Jordan Wong

Alright. Hi, everyone, and welcome back to Tech Talk.

Of course, I'm joined by Marcello Montanari, Managing Director, Senior Portfolio Manager at North American Equities, and Rob Cavallo, Senior Portfolio Manager, on the RBCM North American Equity team. For those of you a bit newer to the program or perhaps tuning in for the first time, Tech Talk is a monthly web series where I get to connect with both Marcello and Rob, and we talk all things technology, and health care related, as it pertains to two of their flagship strategies, the RBC Life Science and Technology Fund and the RBC Global Technology Fund. Now whether you or your clients invest in these strategies or not, isn't, you know, so relevant. I think this series is just a great way to stay up to date, on all things technology and health care related as they do happen to be to very highly innovative areas of the S&P 500. Marcello and Rob, thank you guys for making the time as always.

Marcello Montanari

Thanks for having us.

Jordan Wong

Well our last episode, we recorded I think a day or two after Liberation Day, and a lot seems to have gone on since then. I know it's only been, you know, four or five weeks. But really the agenda for today's episode, I'm hoping to kind of talk a little bit about, you know, this little market rally that we've seen post Liberation Day. I know it's been a volatile earning season for you guys, and so I'll kind of want to touch on that as well. And maybe a few other sort of company specific developments, things have been going on with Google and Apple, for example. So hoping to touch on sort of all those topics in the next ten or fifteen minutes or so. But maybe if we start with kind of what has gone on post Liberation Day, you know, we've seen the Nasdaq rally 17%. Technology is kind of, you know, reasserting its market leadership, it looks like, at least over, you know, the very short term here. Maybe I could get you guys to just talk a bit about what has driven this response from the technology sector, and have any of these developments altered your view and how you're kind of thinking about portfolio positioning, at the moment?

Marcello Montanari

Okay. Maybe I'll start. So just to put things into perspective, to talk about what's happened kind of, you know, about this bounce that you're talking about, you need to have a little bit of context. And if you think about it, we had this kind of cascading series of negatives that, that were kind of, playing out in the marketplace. You still kind of had a little bit of a hangover over deep seek and what it meant for the whole AI complex and spending in that area. On top of that, you had a lot of noise about Microsoft and what it was doing, because it seems to be backing away from a whole bunch of commitments in terms of its data center capacity. And so there's a lot of noise around, you know, is Microsoft backing away from AI, is there something in the marketplace that we don't see? Are they reacting to deep seek or something like that?

 And in the middle of all that, you know, Microsoft has definitely been kind of rejigging its relationship with OpenAI, which has been kind of, like, at the forefront of all of the training that Microsoft's been involved with. So there's a lot of noise about, you know, CapEx from Microsoft and what that meant for the AI complex. And then again, there was the, you know, the tariff fears turned into like, oh my god, what is this? When, you know, Donald Trump stood in the rose garden and unveiled these incredible, tariff percentages that, were, you know, frankly, were pretty laughable at the end, you know.

 As we saw from all the memes of the penguins being tariffed and how they the penguins were very upset about all of this. And then kind of like, you know, kind of early, like, within the reporting period, Snapchat, which is not really a bellwether in terms of the online ad business and the, ecommerce ecosystem. They're not really a bellwether, but, you know, they came out with some pretty bad numbers, and that just kind of added a little bit more fear to that. So kind of what's happened since then that we've kind of gotten this rally is, basically, you know, one thing to point out is, like, the software results have been really strong. Like, some of the big bellwethers, whether it's ServiceNow or SAP from Germany, have come out with, with really strong numbers.

 We saw, Microsoft, and I think we'll probably speak about Microsoft a little bit later, so I don't want to like front run everything. But Microsoft had good results, and their Azure business, which I think last time that we spoke about how Microsoft was dealing with some capacity issues and then some Salesforce realignment issues that we'd hoped that we'd see some of that kind of, like, fixing itself towards the end of the quarter leading into the next. And we actually saw a fair amount of that so we think that started turning around a little bit earlier. We started actually getting the bellwethers, in the ecommerce and the ad space, which would be like Google and Meta with solid numbers.

 On top of that, we saw the capital spending, in particular, Meta basically raised, capital spending all to do with AI. So a lot of these things that had become that had, you know, kind of created this mountain of negativity started to kind of unwind itself. And as a result, we've kind of seen a reversal of what's happened here. And maybe I'll just hand it over to Rob. I'm sure he's got a few thoughts to throw in there as well.

