Why Bank Stocks Love Trump & The Next Big AI IPO

Hello and welcome back to The Deal Room. And as much as this episode is going to be all about AI from CoreWeave, who you might not have heard of but is being lined up as one of the biggest IPOs for 2025— all the big banks, of course, are involved— going to touch on NVIDIA because they're very much linked to that story, and Palantir as well. But of course, we can't go a show here with a conversation with Stephen without mentioning the Trump victory at the US election. And what I've got here is a little bit of the day after the result came out, how different stock equity sectors performed, and just to get Stephen's take on why they did what they did. And so I've got several here and we'll do a quick rapid, um, kind of move through these different sectors, starting off with the banks, because we talk about that on this, particularly on The Deal Room, a lot. About the composition of what drives banks, but there were some big moves, uh, yesterday. Just to give you an idea, I mean, I say yesterday, the time this goes out, this was last week, the day after the election, but GS and MS, Goldman Sachs and Morgan Stanley, were up more than 11%. Uh, JP Morgan, Bank of America, Citigroup were up anywhere between 8 to 12%. So Stephen, what's Why are the banks so happy with Trump coming into the presidency?

Gosh, why are the banks so happy? It's really interesting. Maybe just taking a step back on all things Trump. I think, you know, he won, he won the election based on the economy and, and what's happened across sectors, as we'll discover in the next few minutes, is, uh, stocks have rallied and it's, it's so interesting thinking about the way that individuals vote and what's most important to them. And I'll give you a very, very, uh, recent example. You know, I was speaking to my wife about the election and we were lamenting, you know, uh, the fact that a not particularly savory character is gonna be back in the White House. And then I told her that as a result, we had become quite a lot richer because a lot of, a lot of our investments had gone very, very nicely over the last 24, 48 hours. And suddenly she was like, oh, all right. 'Well, that's not so bad then.' So you have this kind of macro, kind of ick when it comes to someone like Trump, and then you're like, 'Well, you know, if he's going to make me a little bit better off, then, you know, I'm going to hold my nose and crack on.' And this is, you know, so bank stocks, as you said, JPMorgan, Morgan Stanley, Goldman Sachs, double-digit increases. What are they betting on? They're betting on lighter regulation. You know, we spoke about this a few weeks ago with Jamie Dimon just saying, look, you know, maybe regulation's gone a bit too far. And they're also betting on the fact that interest rates might not go down as quickly due to the potentially inflationary pressure of tariffs and trade wars. And you know what Trump's like. So big, big boost for the banks because of interest rates and regulation.

And then does this have also a knock-on impact for dealmaking? So when we're trying to think about now, what does that look like as we go into next year? Because I did see the likes of private equity space, Apollo, KKR, they were also up more than 10%.

Yeah, this is crazy. I think the dealmaking environment is probably going to improve both from a normal M&A perspective, I think that there'll be, I think that Lina Khan and the FDA will probably be slightly hamstrung by a new Trump premiership. So there might be more deals that maybe wouldn't have passed the antitrust test that might get through in this new environment. And obviously, private equity firms, what do they want? They want a very fertile deal-making environment with valuations that are going up and up and up. You know, what we've spoken about previously on the podcast is that there's this massive backlog of companies that were bought during the quote-unquote good times of 2020 and 2021 when valuations were high, and then valuations had come off a cliff in part due to interest rates. So now maybe the animal spirits are back, valuations are starting, you know, S&P's hitting new highs every day, right? So this now becomes a pretty fertile space to do deals. And it's not as if Donald Trump's going to do anything punitive with regards to private equity compensation and tax regulation around private equity capital gains and things like that, because quite a lot of his mates at Mar-a-Lago are probably benefiting quite a lot from the PE boom. So, uh, yeah, definitely good reasons why the likes of KKR and Apollo have really smashed it over the last 24 hours.

Okay, and then a look at the energy sector, and there's two parts of this. There's the kind of oil majors, Exxon and Chevron. They were actually up nearly 3% despite the kind of surging dollar on, as you mentioned, the potential inflationary pressures and the shift in rate expectations on tariffs and so on. So oil was down, but the oil majors were up. And then you also had renewable energy companies in Europe, obviously getting slammed.

