Barron’s Weekend Summary: Energy has taken a central role in global affairs, soaring last year as the war in Ukraine upended the market.
Cover Story:
-Energy has taken a central role in global affairs, soaring last year as the war in Ukraine upended the market. Now, commodity prices are tumbling again, the stocks are wobbling, and an even bigger change—a global transition to clean energy—appears to be around the corner. To understand how all these dynamics will play out in the coming years, Barron’s convened a roundtable of energy experts that met May 9 on Zoom. The group included Helima Croft, head of global commodity strategy and Middle East and North Africa research at RBC Capital Markets; Dan Pickering, founder and chief investment officer at Pickering Energy Partners; Christyan Malek, global head of energy strategy and head of Europe, the Middle East, and Africa oil and gas equity research at JP Morgan; and Karim Fawaz, director of financial and capital markets at S&P Global Commodity Insights.
Interview:
-See Cover section for this week’s interview feature.
Tech Trader:
-How should investors play the artificial intelligence software mania.
The obvious bets are so well known that it seems everyone owns them. The consensus big winner is Nvidia, which makes graphics processors used to train the large language models at the heart of generative AI. Nvidia shares have more than doubled this year already, and the company now ranks as the fifth most valuable tech stock, ahead of Meta Platforms and Tesla. Microsoft was the market’s first pick on AI software, given its large stake in ChatGPT creator OpenAI and the introduction of AI features into a host of Microsoft applications. The stock is up 33% this year, and has a market value of $2.4T, trailing only Apple. Alphabet shares were shunned earlier this year after Microsoft unveiled an AI-powered version of its Bing search engine. But Alphabet has been investing in AI for at least a decade and recently announced AI advancements of its own. The stock is up 39% in 2023. Also creeping into the discussion: Oracle, which has an agreement to host Nvidia-powered supercomputing services on the Oracle Cloud. Oracle shares are pennies from an all-time high, up 26% for the year.
Then there are the crowd favorite but speculative AI plays: enterprise software maker C3.ai was up 30% this past week; data analytics firm Palantir Technologies was up 23% on the week, while voice-enabled AI play SoundHound rallied 10%. But if AI is going to be world-changing technology along the lines of the internet, the cloud, the smartphone, electricity, and air travel, there have to be other ways to play it, right? Brook Dane, a Goldman Sachs tech portfolio manager, who was a guest this past week on Barron’s Live, our daily webcast and podcast. He’s fully focused on finding the next AI winners even though it’s still early. But, one of his favorites is Marvell Technology (MRVL), which makes chips used in data center connectivity.
The Trader:
-Apple has ruined this market. And it’s the biggest impediment to more gains.
That might seem like an odd thing to say. The S&P 500 index rose 1.6% this past week, while the Dow Jones Industrial Average gained 0.4% and the Nasdaq Composite rose 3%. Apple, which was up 1.5% for the week, certainly did its part. But at some point in the past couple of weeks, depending on data providers, Apple’s market capitalization, at $2.76T, topped the combined market cap of the entire Russell 2000RUT –0.62% index of small-cap stocks. Michael Arone, chief investment strategist at State Street’s US SPDR exchange-traded fund business worries that this concentration of gains is “contributing to investor anxiety,” says Arone, adding that it’s why investors have had an uneasy feeling about the market rebound since October.
-Porsche’s stock might prove to be as appealing as the company’s cars. The problem is: which Porsche stock to buy? US investors can be forgiven if that sounds like an odd question. Porsche stock isn’t nearly as straightforward as Ford, GM or Tesla.
There are American depositary receipts of Porsche Automobil but that isn’t Porsche , the car maker. It’s a holding company that owns about 25% of the ordinary stock in Porsche and about 53% of the ordinary stock in Volkswagen. Porsche, the maker of the famous 911, is actually named Dr Ing hc F Porsche AG, though it’s usually just referred to as Porsche. The ticker of the US-listed ADR is DRPRY. The company has 911 million shares outstanding in Germany, a total composed of 455.5 million ordinary shares and 455.5 million preferred shares. In Germany, it trades under the ticker P911. (Clever, huh?)
That’s the one investors uninterested in complexity should consider buying. Though the stock is up roughly 40% from its initial public offering about eight months ago, there’s still room for more gains, if trading in Ferrari. Ferrari sells fewer, more expensive cars than Porsche, but both companies are low-volume, ultra-luxury car makers that have no problem selling out their annual production—and are less impacted by a slowing economy or affordability issues.
