VIDEO: Apple and Palantir on Deck

In Monday’s video, Chris discusses Marvell’s (MRVL) announced deal for Lumentum, and why the hyperscalers shoring up their balance sheets could put fundamentals and the portfolio’s chip names back in focus. He also explains why October’s ISM manufacturing data says inflation isn’t done yet, previews what matters most in Monday night’s Apple (AAPL) and Palantir (PLTR) reports, and tackles Office Hours questions on gold, cybersecurity, uranium and Applied Materials (AMAT).

Transcript

Hey everybody, Chris Versace here. It’s Monday, November 2nd, the first trading day of November. It also happens to be the Day of the Dead, and I know some eagle-eyed folks out there, Beach Bum included, have taken note of some of my past backdrops. I hope you all had a fun Halloween, with plenty of candy, tricks, treats and all that good stuff.

Before we get rolling, a quick reminder that our October Monthly Roundup will be out later today. There’s quite a bit tucked inside that rather large alert, so please take your time and give it a thorough read. I think you’ll find a lot of helpful data points and insight into how we’re thinking about the portfolio and its positions.

With the Marvell-Lumentum deal announced this morning, a little earlier than the midweek timing many expected, we’ll look to have updated pickup points out either late today or, if not, by tomorrow morning. I know a lot of folks are looking forward to those.

Also remember that tomorrow brings the midterm elections, so be sure to get out and vote. Prediction sites are calling for a blue wave. We’ll see what happens, but if it is a blue wave, the outcome may not be much of a shock to the system. As you know, we tend to put politics to the side at the portfolio. We’re more policy-focused: we want to assess which policies matter most and what impact they have on industries and the market.

Marvell and Lumentum

With that, let’s get to Marvell and Lumentum. Hopefully by now you’ve seen our alert on the deal, which follows up on our initial thoughts from last week. In those initial thoughts, we explained why combining the two companies would make good strategic sense. Our open questions were what the structure would be and how much Marvell would be paying. Today we got some of those answers.

When you read today’s alert, you’ll see that we’re still in favor of the combination for several reasons, especially since it looks to be accretive to Marvell’s bottom line. That was one of the questions we were struggling with until we knew the terms. Based on the analysis in the alert, the deal looks accretive even before factoring in the $1 billion in potential synergies that Marvell and Lumentum referenced on this morning’s conference call discussing the transaction.

Our take is that because this is a fixed exchange ratio, roughly 4.5 Marvell shares for every Lumentum share, the deal is in the hands of the arbs for now. As we explained in the alert, that likely means Marvell will need to deliver upside when it reports its December-quarter results. Remember, at its investor meeting in early October, the company already raised its multi-year expectations for both overall revenue and its closely tracked custom silicon business. I wouldn’t be surprised if, as management thinks more about pooling Marvell and Lumentum together, it revisits those multi-year targets to factor Lumentum in. We’ll have to see what they have to say.

Hyperscaler Funding and the Return of Fundamentals

Last week, we talked about how the market wanted to get its arms around how the hyperscalers would fund another step-up in AI capital spending. Then what did we see? First SpaceX, then Meta, then Microsoft and, more recently, Amazon and Google moved to shore up their balance sheets. That should address, or at least tamp down, some of the funding concerns around their 2027 capex plans, which again should step up year over year.

As the market wraps its head around this, I think the focus will shift back to backlog levels and to what we’ve seen from the hyperscalers so far this earnings season: accelerating cloud businesses, expanding margins and climbing incremental profits. I think fundamentals are going to come back into vogue for these names.

That should be a fundamental positive for the portfolio’s chip positions, including a combined Marvell and Lumentum. On the chip side, remember Marvell’s ramping custom silicon business, not only with Amazon but with Google, as well as the revenue targets put forth in connection with Google’s custom silicon-related investment in Marvell. There’s also the networking side, driven by the continued explosion in data consumption and creation as AI adoption and usage ramp, along with other longer-term drivers. Especially with Nvidia’s capacity being tight, I think that as investors refocus on the hyperscalers, their big backlogs, the conversion of those backlogs into revenue and the resulting need for additional capacity, they’ll revisit these shares in a favorable light.

October ISM Manufacturing: Read the Prices Number Carefully

That said, we have the midterm elections to get through tomorrow, and on Wednesday we’ll get the ISM Services PMI for October. We’ll want to see what it says about inflation, because today we received ISM’s October Manufacturing PMI. By and large, the numbers were pretty good across the board. The headline figure came in at 55.5, up sequentially from September. New orders showed little change but remain nicely in expansion territory, which helps set us up for November. Employment dipped modestly to 52.4 from 52.7 in September but is still in expansion territory.

