The Exchanges

Q So when you spent your six years at Fidelity and you were exposed to all these different styles, you knew that you were interested in the growth of tech sector. What did you find was your style of investing and how you wanted to pursue the trade?

A One of the things I was good at understanding was that you really wanted to be behind product cycles and true growth. And in tech, there are areas that don't grow that much. And frankly, the period after the internet crashed and before the mobile revolution happened, there weren't any major mega trends happening, but there were minor trends and it would make sure that I was invested behind those. And then, of course, I started in the internet itself in 9796, and got the early days of Amazon. And even before that, I invested in AOL for my own PA at the time, which was just growing like crazy. I devised this three-part framework, which we're known for at Whale Rock, which is S-curve, competitive advantage, underappreciated earnings power. And the first one is all technologies start slowly. They have a lot of barriers to adoption. It might be too expensive or complicated. There might not be the right ecosystem. There might be a lot of inertia. There were smartphones before the iPhone, but they were big, clunky, hard to use. There was no wireless network, and they were expensive. Steve Jobs fixed all that with a 200 dollar phone, a touch screen monitor that Your grandmother or child could use, and then he connected it to the three G network. And so all those barriers were immediately removed. And then you hit that mainstream takeoff phase, that inflection where you go from one perc…

AI assessment note: “I devised this three-part framework, which we're known for at Whale Rock”

Q As you pull that thread now, a couple of years later, how are you thinking about AI as it relates to your framework?

A I think AI is definitely one of the major mega S-curve trends, and it's great that we have another one to invest in. It's going to be a multi-decade story, like the cloud, like mobile. This is, in a lot of ways, more complicated than the previous ones. With smartphone, you had units and ASP. You could really quantify easily how big the market was with precision. When you have a new computing cycle, you've got the whole stack. This was pioneered by Lou Gerstner. He talked about the new stack in a client-server world versus the mainframe world. In the AI world, there's a new stack. And at the bottom, always first comes the infrastructure layer, because you've got to build the compute out. And when you have a new stack, that's when the inflections happen, creating winners and losers. Then above that is the cloud. Most of the AI is going to take place in the cloud. There's the cloud delivery layer with AWS, Azure. There's some of the new Neo clouds, and then some will be delivered on-prem. And then above that is the foundational model layer. These are the big LLM companies like OpenAI, XAI, Google Gemini, Meta. And then above that are the applications. That can be software applications or internet applications, and they can come from startups or incumbents. Our thesis was invest in the infrastructure layer first, because that's always the first to inflect on the S-curve. It also, n…

AI assessment note: “Our thesis was invest in the infrastructure layer first, because that's always the first”

Q How do you think about layering on shorts?

A The S curve framework is good for shorting as well, and you can find great shorts all across the S curve. The classic would be mature and getting disrupted. So traditional media by Netflix or newspapers or CPUs losing to GPUs. Then you can have great shorts in the best part of the S curve because You might be in the sweet spot of the S curve and selling into it, but if you don't have an airtight competitive advantage, you're a zero. You're going to destroy value. In smartphones, if you were RIM, Palm, Nokia, HTC, Motorola, Lenovo, the list goes on, you're a complete zero. And there are a lot of electric vehicle companies that tried to be Tesla or BYD, and they're all very likely to Either fail or not generate any profits. And then there's too early in the S curve. Again, people get excited about new technology. It's real. It's going to happen. But the barriers to adoption are strong and not removed. So AR VR glasses, for example, has been stuck in too early in the S curve. At one point we were short a Japanese video game company where the CEO was like, I'm moving all to VR games. The problem is there's no VR games. Headsets cost 5000 dollars. There's no killer app. There's no market in place. One of our best shorts was an EV battery company 12 years ago spun out of MIT, supposedly had proprietary technology, and they were building capacity for this coming EV boom, but it was 10…

AI assessment note: “The S curve framework is good for shorting as well, and you can find great shorts”

Q What was it that you saw in the tech sector that led you to be excited about the future and wanting to push in that direction?

A The amount of innovation and growth, you could just see it. I mean, we had the internet come and that spawned whole new companies. Each tech innovation from the mainframe to the PC to the client server computing to internet builds upon the previous one and unleashes more growth and more innovation. And you could see the tech was such a small part of the GDP. But through the internet was rapidly expanding. This was right at the cusp of the iPhone, because I started Whale Rock in oh six. The iPhone was launched in 2007. And at that point, the big product for Apple was the iPod. You could just see digital music and the explosion of the iPod and what that did to the earnings power. Moving from the iPod to the phone was such an obvious move. Because all you really had to do was put a modem into that iPod, and it was one device that could do more. Obviously, at that time, I didn't even realize how powerful that would be. What's been so fantastic that I didn't see is each of these cycles gets bigger and bigger and takes more and more of the economy, and it doesn't stop. And frankly, I was a little worried when I first started doing internet. I was like, okay, I'm going to be great for two years, and then the rest of the world's going to figure out all about the internet, and there won't be that much change, and then I'm going to have to find other ways to make alpha. But what's been s…

AI assessment note: “The amount of innovation and growth, you could just see it.”

