Barron’s Weekend Summary: Silicon Valley has had its share of big personalities
Cover Story:
Silicon Valley has had its share of big personalities, from Steve Jobs to Marc Andreessen, but even among this cohort, Marc Benioff stands out; and he’s fighting to put Salesforce the high-profile enterprise software company that just dropped an outstanding earnings report, back on top. The earnings report and accompanying guidance was a shot back at Wall Street and, to Benioff’s mind, a vindication of his efforts to right the Salesforce ship, which has been listing. “We needed that,” a Salesforce executive said to me after the earnings report, with palpable relief in his voice.
Interview:
-This week, Barron’s interview features Barnaby Wilson, a London-based managing director and portfolio manager at Lazard Asset Management. He takes a tailored approach to growth-stock investing, focusing on companies that produce cash-flow returns on investment at a low- to midteens percentage rate. His favorite companies are capital-light, meaning they don’t need to invest large sums in heavy equipment. Wilson and his team value companies on a discounted-cash-flow basis, investing only in those that sell at a discount to their public market value. The team also looks for companies with a competitive moat.
Tech Trader:
-Dell Technologies recently traded for seven times projected fiscal 2024 profits, the lowest valuation of any tech company I track. The stock trades at 0.5 times enterprise value to revenue, again among the lowest readings of any tech company. Dell, founded nearly 40 years ago by namesake Michael Dell, is cheaper than PC rival HP, or enterprise hardware provider Hewlett Packard Enterprise, or IBM (IBM), or disk-drive stocks, or almost anything else.
Of course, there are reasons for the low valuation. The PC market is in a deep post-Covid temper. And corporate enterprise spending on other stuff Dell makes—servers, storage systems, security software, and the like—is also under pressure, as IT departments tighten their belts in anticipation of a slowing economy.
The Trader:
-On March 1, Okta, whose software helps companies securely manage access by employees, reported adjusted fourth-quarter earnings of 30 cents a share, beating analyst forecasts for nine cents a share. (According to generally accepted accounting principles, the company lost 95 cents a share, due to stock-based compensation expenses.) Sales of $510 million also beat expectations, and Okta said it would earn 77 cents a share for its 2024 fiscal year on sales of $2.2 billion, an 18% rise from the year before. Investors were thrilled, and the stock has jumped 15%, to a recent $82, since the release.
-Buybacks have shown no sign of letting up. Total spending on share buybacks by S&P 500 companies is on pace to hit $900 billion this year, according to LPL Financial, just a touch lower than it was in 2022, when companies spent $922 billion. The number is far more than the $500 billion spent on repurchases during pandemic-stricken 2020. There’s a good reason for companies to continue their buyback binge. Biden’s proposal, for one, is still just a proposal, and the stock market’s decline last year has left many companies with much cheaper stocks than they had at the end of 2021.
Features:
-Norfolk Southern’s train derailment in East Palestine, Ohio unleashed vinyl chloride and other toxic chemicals into the surrounding area. Just a little over a month later, another train derailed in Ohio, this time not posing a threat to public health. The legal liability system calls for lawsuits to be brought against Norfolk Southern and others to compensate those who were harmed by the accidents. Federal and state regulators also reacted by proposing various safety regulations to help prevent future rail accidents.
-Regulators shut down Silicon Valley Bank to protect depositors following a cash crunch. The Silicon Valley-based bank is the second-largest FDIC-insured bank by assets to fail and the largest since 2008 when Washington Mutual collapsed, according to Dow Jones Market Data. SVB has $212 billion in assets; Washington Mutual had $307B in assets.
European Trader:
In Europe, Zalando is trying to do for fashion what Amazon did for books more than two decades ago—crack the code for selling to the masses online. Clothes are a little trickier to sell online. People still like to buy them in person because the feel, the fit, and the small details matter so much. Returns from online purchases are more frequent, especially when you can’t try things on before you buy.
Zalando’s answer is to become the go-to platform between consumers, retailers, and fashion brands. Zalando works with more than 6,500 international brands in 25 European countries. Like Amazon, it shares logistics with partners. It also offers its own private-label clothes.
Emerging Markets:
-GDP in Vietnam growth hit a 25-year high of 8% last year. Foreign direct investment surged to $22B as multinational corporations sought alternatives to China. So why is its stock market barely flickering? Global emerging markets have rallied by 9% since Nov. 1. The VanEck Vietnam exchange-traded fund did nothing. It’s down by half from a peak in early 2022. The culprits are usual suspects for meltdowns in emerging markets, and not only emerging markets: overleveraged real estate and political shifts that may not be in investors’ favor.
Commodities:
-Lithium demand growth is accelerating. Lithium production has risen at roughly 12% a year for the past 20-plus years. That is an incredible rate for a commodity. Global copper production has grown 2% to 3% a year on average over the same span. Steel demand has grown at about 4% a year on average.
Citi expects benchmark lithium prices to remain at about $30,000 a metric ton in the long run. That’s what it will take to incentivize the industry to develop the new mines and assets required to meet growing demand.
Lithium prices were roughly $7,000 a metric ton in 2021.
Streetwise:
-Jack Hough wants to beat the stock market. And Jonathan Golub, chief US equity strategist at Credit Suisse has some ideas to help him put. Investors who can commit for 10 years or more should stick with stocks, but their returns are likely to be lower than they’re used to, says Golub. Near term, defensive stocks don’t look great. Big tech is worse. Favor consumer stocks and healthcare. And if you’re worried about a market swoon, buy a hedge, which for now happens to be cheap. At the center of Golub’s outlook is something called uninversion, which sounds like yoga, and rightly so, because I might pull a hamstring trying to explain it. Long-bond yields are currently lower than short ones; the 10-year Treasury recently paid less than 4%. That’s an unusual condition known as an inverted yield curve—“curve” referring to the shape of yields plotted on a graph. It can mean that investors expect the economy to slow. They’re usually right.