The number I want to spend a little time on is prices, which came in at 75.2, down from 77.9 in September. Let’s be careful with this one. Some people will say it’s down month over month, and that’s good. It is but remember that any ISM reading above 50 signals expansion. The right way to interpret this is that prices are still rising, just not as fast as they were in September. In other words, inflation pressures are still blowing.

On that front, recall what more and more companies have been saying as the September-quarter earnings season goes on: rising input prices, and rising output prices to help preserve margins. As we touched on in this morning’s alert, there are other drivers of inflation to consider as well, including healthcare. We’ll want to get through Wednesday’s ISM Services PMI and what it says on prices, and then we’ll start to recalibrate expectations for October CPI, PPI and other inflation data.

Apple and Palantir Report After the Close

Coming up after today’s close, we have two portfolio companies reporting. The first is Apple. Let’s just say expectations have probably been building ahead of the report, at least judging by the move in the stock, which has Apple back as the largest holding in the S&P 500 and the Nasdaq Composite. That tells us the results and guidance will carry weight not just for Apple shares, but for the broader market tomorrow.

First, iPhone. We’ll only see a few weeks of the ramp for the newest models. Remember, the iPhone 18 Pro and iPhone 18 Pro Max came out in mid-September. The Duo, although announced around the same time, only began shipping a few weeks ago, which firmly plants its impact in the current quarter. We know shipment times for the Duo have extended into January and, in some cases, February. That tells us Apple is ramping production to meet demand, which will ripple through its supply chain. That’s a positive, but it will show up more in the guidance.

Besides iPhone, the other key business is Services. That’s Apple’s sticky, higher-margin business, and it offers a stable base that can lessen the impact of iPhone seasonality. Right now, we’re in a seasonally strong period for iPhone demand, with new models and the ramp into the holiday shopping season. Beyond the holidays is when we’ll really see that stabilizing effect from Services. In the current quarter, I think Apple should continue to benefit from the further expansion of its ecosystem and the number of people using it, as well as price increases put in place earlier this year.

Margin guidance for the current quarter, and potentially subsequent ones, will be key, and what new CEO John Ternus has to say about it will be closely tracked. Memory prices have gone through the roof, so to speak, and that’s impacting certain end markets, certainly smartphones and PCs. That’s what Intel told us last week. We’ve been expecting this for some time given the capacity constraints in the chip market and ramping capex, which bodes well for Applied Materials, but more on that later. With iPhone and Services combined driving about 80% of Apple’s revenue, we’ll keep that mix in mind when the company gives margin guidance. We’ll also be listening for comments on the dividend and buybacks, and for how Ternus puts his thumbprint on the call. This is his first earnings call as Apple’s CEO.

We also have Palantir reporting after the close. Consensus calls for EPS of $0.41 on $2.18 billion in revenue for the September quarter, and guidance of $0.46 per share on $2.46 billion in revenue for the current quarter. We’ll size those figures up against what Palantir reports, but alongside them, we’ll be very interested in the quarter-over-quarter change in the company’s remaining deal value. Palantir tends to give us two figures: U.S. commercial RDV, which stood at $6.24 billion exiting the June quarter, and total RDV, which was $13.1 billion. To the extent those figures step up, it tells us AI usage and adoption continue to grow. To help triangulate, we’ll also pay attention to what Palantir says about the number and size of the deals it’s winning compared to recent quarters. We’ll most likely have comments on both reports for you early tomorrow morning.

Office Hours: Your Questions

17942 asks: Chris, what are your thoughts on the SPDR Gold Shares ETF? At the time of writing, it’s at $356. Do you think it’s going lower, or is this a buying opportunity?

I know some people argue gold should be part of every portfolio. When we’ve owned it in the past, it’s served either as an inflation hedge, which could make some sense now, or as a way to tamp down market volatility, since it’s a hard asset. Right now, the question is whether the reported peace talks between the U.S. and Iran bear fruit. That’s hard to say. I think we’ll need to get through the midterms and see what the rhetoric looks like afterward, and I wouldn’t be surprised if the outcome dictates some of the next steps on that front. So, I’d say intrigued, but staying on the sidelines for now.

Tonelys asks: Chris, I’m still in Neostellar. Is it over? I got in at $10.36. Should I be patient? Thank you.

Good question. I think Neostellar’s portfolio holds some really well-positioned assets, and it will take time for that to play out. As we discussed in this morning’s opening comments, it appears OpenAI’s next fundraising round will target only $20 billion, down from $30 billion, and the post-money valuation looks set to step down as well. Even so, I still think the flow-through should allow Neostellar to step up its net asset value later this year. When it reports, with the OpenAI deal and potentially other deals in the hopper for its portfolio companies unfolding, I’d take a hard look at the year-end net asset value. I suspect it will be higher than it was at midyear. If that’s the case, the discount has probably widened, which likely warrants hanging on to the shares. For those looking to dip into small- and mid-cap names, it may be an opportunity as well.