Features:
-Negotiations over the debt ceiling resumed late Friday after talks were put on hold earlier in the day, according to The Wall Street Journal. A White House official said negotiators were meeting Friday night on Capitol Hill, the Journal reported. Earlier, Rep. Garret Graves (R., La.) walked out of negotiations with the White House after failing to come to an agreement on raising the debt ceiling. “We’ve decided to press pause because it’s just not productive,” Graves told reporters.
-Tesla investors can feel relieved that their CEO Elon Musk can devote more attention to the cars and less to Twitter, which got a new CEO in the form of Linda Yaccarino. Now they can start thinking about what comes next for Tesla, wwhose shares closed at $180.14, up 1.8% Friday while the S&P 500 and Nasdaq Composite dropped 0.1% and 0.2%, respectively. With Friday’s gain, shares are now up almost $12, or about 7%, since Musk tweeted out on May 11 that he had found a new CEO for Twitter. For the week, shares rose more than 7%, boosted by the company’s annual meeting of shareholders where Musk reaffirmed his commitment to running his car company.
European Trader:
-BT Group said it wants to reduce its workforce by possibly more than 40% by the end of the decade. While the British telecommunications company is not the first to credit artificial-intelligence for enabling mass job cuts, the scale of the reduction could set a new bar for US peers such as AT&T and Verizon. BT said Thursday that its total workforce –including employees and third-party contractors–will fall to between 75,000 and 90,000 by between fiscal 2028 and fiscal 2030, from 130,000 currently. That’s a potential 55,000 workers to go.
CEO Philip Jansen said around 10,000 of the job cuts would be due to automation and digitization, including the use of AI technology.
Emerging Markets:
-Investors who don’t mind playing with some fire may find ways to make some gains in Turkey based on the tried and tested policies of President Recep Tayyip Erdogan, who is all but certain to win re-election in the forthcoming runoff vote following the May 14 elections. One way to play Erdogan’s re-election is through the country’s hard-currency bonds, most of which are yielding between 9% to 10% annually. Chances of default look low, even with five more years of Erdogan. “There are other single-B sovereigns out there that offer higher yields, he says, referring to Turkey’s credit rating, one notch into junk. “But they don’t have Turkey’s strong repayment history, favorable public debt ratios, or diversified economy,” says Blaise Antin, head of sovereign research at TCW.
Commodities:
-Gasoline prices are falling fast heading into Memorial Day, but it’s no guarantee that will get more people behind the wheel over the holiday weekend. Demand for gas has been lackluster this year despite the drop in prices, and some experts see little chance of that changing.
At $3.50/gallon, average national gas prices are $1 less than they were a year ago. That milestone has been matched only three times in recent history—during the 2009 recession, the 2015 OPEC supply glut, and the height of Covid in 2020, according to Patrick De Haan, head of petroleum analysis at price-comparison company Gas Buddy. In general, oil prices are weak because of slowing demand around the world, as high interest rates and other issues are weighing on economic growth. Products like gasoline and diesel, which were in short supply last year during the early stages of the war in Ukraine, are now less scarce.
Streetwise:
-While ‘green’ hydrogen has produced interesting results in testing, hydrogen exposed stocks have not. The hydrogen hype cycles has focused on consumer uses, like fuel cells for cars. But the one to consider now is more about using industrial-scale hydrogen to clean up fertilizer and steel. And the perks have never been bigger. The US is suddenly offering $100B for clean hydrogen production. That’s a bonanza, or a mirage, depending on the precise definition of clean hydrogen, which, it turns out, lawmakers didn’t quite nail down. But guidance is coming, and projects have begun. Some things aren’t so different. Clean hydrogen’s heyday remains far off. “Broad adoption, in our view, should not take place in the foreseeable future,” wrote a team of JP Morgan analysts this past week. The world’s lightest element is still Hindenburg-ing investor cash. Defiance Next Gen H2HDRO, an exchange-traded fund of clean hydrogen and fuel-cell plays, has lost 69% since launching just over two years ago. This isn’t a criticism of clean hydrogen technology by some cranky stock market scribbler who last studied chemistry a third of a century ago and took to it like a vampire to holy water. It’s a complaint again st the investment case. (That other stuff checks out.)
Changement stratégique au conseil de Casino
L'enseigne est endettée à hauteur de 6,4 milliards d'euros à fin 2022, dont 4,5 milliards sur son activité France.
