, this is where you’d see it first, and it’s just not showing up.
[10] Low VIX has historically been a healthy regime, not complacency.
VIX is sitting around 14 to 15 right now.
The take is usually that this is complacency, but the 50-year data says otherwise. When VIX is in Q2 (13.3 to 16.1), the median 12-month forward S&P return is +11.6%, and it’s positive 89% of the time.
That’s the best hit rate of any VIX cohort. The complacency read is looking at Q4 (VIX 19 to 24), which is where hit rates actually break down.
[11] Every midterm path diverges.
Now here’s some interesting data.
Over the 8 midterm cycles in the base, the average final path from now through election day is +1.5%, the median is -0.6%, and the group is positive 4 out of 8 times. But the range is +12.1% (2010) to -5.7% (2022). The aggregate is a coin flip. Again this is measured between today and this year’s midterm election.
The two forces we’re watching most closely are what Iran does between now and November, and whether the current administration can use the situation to cut a deal. Both outcomes are binary. And when the setup is that binary, we don’t want to do too much.
Net Net
Ok so the through-line this week is that the pieces are lining up. Software and AI are not competing as much anymore for interest or trading activity, real wages are positive, jobs are stable, and the VIX regime is one of the strongest historical setups for forward returns. The counter is that midterm paths diverge and we’ve got a binary sitting on top of a foreign-policy variable. So the base case is constructive, and we stay measured in the parts of the book where the outcome is binary rather than probabilistic.
That’s all for this week!
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