ServiceNow as an AI Stock - Investing in NOW as an AI Investment (AI Stock $NOW)

ServiceNow (NOW) stock has produced impressive gains thanks to its AI investments and impressive growth in various software as a service fields. Should you invest in ServiceNow as an AI investment?

ServiceNow ($NOW) is a SaaS company that provides customer service, HR, and employee workflow software. The integration of AI into their products is a key focus for ServiceNow, with initiatives such as AI-powered dispute resolution, AI agents for internal employee service, and AI legal contract writing tools. While ServiceNow has strong fundamentals and market potential, the NOW stock valuation is high, which may limit potential upside. 

ServiceNow Stock Analysis Takeaways:

-ServiceNow's integration of AI into their products aims to automate processes and improve productivity for organizations.
-ServiceNow has a strong customer base and high customer retention rate, but its valuation is a concern.
-Market volatility and interest rates can have a significant impact on different sectors
-AI and automation have the potential to disrupt industries and replace certain jobs

ServiceNow Stock Analysis Chapters:

0:00 Introduction to ServiceNow
6:24 ServiceNow's AI Integration in HR and Customer Service
26:41 Market Volatility and Interest Rates
33:18 The Potential of AI and Automation

View all our analysis on AI stock ServiceNow (NOW) at https://investingintel.ai/servicenow-now-ai-stock.html along with other AI investing tips and ideas for which AI stocks to invest in.

Transcript

James (00:00.846)
Welcome to Investing in Intelligence, where we talk about artificial intelligence companies, stocks, and trading. I'm James, here with my cohost Kai. Today, we'll be discussing ServiceNow. I want to remind you that the opinions expressed in this podcast are just that—opinions. They should not be taken as specific advice to invest in a particular way. ServiceNow is a SaaS company making a big push to integrate AI into their products. So, what does ServiceNow do?

ServiceNow provides customer service software and solutions, as well as HR and employee workflow software. They started with ITSM, which stands for Information Technology Services Management. They also handle ITOM, which is the operations management version of that, kind of like a help desk type of service. But they've also expanded into HR, customer service, and now even security. They serve diverse industries like telecom, banking, restaurants, airlines.

Some of their customers include USPS, the US Army, Chipotle, Air France, and Visa. They have no small business exposure. Most of the largest 2000 companies in the world are ServiceNow customers, and about 80% of their customers use multiple products of theirs. ServiceNow interfaces with all the different software platforms.

Like Workday, Oracle for finance, Salesforce.com for CRM, Adobe for marketing automation, ADP for payroll, and Salesforce. Sorry, ServiceNow can automate processes across all functions for these things for an organization. So as a retail trader with no software background, Kai, does an investment like this bore you or intimidate you? This is like a SaaS company. You and I will probably never interact with the products, or if we do, we won't even know it.

So is something like this interesting to you as an investment, or is it just kind of boring or even intimidating?

Kai (01:58.998)
Both. I mean, what you said there is just incredibly boring. If I were a listener tuning in, I would probably be snoring and falling asleep right about now. And so, one, it's boring in regards to what ServiceNow does. But the second point is, I think it's incredibly important, especially in the economic system in which we live today. I don't know if I'm even saying that correctly, but why don't you explain to me since...

James (02:02.094)
Yeah.

Kai (02:28.47)
If I'm the average listener, average person, retail investor, starting to look at ServiceNow, why those elements, whether it's HR resources, security, cybersecurity, customer service, IT management, why is that so incredibly important for a company as profitable as ServiceNow?

James (02:51.118)
Well, as you know, I've been involved with business in the past, but I've been on the small business side and I can tell you small businesses have to spend enormous amounts of money on software. They also have to spend enormous amounts of money on advertising, which is usually Google, which is kind of like software, but almost every small business now pays for Google Workspace, which includes Google Sheets, Google Gmail, all these different things. And then maybe they pay for website hosting. They pay for software development. I mean, everything is software now. So even a small business pays an enormous amount for software. Once you get to larger scales, a larger business is going to have to pay for an application, an iPhone, an Android app, which is enormously expensive. They're going to have to pay for all these other things. And some of these things are optional, like HR. Do you want to have an HR team, or do you want to have HR software? But everything is moving towards software. So what I would say is, software is it, man. You and I don't fully understand all the ways that software is integrated into these large businesses, but it is integrated and it is big money. So I guess that's my response to that. Like, you almost have to try and understand it in order to make the returns on investment because the real money in the past years, in the past decade, is made in software companies, not in Starbucks or Walmart. It's the real get-rich-type returns in tech.

