Will the biggest spenders on AI semiconductors continue to allocate capital at this delirious rate?
This is the overwhelming question for investors, and the answer will have a profound impact on global stock and other markets. Fears of a spending slowdown among hyperscalers rocked the tech market in July, as well as the markets in general, and caused many tech-oriented hedge funds to report huge losses.
They include Valiant Capital Partners, whose liquid portfolio dropped 12.83 percent for the month, cutting its gain for the year to 4.11 percent, according to the firm’s monthly client email. Its power SPV lost 17 percent in July, leaving it up 15 percent for the year, an investor says.
The folks at Valiant are not shaken.
“Although volatility came back with a vengeance in July with the drawdown in anything and everything related to ‘AI winners,’ we stayed the course with the majority of our positions,” said Valiant head and Tiger Grandcub Chris Hansen in his second-quarter letter, sent to clients this week. “We have deep conviction in . . . our multiyear theses for the vast majority of positions that were down the most last month.”
He expressed confidence that spending on AI semiconductors and related equipment will not slow down anytime soon. “We think AI capex spending by hyperscalers will prove more durable than the market is forecasting for the next several years,” Hansen said. “Improved functionality (stemming from model improvements and other innovations) continues to drive significant increases in usage, which, in turn, [are] driving significant increases in compute needs — with the increase being driven almost entirely by inference as opposed to model training.”
Hansen noted in the letter that the shortage is evident “in the pricing of new and older-generation AI accelerator compute loads that hyperscalers, neoclouds, and others can charge” customers. As for the hyperscalers, he said, many have multiyear contracts that necessitate growing their compute bases significantly in the coming year to meet customer obligations.
What’s more, despite recent market skepticism of hyperscaler AI spending and its implications for cash flow and shareholder returns, the return on invested capital on such spending is improving. Hansen explains that a two- to three-year lag between initial spending on data centers and seeing revenue makes it difficult for investors to gauge the ROIC, especially given the magnitude of the increase in expenditures and the fact that reported free cash flow is backward-looking.
“The economics they are achieving from investment decisions made in 2024 and 2025, when there were also bouts of skepticism surrounding increased AI capex spending, point to rising margins and returns, not falling returns,” Hansen insists. “Given the recent surge in cloud backlogs coinciding with pricing tailwinds, we expect the current margin trends to continue improving over the next few years. Equally important, these backlogs provide Amazon, Microsoft, and Google with incredible visibility into demand and the confidence to invest in capacity at very attractive expected returns.”
As for big power bets, the hedge fund manager reminds his investors that power-related stocks account for roughly 40 percent of Valiant’s long exposure.
“We continue to believe that the risk-reward and [internal rates of return] of the positions we own are exceptional,” he says, stressing that the acute shortages in power generation and transmission and distribution capacity the U.S. faces will likely take five to ten years to resolve, which Hansen believes will provide strong, durable tailwinds to revenue and earnings growth for many years.
He adds that Valiant’s power-related investments will benefit from backlogs extending into the early 2030s or have already secured long-duration contracted cash flows of ten to 20 years. “This generally limits their P&L sensitivity to the spot-pricing dynamics that have driven stocks in the recent few months and provides us with far greater confidence in the sustainability of earnings and cash flows for the businesses on a relative and absolute basis,” Hansen asserts.
He points out that the demand drivers for the majority of the firm’s power-related names are so broad-based by sector and geography that Valiant thinks the base level of electricity/electron demand will outstrip supply for years even if new AI data center demand deteriorates significantly.
“Accordingly, with the recent technically induced drawdown in AI-related stocks, we believe that the risk-rewards for our power and power-adjacent investments are as favorable and asymmetric as when we built up our exposure in 2024,” Hansen stresses.
He notes that Valiant’s power-related stocks trade at a weighted average 2027 EBITDA multiple of just 13.7 times, despite having cumulative projected EBITDA growth of more than 40 percent, with much of that growth already backlogged or contracted.
“We continue to believe the margin of safety created by contracted economics and low valuations offers an extremely rare opportunity to own high-quality businesses that can grow for many years into the future,” Hansen adds.
As of the end of June, Valiant’s five largest stock holdings accounted for roughly 70 percent of exposure. They are Core Scientific, responsible for more than 21 percent of exposure; Taiwan Semiconductor Manufacturing; Amazon; Eli Lilly; and Siemens Energy.
