Tales from the Melt-Up in the AI Time Machine

Much, perhaps too much, has been said and written about the latest batch of quarterly financial results from the technology sector. Well, to cite dialogue from Brian De Palma’s Scarface: “Nothing exceeds like excess.” While you’re trying to make sense of that quote, I’ll add to the heaping mound of tech-market commentary.

Foxconn Technology Group, formerly known as Hon Hai Precision Industry, rode to qualified fame and considerable fortune as a result of iPhone contract manufacturing for Apple. While Foxconn largely retains its business relationship with Apple, it now derives a substantial portion of its revenue and earnings from elsewhere. Can you guess where Foxconn has tapped its new motherlode?

If you said AI — and nearly everybody is uttering AI incantations these days — you’d be correct. The Wall Street Journal reported yesterday that Foxconn enjoyed solid first-quarter revenue and profit as it “ramped up production of server racks, other advanced equipment and consumer devices for the global artificial-intelligence build-out.”

Foxconn’s cloud and networking products, inclusive of AI servers, “accounted for almost half of total revenue in the three months ended March, while smart consumer electronics, the segment that includes smartphones, contributed about a third to the top line.” All told, Foxconn reported 19% growth in net profit, amounting to US$1.58 billion, consistent with market expectations; revenue was up 29%.

Coasting on the Gravity-Defying Melt-Up

The company expects AI server-related demand to keep the ship afloat — the rising AI tide has buoyed sailing conditions for a wide array of infrastructure vendors — and it says AI has also fortified demand for refreshed consumer electronics, including smartphones.

Indeed, the only storm clouds Foxconn can see on the horizon involve rising memory costs, squeezing global demand for consumer electronics. Even then, the company believes the threat is being felt to a lesser extent at the high end of the market.

While reading the Wall Street Journal article on Foxconn’s results, I encountered an unfamiliar term. It’s in the following paragraph:

The company’s latest gains have come amid the broader chip-stock melt-up, which saw S&P 500’s semiconductor companies adding roughly $3.8 trillion in market capitalization in the past six weeks alone. Chip makers have reported blowout profits as they feed AI companies’ insatiable appetite for computing power.

The term at issue is “melt-up.” It’s both inelegant and unfamiliar, at least to me. I had to look it up, which is what I invariably do when I come across a word or a phrase that leaves me perplexed. The reflexive image that comes to mind when confronted by “melt-up” is that of an oleaginous cheeseburger defying the laws of gravity, its gooey cheese melting up from the bottom of the bun.

Alas, that is not what “melt-up” denotes. Instead, the term refers to . . .

a sustained and often unexpected improvement in the investment performance of an asset or asset class, driven partly by a stampede of investors who don’t want to miss out on its rise, rather than by fundamental economic improvements.
Gains that a melt-up creates are considered to be unreliable indications of the direction the market is ultimately headed and often precede downturns known as meltdowns. Investors should pay attention to economic indicators and company fundamentals to avoid poor decisions during these periods.

So, unlike with my imaginary cheeseburger, the laws of gravity are still in effect. Melt-ups typically precede meltdowns, rarely (if ever) welcome events. The melt-up, then, is a decidedly mixed blessing, a period that is too good to be true, and one which ultimately reverts to a less salubrious mean. Caution is the eternal watchword.

Cisco’s Exclusive Party on Its AI Time Machine

History might not repeat itself, and perhaps it doesn’t even rhyme. A letter to a newspaper editor recently opined that it’s human nature that repeats, not history. That rings a clanging bell of truth, but don’t tell Cisco Systems, which is partying like it’s 1999. Cisco, as you might recall, was among the wildest revelers as the 20th century came to a close, its business and stock on a robust multi-year run that showed little sign of abating. After partying in 1999, Cisco kept the merriment rolling into the new millennium, briefly surpassing Microsoft to become the world’s most valuable company in March 2000.

What happened after that is less celebrated, though well documented. The dotcom boom transmogrified into the dotcom bust, and outsized fortunes were promptly resized to align with the market’s verdict.

More than 26 years after it was fleetingly crowned the world’s most valuable company, Cisco stock is on another torrid run. There’s life in the old codger yet. While Cisco is not about to supplant Nvidia at the top of the valuation charts — Cisco is 27th with a modest bullet these days — it’s benefiting hugely, as are many infrastructure suppliers, from the AI boom.

In its fiscal third quarter, Cisco posted better-than-expected earnings and revenue, propelled by AI-related demand drivers. Not everybody at Cisco was in a celebratory mood, though, as the company simultaneously announced that it would cut 4,000 jobs, about 5% of its workforce.

TechCrunch was among those to report on Cisco’s concurrent earnings beat/reduction in force. The following paragraph is excerpted from that article:

In a blog post published Wednesday, Cisco’s chief executive Chuck Robbins touted the company’s “record revenue” and “double-digit growth,” while acknowledging that Cisco was making strategic investments “in our employees’ use of AI across the company.”
According to public filings, Robbins was slated to earn more than $52 million in executive compensation during 2025. When reached by TechCrunch, a Cisco spokesperson did not comment beyond Robbins’ statement, or say, when asked, if Robbins plans to reduce his compensation.

Making their sympathies apparent, the editors at TechCrunch featured a decidedly uncomplimentary photograph of Chuck Robbins at the top of the news item.

What Cisco is doing, cutting employees amid impressive profits and rising revenue, is not anomalous in the current AI era. In fact, corporate prosperity and layoffs have become conjoined twins, as companies reallocate resources to gird for what they hope will be a fecund, sustained AI harvest. What remains in question, in the absence of hard data, is whether these sizable staff cuts are a result of resource reallocation or whether AI is actually delivering a productivity boost that renders certain human jobs superfluous. Both factors are at work, I suspect, though the former seems the more prominent culprit.

Many balls are in play. The challenge, impossible to meet, is to keep our eyes on all of them.