Tech analyst and AI bull Dan Ives is leaving Wedbush Securities, not to become a full-time fashion designer (unfortunately), but to launch a “modern merchant bank,” combining proprietary research, strategic advisory, capital raising, and investing across technology, energy, and financials.

In last Thursday’s June jobs report, US job growth fell well below analysts’ estimates, but the unemployment rate unexpectedly dipped. Stocks got an initial bump from this print, but a selloff in chip stocks dragged the Nasdaq 100 lower, while the S&P 500 closed flat on Thursday. Both indexes posted weekly gains, while the Russell 2000 logged both a daily and weekly loss. 

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Last week, Bloomberg reported that the social media giant Meta is planning to join its Mag 7 hyperscaler peers and start a cloud business that sells excess AI compute.

Selling compute rather than using it for, say, training models that disappoint, would offer an immediate short-term financial benefit. And the idea that there’s excess compute to begin with implies that maybe Meta’s AI capex bill won’t be so high going forward.

On the other hand, it’s not like the market has been rewarding cloud businesses lately. Hyperscalers recently traded at their lowest forward valuation since the launch of ChatGPT, and at a discount to the S&P 500. Hell, Microsoft just had its worst month since 2000 during the S&P 500’s best quarter since 2020!

The implicit assumption that the market seems to be making here is that admitting you have enough excess compute for a cloud business is the first step toward not spending so damn much on compute. That may be a safe assumption; it may not. Cloud businesses require scale, and moving into the cloud business is a de facto commitment to having excess capacity that you’re able to sell!

And that means it’s not necessarily a clean down-arrow for the forward capex outlook; if anything, it’s a bet on the continuity and breadth of AI downstream demand. So far this year, market participants have routinely preferred to bet on picks-and-shovels or “bottleneck” stocks that benefit from AI capex over any potential ROI from would-be downstream demand.

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