Thomas Piquemal, représentant de Fimalac, démissionne de son poste d'administrateur du groupe Casino, « à effet immédiat ». Actionnaire à 2,6 % du distributeur, la société de Marc Ladreit de Lacharrière a pris cette décision « afin d'éviter tout risque de conflit d'intérêts dans le cadre de l'étude par le groupe Casino de la proposition de EP Global commerce et de ne gêner en aucune façon les travaux du conseil d'administration », précise le groupe dans un communiqué paru vendredi, confirmant ainsi une information des Échos.
Le 24 avril, le milliardaire tchèque Daniel Kretinsky a proposé à Jean-Charles Naouri, le PDG de Casino, de souscrire à une augmentation de capital de 1,1 milliard d'euros. Il y participerait à hauteur de 750 millions, Marc Ladreit de Lacharrière y apportant, de son côté, 150 millions. Cette augmentation de capital ferait de Daniel Kretinsky le premier actionnaire de Casino. Ce dernier a toutefois conditionné son offre à une « réduction très substantielle de la dette brute non sécurisée du groupe », qui s'élève à 3,6 milliards d'euros. Il serait proposé deux options à ses créanciers non sécurisés : convertir leur dette en capital ou accepter de la céder avec une très forte décote.
Daniel Kretinsky déclenche une bataille pour le contrôle de Casino : https://www.lefigaro.fr/societes/daniel-kretinsky-declenche-une-bataille-pour-le-controle-de-casino-20230424
Casino a sollicité ses créanciers afin qu'ils approuvent la demande d'ouverture d'une procédure de conciliation, préalable à une renégociation de la dette. Les créanciers du groupe ont jusqu'au mardi 23 mai, 17 heures, pour remettre leur réponse. Dans la foulée, le groupe réunira son conseil d'administration pour décider de demander ou non l'ouverture d'une procédure de conciliation auprès du tribunal de commerce. Si c'était le cas, Marc Sénéchal pourrait être nommé conciliateur. Charge à lui, ensuite, de renégocier la dette avec les créanciers et de trouver la meilleure issue possible pour Casino, lourdement endetté. Casino négocie, par ailleurs, une fusion de ses activités française avec Teract. Son PDG souhaite désormais voir les deux offres converger.
The Week’s 10 Biggest Funding Rounds: Big Money Flows To Water Tech Startup Gradiant
After several weeks of just having one or two rounds of nine figures, this week saw an explosion. Eight rounds hit $100 million or more as big rounds seemed to pour in. No one sector cleaned up, as the money was spread around from cleantech to biotech to fintech to even restaurant-centric software.
1. Gradiant, $225M, cleantech: Gradiant became one of the newest unicorns this week after raising a fresh $225 million in a Series D led by BoltRock Holdings and Centaurus Capital. The water tech startup is now valued at $1 billion. The startup develops technology to reduce water usage and build wastewater treatment systems for companies in the pharmaceutical, semiconductor, food and beverage, and other water-demanding industries. The funding is the largest in the wastewater treatment space, at least since the beginning of 2022. Founded in 2013 at the Massachusetts Institute of Technology. The company has now raised more than $392 million, according to Crunchbase.
2. Tipalti, $150M, fintech: Automated payment solution Tipalti raised big this week with a $150 million “incremental growth financing” round, as the company called it. Back in 2021, the Foster City, California-based fintech raised a $270 million Series F funding led by G Squared at a valuation of $8.3 billion. No valuation was given this time around — although that is not unusual in this time of slowing venture funding and declining valuation. The latest round was from JPMorgan Chase Bank and Hercules Capital, which specializes in venture debt, although no distinction between debt and equity was announced by Tipalti. Founded in 2010, Tipalti has now raised about $700 million, according to the company’s release.
3. Restaurant365, $135M, accounting: It’s hard to run a restaurant — as anyone who has watched several reality shows based on doing so knows. Restaurant365 tries to make that a little easier and this week the Irvine, California-based startup added some big-named backers. The company nailed down a $135 million round co-led by KKR and L Catterton. The new round values the company at $1 billion, per its release. Restaurant365 offers enterprise management software for restaurants, helping them take care of accounting, payroll, supply chain and more. The company has surpassed $100 million in revenue and is used in more than 40,000 restaurant locations. Founded in 2011, the company has raised more than $260 million, per Crunchbase.
4. (tied) Avenue One, $100M, property management: New York-based Avenue One also joined the unicorn herd this week with a $100 million raise led by WestCap. The cash infusion gave the company a valuation of $1 billion. The startup, founded in 2020, provides a handful of services to single-family rental investors — such as finding their next property or financing. Institutional investors started buying up single-family homes during the pandemic as interest rates remained low and families sought more space. Even as interest rates have climbed back up, there clearly is still enough interest in the market to mint a property management startup as a unicorn.