Kai (04:13.75)
Yeah, and so, um, there's a lot of revenue growth in tech. There's a lot of, I think it's a very important part of business in general, HR services, things that businesses in multiple different industries have to spend money on, whether it's software or even in the healthcare industry. And so we both have our particular backgrounds, but as far as IT and, uh, in the healthcare industry and software, that's an overhead expense that nobody had to spend on those things 30, 40 years ago. And it's an incredible amount of money. It's a huge business. Epic in regards to the healthcare industry is a huge business. I mean, these hospitals are spending millions and millions of dollars on their software that they use. Their HR departments are large. I mean, I would love to take the average HR department for a business of let's just say 10,000 employees and think of the overhead that that business has to spend on HR. And particular views on HR—it's great to outsource human resources. It's incredibly good if I could own a business and then be able to outsource my HR department to an outside, whether it be a law firm or some other resource, that would be incredibly beneficial to me because there's a non-biased element in regards to solving even some of those problems. Payroll. And so software payroll. And so some of these things may sound boring, but however, there's a lot of money that goes into them and a lot of overhead costs for businesses that go into them.

James (05:47.95)
Yeah, and you know, we probably both heard on the All In podcast recently, how they talked about HR and how startup companies kind of don't need HR in their opinion. But, and that's what you just mentioned outside legal counsel, kind of as a replacement for HR, but how about you, you mentioned the needs for HR. Let's talk about how ServiceNow is integrating AI into their products and how maybe AI can help bring down the cost for some of these things like HR. So ServiceNow recently.

Kai (06:25.302)
Well, let's just talk about UNHR and customer service. I mean, one of the things that's a big pet peeve of mine, so to speak, is when I call, for example, an AT&T company, they outsource the phone call to somebody that has no idea. And I don't know if anybody else noticed it. It's a vein of my existence to not get a human being on the phone to talk to me because it doesn't exist anymore. And so the question becomes when I get on ChatGPT and ask ChatGPT an answer.

James (06:39.822)
Yeah.

James (06:48.558)
Yeah, so.

Kai (06:54.518)
It provides me with almost a better answer than getting an outsourced human being from another country trying to understand what I'm asking them. And so if you can provide a service of using artificial intelligence that can answer your questions better than an outsourced human being, I would, I would take that honestly. And so I don't, I think it could.

James (07:15.214)
Yeah.

Yeah, so that's why Visa is actually partnering with ServiceNow right now. So ServiceNow has a new thing with Visa where they're doing end-to-end AI-powered dispute resolution, which is kind of what you're talking about. But, and they're saying, ServiceNow is saying that their new GEN AI capabilities have produced the highest new ACV, which is contract value of any product they've ever introduced.

So pretty much the CEO on the conference call said that this SKU has outsold any other and there's no price sensitivity. So essentially if it improves productivity, companies are willing to pay for it. So they're also doing AI agents now for internal employee service. They're doing text to code for the developers and they're saying that it's increased productivity by 52%. They've got a new AI legal contract writing tool that they built.

So it's pretty impressive, the stuff they're doing. What do you think about their AI? So you just mentioned how software is critical in building profitability, reducing costs, and helping with margins. But what about AI integration? So ServiceNow admits that they're early on in monetizing AI. Do you think that this is hype or when do you expect stuff like this will be effectively monetized? What are your thoughts on that?

Kai (08:35.958)
Number one, I would say unknown, right? This is, we talked about the narrative of the story that's being written. So there's an unknown, but I would also say unlimited market potential. And so the, some of the applications to some of the things, for example, ServiceNow does have unlimited potential in regards to what sort of market they would be reaching as well as the profitability and revenue growth that they could generate from people that want their services.

James (08:41.486)
Yeah.

Yeah.

Kai (09:06.326)
And so, and I think that you see this story being played out. Uh, one of the things again, we've gone back and looked at is, and I harped on this as EPS growth and it's difficult to determine in fairly new companies, EPS growth. Uh, let me just say this in 2021, the earnings per share of ServiceNow was about one, 2022, 1.6, 2023, 8.4. That's a 426% increase. And so.

The last quarter of ServiceNow, and you mentioned this in regards to another company was SMCI was 1.44, which was more than its 2021 EPS for the whole entire year.

James (09:47.918)
Well, look, I think it's important to understand the fundamentals that underlie their financials. So look, they were founded in 2004 and their first profitable year was 2019. So they just recently became profitable, but they have a pretty high moat. So Morningstar says that switching costs are very high for ServiceNow. In other words, once someone is using ServiceNow, they don't want to switch to something else because it'd be extremely expensive and time-consuming for them to switch to another software product.

So they're pretty much the market share leader in ITSM. They've disrupted the industry and even caught companies like IBM off guard. So 10 to 15 years.

Kai (10:22.902)
Well, one of the things that would be interesting to look at in regards to even when you buy, for example, a software product is the, is the product you're buying on a contract for a one-year, two-year period. And then you can switch. And then when you buy another contract and you build up, for example, your software, it's incredibly difficult to transfer what you've built to an additional product. So you have an unlimited market potential currently. You have a product that people don't want to switch off of.

