This Week’s Topics
Chip Sector War Continues: Intel Says New Chip tops Nvidia’s in Speed and Cost
Alphabet's Cloud Event Sparks Investor Optimism Amid AI Concerns
Apple's Gross Profit Margins Surprise Investors, Analysts Forecast Upside Potential
Navigating the Geopolitical Minefield: U.S. Chipmakers' Dance with China
US Government Grants Billions to TSMC for Arizona Chip Expansion
A Small Crack in the Market’s Rally, The Start of a Correction?
Analysis of Recent Movements in S&P 500 E-mini Futures Contracts Sparks Debate Among Chart Analysts
Xiaomi's Electric Ambitions: Navigating the Road to Automotive Dominance
In the Recovering Airline Sector, Delta Earnings are Leading the Pack. Is it a Buy?
Costco Strikes Gold: How the Retail Giant Turned Precious Metal into Profit
Charting the IPO Landscape: From Uncertainty to Cautious Optimism
JPMorgan's Commodity Strategy: Navigating Inflation and Geopolitical Risks
Summer Is Here & The Sun Is Out: Is Now the Right Time to Invest in Solar Energy?
Rising Market Crowding
Bloomberg host, Helma Parmar from Bloomberg News reported on concerns raised by Man Group regarding market crowding. Market crowding occurs when a substantial number of investors concentrate their investments in the same assets or securities. In recent months, this trend has become increasingly evident among larger tech companies such as Nvidia and other members of the "Magnificent Seven."
Many investors allocating funds to the same stocks, particularly during market corrections or periods of apprehension, increase the risk of large withdrawals by investors, thus increasing volatility and expanding the potential for significant downside. Parmar also underscored the challenge investors encounter in identifying market crowding across various funds, often becoming apparent only after the fact. Therefore, it is important for investors to closely monitor stocks experiencing this type of crowding and factor it into their investment decisions.
Source: Bloomberg
Chip Sector War Continues: Intel Says New Chip tops Nvidia’s in Speed and Cost
One sector that has been a direct beneficiary of the recent AI craze has been semiconductors, all AI and language learning models need chips to operate, thus the companies that manufacture these chips have had a lot of revenue and opportunity sent their way. This has caused the competition amongst chip manufacturers to be quite fierce. Although Nvidia has been the company that has received the most media attention due to its unprecedented stock price increase, there are many other companies that can compete within the semiconductor space.
This week Intel had its Intel Vision customer event in Phoenix, AZ. At the event, they unveiled their new Gaudi 3 AI accelerator chip. The company has stated that the Gaudi 3 is faster and more efficient than any of Nvidia’s current chips, including Nvidia’s new groundbreaking Blackwell class GPUs. Eric J. Savitz of MarketWatch wrote, “Intel asserts that Gaudi 3 is up to 1.7 times faster than the Nvidia H100 at training large-language models, and up to 1.3 times faster for inferencing than the Nvidia H200, which is used specifically for inferencing rather than training. Gaudi 3 is up to 1.5 times faster than Nvidia’s H100 for inferencing applications, Intel says.” The Gaudi 3 will begin shipping later this year and will become Intel’s flagship chip. Intel also announced that they have firm commitments from four of the top AI server companies Dell, Hewlett Packard, Super Micro Computer, and Lenovo to begin building systems off of the Gaudi 3 chip.
Source: Eric J. Savitz, MarketWatch
Marvell Technology's AI Initiatives
Marvell Technology is capturing investor attention with its promising trajectory in artificial intelligence; a view echoed by analysts on Wall Street. In the CNBC article “Analysts are saying this chipmaker, which just held an AI event, is the most levered to the trend besides Nvidia,” Samantha Subin quotes UBS analyst Timothy Arcuri, saying, “MRVL hit back at some recent debates and laid a case that, next to NVDA, it is the company in the sector that is most levered to AI given its broad [intellectual property] portfolio and leverage across the data center,”
Timothy emphasized Marvell's significant involvement in AI, highlighting its extensive intellectual property portfolio and broad influence across the data center sector. The company's recent AI event further fueled speculation, particularly with the announcement of a potential new compute customer, potentially Microsoft, sending waves of optimism through the market. This momentum has propelled Marvell's stock up by an impressive 19% this year alone.
In the same article, analysts like Harlan Sur from JPMorgan expect Marvell to strengthen its position in the AI and data center sectors, predicting significant growth opportunities. Sur suggests that Marvell's AI-specific integrated circuits could generate sales of $7 billion to $8 billion by 2028, showing the company's strategic positioning. Goldman Sachs analyst Toshiya Hari shares this view, believing Marvell will exceed industry growth thanks to its wide range of products and the growing market in the computing industry. At the same time, Wells Fargo's Gary Mobley has raised revenue and earnings estimates, anticipating a faster increase in AI sales following recent developments at Marvell.
