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Market scorecard

US markets closed down yesterday after the Fed's meeting. Chair Jerome Powell said it's not likely that the central bank will cut interest rates in March or reduce their inflation target range. In response, the S&P 500 had its worst day since September with big tech stalwarts like Google (NASDAQ: GOOGL ) (-7%) and Microsoft (NASDAQ: MSFT ) (-2%) leading the losses. The S&P 500 was still up 2.17% in January, its third month in a row.

In company news, New York Community Bancorp plummeted 38% after the bank swung to a loss, bringing the regional banks index down 6% with it. Locally, Multichoice is up 25.7% after Group Canal+ SA made an R105 per share offer to purchase the remaining shares that it doesn't already own in the broadcast company.

Elsewhere, Dischem founder Ivan Saltzmann sold a R1.4 billion stake in the company a week after dumping R500 million property to the group, the shares were bought by Coronation. Lastly, Ellies share price tanked over 60% after the electronics company filed for bankruptcy protection.

Here's how it went, the JSE All-share closed down a tiny 0.07%, the S&P 500 fell 1.61%, and the Nasdaq was 2.23% lower. Ouch!

Bright's banter

Microsoft (NASDAQ: MSFT ) reported its December quarter numbers that beat on both revenue and profit but issued lighter revenue guidance for 2024. The company's shares are up almost 70% over the past year, and they're 11% higher in 2024 so far.

The enterprise software giant generated $62 billion in revenue, up 18% year-on-year, and net income of $21.9 billion, up 33%, its highest profit growth since 2020. A large thanks must go to the intelligent cloud division, which includes AI-heavy Azure, growing by 30%.

This quarter marks Microsoft's first earnings report since becoming a $3 trillion company and includes revenue from its recent Activision Blizzard (NASDAQ: ATVI ) acquisition, making gaming the third-largest business. Office and cloud revenue remain the top contributors, accounting for nearly 60% of Microsoft's overall revenue.

Microsoft's Office division continues to perform well, with productivity and business processes revenue up 13% year-over-year. Microsoft 365 Consumer subscribers have reached 78.4 million, nearly 16% up year-over-year. Office commercial products and cloud services revenue grew by 15%, ending the quarter with over 400 million paid commercial seats.

Microsoft's intelligent cloud business generated $25.9 billion in revenue, a 20% year-over-year increase, mostly driven by Azure.

Microsoft's gaming division has seen a 49% increase in revenue to $7.11 billion for the quarter, bolstered by the inclusion of Activision Blizzard, and has also seen a substantial increase in Xbox content and services revenue, up by 61%. Microsoft CFO Amy Hood expects overall gaming revenue to grow in the low 40% range next quarter, with around 45% due to the Activision Blizzard acquisition.

Microsoft's AI strategy includes AI software assistants called Copilot, powered by the same technology behind ChatGPT. Copilot was rolled out for Microsoft 365, offering features like summarising transcripts of video calls and generating emails. We are optimistic that businesses will adopt Copilot, creating a significant new revenue stream for Microsoft.

We love this business. It is diversified across enterprise software with annuity-like income through all its subscription services. Microsoft should be an anchor position in your portfolio if you don't already own it.

One thing, from Paul

I was asked by a client why we didn't buy him Advanced Micro Devices (NASDAQ: AMD ). My answer was, because you already own Nvidia (NASDAQ: NVDA ).

Broadly speaking, we seek out the leading company in an economic sector that we like, and buy that one, then sit tight.

So, if we are asked why we don't own Mastercard (NYSE: MA ) the answer is, because you own Visa (NYSE: V ).

Here's another good example. Quite a few clients own L’Oreal (EPA: OREP ), which is the largest beauty products company in the world with a 16.1% global market share. The second biggest company in that industry is Este Lauder with a 13.6% market share. We don't own it.

L’Oreal has been doing well lately, but Este Lauder has struggled because it overpaid for Tom Ford (NYSE: F ) in 2022. It also had some inventory problems in China.

Take a look at the share price charts in the chart below. In lockstep with each other up to 2023, but since then, a big divergence.


Byron's beats

The image below shows the 12 biggest companies in Europe. These are well-known brands, and many are global leaders in their fields. Novo Nordisk (CSE: NOVOb ) has catapulted to the top thanks to their blockbuster obesity drug Wegovy.

If you add the market caps of all these stocks you get to $2.9 trillion. That is still smaller than Microsoft which has just crested $3 trillion. The size and scale that these US tech giants have managed to achieve is just incredible.

Michael's musings

I've written a few times grumbling about excessive executive remuneration. I think in some cases the remuneration doesn't reflect the economic value created by the executive team. In my view, Elon Musk's $55 billion payday is not one of those cases. Yesterday, a court voided the incentive scheme, calling it flawed, and ordered Musk to return his share options.

How can I say that $55 billion in pay isn't excessive? Well, at the time, Tesla (NASDAQ: TSLA ) only had a market cap of about $59 billion and Musk would only get his first tranche of share options if the market cap reached $100 billion, and then again in $50 billion increments, all the way up to a market cap of $650 billion.

The New York Times at the time said "many experts would contend [it] is laughably impossible" for Tesla to reach a market cap of $650 billion. It went on to say, "As executive compensation plans go, Tesla's is about as friendly to shareholders as they come."

Remember, back then, Tesla was heavily shorted and many people thought a $59 billion market cap was already ridiculously high. If Musk didn't get Tesla to a $100 billion market cap in the near term, he would get $0 in compensation. As a result, no one seemed to care that he could earn $55 billion in exchange for taking Tesla from $60 billion to $650 billion.

I remember thinking, at the time, that as a shareholder, I would gladly pay Musk 9% of the gains if he could make my investment a 10-bagger. Many hedge funds charge 20% of the upside, with worse performance. Musk's compensation sounds like a bargain.

Signing off

Asian markets are mostly higher this morning. Benchmarks rose in India, Hong Kong, mainland China, and South Korea, while Japan is having a sluggish day. Chinese markets swung into gains after a four-day decline as the politburo vowed to focus on investing more in technology and chip manufacturing.

US equity futures edged higher pre-market. It is a big night for Vestact stocks, with Apple (NASDAQ: AAPL ), Amazon (NASDAQ: AMZN ) and Meta (NASDAQ: META ) all reporting after the market closes.

The Rand is trading at around R18.65 to the US Dollar.

The sun is shining and the highveld is green, enjoy the day.

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