Barron’s Weekend Summary: artificial intelligence has been a significant driver of growth
Cover:
-Artificial intelligence has been a significant driver of growth in the past 18 months, with Nvidia dominating the market for AI-related chips. Previously known for gaming graphics cards, Nvidia has transformed its GPUs into the core of the AI revolution, powering large language models and inference software in data centers worldwide. However, competition is coming from companies like Advanced Micro Devices and Intel, with the AI chip market projected to reach $400B by 2027 and $1T by 2030. Chip buyers are not keen on relying on a single source, with hardware companies like Dell Technologies, HP Enterprise, Lenovo, and Super Micro Computer seeking alternatives. Cloud providers like Amazon and Google are also designing their own chips to meet customer demand.
Interview:
-Gold's price has risen by 15% this year to $2,409, a 22% increase since the Federal Reserve began raising interest rates in March 2022. This is due to competition from higher bond yields, which have no yield. However, this is just one anomaly in the metals market, says Imaru Casanova, a portfolio manager at VanEck. The firm offers exposure to gold through exchange-traded funds, such as the VanEck Merk Gold Trust, VanEck Gold Miners ETF, and VanEck Junior Gold Miners ETF. Casanova, a Venezuelan mechanical engineer, joined VanEck in 2011 and became a deputy portfolio manager in 2014. She recently took over as manager of the firm's actively managed gold equity investment strategy, which includes the VanEck International Investors Gold fund (INIVX).
Tech Trader:
-Netflix's share price rallied 17% in January after reporting fourth-quarter earnings, despite missing revenue and profits by a few pennies. The company added 13.1M net new subscribers, ahead of its own forecast of 8.7M. Netflix has been hinting at reducing the focus on subscriber growth, and in late 2022, it announced it would stop providing quarterly guidance on subscribers starting in 2025. However, both CEOs, Greg Peters and Ted Sarandos, downplayed the news, and investors seem unconvinced. Netflix's decision to stop reporting its subscriber count is expected to impact the company's financial performance.
The Trader:
-Air Products anb Chemicals has experienced a 15% drop in 2024, with a significant portion of the loss occurring in February after missing expectations in the first quarter. The company's full-year earnings guidance was cut to $12.65 due to China's weakness. Analysts predict sales of $3.05B, down from $3.2B in 2023, and earnings of $2.70 a share. This falls short of the company's full-year guidance, but the market is ok with this, as analysts have projected rising sales and earnings in the third and fourth quarters of the year. Asia industrial gases' revenue is projected at 3.2% growth, which is not a significant increase given China's growth and first-quarter GDP growth. The company also has traditional hydrogen projects in Saudi Arabia and Uzbekistan that could add revenue.
-The S&P 500 experienced a 3% drop, marking its third consecutive week of declines. The Dow Jones Industrial Average was also down 0.3%, while the Nasdaq Composite fell 5.3%. The S&P 500 is still up 21% from a low in October, but investors are now realizing that the economic and geopolitical landscapes have turned against them. Economic data shows that March retail sales rose 4% year over year, raising concerns about the economy's strength and the delay of Fed rate cuts. The two-year Treasury note spiked to 5%, indicating that rates are expected to remain higher for longer. A more restrictive Fed would remove a tailwind that has helped stocks rally this year. Geopolitics adds a headwind, with Iran's attack on Israel and Israel's response requiring a degree in game theory rather than finance. The potential for additional flare-ups could also support oil prices, even if Brent crude futures fell 4.7% this past week. Persisting inflation forces raise the risk that rates will need to stay higher for longer than expected, compounded by upside risks to oil due to geopolitical developments.
Features:
-A new study by Equilar shows that median pay for America's top CEOs rose 11.4% in 2023 to a record $23.7M. This increase is ahead of the 3.4% inflation rate and the 4.3% gain for the average worker. Equilar's list includes the largest CEO pay packages at companies with revenue of at least $1B that filed their proxies to the Securities and Exchange Commission by March 31. Jonas Johnson, vice president of research at compensation consulting firm Economic Research Institute, warns that the trend of outsize salary increases for CEOs cannot continue forever, as the numbers become unsustainable.
-Tesla's stock fell for a sixth consecutive day on Friday, possibly due to news of a recall of its Cybertruck to fix an accelerator pedal issue or market weakness. The company has recalled about 2.6M vehicles, with the small number of 3,878, according to the National Highway Traffic Safety Administration's recall notice. The company's stock is trading lower due to the small number of recalled vehicles, which are likely all the trucks that have been delivered. Recall announcements can be jarring for automotive investors, but they are a normal part of the business. Tesla's stock is likely to break a level that suggests more losses could be ahead.
Europe:
-LVMH Moët Hennessy Louis Vuitton missed first-quarter revenue estimates due to slightly contracted demand for its luxury goods. The company reported revenue for the quarter ending in March fell 2% year-over-year to €20.7B ($22B), just below analysts' estimates for €21B ($22.3B). Organic revenue rose by 3%, while foreign exchange factors represented a 4% drag on reported revenue. The company's wines and spirits business experienced the biggest sales decline, down 16% compared to the same period last year. Demand for Champagne and Hennessy cognac was particularly challenged this quarter, with champagne sales hampered by normalizing demand post-pandemic and waning demand in Europe. The beauty category saw a 3% increase in perfume and cosmetics sales, while selective retailing, including the Sephora brand, rose 5%. LVMH remains vigilant and confident at the start of the year, despite an uncertain geopolitical and economic environment.
Emerging Markets:
-No update this week
Commodities:
-Oil prices have been rising due to production from Venezuela and Iran, which have strained relationships with the US. New political developments could potentially curb some of these supplies, potentially causing further price increases. International crude oil prices have risen 13% this year to $87.29 per barrel, while the average national gasoline price is $3.68 a gallon. President Joe Biden is trying to manage complicated relationships with oil-producing countries while avoiding price spikes. The Biden administration has announced sanctions on Venezuelan oil due to Maduro's actions, which violate the agreement. Sanctions could curb Venezuela's total crude oil supply by 120,000 barrels in the near term.
Streetwise:
-European earnings season began with reports from Bavarian Capacitor and Royal Jellied Eels. The iShares Europe ETF has underperformed its US counterpart, the iShares Core S&P 500 ETF, over the past several years. European earnings are estimated to have shrunk by 11% in the first quarter, compared to a 3% increase in America. JP Morgan is less bearish on Europe and believes the period of US earnings outperformance versus the euro zone might be ending. The US has benefited from government spending and currency effects, while the Magnificent Seven tech stocks have shone, though earnings growth is slowing. The 3% first-quarter growth forecast was over 10% last summer, raising doubts about remaining forecasts that have US growth rebounding to double-digit percentages later this year.