James (10:31.694)
Yeah, it's on the contract.

James (10:40.622)
Yeah.

James (10:49.006)
Yeah.

Kai (10:49.59)
You have, you could call it a boring product, but it's a needed product. So let's just go on those three basics in regards to ServiceNow. So go ahead with it.

James (10:54.83)
Yeah. Well, there is, there is one problem. There's a problem. Okay. So first of all, you mentioned, you mentioned the good things. So they're ACV, their contract, their annual contract value, like how much money they're making from their contracts. It has doubled over the last few years. Um, and you mentioned that too. So on their Q4, 2023 earnings call, which is their most recent earnings call, we're in Q1 of 2024 now, their subscription revenue grew 25.5% year over year. They had great margins, 29%.

And I believe it was their CFO who mentioned that a few years ago, their total annual contract value was 10 million and now it's 1 billion. So huge growth. That's because 99% of their customers are renewing. So they're not losing any customers. They're just adding customers and those customers stay with them. They have 8,100 total customers and they're operating at the rule of 55 plus. So you might've heard this term in the past guy. There's this idea, the rule of forties, the rule of forties is pretty much you want.

your margins plus your year over year revenue growth to equal at least 40. So let's say your margins are 20%. Well, then you need your year over year revenue growth to be at least 20% to meet the rule of 40s. Well, in the case of ServiceNow, they're operating at the rule of 55. So their revenue growth year over year plus margins are 55, which is awesome. But as I said, there is one problem. Their valuation is a bit high. So...

I'm going to go ahead and share our website. I'm going to show how we have, I'm going to show our page on, on ServiceNow. So you see here that we have an optimistic target, which is kind of looking at the following year's earnings. But as you can see on our AI report card, we have a minus next to fairly valued. That's because their PE is pretty high. It's 57, 59, hovering around upper fifties. I mean, the market cap is close to 200 billion.

Kai (12:48.31)
You're using the forward PE, you're using the forward PE or the...

James (12:52.43)
That's a good question. Let me go ahead and switch over to Yahoo Finance and I'll just take a quick look and see what their trailing PE and their forward PE. 91 is their trailing. 91 is their trailing, forward PE is 59. Yeah.

Kai (12:59.062)
Yeah. So previously the, the PE. Well, so, so that's what I'm saying. And so the, so yeah, so I'm, I'm going to give you three price targets. I'm going to give you one that's around 800, one that's 900 and one that's at 1100. Okay. And the reason why I'm going to do that is so I'm going to say their EPS is either nine, 10 or 12 for the year. And I'm going to go ahead and trade them at a 90 PE because that's essentially what they've been trading at. I think they're I, they're service now.

James (13:09.774)
Okay.

Kai (13:24.886)
So let's separate these two, let's separate these into two different things. Okay. Service now as a company in regards to going a long-term investment. And then let's go ahead and just talk about just where ServiceNow is now in regards to its chart analysis, what it's trading at, and its projections. So as a company, well, absolutely. But I just want to clarify both of those two things separately, as far as I do think it's important when you enter an investment. Okay.

James (13:39.438)
Well, I think those things have to be taken together, right?

James (13:47.694)
Okay.

Kai (13:50.678)
or go long on a stock and the entry and exit points or no exit points. It offers a, let's just call it a boring product for maybe to you and me or the average person hearing that may be boring, but it has unlimited market potential. It has good sales growth, good revenue. It has excellent cash to liability ratio. It has excellent asset to liability ratios. Its debt is 1.5 million.

James (13:54.094)
Yeah.

Kai (14:16.758)
Billion James is debt is 1.5 billion and its assets are about 17 billion. Okay. It's 52% 52 week growth for the year. And so when I look at ServiceNow, there's only one question mark that I have is it is a company is that how this AI story develops in five years will determine where ServiceNow is in five years, but currently unlimited market potential. Let's just say that.

James (14:46.286)
But that's priced in. That's the problem. The problem is it's already at its fair value. Morningstar and I agree on this one for once. It's at the price where it needs to be at $770, $780. So in other words, there are only two things that are going to make it go up. Hear me out. There are only two things that make a stock go up, either earnings growth or multiple expansion. So multiple expansion can't happen anymore. ServiceNow it's already at a 90 trailing PE and a 59 forward PE. So multiple expansion is out of the question. So you have to have earnings growth. So this is one that's actually setting up.

Kai (14:58.646)
So there's the.