4. (tied) Boundless Bio, $100M, biotech: It seems every week a biotech startup or two raise a huge round. This week is no different. First off is Boundless Bio, a clinical stage, next-generation precision oncology startup, which raised a $100 million Series C co-led by Leaps by Bayer and RA Capital Management. The San Diego-based startup is developing therapeutics directed against extrachromosomal DNA for patients with oncogene amplified cancers. In the past, targeted therapies have been mostly ineffective in treating patients with oncogene amplified cancers, according to the company. Founded in 2018, the company has raised more than $250 million, per Crunchbase.
4. (tied) Eagle Eye Networks, $100M, security: When a security company raises a nine-figure round, it is normal to assume it is referring to cybersecurity. However, not in this case. Eagle Eye Networks is an actual physical security company — although with a tech twist. The company offers cloud-based video surveillance. Perhaps not the sexiest of industries, but still a significant market. The Austin, Texas-based startup locked up $100 million in a round led by Japan-based Secom. Founded in 2012, the firm has now raised $195 million, according to Crunchbase.
4. (tied) Ray Therapeutics, $100M, biotech: Another biotech was able to raise a nine-figure round this week. San Francisco-based Ray Therapeutics locked up a $100 million Series A led by Novo Holdings A/S. The startup is looking to restore vision for people with the rare blinding disease retinitis pigmentosa. While some companies are looking to stop the disorder before it results in blindness, Ray differentiates itself by looking into therapeutics to actually bring back vision. Founded in 2021, the company has now raised $110 million, per Crunchbase.
4.(tied) Zip, $100M, procurement: Procurement software certainly is not the sexiest of industries, but there is no denying the need for systems that help companies with the burdensome process of buying new software and hardware. San Francisco-based Zip helps companies do just that and this week it raised a $100 million Series C from investors Y Combinator, CRV and Tiger Global. The startup also bucked the trend of declining valuations. The new cash gives the procurement startup a $1.5 billion post-money valuation. While many companies are seeing stagnant or falling valuations, the new valuation represents a slight bump from its previous $1.2 billion valuation last May after the company raised a $43 million Series B. Zip helps companies with sourcing, approving and paying for needed business tools, ideally helping to streamline the process to make it less taxing. Founded in 2020, Zip has raised $181 million to date, per the company.
9. Nido Biosciences, $87M, biotech: Watertown, Massachusetts-based Nido Biosciences, a biotech startup developing medicines for debilitating neurological diseases, announced it has raised a total of $109 million in seed, and Series A and B financings. Previous SEC filings (here and here) indicate the Series B — led by Bioluminescence Ventures — likely was around $87 million.
10. Quince, $77M, e-commerce: San Francisco-based luxury retailer Quince raised a $77 million Series B led by Wellington Management. Founded in 2018, the company has raised $141.5 million, according to Crunchbase, positioning it for accelerated growth and expansion.
Big global deals
Even though the U.S. saw some big funding rounds, none came close to the biggest this week.
- China fast-fashion startup Shein reportedly raised $2 billion at a $66 billion valuation, according to The Wall Street Journal.
Buying Porsche’s Stock Isn’t Easy. How to Pick the Right One.
The reviews are in for the 2024 Porsche Cayenne, which is available as a plug-in hybrid, and they are spectacular. Porsche POAHY +1.14% stock could be spectacular as well, but the big question is, which one?
U.S. investors can be forgiven if that sounds like an odd question. If they want to buy Ford Motor F +0.09% (ticker: F), Tesla TSLA +1.84% (TSLA), or General Motors GM –0.73% (GM), they simply type in the ticker and go. Porsche isn’t nearly as straightforward.
There are American depositary receipts of Porsche Automobil (POAHY), but that isn’t Porsche , the car maker. It’s a holding company that owns about 25% of the ordinary stock in Porsche and about 53% of the ordinary stock in Volkswagen (VOW.Germany).
Porsche, the maker of the famous 911, is actually named Dr Ing hc F Porsche AG, though it’s usually just referred to as Porsche. The ticker of the U.S.-listed ADR is DRPRY. The company has 911 million shares outstanding in Germany, a total composed of 455.5 million ordinary shares and 455.5 million preferred shares. In Germany, it trades under the ticker P911. (Clever, huh?)
That’s the one investors uninterested in complexity should consider buying. Though the stock is up roughly 40% from its initial public offering about eight months ago, there’s still room for more gains, if trading in Ferrari RACE +1.04% (RACE) is anything to go by. Ferrari sells fewer, more expensive cars than Porsche, but both companies are low-volume, ultra-luxury car makers that have no problem selling out their annual production—and are less impacted by a slowing economy or affordability issues.