Despite the optimism surrounding Marvell, Again in the same article, Samantha Subin quotes Morgan Stanley's Joseph Moore saying, “We would see this story on the positive side of the AI debates, and the company made a strong case, but we do have a preference for NVDA with stocks at current levels,” Joseph remains more inclined towards Nvidia, pointing out Marvell's relatively flat performance over the past year and its higher valuation compared to peers. While recognizing Marvell's strength in the AI sector, Moore still favors Nvidia, given the current market conditions. This detailed analysis reflects the ever-changing nature of the semiconductor industry, where companies compete for leadership in emerging technologies like artificial intelligence.
Source: CNBC
Alphabet's Cloud Event Sparks Investor Optimism Amid AI Concerns
Alphabet's recent moves in the cloud computing domain have sparked hope among investors, shedding light on the tech giant's potential in artificial intelligence (AI) innovation. In the CNBC article “A chance to ‘differentiate’ its offering: What analysts expect from Google’s cloud event” Samantha Subin quotes Bank of America’s Justin Post saying, “With unique AI assets, including proprietary infrastructure and an advanced LLM model, we believe Google cloud has an opportunity to differentiate its cloud offering, improving market share and street sentiment,”
Justin is encouraged by Alphabet's distinctive AI assets, including its proprietary infrastructure and advanced LLM model. These assets are perceived as strategic advantages in the competitive cloud market, offering Alphabet opportunities to gain a stronger foothold in the industry. Despite the company's stock performing well against major U.S. indexes this year, it still lags behind competitors like Nvidia, Amazon, Meta Platforms, and Microsoft.
The timing of Alphabet's recent cloud-focused event is significant as the company navigates through investor doubt and occasional setbacks in its AI ventures. While the long-term outlook remains promising, Alphabet faces short-term challenges, with recent setbacks potentially impacting investor sentiment. Post expresses hope that the event will address these concerns, especially with anticipated positive updates on Gemini's capabilities and customer engagement, potentially shifting sentiment towards Alphabet's AI initiatives.
In the same article, Samantha Subin quotes Brain Nowak from Morgan Stanley, saying, “The potential for better than expected top-line, EBIT beats – from durably re-engineering the opex base – and new product announcements set GOOGL up for a strong performance this Spring,” Brian emphasizes the crucial role of Alphabet's cloud segment in the company's stock performance. This emphasis is justified given the increasing demand for AI and the cloud segment's faster growth rate compared to the advertising business. Projections indicate substantial revenue growth and margin expansion for Google Cloud, with analysts foreseeing a significant contribution to Alphabet's future revenues. Nowak identifies the cloud event as one of several catalysts for Alphabet's performance in the coming months, highlighting the prevailing optimism surrounding the company's AI-driven transformations. Alphabet's recent focus on the cloud has not only showcased its AI capabilities but has also renewed investor confidence in its long-term prospects. With strategic investments in AI infrastructure and promising growth in the cloud segment, Alphabet appears poised for continued success in the dynamic tech landscape.
Source: CNBC
Apple's Gross Profit Margins Surprise Investors, Analysts Forecast Upside Potential
In CNBC’s article “Bank of America says investors are getting it wrong about Apple — again,” Samantha Subin quotes Wamasi Mohan, an Analyst at Bank of America, saying, “In our opinion, the Street continues to underestimate the long-term gross margin potential for Apple across both Products and Services yet again, where we see about 180bps of Product gross margin upside and about 150 bps of Services margins upside over the next few years,” Investors are once again taken back by Apple's resilient gross profit margins, as indicated by insights from Bank of America. Mohan emphasizes the consistent underestimation by Wall Street of Apple's long-term gross margin potential across its product and service divisions. Mohan forecasts substantial upside, projecting approximately 180 basis points for product gross margins and 150 basis points for service margins in the coming years, citing past instances where Apple exceeded market expectations.
Reflecting on historical trends, Mohan recalls a similar scenario in 2018 when Wall Street's forecasts for 2023 gross margins stood at 39%, only to witness Apple surpassing those estimates with a reported 44% gross margin. Despite these impressive margins, Apple has faced challenges this year, evidenced by a 13% decline in its shares amid concerns over slowing iPhone sales and the articulation of its AI integration strategy.
Again in the same article, Mohan Is quoted saying, “The increasing mix of Services (higher margin business) as a proportion of the total company revenue can improve gross margins by 60 bps,” Mohan outlines the paths for margin expansion, including vertical integration, optimization of product mix, and the utilization of internal modems. Furthermore, the potential for Apple to develop its own data center chips and leverage its silicon in data centers presents opportunities for cost reduction and margin enhancement. Mohan also underscores the growing significance of Apple's services segment, promising higher margins and potentially strengthening the company's financial outlook.