Q That is true. Why don't you take me back before that? When did you first get interested in stocks and businesses?

A Well, I think actually the first stock that I owned was Apple back when the PCs were coming out, and I owe it to my father. He was longtime Goldman Sachs partner. He ran corporate finance in the eighties and then the chairman of the private equity group in the nineties and into the 2000. I lived in New York and I always was exposed to a lot. We had a few shares of Apple and we were so excited when it split. And then in college, I remember buying Boeing on the theory that they were somewhat of a monopoly, and air travel had a huge future. I've always been interested in investing from an early stage, and I was lucky to just be exposed to my father and a lot of others along the way.

AI assessment note: “the first stock that I owned was Apple back when the PCs were coming out”

Q So as you're learning at Fidelity, how did you think about the mentorship that comes from having all these different PMs around?

A Fidelity is a very interesting culture because It's a huge team, but it's very individualistic. I don't want to say it's sink or swim. There's some training. You have to do industry reviews and write notes, but it's really up to you to learn how to do creative research, but you learn a lot by watching all the different PMs and their various styles, and of course, you've got to pitch your stocks to all these PMs, so there's so many great characters of Fidelity. There's value managers, growth managers, GARP managers, high yield debt managers, and then you're just in an environment where you're constantly talking about stocks, other people's sectors, your own group, and your own peers, your peer analysts as well. I've had a few great mentors who really taught me to push and do creative research in different ways. What's the gross margin? What are all the factors that drive into that? And then how can you research those to get even deeper? On those. But there's so many different styles of investing. You learn what your style is very organically.

AI assessment note: “I've had a few great mentors who really taught me to push”

Q What are some of the other S curves you're watching?

A Driverless did hit the mainstream takeoff. We are taking driverless taxis, one basis point of miles driven, and they're going to be rolling out cities, and it's just going to get bigger and bigger. So that is one that's definitely going to be hitting. It could be negative for some companies who are selling cars that don't have good technology, or maybe some people think it might be bad for Uber. We'll see what happens with that. Another one is robotics, and that is very exciting, but a lot of people are starting to believe that this could be the year. We've seen a lot of that in the past. I think it will take longer before we can have a humanoid robot doing anything too complicated, but we'll see what the world holds there. So we're watching those two.

AI assessment note: “Driverless did hit the mainstream takeoff... Another one is robotics”

Q What did you find and learn along the way that made for an effective stock pitch to a portfolio manager?

A Peter Lynch, he wasn't active when I was there, but he would meet with the analysts individually three or four times a year, and he always had his thing, the egg timer, where you go into his office and he turns the egg timer. In fact, At one point, I had one here. You've got to figure out how to do it quickly. Obviously, it's the key points, it's the thesis, it's where you're differentiated. You've got to get your earnings estimates, your PE, get to the crux of it very quickly. And I find that's a hard skill for a lot of people where everybody's pressed for time, getting to the key points very succinctly and quickly, and just cutting down to what really matters and why is this so much better.

AI assessment note: “You've got to figure out how to do it quickly. Obviously, it's the key points”

Q Where have you had situations where you're long something that you think is in the right part of the S-curve, you're short, losers in that trend, but you got it wrong?

A In our experience, when we make something big, and we have a 10 out of 10 conviction across the board where you've got valuation support, you're really confident this S-curve is happening, and you have very strong underpinnings of the competitive advantage, it really is a risk reducer because you've got valuation support. The biggest reason people blow up in tech is they miss on revenue, and when you're rocketing up that curve, You very often over deliver on the sales. And if you do have an airtight competitive advantage, there's few things people can do against you. But sometimes you get excited. One S curve that we got wrong, but we're able to get out was the EVS curve. And that's another dynamic S curve. The idea was that 50, 60% of cars were going to be electric. And that's happened in China. But when we hit about 10% in the US, it hit a wall. Tesla and the EVS curve was amazing, and they had a great competitive advantage, and they had underappreciated earnings power. But then that S curve went from being a 10 out of 10 to a zero out of 10 because it was mature in the USA. And the underappreciated earnings power went from being really cheap to expensive given it wasn't growing. We haven't owned Tesla in a while because of that.

AI assessment note: “One S curve that we got wrong, but we're able to get out was the EVS curve.”

Q When you're thinking about figuring out that S-curve, let's assume you find a trend that you think is going to climb an S-curve. How do you decide where you want to buy in on a stock on the S-curve?