Rob Cavallo

Yeah. And I just say, like, you know, even stepping back and kind of building into your second part of the question about, you know, how we're thinking about positioning from this moment. Really, when we look back in hindsight, at least in the very short term, in the few days following Liberation Day, we kind of got peak tariff fears priced into the market. Since then, we've come the market's come to some sort of acceptance that, you know, there's going to be a negotiated rate that ends up being better than, you know, where things landed right in that immediate moment. We saw some exemptions around certain parts of the consumer electronics and broader electronics industry, provided a lot of relief around sentiment, you know, from the depths of the lows.

 Also important to know, like, Marcello sort of touched on, but, like, we kind of came through an earning season at least to the today so far that has been better, I think, than where expectations were going in. We have not seen any of the potential negativity priced into or reiterated or any sort of guidance from companies. Maybe that's because it's not going to come, maybe because it's too early, but I think the market was expecting much more downside on guidance looking forward into the next quarter. We didn't get that, and this just kind of fed onto itself for some of the other company specific things Marcello has talked about. Mag seven has been very strong, and that's also been, you know, a very positive to kind of lift the whole tech sector as a whole.

So those are some of the positives. But as we kind of look forward from here on, we're still not in an “all clear” environment, and we still think the barbell approach is right because we can very easily paint both sides of the upside or downside scenario from here.

 On the upside, you know, if this again is a growth scare that's not leading into a recession, we're at a point you know, you look at some of the earnings revisions data - it looks like this is where things bottom in prior growth scare cycles, like, in 2016, '20 '20 '2. So, like, revision higher as we move into the rest of the year would be a positive. And, you know, we can paint a good scenario around that, especially if we get tariff agreements coming together over the next several weeks, and then we get into the second half of the year and the pro-growth agenda starts to take shape and form the deregulation tax cuts, etcetera.

 But on the downside, you know, we're not quite out of the woods yet. Like, some of the tariff issues could prolong, which could then start to seep into, you know, the labor markets and so forth. And, like, we do see this downside scenario that could still play out. So we're still kind of in a very much in a 50/50 split between defensives and more cyclical risk on type investments, kind of tactically going back and forth, between them.

 But, you know, we still we still kind of are taking a barbell approach because the uncertainty just isn't there. And, you know, like I said, we'll have a bit more understanding as we progress, but we still feel a balanced approach is the right approach at this time.

Jordan Wong

That's great. That's really helpful. Thank you both.

Now maybe I could circle back, Marcello. You started to talk a little bit about, you know, the latest earning season. You know, it was kind of volatile, some big moves across a number of bellwethers as you mentioned. So maybe I can give you guys a few minutes to maybe expand on some of those thoughts and what you kind of took from that, what you found you know, what you think is important or your takeaways from this latest earning season as it pertains to the portfolio. And, so maybe you can comment on that.

Rob, I would love to get your insight on some of the health care names that released, perhaps like Lilly or UnitedHealth.

Marcello Montanari

Yeah. Okay. Maybe I'll get started.

So as I alluded to earlier, like, Microsoft is, you know, it is kind of the biggest bellwether in the software space. And it was accompanied, like I said earlier, we had really good results out of SAP, and also ServiceNow in particular. And ServiceNow has, you know, they're rolling out kind of this agentic platform on their software platform. They’re starting to get traction on that. And, you know, they've been I mean, there was a lot of fears on ServiceNow going into the into the quarter because of everything that has been going on, at the federal government in terms of Doge and all the cost cutting. But, you know, who knew that a company that is focused on, you know, saving their customers money by streamlining processes and automating things would actually benefit in this type of, environment.

But, ServiceNow kind of came through the quarter with flying colors and again showed some upside potential with some of the AI agent tech stuff that they're going to be working on. But like I said before, Microsoft is like the bill big bellwether. And we came out of a fourth quarter where, you know, they had a couple of kind of soft numbers, and a lot of it had to do with capacity constraints around basically their entire data center and operation, which is there's kind of two pieces to that. There's Azure and then there's their AI offerings like Copilot, GitHub, things like that. And the Salesforce in the fourth quarter had been really kind of fixated on selling some of the AI stuff even though in some, respects is not totally, ready for all of their clients.

So as the Salesforce was pushing that, the Azure part of the business kind of got, I guess, neglected a little bit. And the company had vowed that they were going to reverse this. And on top of that, they also had capacity coming on. So we kind of call saw that coming in, in a significant way in this quarter. The capacity and there's still more to come.

