Bretton Fund: AI Chip Spending 'Staggering,' Buys SAP, Constellation

Bretton Capital Management's flagship fund lagged the broader market in the second quarter. The manager said the fund sat out a boom in semiconductor stocks that it considers unsustainable.

"The amount being spent on chips, memory, and facilities is staggering and cannot be maintained," the letter said. Memory makers have seen the most dramatic rallies. Micron (MU) is up roughly 600% over the past year, SK Hynix roughly 500%, and Sandisk more than 3,000%, the fund noted.

"The short-term surge in spending by AI providers like Google, Microsoft (MSFT), and OpenAI is rational behavior given first-mover advantages," the letter said. The buildout phase won't last forever. The amount of computing power required to run AI models is dropping dramatically, often 50% in a few months, the fund said. That will reduce the need to spend as much on chips.

"Nothing fundamental has changed about the memory business, and the sector will see a painful downturn at some point," the letter said. "We will appear out of step until that happens, but we are not going to jump into valuations that make no sense to us."

UnitedHealth was a bright spot. The stock lost more than half its value in about a month a year ago after the company faced higher healthcare usage and unprofitable business lines. The fund bought more after the decline. UnitedHealth has since returned 37% over the past year, up 80% from its lows. "We think there's more to come," the letter said.

Alphabet, the fund's largest holding, added 3% to performance. American Express added 0.7%. The quarter's main detractors were TJX, Berkshire Hathaway, and AutoZone.

SAP and Constellation: The Fund's AI-Insulated Software Bets

The AI trade has also punished software stocks on the premise that AI will let customers build their own replacements. The fund used the selloff to add two new positions: SAP and Constellation Software.

The fund bought SAP at about 16 times estimated 2027 earnings, a discount to the broader market. Revenue is growing about 9% and earnings about 15% as margins expand with the cloud pivot. "For the core SAP customer, we don't think this risk is huge," the letter said. "SAP is a beneficiary of AI as it's now able to produce more code more efficiently."

Constellation Software buys niche, slow-growing software businesses that are too small for public markets or large acquirers like Salesforce (CRM) or Atlassian. The fund bought it at a little more than 13 times estimated 2027 free cash flow. Free cash flow per available share is expected to grow 15% to 20% in the coming years.

"The software world is changing fast and the investors are rapidly trying to price that risk," the letter said. "We believe the price we're getting for these businesses that we feel are relatively insulated from AI are bargains."

Microsoft (MSFT) has an Alpha Score of 69/100 at AlphaScala, indicating moderate sentiment. Salesforce (CRM) has a score of 58/100.