James (15:16.192)
for a potential drop if it misses earnings. Now I don't necessarily think it's going to miss earnings. We own the stock. It's one of our core portfolio holdings. But if it did miss earnings, the valuation is too high. So that valuation is going to come down. So it has to. Earnings growth is the only thing that can make ServiceNow go up. And Morningstar and I also agree, earnings growth is probably going to slow a little bit. And if you look at the surprises on each consecutive quarter with ServiceNow, they've been surprising less and less. So you might have gotten close to a 20% surprise or a 15% surprise a few quarters ago and now we're getting like an 11% surprise on earnings. So in other words, I would be cautious with this one just because of the overvaluation of it.

Kai (15:58.614)
Well, one of the things that you can look at right now, ServiceNow is trading at, I think it's at the 750 range, right? If you look at its six-month chart, I like to look at the six-month daily chart, put the 21-day moving average, 10-day moving average, and 50-day moving average on the chart. And it's currently, it's 50-day moving average and 21-day moving average are coalescing into about the same value. ServiceNow has been trading sideways. We call it, it's forming a base. And so the question is, is ServiceNow going to break up or is it going to break down?

James (16:04.91)
Yeah.

James (16:20.814)
It's going sideways, it looks like. Yeah. Yeah.

James (16:28.494)
Earnings.

Kai (16:28.79)
And so it's present well, the earnings are April 26th. So we've got a couple of weeks until earnings. Um, this is one of the strategies that I particularly use is when you have this sort of base that's formed. I watched the volume on the stock and which way it goes. And so I set a value above a percentage above what that stock is trading at. And as that stock either breaks out.

James (16:33.102)
Yeah.

Kai (16:55.03)
above and below, I will either buy or short sell a stock. And so ServiceNow is forming a base. It's one that's really well to watch. I also full disclosure own this stock as a full disclosure. And so it's one that I'm watching very closely. However, I do think all the fundamentals of this company are extremely good. And I price target ServiceNow at 1080. I price target ServiceNow for the year around 1100. And so...

James (17:24.494)
disagree on that but 30% upside for I mean it's at a PE of 90 and you're expecting 30% upside for this current year and also I want you to clarify one thing you said when it builds a base you either buy or short sell those seem to be opposite things can you can you clarify that?

Kai (17:24.758)
I think that we disagree on something.

Kai (17:41.11)
Yeah. So what I'm saying is that you can, um, basically if you can calculate a certain percentage, and I usually do about a 25, not 25%, but I usually do just slightly above, maybe it's a, uh, $5 above or $5 below, for example, on a hundred dollars a share stock. And as, as that stock moves up or breaks out of its base and the volume, if I see the buyers come into the market,

then I'll go ahead and buy along with that market. And so when it forms a base or even the stock will drop and form an additional base, it will rise out of that base and buyers will come into the market and start to buy that stock. And so,

James (18:09.358)
Okay.

James (18:18.254)
You're not short, but you're not shorting it. You're not shorting it at that time. You're not short selling at that time. Okay, okay. Okay.

Kai (18:22.326)
I'm not I don't plan a short sell service now I was using that as an example of a stock just in general but I do think this is one to watch as a new base is a new time for buyers to be able to start to come into the market or even right now I do think it's going to set up and probably break out of its 21 day or 50 day moving average fairly with well earnings is a look you know what's interesting about this if earnings were next week I think oh yeah the earn it could post really good earnings even

James (18:40.718)
With good earnings, it could, yeah.

Kai (18:50.166)
better than expected. And then all of a sudden the buyer's going to come in this market and it's going to drastically go up. And so right now it's forming a base. That's all I'd have to say. The 21 day moving average and 50 day moving average are right at where ServiceNow is trading. I will also point out that ServiceNow has been relatively unaffected by the movement of the market. It's traded exactly sideways. And so what you've noticed really over the volatility that has been this week is that you've seen

James (18:55.278)
Yeah.

Kai (19:20.118)
the equal weighted NASDAQ really be taking a hit in regards to the inflationary reports. However, the heavy weighted NASDAQ is held up pretty well. And so QQQ is held up really, really well. And so ServiceNow is one of those stocks that has held up really well.

James (19:30.862)
Yeah.

James (19:37.038)
Yeah. So this morning we were down about a percent in the NASDAQ and service now was actually down less than most of our AI holding. So people like service now. And as we showed on our website, sentiment is good for, for service now, but let's talk about another one shifting to the broader market and AI stocks more broadly. Let's talk about another one that is not doing well. Arista networks down 8% today on a downgrade from Rosenblatt.

Rosenblatt downgrades from buy to sell, skipped hold, just went straight to sell from buy, slashes the price target from $330 to $210. And I see you're smiling. You know I'm ecstatic about this because we covered this stock. It was our first video. So Rosenblatt says, we believe Ethernet is a winning technology, but we think most of the spoils will go to Nvidia. The primary data center competitor is now Nvidia, which has significant advantages over Arista.