JPMorgan shares its view of Apple's underappreciation by investors but notes signs of improving sentiment, partly driven by the company's valuation premium hovering at the lower end since the launch of the 5G phone. Analyst Samik Chatterjee is quoted saying, “Contrary to the deterioration of fundamentals relative to both Hardware demand as well as outlook for Services growth, the interest in AAPL shares [has] improved from the broader group of investors who have otherwise been averse to the premium valuation multiple despite one of the lowest growth outlooks relative to the other Mega Cap Tech stocks,” Samik highlights the increasing interest in AI and its anticipated role in the next iPhone upgrade cycle as factors contributing to renewed investor interest. Despite challenges in hardware demand and the outlook for services growth, Apple's shares are attracting increased attention from investors, indicating a potential shift in sentiment towards the tech giant's valuation multiples.
Source: CNBC
Boeing Faces Quality Challenges Amid Increasing Demand
Boeing recently released their delivery numbers, which experienced a sharp decline compared to previous deliveries. In the first quarter, they delivered 83 commercial planes, marking the lowest figure since mid-2021. During a segment on Bloomberg Markets: The Close, Lisa Anderson, President of LMA Consulting Group, delved into the recent challenges faced by Boeing. She shared that due to recent quality issues, Boeing finds itself with excess inventory and is now compelled to retrace its steps.
Despite the recent decline in delivery numbers, Boeing still experiences strong demand for its aircraft. Anderson stated, “Boeing has significant demand out there from their customers like United Airlines and American Airlines. However, since they’ve run into these issues with quality, they clearly are not able to supply enough… The FAA has put restrictions on the demand, meaning how much they could produce, because they wanted to make sure they could produce quality products, which is, of course, critical.” With these quality struggles and underwhelming delivery numbers Boeing stock suffered its worst close since October 2023.
Source: Bloomberg
Navigating the Geopolitical Minefield: U.S. Chipmakers' Dance with China
In the intense world of global semiconductor trade, China stands out as a crucial player, catching the interest of American chipmakers despite stricter export rules enforced by Washington. Big names in the industry, like Intel, Broadcom, Qualcomm, and Marvell Technology, make a significant chunk of their money from China, even more than what they earn domestically. This story of technological competition plays out against a backdrop of strategic moves. The United States, concerned about China's increasing strength in semiconductors, puts in place export controls, focusing on important chip technologies used in things like artificial intelligence. However, the rules are complex; while some products face tighter restrictions, there are still opportunities for trade within certain limits. This careful balance between following regulations and making the most of the market highlights how economic interests and geopolitical tensions interact in a complex way.
Despite the regulatory challenges, American chipmakers like Micron Technology, AMD, and Nvidia navigate a complicated set of export rules, working to keep their foothold in the profitable Chinese market. Despite the obstacles, these companies persist, adjusting their strategies to overcome regulatory hurdles, such as creating customized chip designs and engaging in lobbying efforts. This determination highlights the resilience of American tech giants as they face increasing regulatory obstacles.
As the geopolitical situation changes, China also adjusts its approach. Driven by a desire for self-reliance, Beijing launched an ambitious effort to boost its own semiconductor industry, backed by substantial government subsidies and a push for technological independence. In this fast-moving arena, the competition for dominance in semiconductors takes place—a struggle influenced by innovation, regulations, and economic needs, shaping the future direction of global technology.
Source: CNBC
US Government Grants Billions to TSMC for Arizona Chip Expansion
Taiwan Semiconductor Manufacturing Company (TSMC) is poised to receive over $11 billion from the US government to assist in building factories in Arizona. Before this influx of capital, TSMC had plans to construct two factories in Arizona. However, with this additional infusion of funds, it has committed to building a third factory. Kailey Leinz from Bloomberg News said, “The total investment TSMC will be making in the state of Arizona is to the tune of about $65 billion and they'll be getting US help to do that with about $6.6 billion in loans, and then up to another $5 billion in grants.”
These developments in Arizona will prove advantageous for the economy, providing 6,000 high-tech manufacturing jobs and roughly 20,000 construction jobs. TSMC is not the sole recipient of such funding from the government. Leinz said, “Intel has been awarded grants of more than $8 billion… and there's still plenty of money to give out, about 19 billion of the 39 billion in grants included in the Chips Act which passed in 2022 have yet to be doled out. Samsung, though, is expected to get about 6 billion of that.”
This act focuses on boosting domestic research and manufacturing of semiconductors in the United States. With this, and continued grants provided to chip companies in the US, production is expected to increase, and boosts to stock prices may continue to be seen. TSMC experienced stock gains shortly after this grant was announced.
Source: CNBC
A Small Crack in the Market’s Rally, The Start of a Correction?
The market has been in an insatiable rally in the first few months of this year, the question hasn’t been if a correction will happen, but when. This last week showed signs of the first potential crack in the market’s rally. This crack revolves around two main technical market indicators, the level of the VIX index, and the amount of put options bought. I will describe what both of these are and what they indicate in the body of this article.
