💪 Big Tech saves the day

Good morning Investor. “Give yourself no choice but to succeed. Let the consequences of failure become so dire and so unthinkable that you'll have no choice but to do whatever it takes to succeed.”

— Jordan Belfort

MARKET UPDATE

Shares of Adyen dropped 18% yesterday after missing revenue expectations, While shares of Snapchat rocketed higher by 23% in after hours trading after releasing upbeat earnings.

TODAY’S BIG HEADLINES

• Big Tech saves the day

• The end of cigarettes for Phillip Morris?

• Hermes is one step above in luxury

• The AI energy problem is catastrophic

EARNINGS RESULTS

Big Tech saves the day💪

Avengers Assemble: After the market’s been on a rollercoaster ride that would make even the bravest theme park enthusiast queasy, we were in desperate need of some good news. And who better to deliver than our very own superheroes, Microsoft (MSFT) and Alphabet (GOOGL)?

Just Google It: Google didn’t just beat earnings expectations, it smashed them like a piñata at a birthday party! Reporting revenue of $80.5 billion, up 15% year-over-year and well above analyst expectations of $78.58 billion. But let’s not forget about those delicious profits. Google reported an EPS of $1.89, which is well above the $1.51 consensus estimate and represents a 61.53% increase YoY! Alphabet beat expectations for the quarter in sales, profit, and advertising, but the real star of the show was their cloud revenue which grew 28% YoY, largely thanks to a boost from their AI offerings. This led to CFO Ruth Porat stating that the company’s operating margin would also be higher in 2024 than it was in 2023. Talk about a silver lining!

The Cherry Ontop: But wait, there’s more! In a move that’s as surprising as finding a golden ticket in your chocolate bar, Alphabet announced they’re going to initiate a dividend for the first time ever. This will be a quarterly dividend of $0.20 per share, or roughly a 0.50% yield at the current price. It appears they studied the market’s reaction to Meta making the same move just recently. Additionally, the company announced that the board has approved a $70 billion dollar share buyback program. Yes, you read that correctly! The company will be returning capital to shareholders while heavily investing in the expansion of its AI and data center capacity. Now that’s what I call a win-win!

The Dynamic Duo: Microsoft also reported excellent earnings, beating on the top and bottom line. The company reported revenue of $61.86 billion, up 17% YoY, and above the $60.80 billion expected, and earnings per share of $2.94, up 20% YoY and above the $2.82 expected. Management also provided revenue guidance of $64 billion, slightly below the $64.5 billion estimates for the upcoming quarter, but with an operating margin of 42.3% which is above the estimated 41.5%. The big takeaway for Microsoft is that Azure’s growth is actually accelerating with its sales increasing 31% year-over-year, vs the 30% reported in the previous quarter.

Wall Street Whispers: Shares of Alphabet soared over 11% in after-hours trading, while shares of Microsoft also saw a rally of over 5%. It seems big tech are still as reliable as ever, proving once again that superheroes do exist, even in the stock market!

sources: (Reuters), (CNBC), (The Guardian), (CNN)

THE SIN STOCKS

The end of cigarettes for Phillip Morris?🚬

The Winds of Change: It seems the glory days of large cigarette makers like Phillip Morris (PM) are fading faster than a sunset. With declining sales and markets like the UK phasing out cigarettes entirely, it’s clear that times are changing.

Smokeless Salvation: But don’t count Phillip Morris out just yet. The company has managed to puff up its sales growth in the first quarter by 8.3% year-over-year, all thanks to its investments into “smokeless” products. These include their own “IQOS” heated tobacco sticks, which saw a 21% sales growth in Q1, and the viral sensation Zyn.

The Zyn Deal: Phillip Morris played its cards right by acquiring an asset that’s taken off faster than a rocket! Back in 2022, the company acquired Swedish Match, the maker of the popular Zyn nicotine pouch brand, for $16 billion. Thanks to some aggressive marketing tactics, Zyn is now a viral hit among teens. And with only 1.5% of teens using Zyn, the growth potential is as vast as the ocean.