Porsche, though, trades for 18 times estimated 2024 earnings, less than half the 37 times Ferrari fetches. Ferrari deserves some premium—its earnings are expected to grow at about 13% a year on average for the coming two years, faster than the 9% rate for Porsche—but that premium seems a bit much. The franchises are similar enough that they can trade closer to one another. Valuing Porsche at 21 times, as Société Générale analyst Stephen Reitman does, would put Porsche stock at about $146 a share, or about $14.60 for the ADR, up 16% from Thursday’s close of $12.59.
Porsche Automobil is more intriguing. Its stakes in Porsche and Volkswagen are worth roughly $39 billion, but it has an enterprise value (market capitalization plus debt) of just $25 billion, a 37% discount. There are reasons for that discount—potential payouts related to charges that Volkswagen had manipulated emissions testing in the U.S. is the largest overhang—but it’s grown too large for Abhay Deshpande, founder of Centerstone Investors, to ignore. He believes a discount of 10% to 15%, in line with its historical discount, is more reasonable, and would imply a 50% gain for Porsche Automobil.
“I know the thesis about [P911] being highly profitable…a luxury goods kind of concept,” Deshpande says. “We own the holding company.”
Smead Capital Management CEO Cole Smead, who bought the Porsche IPO, now thinks shares in the holding company, Porsche Automobil, are the better bet. He cites the possibility, if not probability, that the latter decides to spin out the individual auto makers, or at least part of them.
Investors can take advantage of the holding company’s complexity or keep it simple and buy shares in the auto maker. Either way, they should go far.
Everyone Is Focusing on Bud Light’s Transgender Controversy. They’re Missing a Bargain Stock Opportunity.
The mess involving Bud Light has dampened a revival at Anheuser-Busch InBev BUD +0.99% and soured Wall Street on the global beer giant’s stock.
Investors, however, might want to consider the depressed shares (ticker: BUD), which have fallen about 11%, to $58.80, since the company reported good first-quarter results in early May. Now fetching about 18 times projected 2023 earnings of $3.19 a share, BUD is more than 50% below its 2016 peak of $133 and trades at a wider-than-usual discount to leading consumer stocks such as Coca-Cola (KO) and PepsiCo (PEP), which command about 25 times earnings.
The drop was spurred by a Bud Light promotion featuring transgender influencer Dylan Mulvaney, leading many conservatives to boycott the brand.
While Bud Light’s troubles are hurting its U.S. brands, BUD gets just 30% of its profits from the U.S. and Canada. The company has strong positions elsewhere around the globe, anchored by Central and South America, where it generates about half of its profits. The beer business shows signs of perking up, and BUD’s improved balance sheet has let the company boost its dividend, now yielding 1.4%.
Says Evercore ISI analyst Robert Ottenstein: “The issues in the U.S. present a serious challenge today, but seem to be stabilizing. If [negative] volume trends start to moderate soon—and we think there is a good chance [they will]—this will likely prove an attractive entry point.” He rates the stock Outperform with an $80 price target.
Investors, however, might need to be patient. Owing to the Bud Light brouhaha, Wall Street has cut its 2023 estimates by about a dime a share and sees little or no earnings growth this year. The villain: 20%-plus declines in Bud Light off-premise sales—those at retail stores—since the controversy erupted more than a month ago, according to Beer Business Daily. And the drop at bars and restaurants, some investors suspect, may be worse.
Moreover, the controversy appears to be hurting other BUD brands, including Budweiser and even Michelob Ultra—one of the few bright spots domestically for the company, which has suffered steady overall U.S. volume declines for a decade.
However, BUD’s global beer volume rose 1.8% in 2022 and 0.9% in the first quarter, with revenue up 12.4% on higher pricing. Citigroup analyst Simon Hales, who rates BUD a Buy with a $73.50 target, expects a 13% drop in Bud Light volume in 2023’s final three quarters, but argues that its woes already are more than discounted in the stock price.
There have been encouraging developments. BUD has shifted from an acquisition-heavy growth strategy to one focused on driving volume and revenue growth.
The architect of the old approach, Carlos Brito, stepped down as CEO in 2021, replaced by another Brazilian, Michel Doukeris. Now, the company is emphasizing its premium-price beers, led by Corona, Stella Artois, and Budweiser, which are marketed worldwide. In the first quarter, earnings rose 9% year over year to 65 cents a share. Corona’s revenue rose 11.9%; Stella Artois’, 13.3%; and Budweiser’s, 17.8% outside their home markets of Mexico, Belgium, and the U.S., respectively.