The capacity came on. The Salesforce basically kind of course corrected and started selling the Azure. The Azure is really important because Azure kind of underpins the entire kind of digital transformation of enterprise. So that story is starting to basically work again for, Microsoft. On top of that, you layer on the AI stuff that is, again, supported by additional capacity coming on.

And then, you know, with all the concerns about their data center strategy going forward and why they've been kind of backing away from some locations and things. The company's done a really good job of just explaining that they were early on to the whole AI, theme, and they went out there and basically kind of put chips on a lot of different locations to put data centers. And they didn't need all of it. On top of that, like what happens with semiconductor-based businesses is that over time is that they get more and more efficient anyway. So they basically kind of started pruning some of the things that they don't need.

So that was viewed as a negatively in the market, but they did a good job of basically saying, “look, going forward, we're going to continue to spend. Our spending continues to grow, but not at the same level. And, we'll, we'll be focusing more on chips and hardware and optics versus cement, which is good for the entire kind of AI infrastructure ecosystem that, you know, that Rob covers for us in terms of Nvidia and all those guys. So that was, you know, important for, like I said, digital transformation theme, the AI theme, the capital spending theme, a lot of things there. And again, the software in general did well as well.

Rob Cavallo

Yeah. And I can quickly add just a couple quick comments around UnitedHealth and Eli Lilly just given the size and importance of the sector and to our portfolios. Starting with UnitedHealth, 22% sell off on the day of results. Sold off 34% to today from day before results to today. Lot of moving parts here but really boils down to one main thing.

 There's a change in how coding is going to be done, and UnitedHealth is going through this transition as is the rest of the industry. UnitedHealth being the bellwether and watched very closely by Washington, they got to be extra careful on how they code certain things in this whole environment. And, it really impacted their guidance going forward, which led to huge decline in earnings expectations or earnings estimates across the street, and the stock has sold off accordingly because the thinking is now 2025 is going to be challenging, and now we have to move into 2026 and further for recovery. Probably a lot of overshot here, but very difficult to disprove in the very short term. But we don't think changes anything structurally, but clearly caught the market completely off guard.

 As it relates to Eli Lilly, two big things here. Stock had a big rally a couple weeks before earnings because they released the data on their first set of trial for their oral obesity medication. This would be their oral GLP one. Data was great. Read across is when we get to the obesity trials for this drug later in the year, they're going to be great. Stock had a big rally on the relief of that potential risk, to something being wrong in the data not good in the data. They then report stocks sold off, basically gave away all those gains. Report was great. Problem was there's a fear in the market that there's a pricing war that's going to start between them and Novo Nordisk because of one agreement with CVS Caremark, who is a pharmacy benefit manager, who is putting, Novo Nordisk's obesity drug as their preferred recommended drug for their clients.

 The market extrapolated this into the start of a price war, which, again, is extremely overdone at this stage of the whole life cycle of where we are in these markets, but that really weighed on the stock. But, again, we see as a long-term opportunity to, you know, potentially add more risk into that name. Add more opportunity to buy into that name, I should, clarify.

Jordan Wong

Excellent. Yeah. That's really helpful, Rob. Thank you.

 I want to talk a bit about NVIDIA, Rob, which is which is a stock that you cover. As Marcello mentioned, you know, AI related results have been quite strong, and seemingly, this is a positive tailwind for a stock like NVIDIA. At the same time, though, we're reading a lot about developments with regards to chip restrictions and so on and so forth. So maybe you could just give us a quick update on the stock and how you're kind of thinking about all this right now.

Rob Cavallo

Yeah. So, generally, the CapEx commentary that Marcello talked about and some of the other kind of tea leaves bodes well for NVIDIA. I don't think it clarifies the debate yet exactly about how to think about growth into next year, but is a good starting point to kind of change in our view to become a bit more tactically positive, although we haven't done that quite yet. Because there's been other developments as well.

 Starting in, my dates are all mixed up here, so this might be kind of four or five weeks ago instead of three or four weeks ago. But first, we had the China, new restriction around a specific AI chip that they're allowed to sell to China. The name's h20. This was basically a scaled down version, very skinny version of their AI chip that they had been allowed previously to sell to China. That's no longer going to be the case.

 They took a 5 billion plus write off, and, essentially, the market is going to write off, you know, somewhere reaching 10 and 15 billion dollars of revenue going forward this year because they they're not going to be able to sell this chip in the market. That's a negative. Able to work through, but, you know, like, clearly, it was a short-term negative for NVIDIA.

On the other side of it, just yesterday, we got word that the Trump administration might not put into effect something called the AI diffusion rule that the Biden administration put into the market right before the end of the term. Essentially, this was a rule that was going to split the globe into three different tiers of countries.