Yeah. I mean, so Trump is obviously a populist and, and he is appealing to some of the most important sentiments in the country, not only the oil and gas industry, which is a massive employer, but also elections in the US can turn on the price at the pump, right? And if you turn on, you know, if you turn on the taps from a production perspective in the US and you're getting cheaper gas prices at the pumps, then you're going to be a lot more popular as a president. And it's probably fair to say that, you know, the election was lost because of inflation. And it might well be, you know, Trump might well be very successful because he's inheriting a bit of a Goldilocks economy, right? It's not too hot, it's not too cold, and we can put downward pressure on prices at the pump and the oil majors. Yeah, definitely recovered from that dip at the beginning of the session.

So some of those double-digit gains for the bank stocks might have sounded quite tasty. I'll just briefly mention Tesla, which also went gangbusters yesterday because obviously Elon is positioned himself very nicely. But I was going to say, what is the best performing couple of stocks and what do they represent? It's going to ask you a question. So one was the, the government-backed housing agencies, Fannie Mae and Freddie Mac. Now they were up about 35 to 37%. Talk about Trump could push for a full privatisation. So they were up nearly 40%, but there were some companies that went up more than that. And I'll give you a clue. Their names were Geo Group and CoreCivic. So what do you reckon that those companies might do? Geo Group and CoreCivic.

Well, can we, can we just see how much Truth Social's gone up overnight? I don't, I don't, I'm not even sure if they're, you know, if, I mean, it was a bit of a basket case of company that might have had a bit of a bump. So what, what do you say? Geo Search and Core something or other.

Geo Group, CoreCivic.

Oh gosh, I don't know. Um, some mining companies, uh, exploration companies. What, what are we talking here?

Private prisons. So private prison stocks hit a multi-year high, basically. So the idea that the government outsourcing incarcerations, lifting, lifting those stocks.

It's remarkable. The, the, the prison industrial complex in, in the US is quite remarkable. It, you know, again, it is a singular country, and this is why we talk about it so much, because it's such a remarkable— it's such a remarkable hodgepodge of different capitalist sentiments swirling around this absolutely ginormous resource-rich, uh, resource-rich country. So That's why we get interested in it.

Okay, well, look, let's move on to the bulk of the show, which is a focus on AI. And I was reading a report on the FT yesterday and it was talking about this, this, you know, I love to kind of go into jargon words and try and write LinkedIn posts kind of just explaining what these things are. And it was something called Neo Clouds. So that's what first caught my attention. I was like, what on earth is a Neo Cloud? Because I hadn't heard of that. And as I started to read this, I thought, rather than me write this, I think this deserves a little bit more of an investigation and an unpacking from yourself. So where do you want to start with this CoreWeave IPO story?

Yeah, it's such an interesting story and I think we're not going to do it justice because our level of technical proficiency is just not there, but we're going to do our best. And I thought we should start with the CoreWeave IPO because CoreWeave is one of the hottest AI neo-cloud, and we'll discuss what that means, neo-cloud companies that is, that is hitting the market at the moment. And it is quite a remarkable story. So CoreWeave, they call themselves the AI hyperscaler, which is what it says on their website. So it's a private company that was started in 2017. So not an age ago. And it started out, and this is so interesting, it started out as a crypto mining firm. and actually bought a load of NVIDIA GPUs to do crypto mining. And then in 2019, I had what we call in the startup world a bit of a pivot and realized, not unlike when NVIDIA realized that their gaming GPUs could be, could be used for large language models, they realized that, all right, we've got all of these GPUs, why don't we use it why don't we use those GPUs and rent them out in this AI revolution? So CoreWeaver has found themselves in this really interesting intersection between the hardcore GPUs and the hardcore data centers and those thousands and hundreds of thousands of businesses that want access, almost on-demand access to these GPUs. So they're almost like a broker, almost, you know, and if you go on their website, you can see the price of the different Nvidia GPUs, the price that you have to pay to rent them out. They also have CPUs on there as well, which obviously a lot cheaper on a dollar basis. So they act as this intersection. And what is so remarkable about the company CoreWeave and just looking at some of their numbers, They are slated to IPO during 2025, and they've actually just selected Morgan Stanley, Goldman Sachs, and JP Morgan on the ticket. They're valued at $23 billion. That was their valuation earlier on this year, less than a month ago when Cisco made a significant investment. Now their revenue was $465 million in 2023. That was 50 times higher than their revenue in 2022. And the expectation is that their revenue is going to be well above $2 billion in 2024. That is absolutely ballistic. 2022 to 2023 revenue growth, 1,760%. It kind of blows your mind. And they, you know, one of the best bits of advice that, that you can give from this story is when you're onto a good thing, you go big. So if you just do a search for CoreWeave fundraising, they've raised over $10 billion, but they've raised over $10 billion in about 7 months. They've just kept, they kept going back to the market, tapping up the market, tapping up the market in order to build, basically in order to buy more GPUs build more data centres in order to have a better roster of products and availability for their big clients. And now their big clients are the likes, you know, they're, you know, small and medium-sized data and technology businesses, but they're also the likes of Microsoft that basically can't, can't get the capacity that they need on their Azure cloud platform and need to rent additional capacity, and they need to contract additional capacity from the likes of CoreWeave. And this is a multi-billion dollar deal over the next 5 years. So you've got a company that started in 2017, pivoted in 2019, only made $25 million of revenue in 2022, that's going to IPO for upwards of $23 billion and has signed multi-billion dollar contracts with the likes of Microsoft. It is quite ballistic.

