Barron’s Weekend Summary: Nvidia is the clear beneficiary of AI development
Cover:
-Nvidia is the clear beneficiary of AI development, with its stock remaining attractively priced despite a significant run this year. Super Micro Computer and Vertiv Holdings are also expected to benefit from AI infrastructure and projects. Corporate technology buyers prioritize AI infrastructure and projects over the next three years, with 75% of chief information officers testing or implementing AI projects. A recent survey of 600 corporate executives revealed over 60% plan to adopt new AI products. CEOs are investing in AI to protect their market position and ensure a durable structural shift to AI.
Interview:
No interview this week
Tech Trader:
-The year has been a spectacular one for technology stocks, with the Magnificent Seven megacaps, Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms, and Tesla, having more than doubled their prices. However, the rally seems unsustainable, and investors are looking for new ideas in 2024. HP Inc., which is known for its AI-capable microprocessors, is one of the stocks worth considering. Dell Technologies, which has seen a 79% rally this year, has predicted a rebound in PC demand in 2024. HP trades for just eight times earnings and offers a nearly 4% yield. HPE, which makes servers, supercomputers, and networking gear, has seen a 37% spike in sales in the latest quarter. HPE's high-powered systems are well-suited for building AI models, and orders are piling up. HPE's stock is up a measly 6% this year and trades for only eight times earnings. SoftBank Group, a Japanese tech holding company, has had a rotten year, with its stock off 3% and suffering losses on some bets made in the Vision Fund. However, SoftBank remains absurdly undervalued, with its 90% stake in Arm Holdings accounting for 95% of its market capitalization.
The Trader:
-Activist investor Elliott Management is advocating for changes at Crown Castle, a communications-infrastructure real estate investment trust, which could potentially boost the stocks of cell-tower REITs. The hedge fund is pushing for improvements to Crown Castle's corporate governance and a rethinking of its approach to fiber-optic cable investments, which have not been generating sufficient high returns. This could involve paring back capital expenditures or selling the business and associated assets. Shares of Crown Castle jumped 15% this past Monday. However, the three cell-tower REITs, Crown, American Tower, and SBA Communications, were already attractive before the hedge fund's involvement. The stocks have been out of favor this year, with American Tower off 1% and SBA and Crown Castle down around 10%.
-Gold is at a record high, driven by a dip in bond yields, a weaker U.S. dollar, and geopolitical risk. The rally has legs, with gold trading above $2,060 per ounce on Thursday, surpassing its August 2020 high. Gold has gained 12% since trading around $1,830 per ounce in early October. Since the Middle East war, bond yields have reversed, making gold more attractive. Gold miners' shares haven't kept pace with the metal's price, but the VanEck Gold Miners ETF is up almost 9% year to date, following a 16% surge since October. Newmont stock is down 14% in 2023. The scale of the divergence and technical indicators suggest a continued catch-up rally by gold-mining stocks. The gold futures closed higher than 91% of all other prices over the trailing three years, creating a massive divergence.
Features:
Uber Technologies, Jabil and Builders FirstSource will join the S&P 500 before the opening of trading on Dec. 18. The above three will replace Sealed Air, Alaska Air Group, and SolarEdge Technologies will join the S&P 500 index. Uber, the largest US company by market capitalization (that wasn’t on the S&P), qualified for inclusion after its third-quarter earnings report showed profitability over the prior four quarters. The ride-share company's stock gained 1.7% in regular trading and 4.6% in after-hours trading. Investors often advance on news of company additions to the S&P 500.
-Federal Reserve Chair Jerome Powell stated that while the central bank has made significant progress in reducing inflation to its 2% target, it is still prepared to tighten monetary policy further if necessary. Powell emphasized the importance of restoring price stability as it is the bedrock of the economy. He said the Fed is proceeding carefully, making decisions based on the "totality of the incoming data" and the balance of risks, and it would be premature to conclude that it has achieved a sufficiently restrictive monetary policy stance.
Europe:
-The European Union is negotiating a draft of its proposed AI Act, which could benefit US tech companies like Microsoft, Google, and Amazon. The Act, which is the world's first comprehensive legal framework for the sector, specifies potential fines based on global revenue. The EU Act is expected to be the biggest winner, as it imposes a regulatory burden that could cement their dominance. The US government has imposed an executive order on AI, but it's unclear how that would be enforced. The EU's rules, known as the Brussels Effect, often become the effective international standard, affecting US tech companies like Google and Amazon.
Emerging Markets:
-No Emerging Markets report today
Commodities:
-Occidental Petroleum is in talks to buy CrownRock, an operator in the West Texas Permian Basin, potentially worth over $10B. Warren Buffett's Berkshire Hathaway is a significant shareholder of Occidental stock. Share prices in the oil giant slipped 0.3% to $60.16, following Exxon, Mobil's acquisition of Pioneer, and Chevron's $53B purchase of Hess in October. Oil prices have slipped slightly this year, setting the stage for mergers as companies maximize their assets.
Streetwise:
-Lilly's weight-loss drug, Zepbound, has risen to No. 9 (in the S&P) in market value, reaching nearly $600B, up from less than $100B in just over five years. Lilly’s top competitor, Novo Nordisk, is Danish, so it’s not in the S&P. If it were, its market value of just over $450B would put it at No. 13, replacing JPMorgan Chase. Novo stock has multiplied more than fourfold in price in five years. Zepbound, which is already sold for diabetes as Mounjaro, has received a regulatory nod for obesity, with a 72-week trial showing an average weight loss of 22.5%. The drug will list for $1,059.87 per month, 20% cheaper than Novo's drug. Obesity is now one of the biggest commercial drug opportunities ever, with consensus estimates estimating $67 billion in annual sales by 2032 and the overall category potentially hitting $100 billion by 2030. This means obesity drugs will outsell immuno-oncology ones, another group with a vast patient population and high list prices.