Net debt fell to a still hefty $69.7 billion at year-end 2022, versus $76.2 billion in 2021, helping to raise BUD’s credit ratings from Moody’s and S&P to single-A from BBB and the equivalent. For years, especially after it bought SABMiller for $100 billion in 2016, a knock on BUD was that it was taking on too much debt for acquisitions.
Ottenstein and some other analysts think the Bud Light controversy will fade by next year. That’s reflected in the FactSet consensus call for a 15% increase in 2024 earnings to $3.69 a share, which puts the stock at a reasonable 16 times forward earnings. Doukeris and other executives were upbeat on the company’s first-quarter earnings conference call in early May, saying that they expect 2023 earnings before interest, taxes, depreciation and amortization, or Ebitda, to rise 4% to 8%, in line with its medium-term guidance. They also expect revenue this year to rise at a faster rate than Ebitda.
One problem: The brewer is incorporated in Belgium, so isn’t eligible to be in the S&P 500 indexSPX –0.14% . That gives U.S. institutions less reason to own it.
Although the Mulvaney marketing strategy backfired, it was addressing a real issue: the long-term decline of Bud Light, BUD’s top domestic brand, accounting for 30% of U.S. sales. Volumes were down by a third since 2010, even before the recent debacle.
BUD plans to triple spending on Bud Light marketing this summer. But its handling of the Mulvaney situation has raised questions about its marketing and crisis-management abilities. The company’s initial statement said, “We never intended to be part of a discussion that divides people. We are in the business of bringing people together over a beer.” Nick Puleo, founder and CEO of Comsint, a strategic consulting firm, wrote in Barron’s that such “wishy-washy verbiage isn’t likely to unite anyone.”
Two U.S. marketing executives involved in the initiative have been put on leave, and HSBC analyst Carlos Laboy argues that further leadership changes may be needed. But whatever happens, the stock is cheap enough to warrant a look from bargain hunters.
It’s Time to Think Bigger on AI. These 8 Stocks Could Be the Next Winners.
Investors continue to scramble for new ways to play the mania over artificial intelligence software. From here, they’re going to have to think a little more outside the box.
The obvious bets are so well known that it seems everyone owns them. The consensus big winner is Nvidia NVDA –1.31% (ticker: NVDA), which makes graphics processors used to train the large language models at the heart of generative AI. Nvidia shares have more than doubled this year already, and the company now ranks as the fifth most valuable tech stock, ahead of Meta Platforms META –0.49% (META) and Tesla TSLA +1.84% (TSLA).
Microsoft MSFT –0.06% (MSFT) was the market’s first pick on AI software, given its large stake in ChatGPT creator OpenAI and the introduction of AI features into a host of Microsoft applications. The stock is up 33% this year, and has a market value of $2.4 trillion, trailing only Apple .
Alphabet GOOGL –0.06% (GOOGL) shares were shunned earlier this year after Microsoft unveiled an AI-powered version of its Bing search engine. But Alphabet has been investing in AI for at least a decade and recently announced AI advancements of its own. The stock is up 39% in 2023. Also creeping into the discussion: Oracle (ORCL), which has an agreement to host Nvidia-powered supercomputing services on the Oracle Cloud. Oracle shares are pennies from an all-time high, up 26% for the year.
Then there are the crowd favorite but speculative AI plays: enterprise software maker C3.ai (AI) was up 30% this past week; data analytics firm Palantir Technologies (PLTR) was up 23% on the week, while voice-enabled AI play SoundHound (SOUN) rallied 10%.
But if AI is going to be world-changing technology along the lines of the internet, the cloud, the smartphone, electricity, and air travel, there have to be other ways to play it, right?
I raised that question with Brook Dane, a Goldman Sachs tech portfolio manager, who was a guest this past week on Barron’s Live, our daily webcast and podcast.
“I’ve been a tech investor for more than 30 years. This is one of, if not the most exciting, developments I’ve ever seen,” he said. “The power of these models and how they will change knowledge-worker productivity...is profound...we are fully focused on finding the next AI winners.”
That said, Dane points out that it is “super early.” Microsoft said on its most recent earnings call that generative AI related workloads could add 1% to the quarterly growth of its Azure cloud business in the June quarter. That implies $150 million of incremental revenue, for a company generating about $55 billion a quarter in revenue overall. It’s barely a rounding error.
