Barron’s Weekend Summary: Videogame makers have embraced a more sober approach to gambling
Cover:
-Videogame makers have embraced a more sober approach to gambling, one that allows players to place their first-ever wagers through their games. However, these games, often played by young consumers, have become the source of a booming underground betting economy, where players can convert virtual items purchased for use in videogames into digital currency at specialized online gambling sites. This has raised concerns about the financial and mental health of millions of underage gamers worldwide. A Barron's investigation found at least 73 gambling websites linked to Counter-Strike: Global Offensive, a popular game. Big Tech platforms have also fueled the issue by hosting videostreams sponsored by skin gambling sites.
Interview:
-This week, Barron’s features Suni Harford, president of UBS's $1.6 trillion asset-management business, is a trailblazer in the finance industry. She was the first woman to return to work at Salomon Brothers after taking maternity leave and rose through the ranks after the 2008-09 financial crisis at Citigroup. Harford was contemplating retirement in 2017, but was called to run investments by UBS in 2019. She was named president of asset management in 2019 and added the role of head of sustainability and impact. Harford is officially retiring, effective on March 1, after a 40-year career that touched nearly every sector of finance. She believes her 40 years in finance, including sales, trading, and advisory, are the right time for her retirement.
Tech Trader:
-Nvidia has surpassed its rivals in the artificial intelligence market, with its fiscal fourth quarter revenue growing by 265% year-over-year to $22.1B. The company's data-center business, primarily driven by AI chip demand, was even more impressive, up 409% from last year, reaching $18.4B. Nvidia's guidance for the current quarter was strong, with a revenue forecast range of $24B at the midpoint, which is way above the Wall Street consensus of $22.2B. This growth is unprecedented for a tech company as large as Nvidia, and it speaks to the power of AI. The rise in data-center results reflects growing shipments of its Hopper GPUs used for running large language AI models and generative AI applications. Large cloud-computing providers like Amazon AWS, Microsoft Azure, and Google Cloud accounted for more than half of the data-center revenue for the quarter. Nvidia's performance and strong outlook highlight its advantages, including its prowess in managing its manufacturing supply chain and its ability to innovate faster than its rivals.
The Trader:
-The recent stock market rally, which sent stocks to all-time highs, was not solely based on hype about artificial intelligence. The rally spread beyond AI, with three sectors hitting new highs: tech, healthcare, and industrials. Financials and materials are less than 5% away from their peaks. The market has persisted despite its original justification, which was premised on the Federal Reserve cutting interest rates starting in March or May. However, recent comments from Fed members and signs of persistent inflation suggest that the first cut could come in June or even later. J.P. Morgan strategist Marko Kolanovic found current market developments odd, questioning how far-fetched applications of AI will lift the broader economy. Other economic indicators, such as home sales and corporate earnings, have held up well, with 78% of companies reporting earnings this quarter beating analysts' estimates, a rate better than the historical average.
-Oil and oil stocks have been in a tight price range this year, with Exxon Mobil up 2% in 2024 and down 4% in the past year. Natural gas prices have been more combustible, with prices dropping to their lowest levels since June 2020 due to warm weather. Chesapeake Energy's announcement to cut production expectations to reduce oversupply soared natural gas prices 13%, boosting stocks in the industry. However, this is not a buy signal for most stocks, as gas resumed its downward trend, falling 2%. The longer-term bull case for natural gas depends on expanding U.S. exports, as Europe is moving away from Russian natural gas and Asia uses more gas for electricity generation. By the end of this year, new LNG export terminals will open on the Gulf Coast to supply these markets. By 2028, U.S. export capacity is expected to double again, giving natural-gas producers access to new markets willing to pay a premium for gas.
Features:
-Nvidia's earnings report, which saw revenue more than tripling year over year, sparked a buying spree in shares of companies remotely connected with AI, driving the Nasdaq Composite up 3%. However, Palo Alto Networks, a leading player in the cybersecurity software sector, unveiled quarterly results and forward guidance that generated much concern among investors. Palo Alto Networks shares plunged 28%, vaporizing almost $34 billion in market value. The company raised concerns about a potential slowdown in growth in security software spending and unveiled a new strategy to gather more customers, focusing on ROI and total cost of ownership. CEO Nikesh Arora said that customers are facing spending fatigue in cybersecurity and are asking for ways to get a lower total cost of ownership across their enterprise and better ROI. He believes that the focus is more on optimizing current cybersecurity budgets rather than there being no demand.
-Investors – from a portfolio perspective - should ignore the 2024 US presidential and Congressional elections, as there are numerous factors and trends that matter more to the stock market's direction than the outcome. Factors include economic growth, inflation, Federal Reserve interest-rate cuts, artificial intelligence, and foreign conflicts. The election is not a top concern for most professional investors, as it is listed as the fifth-greatest risk to markets this year. Historically, stock returns in presidential election years haven't been significantly different from the average year, with the S&P 500 gaining an average of 6.8% since World War II. Despite the conventional belief that Republicans are more business-friendly, the S&P 500 has averaged a higher return under Democratic administrations over its history. Differences in Congressional control have no significant impact historically.
Europe:
-The US is attracting more European companies to sell their shares, with UK's Flutter Entertainment, parent of sports betting company FanDuel, making its debut as a secondary listing in New York. Other companies include Finnish sports-brand firm Amer Sports, German sandal maker Birkenstock, and British chip designer Arm Holdings. The percentage of foreign-domiciled companies on the New York Stock Exchange rose to 25% last year from 18% in 2020. The US's larger capital markets, retail investing culture, and record of investment performance make it attractive. The S&P 500 has outperformed the MSCI World Index over the past five years, and the gap between the S&P and the UK's FTSE 100 or Euro Stoxx index is even more pronounced.
Emerging Markets:
-No update this week
Commodities:
-BP and Shell, two of Europe's largest oil-and-gas companies, face a valuation problem that they haven't been able to solve for decades. Both trade at about a one-third discount to their U.S. peers, with Exxon trading at 12X forward earnings and Chevron at seven. This conundrum is a challenge for Shell CEO Wael Sawan and BP CEO Murray Auchincloss, as their latest strategies diverge from American counterparts and each other. American firms are increasing production, while BP and Shell have remained on the sidelines of the recent merger frenzy and set more aggressive targets for the energy transition away from fossil fuels. To close the gap, Shell and BP may need to engage in megadeals or engage in megadeals themselves.
Streetwise:
-Jack Hough urges investors to engage in some financial nudism, that is: investors need almost nothing to be successful. A simple mix of high-quality stocks and bonds with low fees, like the iShares Core S&P 500 ETF and the Vanguard Total Bond Market ETF, is enough. It is essential to have ample cash to cover spending in a prolonged emergency. Some asset classes are fine for speculation or investment but not necessary for long-term savers. Stocks are better than commodities as they represent companies that turn stuff into profits. Real estate investment trusts, options, private equity, and bonds are not necessary for long-term savings. The right mix of stocks and bonds depends on how soon you might need to spend the money and your age. Additionally, target-date funds are not necessary.