The Cboe Volatility Index or VIX, is a market index that gauges the volatility implied in the market. Joseph Adinolfi of MarketWatch described it as, “The Vix measures implied volatility, meaning how much traders’ expect stocks to move over the coming month, based on activity in the options market. Volatility tends to rise more quickly when stocks are falling.” This last line will be very important in understanding why the VIX is implying that a correction may be at the door. The VIX spiked to over 16 last week just as the Wall Street “fear gauge” increased by 23%, this increase in options volatility has many worrying that the market is preparing to crack.
The main driver of this increased volatility has been a large portion of put options being bought by market participants. A put option is a bet that a given stock or index will fall. Regarding this increase in put options activity, Adinolfi wrote, “Rising demand for bearish put options last week pushed the 10-day rolling average of the Cboe equity put-call ratio to 0.661 on Friday, the highest reading since Jan. 26, according to Dow Jones Market Data.”
There are other indicators that a correction may be on the way, the market is currently anxiously waiting for the release of March CPI data which is expected to come in over the Fed’s target of 2%, earnings season, increasing treasury yields, Fed quantitative tightening, and more. Although none of these are huge indicators of a large correction, Matt and Mike Thompson, portfolio managers at Little Harbor Advisors said, “The most notable thing is the fact that it happened at all. We’ve had this quiet period since November. Things were looking like they were going to go up forever. We got a little crack there — it is not a big one, but it is there,”
Source: Joseph Adinolif, MarketWatch
Surge in Buybacks and Increasing Dividends
Michael Casper, a member of Bloomberg Intelligence, discussed the upcoming earnings season and highlighted crucial trends to monitor as it approaches. He noted that balance sheets are currently robust, with as much as $1.2 trillion of cash sitting on the sidelines and within companies' balance sheets. Consequently, many companies are deploying some of this cash through buybacks and increased dividends.
Casper stated, “Last quarter buybacks were up 4.7% year over year, that was the first time in a while that buybacks grew on a year-over-year basis. We're looking for that trend to continue in the first quarter and similarly, for dividends, we've seen about 123 companies in the calendar first quarter announce that they’re increasing their dividend program.” These trends are likely to persist if earnings continue to exhibit growth and as long as there remains excess cash on the sidelines.
A couple of notable buybacks that have recently been announced include Adobe's $25 billion buyback and FedEx's $5 billion buyback. Buybacks can create value for investors in several ways. One such way is through a decrease in shares outstanding, which leads to greater earnings per share. Additionally, increased dividends can be attractive for investors seeking cash payments without the need to sell any of their stake in the company.
Source: Bloomberg
Global Market Diversification
Michael Remak, Head of Investments at Citi Global Wealth, recently discussed optimal fund allocation with Bloomberg. He emphasized that global diversification is a profitable strategy for investors in the years ahead. Additionally, he pointed out that many US investors exhibit a home bias. Home bias refers to the inclination of investors to allocate a significant portion of their investment portfolio to domestic equities, often overlooking the advantages of diversifying into international markets.
Remak said, “We’ve seen over the last 15 years the US go from 50% to 70% of the global market cap. We don’t think over the next 15 years that’s going to trend to 90%. So we think the cost of being globally diversified has improved materially.” Investors may find it beneficial to allocate a portion of their funds to global markets, as the associated drawbacks and obstacles, according to Remak, have decreased significantly. However, it’s essential to recognize that global markets have historically exhibited higher volatility, which often translates to increased risk.
Source: Bloomberg
Analysis of Recent Movements in S&P 500 E-mini Futures Contracts Sparks Debate Among Chart Analysts
In the realm of finance, where each market fluctuation carries significance, the recent shifts in e-mini futures contracts tied to the S&P 500 have triggered a lot of analysis and speculation. The appearance of the third negative 'outside day' in just eight sessions has chart analysts carefully analyzing the implications of these patterns. An 'outside day' occurs when a security's price range exceeds the highs and lows of the preceding day, often indicating shifts in market sentiment and potential reversals. In the CNBC article “S&P 500 futures are showing a bearish trend, here’s what chart analysts are saying about it,” author Tanaya Macheel says, “On Thursday, the futures were trading near their support level, according to Tom Fitzpatrick of R.J. O’Brien. He said 5,191.50 to 5,193 is the level to test, with the next key level down being 5,098, the E-mini’s 55-day moving average.”
However, amidst the concerns raised, some analysts offer a dissenting view. In the same article, Tanaya quotes Ari Wald, an analyst at Oppenheimer, saying, “ These exhaustion signals are developing against a bullish longer-term trend, meaning they aren’t overly convincing in our work,” Ari maintains strong confidence that while these signals are significant, they do not pose a substantial threat to the broader market uptrend. Ari Wald emphasizes the resilience of the bullish longer-term trend against the backdrop of these 'exhaustion signals,' suggesting a continued upward trajectory throughout the year. In the same article Will Tamplin, an analyst with Fairlead Strategies, is quoted saying, “Since the SPX has been consolidating over the past few days, the outside-down-day becomes less meaningful,” Will highlights the contextual significance of these outside down days, suggesting they carry less weight amid recent market consolidation. Nevertheless, a sense of caution remains, particularly in light of recent bearish outside week movements fueled by rising Treasury yields, serving as a reminder of the ever-fluid nature of the financial landscape.