Dane sees four basic ways to play the opportunity in AI. There are pick-and-shovel plays, which enable data centers to run these AI workloads. There are infrastructure needs around AI, “given that data is the key to all this.” There are security firms. And there are applications that will benefit from the addition of AI.
In the pick-and-shovel category, Dane’s favorite pick is Marvell Technology (MRVL), which makes chips used in data center connectivity. Their chips, he says, assure workloads are distributed fast and efficiently.
He also thinks the AI trend will be a boost for software companies focused on electronic design automation, or EDA. In particular, Dane is bullish on Cadence Design Systems (CDNS). He also notes that AI workloads are memory intensive, which is bullish for DRAM and flash memory giant Micron Technology (MU).
As for data technology plays, Dane says he has been talking to lots of companies about how they think about deploying AI, and that a couple common themes have emerged. He says companies want to train models on their own internal data, without sharing intelligence with the world. That requires “cleaning and sandboxing” data, he says, which is a boost to companies like Snowflake (SNOW) and Datadog (DDOG) that help companies warehouse and analyze information.
In security: “Any time you get a big change in the threat landscape, it is very good for cybersecurity companies,” Dane says. “This will introduce a whole new realm of mayhem into the world as bad actors take advantage of this technology and do things that you and I can’t even think of right now. But it’s coming...We’re going to need new forms of protection.”
His top pick to protect against the new threat is Palo Alto Networks (PANW). Dane says Palo Alto has data on “threat vectors” that dwarf anything their customers could compile. “They are going to run AI models across that data to identify threats earlier, faster, and better than any other companies.” He’s also bullish on ZScaler (ZS), a cloud security software company.
Finally, there are applications: “This is the earliest area, but will be the biggest over time,” Dane says. “We’re looking for the obvious places these tools can get deployed in a responsible and safe way.” One stock he likes is HubSpot (HUBS), which provides customer relationship software for small and medium-size businesses. He thinks HubSpot can use AI to make its customers more productive and efficient in their marketing spend. If HubSpot can do that, Dane says, customers will pay more. And the stock should ratchet higher.
To be clear, this is hardly an exhaustive list. I’ve written before about other companies deploying AI software, including Adobe (ADBE) and Duolingo (DUOL). ServiceNow (NOW) just laid out a new partnership with Nvidia to drive better workflow management software for the enterprise.
The internet has changed every business. And so will AI.
10 Stocks to Play a Resurgent Energy Sector, From Our Roundtable Experts
Our energy roundtable predicts higher crude prices as global demand grows faster than supply. What’s ahead for U.S. shale, the majors, and the energy transition.
Negotiators Halt Debt-Ceiling Talks With No Breakthrough in Sight
White House, Republicans hope to reach deal centered on spending cuts, work requirements
Debt-ceiling negotiators broke off a second round of talks late Friday without yielding a breakthrough, as the White House and House Republicans struggled to reach a deal to raise the limit and avert a government default as soon as next month.
The resumption and abrupt end of the talks Friday night followed a breakdown in the negotiations earlier in the day, highlighting the divisions that remain as time for reaching a deal draws short.
Rep. Patrick McHenry (R., N.C.), one of the negotiators, said that he wasn’t confident it would be possible to reach an agreement this weekend, the deadline that President Biden said needed to be met to clear legislation by June 1, when the U.S. could default.
“This wasn’t a negotiation tonight,” Rep. Garret Graves (R., La.) told reporters after talks ended. “This was a candid discussion about realistic numbers, a realistic path forward.”
White House officials left the Capitol without promising to return. “We’re going to keep working tonight,” White House adviser Steven Ricchetti told reporters. “I’m not assessing anything. I’m sorry,” Ricchetti said when asked if he would be returning.
Negotiators said the breakdown in talks centered around how deeply to cut the government budget, with House Speaker Kevin McCarthy (R., Calif.) saying Friday that spending levels were a major sticking point as Republicans pressed for deeper reductions than Democrats appeared poised to accept. Republicans have ruled out any tax increases as a way of reducing federal deficits.
“We’ve got to get movement by the White House and we don’t have the movement yet so, yeah, we’re in a pause,” McCarthy told reporters. “We can’t be spending more money next year. We have to spend less than we spent the year before. It’s pretty easy.”
“There is no question we have serious differences,” White House press secretary Karine Jean-Pierre said in a briefing in Hiroshima, Japan, where Biden was attending the Group of Seven summit. She said the president is being briefed regularly while he is in Asia and the White House will “work hard toward a reasonable bipartisan solution” that can pass both chambers of Congress.
