Watching This Rare-Disease Biotech as Hyperscalers Lead Post-Election Market
Voters hit data centers on Tuesday, but the companies that already own the capacity are the winners.
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The sharp overnight reversal gained traction at the open, and breadth is running at a robust 71% positive. For the first time in a long while, there are twice as many new 12-month highs as 12-month lows.
The big hyperscalers, Amazon (AMZN) and Microsoft (MSFT), and the rest of the Magnificent Seven are leading the charge.
Why Data Center Bans Help the Hyperscalers
At first glance, the hyperscalers’ strength looks odd. Voters crushed data centers on Tuesday. Restrictions won most of the 41 local ballot measures, and Texas elected a governor who campaigned on halting new data centers. You would expect the biggest builders to suffer. Instead, the market sees two benefits.
The first is scarcity. Amazon and Microsoft both say demand for cloud computing is running ahead of supply. If new capacity gets harder to build, the data centers that already have power and permits become more valuable, and nobody owns more of them than the hyperscalers. Tighter supply gives them pricing power.
The second is spending discipline. For the past month, investors have graded AI on the cost of growth. Microsoft rallied when it trimmed next year’s capex, and Alphabet (GOOGL) was punished on profitability. Local bans and moratoriums slow construction whether management wants them to or not. The election may force the restraint investors have been asking for, and slower spending means more free cash flow.
The losers are the companies that need new construction to grow, such as the smaller AI cloud providers and power developers that have to build new sites and borrow to do it. Amazon and Microsoft can move projects to friendlier states or overseas and pay for them out of cash flow. It is the same split between cash-funded and debt-funded builders that has been driving the AI trade for weeks.
The risk is that the restrictions spread far enough to cap cloud growth itself. That’s a problem for next year, not this week.
Rates Will Decide the Rotation
There is a lot of choppy action as investors try to sort out the longer-term ramifications of the election. Small-caps have quickly reversed from their highs, and the iShares Russell 2000 ETF (IWM) is starting to close the morning gap. Money is rotating back into AI-related names, and small-caps are lagging.
Interest rates haven’t moved much. The iShares 20+ Year Treasury Bond ETF (TLT) is inching lower after a positive open. Rates will be key to how this rotation develops. Small-caps need lower rates to sustain a move, and if bonds keep slipping, the money will keep hiding in the mega-caps.
Rare-Disease Biotech
I suspect the Democratic victory will put some pressure on rare-disease biotechs with costly drugs. Drug pricing is a favorite Democratic target. Last year’s reconciliation bill widened the exemption that keeps many rare-disease drugs out of Medicare price negotiation, and Democrats would love to reverse it.
Precigen (PGEN) is an example on my screen. The company sells a high-priced gene therapy for recurrent respiratory papillomatosis, a rare disease that causes noncancerous growths in the airway.
The selling is about sentiment more than policy. Democrats can’t pass a drug-pricing bill over a veto, and any change to the rare-disease exemption would take years to reach these companies’ revenue. For a stock like Precigen, sales matter far more than speeches in Washington, and we’ll get the next look when the company reports its third-quarter tonight. If the election overhang pushes good rare-disease names lower, I see an opportunity, not a reason to sell.
Game Plan
I haven’t made any big moves so far Wednesday, but I suspect we’ll have some good entry points in the next few days as the market digests this news and focuses on determining which stocks will be the leaders.
At the time of publication, Rev Shark was long AMZN and PGEN.