Source: CNBC
Xiaomi's Electric Ambitions: Navigating the Road to Automotive Dominance
Xiaomi's recent expansion into the automotive sector has ignited widespread interest and speculation within both the technology and automotive industries. Recognized primarily as a leading producer of smartphones, Xiaomi has boldly stepped into the electric vehicle (EV) market with aspirations of global leadership. Lei Jun, Xiaomi's founder and CEO, has made clear his vision of not only leaving a lasting legacy but also positioning Xiaomi among the world's top five automakers within the next two decades. This ambitious goal has resonated strongly, particularly with Xiaomi's introduction of its electric SU7 sedan, priced significantly below Tesla's Model 3 while offering comparable technological capabilities.
Analyst reactions have varied yet are generally optimistic. In CNBC’s article, “A Chinese smartphone maker is breaking into EVs and challenging Tesla. How are the stock rates now.” Evelyn Cheng quotes Adam Jonas of Morgan Stanley saying, “ Add Xiaomi to the list of capable China auto/tech firms that may represent attractive collaboration candidates as Western legacy auto firms look for ways to achieve higher scale, improved capital discipline and lower execution risks,” Adam sees Xiaomi as a potential partner for Western automotive giants seeking increased scalability and reduced execution risks. In the same article, Evelyn quotes Morgan Stanley’s greater China tech hardware analyst Andy Meng saying, “If Xiaomi can continue to outperform peers on [driver assist] and smart cabin features, we believe it is likely to become a disruption force with large growth potential,” Andy views Xiaomi as a disruptive presence in the EV market, especially if it continues to excel in driver assistance and smart cabin features. Despite fluctuations in Xiaomi's stock performance, its strategic initiatives, such as the unveiling of HyperOS and seamless integration with smart home systems, have attracted attention for their potential to build a robust, interconnected ecosystem, generating recurring revenue streams. However, amid the enthusiasm, some voices of caution highlight forthcoming challenges, including consumer reception of the SU7 and ongoing geopolitical tensions, particularly regarding trade relations between China and the United States. Nevertheless, with a substantial cash reserve and a steadfast commitment to technological advancement, Xiaomi appears well-positioned to establish a significant presence in the automotive industry, starting with a focused approach in its domestic market before expanding globally.
Source: CNBC
In the Recovering Airline Sector, Delta Earnings are Leading the Pack. Is it a Buy?
The airline industry is one that was struck rather hard by the pandemic and the aftershock effects of Covid, over the last year, and especially in recent months, the sector has been on the recovery. Delta, one of the largest and most well known airlines, has started this year off strong by beating analyst expectations with their first-quarter earnings numbers. Callum Keown of Barron’s wrote, “The airline reported adjusted earnings per share (EPS) of 45 cents on revenue of $12.6 billion—record first-quarter revenue. Wall Street was expecting earnings of 36 cents on $12.5 billion, according to FactSet estimates. Its second-quarter outlook for EPS of $2.20 to $2.50 came in above the analysts’ consensus of $2.22.” Delta attributes this rising in earnings to steady international travel and now increasing corporate travel. Year-over-year corporate sales rose 14% in the first quarter, this is due to many corporate accounts from technology and consumer services companies coming back to Delta. This increase in demand is good for the sector at large, but Delta is proving itself to be leading the pack.
Citi stated the following regarding Delta’s preeminence in the sector, “The results and guide looked very encouraging. Citi continues to identify Delta as its preferred U.S. carrier,” Citi kept a buy rating on the stock and set their price target to $55 (currently at $46.24). The stock price has risen 17.6% year-to-date, it has outperformed United Airlines which is up 5.3%, and American Airlines which is up 1.5%.
Source: Barron’s
Costco Strikes Gold: How the Retail Giant Turned Precious Metal into Profit
The introduction of gold sales at Costco has quickly turned the precious metal into a profitable venture for the retail giant. Since its launch last year, the initiative has become highly lucrative, with monthly revenues estimated between $100 million and $200 million, according to analysts at Wells Fargo. In CNBC’s article “Costco selling as much as $200 million in gold bars monthly, Wells Fargo estimates,” Jeff Cox quotes Edward Kelly, an equity analyst at the bank, saying, “Our work suggests there has been significant interest given COST’s aggressive pricing and high level of customer trust,” Kelly credits this success to Costco's aggressive pricing strategies and strong customer trust, as evidenced by rapid sell-outs online and an increase in Reddit posts praising the effort. This rush in sales is particularly impressive given that gold bars were only introduced in late August 2023, generating approximately $100 million in sales by the end of Costco's fiscal first quarter in November 2023.
