Last night, after delivering a very good earnings report, CEO Mark Zuckerberg told analysts:
You can probably see why this is both good and bad for AI companies.
Good, because just like so many emerging technologies before, the long-term value is usually underappreciated. Plenty of companies went bust building everything from railroads to the internet. But the value that was created is unquestionably immense.
Bad, because there will obviously be bad investments. AI companies may have “all spent some number of billions of dollars more than [they] had to.
Interesting that this quote suggests that Big Tech companies don’t have a choice – that if they don’t spend the money they will be “…out of position for the most important technology for the next 10-15 years.”
Here’s the thing about that: it is inevitable that some companies are spending the money to build out AI without a clear strategy for making money from it. For example, Microsoft has Microsoft Office – a bundle of spreadsheets and word processing programs that could definitely be enhanced by AI.
On the other hand, Google’s AI plan could be undermining the most important aspect of its business: ad revenue.
Who’s WInning in AI
Every tech company out there is getting a beat down today. I have around 45 stocks on my watchlist. You know which ones are in the green today?
Power companies that are supplying the electricity to the data centers that run AI applications. Companies we’ve talked about: Southern Company (NYSE: SO), Dominion (NYSE: D) and First Solar (NASDAQ: FSLR).
First Solar reported earnings last night. The numbers were fantastic. Year-over-year revenue was up 25%, earnings doubled. First Solar’s capacity is fully booked through 2026 and its backlog extends out to 2030.
And the stock trades at 16X full-year 2024 earnings (fiscal 2024 ends in December) and 10X fiscal 2025 earnings. In other words: it’s cheap and there is little risk that it will miss earnings due to that backlog.
As for today’s beatdown, yes, you could say that its the ongoing disappointment with AI spending. But it’s more than that. It’s the Fed too…
The Fed is Gonna Blow It
The Fed finished up its July meeting yesterday with a predictable decision on interest rates. That is, no action.
Chair Powell did open the door to a September interest rate cut. The market took that in stride yesterday, as it celebrated a big bounce for Nvidia shares. The headlines tried to do their part, calling attention to the likelihood that there will be a rate cut in September…
Still, Powell equivocated. He said “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
This statement is actually a new version of the boiler plate statement that “…the Committee is attentive to the risks of inflation.”
It seems like progress. But the fact is, the economic outlook isn’t uncertain. And the risks to both sides of the dual mandate (inflation and full employment) are not equal.
The latest ISM Manufacturing Survey came out this morning. Manufacturing activity was lower for the 4th month in a row.
And the latest unemployment numbers also came out today. Initial jobless claims jumped to 249,000 last week, up from 235,000 the week before.
The U.S. economy is slowing, unemployment is rising and part of the reason is that Americans have too much of their income being diverted to interest payments on debt.
We may be at the start of the vicious cycle, where lower spending means lower corporate revenue and profits, which leads to more layoffs, which lowers spending …
And there’s nearly two full months until the next Fed meeting. Powell and Co. have already blown it. And the stock market knows it.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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