“This is the core of democracy, that’s what we’re seeing at play here,” she said, adding that both sides will need to give up some of their demands to land a deal.
The White House followed up with a tougher statement from White House communications director Ben LaBolt. “Republicans are taking the economy hostage and pushing us to the brink of default,” he said, adding that Republicans “are recycling a barely watered down version of their extreme budget proposal.”
In Hiroshima on Saturday, Biden told reporters during a meeting with Australian Prime Minister Anthony Albanese that he was “not at all” worried about the talks. He said they tend to move in stages and “I still believe that we’ll be able to avoid a default.”
The initial setback in talks tempered a weeklong selloff in U.S. Treasurys, with rebounding expectations for economic growth and inflation driving bond yields to new two-month highs. The yield on the benchmark 10-year U.S. Treasury note settled at 3.690% Friday—its highest close since March 10, the day that Silicon Valley Bank was seized by the government following a run by depositors. Yields rise when bond prices fall.
The Dow Jones Industrial Average fell 109.28 points, or 0.3%, while the S&P 500 and Nasdaq Composite finished slightly lower. All three major indexes finished the week in the green.
The break came one day after the White House and McCarthy had expressed optimism that a deal could be reached soon, after both sides narrowed negotiations between McCarthy and Biden to a handful of key aides and allies. McCarthy said he hadn’t spoken Friday with Biden.
Negotiators are facing a short deadline. The Treasury Department has said that the U.S. could become unable to pay its bills on time as soon as June 1 unless Congress acts. Negotiations have focused on capping spending, revoking unused Covid-19 aid, streamlining permitting for energy projects and changing work requirements for some benefit programs.
McHenry had earlier characterized the breakdown in talks as “putting negotiations at a very bad moment.”
Ricchetti had said as he left a meeting earlier Friday that both sides were “playing by ear” when asked whether there would be more talks.
A bill passed by the GOP-controlled House in April that Republicans see as the starting point in negotiations proposed raising the nation’s $31.4 trillion borrowing limit in exchange for deep cuts in government spending. The bill would return the government’s discretionary spending to fiscal 2022 levels in fiscal 2024 and then cap annual spending growth at 1% over roughly a decade.
Notably, McCarthy in his Friday comments didn’t specify returning discretionary spending to fiscal 2022 levels, which would represent about a $130 billion cut from 2023 outlays. Instead, he said that spending had to be less than the current level, which is $1.65 trillion, suggesting that the opportunity for a deal may lie in reaching agreement on a smaller cut.
In the negotiations, the White House has signaled its openness to a deal that caps future spending for two years, though the specifics of such a proposal are unclear. Some Republicans have pushed for a 10-year spending caps deal.
The White House has argued for weeks that rolling back spending to 2022 levels would require cuts as deep as 30% to many government programs if spending on the military and veterans are protected, as GOP lawmakers have promised.
People briefed on the negotiations said the two sides were struggling to make progress on the core issues that have been at the center of the talks for weeks, and both Republicans and White House officials expressed frustration that an agreement hadn’t been reached.
Some of the people expressed optimism that the negotiators could come back to the table over the weekend, but both sides were evaluating next steps on Friday.
Both Republicans and Democrats have acknowledged that any deal to raise the debt ceiling will include some conditions, after the White House effectively gave up on its insistence that the debt-ceiling increase be “clean.” But the conservative and progressive wings of the Republican and Democratic caucuses have signaled opposition to parts of the emerging talks, putting pressure on leadership when it comes time to corral votes.
On Thursday, the House Freedom Caucus, a group of about three dozen, far-right lawmakers who frequently oppose government spending bills, took a position that negotiations should stop until the Senate passed the April debt-ceiling bill.
At the same time, progressive lawmakers on the far left of the Democratic Party are pushing Biden to use the 14th Amendment to the Constitution to raise the debt ceiling without Congress, as a way to avoid negotiating with Republicans. Progressives have loudly opposed strengthening work requirements for programs that help poor Americans.
“We cannot reach a budget agreement that increases the suffering of millions of Americans,” a group of 11 senators wrote, adding it is “seemingly impossible to enact a bipartisan budget deal at this time.”
The 14th Amendment states that federal debt authorized by law “shall not be questioned.” Biden has said he was considering invoking the amendment as a way to keep paying the nation’s bills if Congress didn’t raise the debt limit. But he added the issue would be subject to litigation and might not be a solution in the current standoff, and administration officials have played down the possibility.
The Congressional Black Caucus has also taken a position opposing new work requirements in any final debt-ceiling bill.