Costco's offering includes 1-ounce bars of nearly pure 24-karat gold, priced approximately 2% above the prevailing spot price, estimated at around $2,400 per ounce. The appeal of gold, driven by a 13% increase in spot prices in 2024 amid concerns about inflation and the U.S. fiscal deficit, has undoubtedly contributed to the popularity of these bars. However, while the surge in sales positively impacts Costco's top line, the bottom-line profit margin remains narrow. Despite adding around 3% to general merchandise sales, the low-profit margins, combined with cashback incentives for executive members and Citigroup credit card users, restrict the profitability of this journey, according to Kelly. However, in the midst of geopolitical uncertainties and increased gold purchases by central banks, gold remains an attractive investment option, strengthening the case for its inclusion in diversified portfolios.
The success of Costco's gold journey highlights the retail giant's ability to capitalize on emerging market trends and consumer preferences. Costco's quick move into the gold market, using its brand reputation and large customer base, shows how flexible it is with strategy. As interest in gold rises due to economic uncertainties and inflation, Costco's decision to sell gold not only adds variety to its income but also confirms its position as a leader in the market, adapting to what its customers want.
Source: CNBC
The Ongoing Investor Battle for Disney (NYSE: DIS)
Disney's stock has seen a remarkable surge, with a 50% increase over the past six months and a 17% rise over the past year. Disney has seen a bit of a turnaround this year with news about its proxy votes on new board members, which has led to a better year than the past two or three years of stagnation and little growth. As investors closely monitor Disney's trajectory, the outcome of recent board battles and strategic decisions could significantly impact the company's future.
This uptick in price was likely influenced after activist investors such as Blackwells Capital and the Trian Fund announced they had bought a large sum of Disney shares, aiming to influence Disney's future strategy. These investors are pushing for changes in executive compensation, a restoration of Disney's box office dominance, and an expansion of profit margins, particularly in alignment with streaming industry leader Netflix.
The boardroom has become a battleground as activist investors seek to secure seats and implement their agenda. Blackwells and Trian have offered about 3 of their own candidates to become board members to help them accomplish their agenda if they are voted in. The current board members including CEO Bob Iger, who the activist investors want to step down, created ads to their shareholders which feature Disney characters like Anna and Elsa from the show “Frozen” telling the retail shareholders, who hold 35% of the outstanding shares, how to vote. The voting result came back at the beginning of April and the current board won by a landslide taking almost 90% of the vote.
The market response has been negative, with Disney's stock experiencing a 16% drop following the news a little over a week ago. Investors now appear uncertain about Disney's future trajectory. With the same board, we are likely to see the same results and behaviors that we have seen in the past. The past results have not benefited Disney for the better and have decreased its box office revenues and streaming revenues. The original turnaround of a 50% increase in the last 6 months was due to the activist investor's potential influence and the market agreed with their objectives. However, after the voting, we aren't likely to see much change in the longevity of Disney.
Disney faces several pressing challenges, including underperforming box office sales, declining viewership in traditional media outlets like ESPN and ABC, and significant losses incurred during the development of Disney Plus, its streaming platform aimed at competing with Netflix.
Retail investors, who own a substantial portion of Disney's outstanding shares, initially responded positively to activist investor involvement, driving up the stock price in anticipation of change. However, the outcome of the recent boardroom battle suggests that immediate transformations may not materialize as expected, leading to investor apprehension and a substantial market pullback.
The contract of CEO Bob Iger is set to end in 2026, with activist investors advocating for his replacement, he has been known to extend his contract in the past and is likely to extend after 2026 if he has the opportunity. The manager of Trian Partners said that if Disney doesn't see the need for change he will try again and fight to get a replacement for Bob Iger.
As Disney takes on its internal and external pressures, investors face a period of uncertainty. The recent boardroom battle demonstrates corporate governance and strategic decision-making that is not moving in a direction to benefit the long-term performance of the business. Moving forward, investors should closely monitor Disney's ability to address underlying challenges and maintain its position as a global entertainment leader.
Charting the IPO Landscape: From Uncertainty to Cautious Optimism
In recent months, there has been a significant shift in the IPO market, moving away from a period of uncertainty towards one characterized by cautious optimism. This change coincides with the broader market nearing its peak, indicating promising opportunities for companies aiming to go public through IPOs. In recent months, we have witnessed an outstanding surge in activity, highlighted by the appearance of several substantial IPO filings. Among these are Viking and Rubrik, with offerings hovering around the $100 million mark, bringing a solid sense of confidence into the market. In CNBC’s article, “There are green shoots appearing in the IPO market. Here are the stocks to watch going public soon,” Bob Pisani quotes Matt Kennedy of Renaissance Capital saying, “Recent filings have been encouraging,” Matt underscores this newfound optimism, pointing to the encouraging trend evident in recent filings. Success stories in the IPO domain, such as the stellar performance of ventures like Astera Labs and Reddit, serve as reassuring benchmarks, indicating a genuine craving for new issuers. In the same article, Bob quotes Greg Martin from Rainmaker Securities, saying, Were nice shots in the arm for the IPO market. They’re great data points with quality after-market performance (so far) that there is real market demand for new issuers.”
