Barron’s Weekend Summary: Plastic has never been so abundant
Cover:
-Plastic has never been so abundant: Oil companies are shifting their production towards chemical plants for plastic, as gasoline's days are numbered. Saudi Aramco plans to send about a third of its oil to chemical plants by 2030, mainly for plastics. The $100B project could transform Saudi Arabia from a midsize player in chemicals to a powerhouse capable of supplying enough plastic for all cars and planes built each year. Meanwhile, Chevron is constructing two major chemical plants through a joint venture with Phillips 66 and QatarEnergy. However, too many companies are ramping up chemical production simultaneously, leading to a glut that looks like it will last for years. Chemical companies could face diminished earnings and take some of the shine off their stocks. Prices for the most abundant chemicals used in plastics production have fallen more than 50% in the US since 2021. Despite the plunge, most companies are planning more new factories, with plants capable of producing millions of tons of unneeded plastics set to swamp the market before the end of the decade.
Interview:
-RK Invest CEO Cathie Wood is a renowned Tesla investor who recently bought shares after the stock fell 31% this year. She believes in Tesla's long-term prospects due to its dominance in autonomous driving and robotics initiatives. However, she is less keen on Nvidia, which has tripled in the past year after Wood's flagship fund, ARK Innovation, sold it early in 2023. Wood recently warned that Nvidia had gotten ahead of itself and compared the chip maker to Cisco Systems, which soared during the dot-com era before plummeting when rivals entered the market. ARK Innovation rebounded last year, gaining 72% against the Nasdaq Composite's 45%. Wood, who co-founded ARK in 2014, shares the firm's trades online daily and has launched the ARK 21Shares Bitcoin exchange-traded fund, which holds the cryptocurrency as its underlying asset. She believes Tesla is conducting the world's biggest AI project through autonomous driving and is expected to generate revenue of $8T-10T by 2030, with platform providers like Tesla receiving half of that.
Tech Trader:
-Earnings season is centered around AI, with the generative AI revolution nearly 17 months into its development. The focus is shifting to software companies, who are writing new code and revamping to join the AI wave. Investors are bidding up software shares, anticipating an eventual AI profit afterburner. Wedbush analyst Dan Ives believes that the AI revolution has begun to hit its next gear of growth, passing the baton to software from semiconductors. He believes first-quarter results will be a major catalyst for tech shares, with a potential 15% rally by the end of 2024. AI-related outlays will be 8% to 10% of 2024 IT budgets, up from under 1% in 2023.
Netflix will raise the curtain on big tech earnings on Thursday, focusing on progress signing up subscribers to its ad-supported subscription tier and the ongoing password sharing crackdown. The key metric is subscriber growth, with consensus calling for 4.5M net new subs. Microsoft's AI Copilot software, priced at $30 per user a month, and is expected to grow 28%. Azure Cloud business is also expected to grow 28%, with Morgan Stanley predicting AI could help Microsoft's per share profits double by fiscal 2029.
The Trader:
-FOMO, or the fear of missing out, is causing some investors to be "OK missing out" on this year's stock market rally due to concerns about earnings and high prices. Julie Biel, chief market strategist at Kayne Anderson Rudnick, believes investors should be cautious due to the narrow rally and stretched valuations. The S&P 500 index dropped about 1% and the Dow Jones Industrial Average fell nearly 2% following a consumer inflation report. Biel warns that growth needs to surprise investors to avoid compression and potential exits.
-The initial public offering market is showing signs of life again, with optimism following strong debuts for Reddit and Astera Labs. A closed-end fund, Destiny Tech100, which invests in Elon Musk's SpaceX, Epic Games, OpenAI, Stripe, and Chime, has experienced a significant increase since its inception in late March. The fund closed at $9 on its first day of trading on the New York Stock Exchange, nearly double its reference price and net asset value of $4.84. Investors are banking on the euphoria for new listings and hoping to invest in Silicon Valley's top start-ups at pre-IPO prices. DXYZ currently lists 23 companies as holdings, with SpaceX making up 34.6% of the portfolio. Musk has long maintained that an IPO of SpaceX isn't likely, but there is growing speculation that SpaceX could spin off its satellite internet unit Starlink through an IPO.