So once again, six weeks ago, this is exactly what we said in our podcast. I was very bearish on investing in Arista due to competition from Nvidia. Now, not only at this point, not only has our AI portfolio beat the market and the best money managers in the market, now our analysis is beating them. So we're six weeks ahead of an investment bank with billions under management.

This is exciting for me to see that our efforts to look closely into these AI stocks is way ahead of people who are supposed to be doing the same thing better than us. What are your thoughts on this guy? Once again, down 8% Arista today, dropping off a cliff as headwinds from NVIDIA's competition surface.

Kai (21:18.326)
I'm going to go on a common theme here that a lot of people are probably going to give me a thumbs down for, but the experts don't know everything. I mean, and this is sort of, we've studied it, they've studied this and sort of actively managed accounts sometimes don't do as well as, don't do better than even passively managed funds. And,

James (21:35.854)
But I'm actively managing. So I'm doing considerable research and I'm buying and selling based on changes. So I am actively managing, but I'm beating them.

Kai (21:39.83)
Well, you're one particular expert. What I'm making an argument in this regard, James, is that it depends on the person. It depends on the expert. It depends on the opinions that one may have. And so the question is, statistically, how often are those people that are managing those funds better than the people that... For example, you were right. In this particular instance, the story's still being written.

James (21:53.216)
Okay.

James (22:08.654)
Thank you. Thank you.

Kai (22:09.398)
written. The story is still being written. Let's just say that. Odds are some of the things that you said in that episode about Nvidia and doing some of the same things and selling the pictures, picks and shovels that service that Arista Networks does is was was correct. However, I still think people are going to buy Arista Networks picks and shovels. It's been a good company. It showed shown that it's good company. If you can take the pain for a little while. I'm not I'm not this is not a recommendation to buy, hold or sell. Okay, let me say that.

James (22:35.086)
You know, my research indicates that they're just not competing. And that's what Rosenblatt just came out and said. So the question is, why do you hold the second, third, fourth, why do you hold the fifth best? And I think that's why they slashed from a buy to a sell. And I agree with them. That's what I said in our previous episode.

Kai (22:49.782)
Yeah.

Kai (22:55.126)
I think my point is, is that you don't have to be an expert to be able to forward predict sometimes things in the market. And so this is something that you just need to do your homework.

James (22:58.318)
Yeah.

James (23:03.534)
You just need to do your homework. You just need to do your homework. Listen to the earnings call, read the Morningstar report, just do your homework. And that's what we're doing. We're trying to synthesize our homework into a shorter, more accessible format so that anyone can get information that's literally beating Rosenblatt.

Kai (23:20.406)
Absolutely. And fact check, fact check why you're doing your homework as well. Fact check us, fact check who you're listening to, fact check the material you're reading. One of the things I love about or have enjoyed about stocks or financial analysis is the numbers speak for themselves unless somebody's lying. And when you're looking at how the CEO or the CFOs of these companies present their numbers, watch, I...

James (23:36.814)
Yeah. Yeah, true.

Kai (23:47.222)
watch what they say, watch the language that they use, because the numbers should be able to speak for themselves. I think ServiceNow's numbers are speaking and will continue to speak for themselves. Their CEO, for example, one of the things I like about ServiceNow is their CVO worked for a company SAP prior to being hired in 2019. He took his company from a market share, I think of like 30, 40 billion to $160 billion.

James (23:59.598)
Yeah.

Kai (24:16.694)
But what that company did, it was a Germany based company.

James (24:17.934)
You're saying ServiceNow is at $160 billion. Are you saying SAP ServiceNow is at $160 billion? SAP, OK.

Kai (24:21.878)
SAP was he took that company from a, yeah, he took the company from a $40 billion market share to 160 billion. But what that company specialized in prior to him being in 2019, he was hired was supply chain management, human capital management, customer relations, business intelligence, analytics, and cloud servicing. That skillset transfers. I can't think of a better person to manage, uh, see the S as a CEO service now. And, um,

James (24:54.83)
Yeah. What's funny is apparently he's taken the market cap of service now very well, actually, I don't know when he joined. You don't have to tell me when he joined service now, but okay. Yeah. It sounds like he's pretty much done the same change in the market cap of service now as he did in, in SAP. But yes, but shifting to the broader market wrapping up service now and shifting to the broader market.

Kai (25:01.718)
2019, 2019.