However, it's the upcoming wave of IPO debuts that truly grabs attention. Four significant offerings are set to hit the NYSE stage, with valuations surpassing $200 million each. This raises anticipation for a substantial increase in capital. The roster, featuring major players like UL Solutions and PACS Group, marks a notable shift from the quiet IPO scene of recent years. Despite the hopeful signs, there are still lingering worries. The possibility of interest rates going up casts a shadow, potentially dampening the excitement of this emerging recovery. Despite these concerns, experts in the industry remain cautiously optimistic and hopeful for a better interest rate situation. As the IPO market prepares for what comes next, the general feeling shifts between being cautiously hopeful and still a bit worried, showing the delicate balance everyone in the market faces in the coming months.
Source: CNBC
JPMorgan's Commodity Strategy: Navigating Inflation and Geopolitical Risks
In light of recent guidance from JPMorgan, it's clear that the investment bank is advocating for a strong approach to commodities, particularly emphasizing energy resources, as a strategic hedge against brewing inflationary pressures. In CNBC’s article “JPMorgan says the U.S. ‘not out of the woods’ on inflation, stay overweight commodities,” Spencer Kimball quotes Marko Kolanovic, JPMorgan's chief market strategist, saying, “We are not out of the woods yet on inflation, and the current backdrop of above-trend growth raises the risk that inflation will re-emerge as a problem for both central banks and markets.” Kolanovic takes a cautious stance on inflation dynamics, pointing out the current economic landscape's above-trend growth, which raises the potential for a resurgence in inflation, posing challenges for both central banks and financial markets.
The unexpected rise in inflation, especially within the services sector across the United States and Western Europe, alongside strong economic expansion, prompts JPMorgan to revise its global growth forecast upward by 0.5% for the first half of the year. Consequently, the investment bank anticipates a delayed onset of interest rate cuts by the Federal Reserve, now expected in July, with an anticipated 75 basis points reduction by year-end. Again in the same article, Kolanovic states, “However, ongoing growth resilience and sticky inflation raise the odds of fewer cuts.” Kolanovic advises caution, highlighting the potential for fewer rate cuts due to sustained economic resilience and persistent inflationary pressures, which could challenge supportive financial conditions.
Moreover, Kolanovic stresses the importance of overweighting commodity investments, particularly in the energy sector, amidst the ongoing surge in oil prices. Geopolitical tensions disrupting shipping routes in the Red Sea and escalating conflicts impacting energy infrastructure have propelled oil prices upward. JPMorgan forecasts a potential rise in Brent prices to $100 a barrel by September, citing anticipated production cuts by OPEC+ member Russia and heightened drone attacks on energy facilities in Ukraine. The repercussions of these disruptions, with substantial portions of Russian refining capacity offline due to attacks, could precipitate further production cuts and potential limitations on gasoline exports. Meanwhile, JPMorgan suggests that the United States might consider tapping into its strategic petroleum reserves as a precautionary measure in the event of further geopolitical escalation, highlighting the intricate interplay between global events and commodity markets.
Source: CNBC
Investment Opportunities in the Medical Sector
Covid-19 brought numerous delays to economies worldwide, and the medical industry was no exception. Countless surgeries and sought-after optional medical procedures were postponed, leaving many individuals awaiting treatment until a later time. As the economy gradually rebounds to its pre-pandemic state, the medical industry is witnessing a resurgence in the occurrence of these previously delayed surgeries.
During an interview on Bloomberg Markets: The Close, Hank Smith, Head of Investment Strategy at Haverford Trust, said that he believes there is an “unleashing of pent-up demand in the medical area, particularly with medical procedures”. With this context, he stated, “We like medical device makers like Stryker, Medtronic, and J&J.” He believes that Maytronics and J&J are particularly undervalued and should be considered by investors for their strong growth potential.
Source:Bloomberg
Summer Is Here & The Sun Is Out: Is Now the Right Time to Invest in Solar Energy?
The recent occurrence of a temporary solar eclipse in the United States brought to light the dynamics of the solar energy industry. The eclipse resulted in a significant 30 gigawatt reduction in solar power supply, which underscored the reliance on diversified energy sources, despite solar's growing contribution to the energy mix in various countries worldwide. Investors, while cautiously optimistic about the potential of solar energy, must navigate through a landscape characterized as a cyclical and a growth industry.
It might be interesting to see the current uses of fossil fuels and the renewable sector use below.
Source: electravision (jpmorgan.com)
Some challenges that are facing the solar industry right now are:
Interest Rates and Financial Costs: High-interest rates exert pressure on sales volume, margins, and valuations within the solar sector. This affects both the operational costs of production and installation, leading to uncertainties among potential customers. Companies like Sunrun and SunPower in the residential sector anticipate rate cuts to stimulate demand. However, commercial projects, with their ability to secure cheaper financing costs, present a safer and slightly less sensitive scenario to interest rates.