Do we know anything about the actual founders of this firm? I'd love to know, like, who are these, the masterminds behind this? And, you know, can I replicate it and have anything, any lessons learned about who they are?

Yeah, it's a good question. I'm just trying to look in my notes to see if I've got anything interesting about these founders. It's one of those things though. And if you listen to any you know, if you listen to any podcast from sensible people that have taken long-term views on business success and things like that, it is remarkable the role that luck plays, right? This company, remember it started out as a crypto mining company. If AI hadn't come along in the way that it's come along and crypto had gone south in the way that it did post post-2020, 2021, this company would go bust. It's GPUs for crypto mining. Fine. But that would go bust. So, it's like, yes, I'm sure that the CEO has done a good— well, made an inspired move to pivot and then has doubled and tripled and quadrupled down on this business and has received investment from the likes of Nvidia, Jane Street, JPMorgan Asset Management, Fidelity, really, really, I think one of the, yeah, when you know a good thing, you go in and that's obviously what the CEO has done.

So how does this link then to Nvidia? So they've got this stranglehold on the supply. So how do they leverage that to their benefit?

Yeah, it's really interesting. So again, right at the top of their website in bright green, it says, be among the first to deploy NVIDIA HGX B200 and GB200 NVL72. Learn more. So they are, they're basically like the shop front for NVIDIA. And what's so interesting about this, and, and by the way, the, the name NVIDIA is probably mentioned more often than the name CoreWeave on the website. So I'm just looking at their front page at the moment and it says, our infrastructure at a glance. And in the middle it says, over 10 different NVIDIA GPU SKUs. And then below that it says, an NVIDIA elite cloud solutions provider for compute and visualizations. So, so is basically well and truly in bed with Nvidia. And what's so interesting about this is Nvidia has invested in this company, and Nvidia tends to invest in those companies that are reliant upon Nvidia for their business model. So the reason why this is interesting is that CoreWeave is so dependent on the GPUs of Nvidia that if Nvidia hadn't invested CoreWeave and hadn't had a vested interest in making sure that CoreWeave was successful, then Nvidia has all the power and CoreWeave has zero power, right? Nvidia can just say, look, no, we don't like you anymore, we're going to stop supplying you with chips, you know, or we're going to double the price because your business model is so heavily dependent on our business model. But because Nvidia has invested in CoreWeave, they don't have that same incentive to maybe screw them over. So it's this really, really tight, very, very close partnership. And it's, it's what's so fascinating, what, what's so fascinating about Nvidia is it is kind of creating its own industry, right? It's the core company and it's got the core technology, and then it's got all of these satellite companies, these neo-cloud companies that sit around it. And then obviously it's got those massive contracts with the big, with the Magnificent Seven. It's quite a remarkable industry that we're seeing being created almost in real time.

And could we just start to then look at this Neo Cloud companies? I mean, you gave it a nice analogy there of like the satellites. I can visualize them at the centre of the universe at the moment. With these other companies in orbit, but perhaps just a bit more on that side of things.

