THE AI TRADE 📈
THE NUMBER
87%
This Is How Much The Philadelphia Stock Exchange Semiconductor Sector Index Has Gained In 2026 (As Of Oct. 6).
Comparatively, a capitalization-weighted portfolio of the five big hyperscalers (Alphabet, Microsoft, Amazon, Meta Platforms, and Oracle) returned just 9% during the same period. The 78% performance gap is notable. It’s a clear signal that the market has become more bullish on the AI chip supply chain than the chip buyers building data centers to power their cloud platforms.
THE VISUAL
Note: Consensus EPS estimates start from each company’s most recent fiscal year-end
Source: The Blind Spot / Data: Yahoo Finance, Fiscal.AI
Nvidia’s forward P/E ratio represents a 38% discount to Costco’s. But the AI chip maker’s EPS is projected to rise at more than six times the yearly rate of the warehouse retailer. The market is placing a premium on Costco’s durability, while it questions how sustainable Nvidia’s meteoric rise is.
THE QUOTE
“This explains, by the way, why we don't own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.”
Having limited exposure to the tech sector in previous decades, the legendary capital allocator said in July that he initiated the conglomerate’s stake in Alphabet in Q3 2025. The internet giant is currently Berkshire’s third largest holding (between Class A and Class C shares). Buffett’s move underscores his conviction in Alphabet being a long-term AI winner and earning adequate returns that justify its capital expenditure supercycle.
THE MENTAL MODEL
Inversion
Applied To The AI Trade
Instead of asking what catalysts will propel the top hyperscaler stocks in the next five years, consider what key risk raises the probability that they put up disappointing returns. If these companies start to report decelerating growth in cloud platform revenues and backlogs, market sentiment could turn negative. This headwind can shift up the AI supply chain.
THE QUESTION
What part of the AI supply chain will ultimately capture the most economic value?
(My take italicized in bold)
Energy providers
Chip makers
Cloud platforms
AI model developers
End-customer products and services: History says that when major technological shifts come along, the infrastructure layer eventually commoditizes. Pricing power, supported by their ability to differentiate, goes to the companies that leverage these new capabilities to create innovative products and services. This allows them to obtain the bulk of the economic surplus.
Reply with your answer
Until next week,
Neil Patel
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