Some political pundits think that Iran holds important negotiating cards versus the US if it can control traffic through the Strait of Hormuz. While that may hold some truth today and for the next few months, some of the world’s largest oil producers are ensuring that the Strait of Hormuz is not the lynchpin it is today.
For starters, Saudi Arabia ramped up the usage of its pipeline that crosses through Saudi Arabia to the Red Sea, thus bypassing the Strait of Hormuz. Before the Iranian conflict started, an average of just 770,000 barrels per day (bpd) flowed through the pipeline. The pipeline was converted to full capacity of 7 million bpd in mid-March following the closure of the Strait of Hormuz. While a tenfold increase is impressive, the two end terminals can only handle about 4.5 million bpd.
The second major exporter trying to bypass the Strait is the United Arab Emirates (UAE). The UAE recently announced that it is fast-tracking construction of a second west-to-east pipeline to Fujairah, which will double its crude export capacity to 3 million bpd. Like the Saudi pipeline, the current and new UAE ones will avoid transit through the Strait of Hormuz. The pipeline isn’t expected to be operational until 2027.
While neither pipeline carries 100% of either country’s oil, these two delivery workarounds divert about 25% of the oil that the Strait of Hormuz carried before the war. We expect other countries to follow suit with pipelines and other methods when feasible.
Are Software Stocks Ready To Take Chipmakers’ Throne?
Recently, semiconductor stocks have been the undisputed kings of the AI trade. The primary semiconductor index ETF () is up more than 130% over the past year, easily outpacing the S&P 500’s 24% gain. Further in the dust lies the software stocks (), which are down 12% over the one-year period. Micron (), up 600% over the past year, exemplifies the semiconductor run, riding a narrative of insatiable demand for chips to accompany the massive AI-driven data center buildout.
Software stocks, meanwhile, have not only sat out the party but also languished. ServiceNow () is a case in point, down by nearly 50% over the last year. Despite posting consistently strong revenue, earnings, guidance, and AI-driven workflow adoption. NOW and other software companies are considered relics of an outdated industry, with no moat against AI. Whether the chip or software narratives are true has yet to be seen. However, the sharp divergence in returns is worth noting.
Thus far, with AI, we are seeing infrastructure stocks, like hyperscalers and chipmakers, lead the way higher. However, AI spending and development will shift once the infrastructure is more fully developed to more agentic uses. This is when money flows from hardware to deployment and monetization of the technology. This should include some software companies.
The setup for NOW is compelling. Valuations relative to growth have compressed while the fundamental story has strengthened. Its enterprise AI adoption is moving from pilot programs to generating real revenue. MU is riding the wave of sharply rising memory prices, which is great. However, chip pricing has always been volatile and tends to peak when the news is best, as it is today.
The graph below charts the MU-to-NOW price ratio. As shown, the ratio is up 1300% in just one year. However, the three technical indicators of the ratio are turning on sell signals, favoring NOW over MU.