Yeah. So these Neo Cloud companies, the likes of CoreWeave and Crusoe, which has got a $3 billion valuation, and Lambda Labs, $2.2 billion valuation, these provide, well, they provide cloud computing to tech groups building AI products. It's as simple as that. But, you know, peel one layer down and obviously we are an IBD-focused podcast. And what I found so interesting when digging into this was the bank's relationships and the bank's lending relationships with some of these companies. So when you think about, when you think about lending, you don't really think about startups, right? And you don't really think about high technology, AI venture-backed startups, because the traditional lending model is you need to be profitable. You need to have free cash flow. We need to be quite confident that you are going to pay back, you know, it's cash flow lending. You're going to get pay back what we've lent you. But in this instance, the likes of Blackstone and PIMCO and Carlyle and BlackRock, the big private credit lenders filling the void of the banks that are overregulated to some extent, they are now lending significant amounts of money in the billions and billions of dollars to the likes of CoreWeave, secured or collateralized, secured against the GPUs. So the GPUs are taking, are an asset, a really important asset that CoreWeave owns. And the likes of Blackstone and PIMCO are saying, look, hey, CoreWeave, you know, we will lend to you, but we are going to take security over your GPUs. Furthermore, we are going to take security over the revenue streams that follow from these GPUs. So if you are CoreWeave and you have just signed a multi-billion dollar agreement with Microsoft, you need to— you might have signed that deal without having the GPUs in place, right? But now you've signed that deal, you've got revenue visibility. You can go out to the likes of Blackstone and PIMCO and say, hey, I need to borrow a billion dollars to buy X amount of GPUs to fulfill this contract. Now, Blackstone, PIMCO, BlackRock, they're like, all right, well, this isn't actually a bad deal because if it all goes pop, I get the GPUs. That's my security. A bit like, you know, a bit like if you take security over a house in a mortgage, but also I get the revenue streams from that GPU. So I will get ownership of that Microsoft contract and that actually de-risks the likes of Blackstone, PIMCO, et cetera, really, really significantly. Now, the big question with regards to these neo-cloud companies and their funding model, the big question is to what extent is, well, to what extent are GPUs really good forms of security or collateral? And that's what, and that's what And this is why the whole thing feels not necessarily like a bubble, but there are layers upon layers upon layers of different risk that are building on top of this GPU and AI revolution. Right. So the best form of security is an appreciating asset, right? That's why banks tend to lend relatively high loan-to-value for a house. I might get 80% loan to value for my house because worst, worst, worst, worst, worst case scenario, my house would depreciate by a few percent, but then the banks are still covered. But are GPUs an appreciating asset? Well, no, because A, there's new supply coming online all the time, and actually the price of compute is going down because of this new supply. The likes of AMD are getting quite sophisticated. The big tech companies are starting to build their own, and new technology is coming out every single cycle. So to take security over a piece of technology that is to an extent replicable and to an extent deemed irrelevant with future new technology cycles, that's when the, the kind of the bubble might pop and you can see the ripples of risk spreading out across not only the AI industry, but also the finance industry as well.

I feel, I feel like time is the one thing that binds all of this together. The founders of the company, the business itself, the banks making these loans, and then Trump wanting to get the optics of a significant AI deal. Public early in his presidency, it feels like everyone's incentivized to do this quickly.

Yeah, absolutely. And when everyone's incentivized to do something quickly, like a blockbuster IPO or whatever it might be, and when you see share prices just getting hotter and hotter and hotter, you do start to think, all right, at some point the bull case becomes a bear case. And it, Who knows when it'll be? And it might be when Nvidia reports a weaker set of earnings and that will ripple through or cascade. It might be when the big tech companies announce a slowdown in their CapEx spend. Because remember, probably the most important numbers for the share price of Nvidia and the future share price of a CoreWeave are the infrastructure and CapEx spends of the likes of Meta and Microsoft and Alphabet, which have been going through the roof and through the roof. So, one of these big things will happen that will suddenly start to take a little bit of the wind out of the sails of this whole industry. And I can imagine the likes of Blackstone and Carlyle are very, very well protected. They will be lending at a modest loan-to-value, and because these contracts with the likes of Microsoft are locked in for a few years, they should be pretty secure. This doesn't feel too speculative, but it's worth understanding, as I said, the ripple effects.

Okay then, uh, the next and final topic then, Palantir, because this is a company name that I have heard lots, and to be quite honest, full disclosure, I have no idea about what it is. That they actually do. So I'm looking forward to the education I'm going to receive in the next 5 minutes.