A It's great if you can get it right at the inflection point, but the thing about the S curve that's so important is it tells you how long you can still own it, and sometimes it's okay to be late, because maybe it's unclear why or how it's totally inflecting, or you're not sure how strong the competitive advantage of a company in that space is, but generally, once you get to 30 to 40% penetrated on the S curve, That's usually when that exponential growth becomes linear, because in the first few years, you go from one percent to three, three to six penetration along the S curve. And then a value of the S curve is how big is this market and how long can this trend keep on going? A lot of times the S curves can be dynamic because these are new things that we don't always know for certain how big They're gonna be, so we do a tremendous amount of research to figure out how big the S-curve is, and some can be very quantifiable, and some are more, you're directionally right. A good dynamic S-curve would have been the cloud computing. When cloud first came out, there was no real estimate for it, and no one really knew what it was. Is it just a server in a warehouse? And we realized it's not just the server, it's the networking, it's the storage. It's the database. It's all the software layers. And we looked at, in the traditional world, that was six hundred billion dollars of spend, and …

AI assessment note: “It's great if you can get it right at the inflection point”

Q It's hard for almost anyone investing in public equities to not be thinking about the Mag-Seven, and this is particularly relevant in your space. How have you thought about how you're positioning relative to Mag-Seven?

A There's a lot to say about the Mag-Seven. Some people are worried that there's a lot of market concentration, and that's a sign that the market's frothy. What it's a sign of is the digital platform economy that we're in, where the leader grows bigger, faster, and is able to accrue huge profits. So it's purely driven by the shape of the digital economy and not by some scary bubble. In general, the MAG-VII is very attractively priced. You've got Amazon now, which is 25 times next year's street EPS, which, that's GAAP EPS, cheaper than Walmart, cheaper than Costco. Meta is something like 22 times earnings. Microsoft is twenty-six-ish. Tesla's quite high. But in general, the MAG-VII has moved up because Of the earnings have been so strong. In addition, most of these companies have major scale, and they have cost savings, so they're able to grow without adding costs. If they want to be more aggressive, they can dial back costs. I think these mag seven have the most to gain from AI on so many different dimensions. Number one, revenue growth. A lot of the mag seven is driven by advertising, and AI plus advertising is Amazing. We've seen this with AppLovin. We've seen this with Meta. Google's doing it, using a massive self-learning LLM to target 30,000 times more effectively than the old CPU-based systems. In addition, a lot of the Mag-Seven have their own clouds, so they're going to b…

AI assessment note: “In general, the MAG-VII is very attractively priced.”

Q So when you set out reading the newspaper, following this stuff at two AM, now, 18 years, teams doing 2500 meetings a year, what keeps you excited to keep going in an industry where lots of people at some point in time have had enough, done enough, it's intense enough that they decide to just hang it up?

A Well, it's just, I'm super curious, and I love the business. I love learning about new things. I love meeting people along the way. I love working with my team. The tech space, there's just always so many fascinating and interesting aspects to it that I'd be reading about and trying to figure out if I wasn't in the business anyway, and so I really enjoy playing the game. Maybe if tech was rolling over, there's nothing going on, it might not be as interesting, but I love stock picking, I love investing, I love learning, and I love building this firm. This is what I really enjoy doing. Building the firm, the team, the organization, all the relationships I've made with LPs, with employees, management teams, just brings a lot of satisfaction. All right.

AI assessment note: “I'm super curious, and I love the business. I love learning about new things.”

Q How did your father transmit that knowledge or interest to you?

A He always had so many stories of the characters he met, the IPOs, the M&A, the deals he would do. Sometimes we'd meet those guys along the way. He was involved in the Alaskan pipeline and meeting some of the entrepreneurs that were trying to build that out and just hearing his stories of the deals he would do all over the world. He was chairman of the commitments committee at Goldman Sachs, and he talked about some of the deals he was able to keep them out of. And then told us about some of the stocks he would own. He would always read Barron's, and I grew up reading the newspaper and in college would read Barron's. Actually, one of our classmates basically decided to invest in my firm early on because we were on a weekend at HBS, and he saw me reading with a flashlight Barron's at two a.m. Sean Dwyer. I always had a small account and was investing along the way. I started in the business in investment banking, and I worked at Smith Barney, which became Citigroup. I was lucky to join the tech media and telecom group there. That's a big thing for me is I was involved in technology early on. And then I realized I wanted to be an investor during that period where we would spend three months with a company And then we'd do the IPO, and I'd show up at Fidelity, and there was a guy my age or a little bit older who just knew everything about the industry, and he was talking directly t…

AI assessment note: “He always had so many stories of the characters he met”