Features:
-Arista Networks, a company that sells high-speed connectivity switches and Ethernet networking technology used in data centers, has been downgraded by Rosenblatt Securities analyst Mike Genovese due to the company's overly optimistic outlook on AI. Genovese lowered his rating to Sell from Buy and reduced the target price to $210 from $330. The analyst also noted that Arista might be losing an edge in Ethernet technology to Nvidia, which has access to the largest and highest volume of Ethernet switching fabrics compared to competitors like Broadcom, Marvell Technology, and Cisco Systems. Arista is currently in a quiet period and unable to comment ahead of its first quarter earnings release on May 7.
-Boeing's stock closed down 2.2% at $169.55 on Friday, marking a new 52-week low. The S&P 500 fell 1.5% and the Nasdaq Composite dropped 1.6%. The stock has been under pressure all year, following an emergency door plug blowout on a 737 MAX 9 jet operated by Alaska Air Group on January 5. This incident has led to increased Federal Aviation Administration oversight and slower production of MAX jets, causing several airlines to grow capacity. The recent weakness is likely tied to CEO Dave Calhoun's massive 2023 pay package, which amounted to almost $33M, the highest annual pay for any Boeing CEO this century. The Wall Street Journal reported that Calhoun took private trips on corporate jets, with Boeing noting $514,285 for Calhoun's plane use as part of "all other compensation" in the proxy. Investors need guidance on when things will bottom out.
Europe:
-The European Central Bank (ECB) may begin lowering borrowing costs at its next meeting in June due to a faster-than-expected drop in headline inflation and anemic growth. Inflation in the euro area slipped to 2.4% in March from 2.6% the previous month, within a whisker of the 2% target. The comparable U.S. inflation rate jumped more than expected to 3.5% last month. The ECB held its key deposit rate at 4%. Until this week, economists had expected both the ECB and the Fed to start cutting rates in June. However, markets now see a strong chance that the Fed waits longer, with the odds of a June cut dropping to around 20% from 60% last week.
Emerging Markets:
-South Korea is attempting to emulate Japan by implementing corporate governance reform, but faces a tougher challenge due to the recent legislative elections. The opposition Democratic Party won, signaling political deadlock for President Yoon Suk Yeol's remaining three years in office. South Korea's capitalist paradox is evident in companies like Samsung Electronics, SK Hynix, and Hyundai Motor with poor stock prices. This is largely due to chaebol ownership, family-controlled businesses that account for the majority of listed Korean companies. Korean law provides incentives for chaebol clans to keep share prices low, with inheritance taxes peaking at 60%.
Commodities:
-Oil prices rose on Friday due to worsening Middle East tensions. Crude, the international benchmark, was up 2.2% to $91.73 per barrel, reaching its highest level since October. Oil-market executives believe stronger-than-anticipated demand, OPEC cuts, and renewed geopolitical uncertainty will keep prices elevated, with some suggestions of triple digits back on the table. J.P. Morgan strategists predicted that prices could touch $100 a barrel, while gasoline could increase to $4 per gallon in May. Oil stocks have also been jumping, with the SPDR S&P Oil & Gas Exploration & Production index up 0.8% and Exxon Mobil up 1.4%. The escalation of the Israel-Hamas war could threaten a larger portion of global oil supplies and transport routes.
Streetwise:
-(Note: This is a column from Apr 5, there was no Streetwise for this week) Wall Street experienced a significant drop in shares of Calvin Klein owner PVH, with shares dropping 22%. The issue was primarily due to Europe's slow economic growth, which has led to a shift in consumer preferences for undergarments and apparel. V.F. Corp., Tapestry, and Ralph Lauren all fell by mid-single digit percentages. PVH was hit harder due to its large exposure to Europe and its proactive measures, such as cutting 30% of its online platforms and eliminating online third-party sellers. The company's financial guidance suggested sales could drop by 6% to 7% this year, compared to Wall Street's 2% prediction. PVH also faced criticism for its recent success, which involved hiring Stefan Larsson, a former executive at Ralph Lauren, Gap, and H&M, to drive a turnaround effort.