Seismic Shift: During the earnings call, management outlined their ambitious plan to generate over half of its revenue from non-cigarette products by 2025/2026, and two-thirds by 2030. This is a stark contrast to their competitors like Altria (MO), who spent a whopping $20 billion to acquire the fast-growing vape brand Juul, only to end up battling a ban on its products shortly thereafter, leading to revenue declines rather than increases. Talk about a tale of two cities!

sources: (New Statesman), (Yahoo), (Reuters)

EARNINGS RESULTS

Hermes is one step above in luxury 👜

Resilient Luxury: French luxury fashion retailer Hermes (RMS) reported its first-quarter earnings this week, and boy, did they hit it out of the park! Despite the Chinese economy slowing down, Chinese shoppers were snapping up their products like free samples at a food fair. The Asia Pacific market accounted for a whopping €1.92 billion of its total €3.8 billion revenue for the quarter.

Growth Across The Board: Hermes revealed the performance of each segment of its business, with the highest growth coming from its two largest business segments. Overall sales for the quarter were €3.8 billion, up 17% year-over-year at constant exchange rates. Here’s how the segments fared:

• Watches - €166 million (up 4% YoY)

• Perfume & beauty - €130 million (up 4% YoY)

• Silk and textiles - €242 million (up 8% YoY).

• Ready-to-wear & accessories - €1.1 billion (up 16% YoY)

• Other - €505 million (up 24% YoY)

• Leather goods - €1.6 billion (up 20% YoY)

Not All That Glitters Is Gold: Despite luxury typically being a more resilient industry during economic slowdowns, Hermes’ earnings have been a stark contrast to Gucci-owner Kering (KER), who have been struggling to resurrect their Gucci brand like a phoenix from the ashes.

Wall Street Whispers: Shares of Hermes are now up over 18% year-to-date, outperforming both Kerring and Louis Vuitton (LVMH), while trailing automaker Ferrari (RACE). One staggering metric to keep an eye on is the growth of Hermes’ free cash flow per share. Over the past decade, they have grown this figure at a CAGR of 20%! Now, that’s something to chew on!

sources: (Fortune), (Quartr), (Bloomberg), (Reuters)

ARTIFICIAL INTELLIGENCE

The AI energy problem is catastrophic🔋

Power Hungry: Earlier this week, we covered a story on Steve Eisman, the investor who was so famous he got his own movie, “The Big Short”. His biggest bet right now is on infrastructure, because apparently, EVs and AI are as power-hungry as teenagers raiding a fridge. Well, it looks like he’s not wrong, we need infrastructure upgrades, and we need them now.

Building Blues: The US government has been throwing subsidies at chip makers like confetti at a wedding, causing a mad scramble to build manufacturing facilities and data centers to handle the compute demands of AI. This has led to shortages of parts, property, and power. Waiting times have skyrocketed, with backup generators now having a delivery time which has increased from one month to over two years!

Creative Crunch: These constraints have builders thinking outside the box, and by box, we mean building next to a volcano in El Salvador and inside shipping containers in West Texas and Africa. Who said innovation was dead?

Hydra’s Headache: Hydra CEO Aaron Ginn said, “With what we’re seeing, the fervor to build is probably the greatest since the first dot-com wave.” Hydra is attempting to set up a facility to house 10,000 AI chips, but months later, it’s still as lost as a tourist without a map. Some areas either don’t have enough power supply, or they don’t have adequate cooling systems with wait times of up to 8 months for new cooling systems. And if they did have adequate cooling, they didn’t have the transformers required to receive the additional power, and new transformers also have wait times of up to a year. Talk about a disaster!

The Supply Snag: AI-training GPUs use five times the energy of a traditional data center CPU. Combine that with the fact that deploying complex AI systems requires more chips than a Vegas casino, and you’ve got a situation where we simply can’t build out capacity fast enough. The question is, will this slow down the rollout of this technology? If so, stocks like Nvidia (NVDA) could be in for a bumpy ride. Now, that’s a plot twist!

sources: (WSJ), (The Guardian)

MORE NEWS

Additional market-moving events🌎

• Death & Taxes: US President Joe Biden has proposed a 44.6% capital gains tax, the highest rate in US history. (CoinTelegraph)

• Chips Grants For Everyone: Micron Technology are set to to receive up to $6.14 billion in CHIPS Act funding. (The Verge)

• Pay-To-Watch: TikTok will be suspending its reward program in the EU which pays its users a small amount each day for interacting with their platform. (The Verge)

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EARNINGS

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On Monday the 11th of March, we released our “two superperformers” stock picks which we believe will provide significant outperformance compared to the S&P 500.

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• Evolution AB: 1,244.50 SEK (📉-5.20%)

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