Cost Considerations: Over the past 15 years, solar panels have witnessed a decline in upfront costs, primarily due to technological advances and economies of scale. Below we can see the price per solar panel dramatically decrease.
Margin Pressures and Commoditization: Solar panels and batteries have become commoditized, resulting in diminishing profit margins within the industry. As products become commoditized, differentiation between companies diminishes, leading to price wars and reduced profitability. Investors must be selective when considering exposure to clean energy stocks, given the sector's poor operating margins compared to other growth industries. This chart below presents a harsh reality when investing in clean energy. They are the only industry that has some average negative profit margins and the lowest average profit margin against other industries. While this does raise red flags and should be cautiously noted this is a new sector and has a high potential and room to grow, which is common to see low margins in these stages.
Global glut turns solar panels into garden fencing option (ft.com)
However, other costs associated with installation, including labor, equipment, and financing, have increased. While the cost per solar panel has decreased it has become a smaller percentage of the total cost. All in all the total cost per Kilowatt of energy has increased. Despite the reduction in panel costs, the overall affordability of solar installations remains a concern for many customers. The recent decrease in panel prices is attributed to a supply glut and government subsidies in China. Tariff considerations in the US may lead to higher prices, potentially impacting market dynamics.
Global glut turns solar panels into garden fencing option (ft.com)
electravision (jpmorgan.com)
Some opportunities in the solar market are:
Technological Advancements and Battery Storage: Advances in battery storage technology hold promise for enhancing the economics of solar energy. Cheaper and more efficient battery storage solutions could make solar energy more compelling and accessible, further driving market growth.
Growing Demand and Record Capacity Additions: Businesses and governments are increasingly investing in large-scale solar installations to meet rising electricity demand. Despite challenges, the solar industry continues to add capacity at record rates, surpassing projections made by institutions like the International Energy Agency.
Electric Vision and Electrification Trends: The transition towards electric vehicles and heat pumps presents significant opportunities for integrating renewable energy into various sectors. Electrification initiatives aimed at reducing fossil fuel usage and shrinking energy footprints align with the long-term goals of sustainable energy transition. We are becoming more and more aware of our footprint and now about 10% of total car sales are plug-in hybrids and electric cars. A very small percentage of homes are getting heat pumps, that decision to pivot is only really made when building a new home. Therefore it will be a very slow transition.
electravision (jpmorgan.com)
The solar energy industry stands at a critical juncture, balancing between challenges and opportunities in a rapidly evolving energy landscape. While the sector faces hurdles such as financial costs, margin pressures, and commoditization, it also presents significant growth potential driven by technological advancements, increasing demand, and sustainability
initiatives. Investors navigating through this dynamic market must adopt a strategic and selective approach, considering factors such as business models, competitive advantages, and technological innovations. Despite short-term uncertainties, the long-term outlook for solar energy remains promising, offering a pathway toward a sustainable and resilient energy future.
Economic Updates
Recent economic data highlights fluctuations in key economies, affecting investment considerations.
Germany's trade surplus contracted more than anticipated in February, dropping from €27.5 billion to €21.4 billion. While exports dipped by 2%, imports surged by 3.2%, and industrial production saw a robust increase of 2.1%, exceeding expectations.
In the United States, consumer inflation surpassed investor expectations, with prices rising 3.5% year-over-year in March, driven notably by energy and shelter costs. Core services inflation also spiked to 4.8% year-over-year.
Minutes from the latest Federal Open Market Committee (FOMC) meeting revealed concerns among members regarding the persistence of inflation, leading to a deferral of anticipated rate cuts. The initial expectations for cuts in March and June have shifted, with a rate cut now projected for September, reflecting a cautious approach to monetary policy.
The European Central Bank (ECB) has maintained interest rates at 4.5%, indicating a stable stance amidst economic uncertainties.
Investors should monitor these developments closely as they navigate investment strategies, particularly in sectors sensitive to inflation dynamics and interest rate shifts.
Iran Attacks Israel, Causing Oil Prices to Skyrocket
Oil prices rose on the final trading day of the week as tensions in the middle east are on the rise. Brent Crude prices went up 2.2% to $91.73 per barrel, closing near its highest level since October. Exxon Mobile stock rose 1.4% and hit a record high, and the SPDR S&P Oil $ Gas Exploration & Production ETF was up 0.8%. Then over the weekend, Iran attacked Israel, this event should spend prices higher again next week as the market prices in the potential hit to oil supply. Helima Croft of RBC Capital Markets said, “stronger-than-anticipated demand, OPEC cuts, and renewed geopolitical uncertainty will keep prices significantly elevated, with some suggestions that triple digits are back on the table,” Continued tension in the middle east raises the risk that oil supplies and production could be damaged or halted.
Source: Barron’s