Sean Liang asks: Hi Chris, is the cybersecurity ETF still a good buy 5% from all-time highs?

Over the last couple of days, cybersecurity stocks pulled back. Last I saw today, the First Trust NASDAQ Cybersecurity ETF was trading around $99, with upside to $115. That’s pretty good for an ETF, especially given the seemingly increasing number of headlines about cyberattacks and AI-enhanced cyberattacks. So yes, I still think it’s a good buy, and it is a One-rated position. When our Signals alert comes out on Saturday, I’m pretty sure we’ll have several supportive signals and data points for the portfolio’s position.

Stock Stacker asks: Hi Chris, with our significant exposure to tech and AI-related stocks and the uncertainty around AI, would it make sense to explore opportunities in other sectors for better diversification and risk management? Just curious how we can balance long-term growth with a little more caution. Would love your thoughts.

Here you go, Stock Stacker. Earlier in this video, and in more detail in the October Monthly Roundup out later today, I spelled out what I think is happening on the AI data center front. Now that all the hyperscalers have moved to shore up their balance sheets, addressing cash flow concerns and the funding of capex, I think investors will take a more sober look at the sell-off in some of those names and recognize it may be overdone.

That said, as we spell out in the October Monthly Roundup, it was the portfolio’s non-tech holdings that really outperformed in October. Somewhat surprisingly, I believe Waste Management was the portfolio’s best performer, but Welltower, TJX and Costco all did very well too.

As for where we’re headed, we’re looking to maximize the returns of the overall portfolio. We’ll look at areas outside of tech, and maybe one or two inside of it, and we’ll keep turning over stones for companies that are poised to grow earnings faster than the overall market, have attractive entry points and, most importantly, benefit from pronounced multi-year tailwinds. I realize that’s not a lot of particulars, but we tend not to pre-announce moves, holding back until we make them or first introduce them in the Bullpen, so keep an eye there. We also want to be mindful that some of these non-tech areas have had strong runs. As we discussed last week, our position in the Health Care Select Sector SPDR Fund was actually overbought at the end of October. So, we’ll tread carefully, balance all things and proceed prudently.

Vasilios asks: Hi Chris. Firstly, in my opinion, don’t sell any AI-related stocks. I would nibble. Anyway, you have the VanEck Uranium and Nuclear ETF in the Bullpen. Is it time to introduce it to the portfolio? Maybe a gold ETF too, either mining or physical gold. The reason being that data centers need energy, and with the debt situation, money printing will be in play. I also think a copper ETF is a good buy now.

Well, Vasilios, if you read our comments, you’ll see we’re inclined to think like you do on AI. On energy, we continue to see demand, which keeps us bullish on the grid build-out and Eaton shares. I’ll also say we’re taking another hard look at the VanEck Uranium and Nuclear ETF, especially as we’re seeing greater interest, at the margin, in nuclear as a viable solution. I’d like to hear what the public electric utilities have to say on their earnings calls about their plans, as that will help pave the way. But remember, folks, any play on uranium and nuclear energy will be a long, long play, so we’ll want to keep that in mind as we contemplate any move.

T Mac48s asks: Chris, hello. Tech seems to be getting crushed during earnings so far. Do we need to reassess the upside potential of Applied Materials, or are you still confident it will double in price?

I want to touch on two things here. First, will it double? That refers to our price target. This might shock some people, but I’m not one who thinks a price target is etched in stone. I’ve gone back and forth on this with a few of you, most notably a good supporter of the portfolio, Mr. Beach Bum himself. Price targets are lines, but they’re etched more in sand than in concrete, because they can move as new information becomes available and new developments unfold.

What I will say is that, directionally, we still see significant upside for Applied Materials shares. The most recent supporting data point came from Intel last week, when it shared that it, too, sees a sizable step-up in capital spending for 2027. That builds on what we’ve heard from Taiwan Semiconductor, Micron, Samsung, SK Hynix and others. Here, too, as concerns about hyperscaler capex get addressed, I think the flow-through will have people circling back to shares of not only chipmakers and networking companies but semiconductor capital equipment companies as well.

Closing

Those are all the questions I found for today’s edition of Office Hours, and I apologize if I missed any. Please remember, if you want your question flagged for Office Hours, tag it #OfficeHours when you post it in the forum. We’ll be calling for more questions later this week as we look to do this again a week from today.

With that, my friends, we have a busy week ahead. Beyond what I touched on today, other portfolio companies are reporting this week, including Eaton and Axon. Please be sure to check your emails and alerts. If we make any moves with the portfolio, we want you right there with us. Thanks for watching.

At the time of publication, TheStreet Pro was long AAPL, AMAT, MRVL and PLTR.