James (25:13.934)
It looks like, so this is one of the rare instances where we're actually recording while the market is open. And I wanted to just point out a couple of things. So the first thing I wanted to point out is that the VIX has a pretty epic move up today. So we've, it looks like in the VIX we had at the peak a 25% move up. Now we're up 21% in the VIX. So I'm showing the one-day chart, which is epic. But once again, if you scroll out to like a six, well, I thought this was going to look better, but okay. So one, okay. I thought maybe I was a little confused on my chart. I thought this would look better when I scrolled out, but it actually still looks pretty bad. It looks like a pretty big spike in volatility. Um, yeah. So one year we're not quite to like the one-year highs, but this is a pretty big spike. And I think we're spiking today on a few things. Definitely the, the 10 years spiked up really high this week. That's definitely an issue, but also there's this continuing talk of the strike from Iran. We recorded a week ago and they were saying that Iran's gonna strike in the next two days and now they're saying the exact same thing, Iran's gonna strike in the next two days. So I'm showing the ten-year here. What do you think is contributing to this huge volatility? Tenure's at 4.544 right now. Do you think that's what's going, is it Iran? Is it the tenure? Is it JP Morgan's bad earnings guidance this morning? What do you think is hitting the market here today and causing this? This is the biggest spike in volatility we've seen in some time. What are your thoughts, Kai?

Kai (26:41.238)
I've predicted to you for a while and you could testify to this that I said, have said, this is sort of like gravity, James, we cannot be at 80% NASDAQ, 80% at the end of the year, that what goes up must come back, come down. And so I said, we're going back to the.

James (26:58.926)
I don't think we went, oh, you mean 80% from the bottoms of 2023 maybe, but we're not up 80% in the NASDAQ, I don't know, this year.

Kai (27:05.846)
The first quarter growth for the stock market, NASDAQ, S&P, Dow, we were at all-time highs. I mean, to continue that sort of momentum for the rest of the year. And my point was, is that some healthy selling, some healthy pullback, some trading sideways to allow some of those moving averages to catch up. I think that those are, that's healthy. I have one concern. Whenever you see the volume of selling,

James (27:12.686)
Yeah, that's true.

Kai (27:33.942)
beating the volume of buying. That's a concern to me. I've predicted that we're trading, we're going to trade sideways and the story is going to be told that through earnings. I mean, this is the super, it's like a, we get four super bowls of the year with earnings court, you know, so this is a big month. Banks started off on Friday. My particular prediction is that the earnings of, for example, let's just use ServiceNow as an example, are going to be in line or better than expected for a company like ServiceNow. And so I do think ServiceNow is going to be around 10 EPS for the year. And so how that affects the overall market, I don't want to make a prediction for. But I think that I can't envision a scenario in which some of these AI companies that you have on your website, which you should check out our website.

James (28:06.062)
Yeah.

James (28:10.862)
Yeah.

James (28:15.982)
Yeah.

James (28:26.446)
Investing in tell.ai, yeah.

Kai (28:28.438)
Yeah, you should check it out. I can't imagine a scenario in which they don't post earnings that are at least in line or better than expected. Currently, because of the state that we're in.

James (28:37.326)
But yeah, so.

The big story over the last month or two was the broadening in the market. So CNBC, all the analysts were just welcoming that money was moving out of Tesla, out of Apple, out of even Nvidia and moving into more cyclical things like utilities, banks. Well, JP Morgan just reported poorly today. They reported okay, but they guided poorly today. So I think we're going to go right back to AI stock. I think we're going to go right back to the Magnificent Six. We're going to go right back to FANG. They're gonna have great earnings and people are gonna pile right back into them and move out of some of these more sketchy things. Energy should stay okay because of all this global insecurity but some of these other things that we've rotated into over the past month or two I think money might come out of them especially small caps and move right back into the mega uber caps like Nvidia that's that's kind of my prediction here.

Kai (29:32.822)
Well, explain to the listener especially why. So increasing treasury yields, why when interest rates are higher and the outlook that the banks may not cut interest rates, why is that not good for small cap companies? Explain that.

James (29:48.75)
You know, so the age-old wisdom, and I want to say one thing about this, but the age-old wisdom is that when interest rates are higher, it's more expensive for small companies to borrow and they need to borrow to grow their business. So they might even not borrow if interest rates are higher. But one thing I wanted to mention about interest rates being higher and one reason why it may need to come down, I heard a new theory twice this past week.

I heard two different analysts saying that maybe the federal reserve rate being higher is keeping inflation higher. In other words, interest rates being higher might actually be keeping interest rates, sorry, interest rates being higher might actually be keeping inflation higher. And the reason for that is that it's more expensive to buy a home, which means rental prices are going up. So there's more demand for rentals since people can't buy.

This is a new theory to me. It's pretty fascinating that maybe we're actually keeping, obviously there's the car insurance. Car insurance is keeping inflation higher too, but the big thing is housing. Housing is a reason that inflation is proving to be sticky here and maybe interest rates being higher is actually the reason. So.

Kai (30:56.246)
Well, one of the things you can use, I mean, and we didn't, it's hard to, I can't claim to be a macro economic expert, but we can use our own intuition. We can use the things that we see around us. I mean, we can see that the McDonald's cheeseburger is twice as much as it was, or is more, it feels like twice as much as it was three, four years ago. And so we can see some of these things. One of the things about banks is they're forward. So.

