Wall Street ends down, calls for AI slowdown pummel chipmakers
Market scorecard
Friday was a bit wishy-washy for US stocks. However, it was still a good week for long-term investors, as all three major US equity indices demonstrated resilience, each posting gains of at least 1.3%. This positive performance marks the sixth week of gains, out of the eight thus far in 2024. Both the S&P 500 and Nasdaq are up 7.3% and 8.3%, respectively, year-to-date.
In company news, Palo Alto Networks (NASDAQ:PANW) was the S&P 500's best performer on Friday, up 5.3% after recouping some of its earlier losses. Elsewhere, Warner Bros. Discovery (NASDAQ:WBD) dropped 9.9% after the entertainment giant missed both on revenue and earnings.
On Friday, the JSE All-share closed up 0.13%, the S&P 500 rose by a tiny 0.03%, and the Nasdaq was 0.28% lower.
One thing, from Paul
Michael Mauboussin is a prominent market strategist, with roles at Morgan Stanley and Columbia Business School. In his latest work, he writes about increasing returns to scale, whereby companies get more competitive as they get larger.
He has teased out five sources of this phenomenon. The first two are obvious, (1) economies of scale and (2) network effects. The others are (3) learning from extensive production, (4) positive feedback leading to product domination, and (5) the recombination of ideas.
These factors are clearly visible with leading companies like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Uber (NYSE:UBER).
This underscores why we prefer that you don't own smaller companies in your Vestact portfolio in New York. Stick to the big guns.
Byron's beats
Bright did a very comprehensive piece on Nvidia's (NASDAQ:NVDA) recent results on Friday. Naturally, people are asking when the competition will jump in and start grabbing some of that pie? That question is tough to answer with certainty, but at this stage, it looks like it will be very difficult for competitors to gain market share or even for the likes of Amazon and Microsoft to build competitive chips in-house.
That is because the big data centre players are so entrenched in the Nvidia network. Nvidia's networking revenue is now sitting at $10 billion per annum. To be clear, this is not from selling GPUs. This is the technology and equipment that allows all their products to talk to each other, like switches and cables. For example, Azure has 29 000 miles of InfiniBand connectivity cabling.
They also recently launched Spectrum X, which, according to CEO Jensen Huang, offers 60% better networking performance for AI communication than any other product in the market. They are not just selling chips, they are selling all the equipment that connects the GPUs.
Lastly, Nvidia owns software that runs these data centres. That part of the business has an annual revenue of around $1bn - small but growing fast. It is going to be very difficult to compete with all of that.
Michael's musings
Last week, the Nikkei set a new all-time high. What makes this so interesting is that it has taken the Japanese market 34 years to make the new high. The previous time that market was at these levels dates back to December 1989.
In the 80s Japan was flying high and growing quickly, until it wasn't. Japan then experienced a period of deflation and continually dropping asset prices. The Japanese economy effectively went sideways for the next few decades. Between 1997 and 2017 the economy only grew 2.6%.
Vestact preaches buy and hold. Often when stock prices drop, we advocate buying more shares. This strategy only works in a growing market though. As such, we ensure that we pick companies that operate in industries and countries that have strong growth. When things fundamentally change negatively for a company due to new regulations or a shift in consumer tastes, then it is time to sell.
Knowing our limits is important. It is one of the reasons why we only offer access to the US market.
Bright's banter
Social media company Reddit has filed for its IPO. The big talking point in the filing is that OpenAI CEO Sam Altman is the third-largest stakeholder.
Altman holds 8.7% of Reddit's outstanding shares, surpassing Reddit CEO Steve Huffman, who holds 3.3%. With Reddit aiming for a valuation of at least $5 billion, Altman's stake could be valued at around $435 million at the time of the IPO next month.
Despite not being a co-founder, Altman has been involved with Reddit since 2014, participating in funding rounds and investing at least $60 million. He also served as a board member from 2015 to 2022 and briefly acted as Reddit CEO for eight days in 2014.
The Reddit IPO marks a significant moment as it is the first major tech offering of 2024 and the first social media IPO since Pinterest (NYSE:PINS) in 2019. Let's see how the market will receive this one.
Signing off
Asian markets are down this morning as the MSCI Asia-Pacific Index erased most of its earlier gains. Benchmarks fell in India, Hong Kong, mainland China, and South Korea while Japan outperformed with both the Nikkei 225 and the Topix in the green after Warren Buffet praised Japanese policies as superior and investor-friendly, when compared to the rest of the world.
US equity futures are slightly lower pre-market. The Rand has weakened to around R19.32 to the US Dollar. Yech.
Today EElanco Animal Health Corp. (NYSE:ELAN), Workday (NASDAQ:WDAY), and Domino's Pizza (NYSE:DPZ) will report their earnings.