Tier one countries could get all the GPUs they basically want. Tier three countries, handful of them like China and North Korea, never going to be able to get the high-end AI chips. And then all the other countries, tier two in the middle, basically have to go one license by one license to see what can happen. Sounds like that's not going to happen. Not clear what the replacement rule is going to be, but, you know, leaning towards it not being as grave.

 So, like, this is another positive step for the NVIDIA story. But we are still waiting for a little bit more confidence around how to build in growth expectations next year. And we can't wait till we know it for sure because then the trade is over. So these are two positive developments, but, like, we're still kind of more in the camp of a little bit, on the sidelines here till we get a bit more conviction around the pace of growth into '26.

Jordan Wong

Great. That's very helpful. Thank you, guys. I am conscious of time, but I do want to squeeze in one last question. I want to, in particular, talk about, what are two very large weights in your benchmark, Apple and Google.

 Over the past few days, we've seen, you know, quite a bit of news surrounding Apple's search ambitions. So maybe you could just talk about what exactly is going on there, and what does that mean for the broader search market in particular, you know, a name like Google?

Marcello Montanari

Okay. So in particular, I think you're referring to what happened yesterday. There was some reporting that had come out from a portion of the trial where Eddie Q from Apple was talking about the relationship between Apple and Google and the amount of money that Apple gets from Google. And, you know, kind of alluded to the possibility that Apple might either go it alone or do stuff with the other partners, whether it be perplexity or anthropic.

 So that basically brought to the forefront the bear argument on Google, which has, quite a bit of validity really, which is Google basically has one of the most attractive businesses on earth, which is basically the search business, and it has a very attractive margins. Google has an agreement where it is the default search engine on the iPhone. Therefore, anytime you search for anything on the iPhone, it defaults to Google, and therefore, the advertising revenues accrues to Google. In return, Google pays that to Apple as what they call TAC traffic acquisition cost. Basically, that's $20 billion roughly from what we've been able to gather, that is at a 100% margin for Apple. It is an immense amount of money.

 Everybody was talking yesterday about how, you know, Eddie Q had had put out these negative comments, but they didn't talk about the comments he started his entire conversation with, which was that Google is the best at this and Google makes the most money at this. And if Google wasn't doing this and we weren't partnered with them, then we'd be losing a lot of money that helps fund R&D and our developers and our scientists and our research, etc. So, you know, all the news reporting kind of omitted that part.

 But, anyway, there is a lot of validity to the argument that as people use more and more like LLMs and anthropic and others to search for things, that basically traffic moves from Google to other sources, and it'll make it harder and harder for Google over time to basically monetize search revenues through advertising because everybody's familiar with the 5 to 10 blue links that you get when you're searching for stuff. But, anyway, this is a really complicated topic. As far as we've been approaching this, we've been kind of very neutral with Google kind of going from underweight to overweight as we see opportunities because, Google is still a very fine company with a great product, great margins, and it is very cheap. We can also see the benefits that they're going to get from what they're doing on AI, what they're doing on Waymo, and things like that. So there's some countervailing positives along the way.

 But at the same time, if you're Apple, you're getting $20 billion from Google at a 100% margin. Okay. Everybody who goes around saying that others are going to steal their lunch. Well, the question is, the others haven't built a product that can actually do that. Secondly, they cannot monetize at the same level as Google does.

 So does Apple really want to start shifting traffic to someone else that can't monetize at the same level? The advertisers get great results from working with Google. They have unknown results working with anybody else. So why would advertisers shift? What I'm trying to point out here is that yeah sure, there's definitely, risks to Google search business over the long term, but it's not something that’s right here, right now, immediate. And it's a long haul to get from where we are today to some point in the future where things are really bad.

 But the markets being what they are, they tend to discount things forward, and everybody's watching the lead leading indicators. So there's always going to be this kind of noise about what is the terminal value of the search business within Google. As a result, like I said, we keep this one pretty close to the chest, and we try to play it. As we see opportunities, we'll buy and we'll sell and back and forth. That’s what we've been doing with it.

Jordan Wong

Great. Well, thank you guys so much. Just looking at the clock, that's all the time we have for this month, so we'll wrap things up here. As always, I want to thank you for taking the time to meet with us each and every month, and thank you to everyone for tuning in to this month's episode. Looking forward to coming back in a few weeks for our next episode.

Rob Cavallo

Thank you.

Marcello Montanari

Thanks.

Jordan Wong

Thanks everyone.