Banks will make more money on higher interest rates, but do you know what? But for example, people aren't going to take out as many mortgages when the interest rates are seven and a half percent. People aren't going to take out small business loans when the interest rates are as high as they are. And so when the interest rates are higher, these smaller companies that are interest rate dependent struggle. And so.

James (31:45.486)
Yeah, from that same vantage point, they're also saying that because new buyers of homes are paying a higher interest rate, if they're going to have renters, they have to pass that on in the form of higher rents. So there are two reasons why interest rates being higher is actually feeding back into inflation. This is like a new theory. I don't think the Federal Reserve is taking stuff like this into consideration, but they have to be taking the price level into consideration.

Unfortunately...

Kai (32:13.974)
Have we created, this is just sort of interesting, type of thought. What you're saying there makes me wonder because are we creating this sort of perfect storm of events in regards to some of these companies can still post really good earnings growth because they can outsource their age, eventually outsource their eight outsource their HR departments, outsource their security, cybersecurity customer service that basically pay less for employment by paying for software companies or AI services. And then they'll still continue to post really good revenue because they are making more money by using, I mean, let's use McDonald's as a particular example.

James (32:48.078)
Yes.

Kai (32:59.094)
Eventually with software, potentially artificial intelligence service, will there ever be a line in Starbucks anymore? Or for example, not a line, but will there ever be an employee behind the counter at not Starbucks, but McDonald's anymore? Or can that be completely replaced by AI eventually in the future?

James (33:18.83)
So it depends on how much a business needs to move atoms in the real world. So when you talk about McDonald's and Starbucks, they would need significant advances in robotics to be able to deliver their food to people, cook, deliver the food, clean, things like that. But there are other companies, like for example, Meta, that just don't move that many atoms in the real world. So Meta actually already has eliminated enormous amounts of employees because of advances in AI. So companies that are more on the software computer,

Kai (33:39.318)
But, but -

James (33:48.784)
type of side of doing everything can eliminate employees. Yes.

Kai (33:50.102)
Okay, but let's, for McDonald's, can you outsource your HR department to ServiceNow? Could your customer, when somebody has to pick up the phone at McDonald's, at least to answer the phone calls so you don't have to pay for them anymore. And then the question is, is the people across the desk or the counter or on the phone with you when you drive up to the car line and you call, can that be completely replaced? And so all you're left with is essentially the cooks or somebody to hand the food.

James (33:55.726)
Yeah, you can. You can.

James (34:16.238)
Shout out to Sound Hound.

Kai (34:20.79)
And so that's what I'm talking about in the beginning of this, when I said unlimited potential in regards to a company like ServiceNow. And then the question becomes,

James (34:20.91)
Yeah.

James (34:27.534)
Yeah, and shout out to SoundHound now trading at a record low or a recent local bottom of $4.

Kai (34:33.078)
Well, and what I'm getting at is how do you, from an economic perspective, how do you predict the overall results that that's going to have on the market? And I think there's, I don't know the answer to that question and I maybe need to do some research on that.

James (34:48.238)
Well, Cathy Wood has her version of the answer. And by the way, Cathy Wood this past week disclosed that she's buying DXYZ, which is another big story. So Cathy Wood says OpenAI, the maker of ChatTPT, is a fundamental hold for the future. So obviously OpenAI is a private company and you have to be an accredited investor to own it. Now, by the way, her ARK Venture Fund apparently is open to investors who can invest at least $500. So I just found out there's this Titan app where you can get access to private credit and things like that. I'm going to look more into it, but I wanted to mention DXYZ because this was one of the biggest stories of the past week.

And also one of the biggest bad investments that I've ever made in my life. So I think I'm down. Yeah. I think I'm down 60%. Um, but I want to make sure before we, before we get your take on this, I want to make sure everyone knows what we're talking about here. So DXYZ is a, an ETF essentially that bought a bunch of privately held shares of companies. So SpaceX is their biggest holding, but they also have open AI. They have Stripe, which is one of the big private payers, payment companies, it competes with Shopify and it jumped to a huge price from it. I think it started around four and it jumped to like a hundred dollars, but NAV is important. So NAV is an important concept when we look at something like this. So what is the actual value of the holdings within this ETF? Well, the actual value puts ETF at a value of about $4, but it jumped to a value of a hundred dollars. So what we have here is, investors who are extremely excited to get access liquid access to private markets I think I bought I did my initial buy around $100 and now I believe is trading around 30 or $40 so I've lost like 60 % on this What are your thoughts on this? Yeah, but no that's 100 %

Kai (36:43.158)
You just bought at the wrong time. Well, initially in that, I mean, you're making a really good point that I was trying to verbalize earlier is that, we're, James, when you're buying these companies and one of your arguments is, is that, well, I'm just going to go by the facts. I'm just going to go by the purchase and, or the EPS. And that's what's going to drive what the stock is trading at Kai. That's just what's good. And I'm, my point is, is that that's not all of it. It's a market, right? It's a market. And so.

