Investment Review №346. Riding the Green Wave

For nearly two decades, hardware has been out of favor. Much of U.S. IT infrastructure was built during the dot-com era; afterward, capital rotated into software, hardware vendors traded at low multiples, and semiconductors were treated as a cyclical, commodity-like sector. Dell (DELL) is a good example: from fiscal 2019 to fiscal 2025, revenue stayed within an $88–102bn range, including a 14% decline in fiscal 2024.  
Last week, Dell—despite not manufacturing chips—raised its fiscal 2027 revenue outlook to $167bn from the prior $140bn, with AI servers alone expected to contribute about $60 bn on a $51bn backlog. Quarterly AI server revenue rose 757% YoY to $16bn. The bottleneck now is supply, not demand: DRAM, NAND, and processors are in short supply, and delivery lead times extend to as long as a year.

A similar story is Intel (INTC): year to date the stock is up more than 220% (from $36.90 to ~$119), one of the biggest reversals among mega caps after widespread skepticism a year ago. Last year, I wrote about mismanagement and production delays, using Intel as a case study. The inflection reflects a structural shift: by H2 2025, inference workloads had outpaced training, and inference is far less GPU-intensive. As a result, the CPU-to-GPU ratio moves from 1:8 in training toward 1:1, and to 4:1 in agentic scenarios, reviving demand for CPUs that were recently considered disadvantaged.  

It’s not just CPUs and GPUs; memory will remain in limited supply at least through 2027. SanDisk (SNDK) and Micron (MU) are shifting to multi‑year, fixed‑price contracts, with SanDisk’s first three deals alone representing $42bn of contracted revenue. Demand visibility out to 2027 is the clearest in a decade—even to non-specialists. Investor positioning also confirms the general trend: the semiconductor share of long hedge fund portfolios is at a record high, while software’s share is at its lowest since 2019. 

One of the most dynamic semiconductor niches is photonics and optics. Copper interconnects can handle high speeds only over short distances; once GPU clusters extend beyond a single rack, data must be transmitted by fiber, making optics the new bottleneck. Year to date, Lumentum (LITE) is up about 180%, Coherent (COHR) has gained more than 110%, and Applied Optoelectronics (AAOI) has advanced nearly 490%, with demand for Lumentum products exceeding supply by about 30%. NVIDIA (NVDA) has pre-reserved optical capacity through agreements with Coherent, Lumentum, and Corning.

As usual, valuation is the key risk: the SOXX index is trading around 27x annual earnings, versus an all-time peak of 29x. The case rests on continued growth in hyperscaler CapEx, with NVIDIA’s plans pointing to more than $1tn in 2027, and on AI monetization keeping pace. Any pause in CapEx, improvement in model efficiency that reduces semiconductor demand, or buildup of overcapacity would quickly remind investors that semiconductors remain deeply cyclical. For now, the balance still tilts to the upside, likely through 2027 and potentially into 2030, but investors should closely track CapEx updates and AI model-efficiency trends when managing long-duration positions.