Yeah. So Palantir, what an interesting company. We could probably talk about Palantir for hours, and I know that there are people that know more about this company than I do, but it is quite a remarkable story. So Palantir, it's a company named after a crystal ball in the Lord of the Rings. It's just, you know that nerds rule the world, right? And this is just a very good representation of that. Founded by Peter Thiel, the contrarian neoliberal libertarian West Coast investor, and Alex Karp. Remember that name because we'll get on and talk about Alex Karp in a couple of minutes' time. But Palantir, what is it? It's an AI-driven software company used by the likes of the US government, the Ministry of Defense, the NHS, and now a lot of large corporates. And what they do, in as simplistic terminology as possible, is they help massive organizations manage, analyze, secure, and get a decent return on their data. So any company or organization that's got lots and lots and lots of data, that might be unstructured, might be housed in different areas, might be secured to different extents. That's where Palantir come in and not only secure that data, make sure that it is appropriately gated, but also help analyze and interpret that data using AI and large language models. So the reason why I'm talking about it today is that last week they absolutely crushed it in terms of their earnings. And this is obviously earnings season. We're talking quite a lot about different companies' earnings, but it was a remarkable— it was a remarkable earnings beat. Sent shares up 15%. The share price is up 191% in the last year. It's now a $120 billion market cap company. It's on the S&P 500, and it is the most expensive software stock on the market trading at 100 times future earnings. So this is why it becomes something that we need to know about. Now the revenues in Q3, they're pretty modest, but they're growing at 30% year on year. So revenues of $725 million. Net income rose to a record $144 million. And revenues from commercial businesses as opposed to governments, which is their heartland, increased 54% year on year. These results were so good that Alex Karp, the controversial CEO that I'll talk about in a second, said post-earnings, given how strong our results are, I almost feel like we should just go home, which is absolutely brilliant. It's kind of like the mic drop moment for the CEO. But, and again, before we'll talk a little bit more about Alex Karp, this company has courted controversy ever since it was founded. And this is the kind of the amoral side of some of these companies. So this company interprets, analyzes data for large organizations, and these organizations, it is not, it doesn't take a moral stance on whether you're working for the Ministry of Defense or the, uh, immigration, uh, immigration agency in the US, or maybe even the Israel Defense Force. Right? It, it's a mercenary. It will sell its capabilities to any organization that wants it. And a lot of these organizations are controversial. So the controversy arises where, you know, this was announced last year, Palantir got a major, major contract with the NHS. So you're thinking, all right, with one hand, this company's helping the NHS manage its data, become a more optimised organisation. But then with the other hand, it's helping the Israel Defence Force gain insights into the war in Palestine, right? So, it's a really, really complex company that's trying to do big things. This is not just playing around the edges. This is big military contracts, big NHS contracts, big immigration and Homeland Security contracts. So, it's definitely a company that we should be tracking a little bit more on this podcast.

Just from a management strategy perspective then, someone like Alex Karp, now the company has grown and accelerated as much as it had, does it start to go into that Elon Musk conversation of, is he now the best person to be managing for the next phase of this business?

Yeah, it's really interesting. So Alex Karp is a little bit of a controversial character. He's a very, very strange bloke, and so is Peter Thiel, to be honest. So, he lives alone in a barn in New Hampshire with a retinue of staff, including an on-call ski instructor, which I absolutely love. And he thinks big. He is an absolute bull on the power of American culture, which sometimes slips into xenophobia. But he's saying, look, American— I'm just reading from his letter to shareholders in Q3. American influence in this unique hour comes not just from controlling the supply of AI, but also from the ability to strategically deploy the newest technologies across corporations and institutions. He then goes on to say, however, the shallow consumerism of the current age risks diminishing our ambition as a culture and as a civilization. Probably a pretty big dig at the likes of Meta, that use some of the biggest brains in the US to create something like Instagram, as opposed to what these guys are doing. He continues, we built this company to arm and defend our most significant institutions, not tinker at the margins, creating idle, decadent diversions. So he, you know, this guy is not backwards in coming forwards and he stokes a little bit of controversy. He is definitely At the moment, at the point of this podcast being recorded, he's definitely an asset rather than a liability. And he courts probably a little bit of controversy, but, you know, this company's going gangbusters. So, you know, when your company's doing well, a little bit of controversy is not the worst thing in the world. But yeah, it's definitely, you know, he looks a little bit like a mad scientist. He's got this kind of grey spriggly hair going all over the place. And he, yeah, his views are pretty interesting. Follow him on, uh, if you still use X, definitely give him a follow. He's got some, got some interesting things to say.

Yeah, I was just having a quick look actually. I just asked ChatGPT, do Karp and Musk hang out? It said they participated together in a private US Senate discussion on AI regulation.

There you go. I mean, that doesn't surprise me, right? Cool. Doesn't surprise me.

All right, well, look, thanks so much for that, um, Stephen. As always, a pleasure. And then any questions at all that anyone has over anything discussed, please do just drop us a comment wherever you see the podcast shared. But until next week, take care.

Thank you, Ant.