James (37:10.638)
But that's not what we're talking about here. Destiny is a meme stock. It is a meme. It's not even a stock. It's an ETF. And it went from... So people shot it up. I'm looking at the chart now from pretty much...

Kai (37:19.67)
Well, my point is this people can shoot a stock up. That's my only point. That's my only point is buyers can come in and drive the price of a stock up. Whether the stock is actually valued at that, should be valued at that or not. And so you have to be, you have to be both careful and mindful that we, it is, this is a market. This is a market.

James (37:23.534)
Yeah.

Yeah.

James (37:31.79)
Yeah.

James (37:37.646)
But there's a big difference between something like Nvidia, which is leading the market or Microsoft and Clorox, which is a meme stock or AMC, which is a meme stock and now Destiny. Tesla is somewhere in between. Tesla, Tesla is somewhere in between being a meme stock and being one of the most important countries and companies in the world. So what I would say is like, this is a very unique situation. This Destiny.

Kai (37:44.886)
Well, did that happen with Tesla? Did that happen with Tesla? Did that happen with Tesla or Dogecoin? You know a lot about crypto. Dogecoin? I don't know if I've said that right.

James (38:03.182)
ETF is something that we need to keep an eye on because it's doing something new. It's giving people access to private markets, giving people access to owning open AI and SpaceX. And they never had that access before. That excitement led to an unreasonable jump in the price and now it's crashing. But I'm looking for a base. Honestly, if this base is around $20, I'm going to, I'm going to admit I've already bought a little bit more since it dropped to like 60 and now it's at 38. So I'm still losing money.

Kai (38:16.374)
Mm -hmm.

Kai (38:23.638)
Yeah.

James (38:30.126)
But I want to find the bottom in this thing. I really want to find the bottom and I want to invest in this. The nav thing is an issue. And a lot of people would tell me, just don't buy it above nav. Like if it's current, if it's market cap is currently above what the true value of the underlying holdings are in the CTF, just don't buy it is what people would say. I don't know if I agree with that. I think having access, there's a premium to just having access to privately held companies. Cause usually you and I, we would need $2 million just, just $2 million just towards that particular.

Kai (38:48.886)
I think that's really good.

James (39:00.11)
asset in order to buy it privately in the private markets. We just don't have that access. So having that access actually comes at a premium.

Kai (39:05.878)
Well...

Well, and there's a, you said it the better. There's a certain amount of fervor that can drive up the price of a stock in regards to the excitement it presents and everything else that's other than fundamentals. And so that is one of the things to watch out for when being a trader is geopolitical things that may have nothing to do in regards to the fundamental analysis of the stock, but that can cause the stock to drop or rise. And that's one of the reasons why we

James (39:19.79)
Yeah.

Kai (39:37.974)
You watch the news. We, we stay glued to CNBC, MSNBC, those. So it's interesting. Wow. Let's keep an eye on that one. You know, we may have to do a podcast on that, but check out our, check out our previous podcasts in the future. You know, as you drive up to McDonald's, I don't know about you. It's, it's a, it's a odd feeling to me when they say, Oh, order on the app. You know, one of the, have you driven up to a McDonald's or they're like, Hey, did you order on the app or do you.

James (39:44.27)
Yeah.

James (39:48.142)
Yeah, absolutely.

Kai (40:06.55)
Did you use the app to order you order on Chick-fil-a app ever? Everything is software. Every, you have to order on the app. You know, is this going to completely replace, um, ordering in person and then as, as AI gonna eventually companies like service now gonna replace that entirely too. So.

James (40:06.99)
Yeah, Chick-fil-A is worse. Yeah, Chick-fil-A is worse. Yeah. Yeah.

James (40:23.47)
That's why you have to have exposure to these companies. But yeah, so wrapping up, anything else you want to add, Kai, before we wrap up? I mean, really good episode. Anything else you want to add on any of these topics?

Kai (40:35.03)
No, I mean, like I said, I'm looking forward to some volatility in April, especially if you like trading and trading options.

James (40:38.766)
Yeah. TSM earnings. So ASML, I personally don't own ASML. It's not available in Robinhood, but I think you might've had some exposure to ASML. I do own ASML through some ETFs, but next week is ASML and TSM earnings. So it'll be fun to watch that. Yeah. So thanks for listening to our show. Please give us a rating or review or on YouTube, a like or comment, and we'll be back in the next episode to cover Microsoft. You can find all our holdings and trades at investingintel.ai. Thanks so much, Kai.

Kai (40:56.15)
Correct.

Kai (41:08.822)
Thanks James, have a good one.