☀️☕️ AI Chips Ahoy!

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Market Roundup 📊 24-Feb-23

US large-cap S&P 500 closed 0.53% UP ▲
Tech-heavy Nasdaq Composite closed 0.72% UP ▲  
Pan European STOXX Europe 600 closed 0.11% UP ▲
HK’s Hang Seng Index closed 0.35% DOWN 🔻
Japan’s Nikkei 225 closed 1.34% DOWN 🔻

— The MoneyFitt Morning (@MoneyFitt)
Feb 24, 2023

📝 Focus

AI Chips Ahoy! (Nvidia)

📊 In the Markets

Domino’s Getting Sliced

📖 MoneyFitt Explains

🎓️ Short selling

📝 Focus

AI Chips Ahoy!

Even though earnings and sales were down 33% and 21%, fabless chipmaker (i.e. design only, no factory) Nvidia handily beat the best guesses of Wall Street’s Finest in the fourth quarter and guided for stronger growth in the current period.

This led to a huge 14% share price jump, taking its market value to nearly US$600 billion, the largest in the semiconductor sector, outstripping its foundry partner (factory only, no design) TSMC by a quarter, and well over double the combined values of CPU leaders AMD (also competitive in GPUs) and Intel (hmm.)

The focus was not on its old staple of gaming chips (sales down 46%) but on AI chip sales, which rose 11% and are now double the size of its gaming chip business. Demand is driven by cloud service providers investing heavily in artificial intelligence (AI) technology.

“AI adoption is at an inflection point. OpenAI’s ChatGPT has captured interest worldwide, allowing people to experience AI firsthand, showing what’s possible with generative AI (with) broad adoption reaching into every industry”

Nvidia CEO Jensen Huang

In an interesting business development that will take years to play out, Nvidia will increasingly offer its own AI supercomputing services directly to large companies and governments via the cloud. Trouble is, this could potentially put it on a collision course with big tech companies like Google and Microsoft, both of which are among the biggest buyers of Nvidia’s chips. At the same time, Amazon and Google are now designing their own competing AI chips, with talk Microsoft is going to do the same.

Fortunately for all the players, the AI chip pie is still growing rapidly. The global artificial intelligence chip market is projected to grow annually at a compound rate of 37.1% from 2022 to 2031 (Allied Market Research, Dec-22.)

Everything but Jensen Huang’s black leather jacket is AI – Image credit: Nvidia via Tenor

Traders still call Nvidia ($NVDA) a graphics chip maker because the GPU market it dominates stands for Graphics Processing Unit, once the geeky, computer gaming oriented little sister of the key bit of a computer, the mighty Central Processing Unit, formerly ruled by Intel. Times have changed for both.

CPU vs GPU – a mini-explainer

A CPU (Central Processing Unit), the “brain” of a computer, is designed to perform many, very complex general-purpose computing tasks using just a few processing cores that can handle a few threads at a time (serial processing.)

A GPU (Graphics Processing Unit) is designed to do repetitive, parallel processing tasks incredibly quickly with thousands of smaller, more efficient processing cores, like rendering 3-D graphics and video processing (… and crypto mining.)

GPUs are increasingly being used in IoT (Internet of Things) and AI (Artificial Intelligence). In IoT, GPUs are used for edge computing, which involves processing data locally on IoT devices such as real-time image recognition and natural language processing, and in AI for super fast training of deep neural networks.

📊 In the Markets

Wall Street is proving (not really) that it has a human side by closing strongly higher after an unexpected fall in the number of normal working Americans losing their jobs last week (which has usually greeted with selling, in recent months.)

The US labour market continues to be red-hot: There were nearly two job openings for every unemployed person in December and unemployment of 3.4% in January was the lowest in over 53 years.

A hot labour market increases the risk that the US central bank, the Fed, may raise interest rates higher to cool things down because of the risk of a wage price spiral, in which high prices push up wages which push up costs which push up wages (rinse and repeat.) A strong labour market means that it can focus 110% on killing off inflation without having to worry about the other part of its job… which is to look after jobs. The Fed has just two things to look after: inflation and jobs. Not growth, not profits, not elections, not climate change.

On top of that, inflation at the end of last year was actually higher than previously reported, at a 3.7% annual pace (previously 3.2%) and excluding food and energy, it was even higher at a 4.3% “core” rate (previously 3.9%.) The PCE price indexes are the Fed’s preferred inflation measures and the hotly anticipated next readings are out later today (Friday.)

Meanwhile, in HK, one of the few non-Korean or Japanese Asian companies (other than maybe banks and airlines) with familiar consumer brand names, Techtronics (669 in HK), was hit with a short seller 🎓 report. The stock tanked 19% on the release of research from little-known Jehoshaphat Research and now has a market capitalisation of about US$18 billion, half its 2021 peak as a massive pandemic period (home improvement) winner. Techtronics is known for cordless power tools with brands such as Dirt Devil, Milwaukee, Ryobi, Vax and Hoover.

Domino’s Getting Sliced 🍕

Domino’s is the largest pizza chain in the world in terms of sales and outlets, ahead of arch-rival Pizza Hut (stable mate of Taco Bell and KFC under Yum! Brands.) It has over 19,000 franchise outlets in over 90 countries. Surprising nobody, one of those countries is not Italy, where Domino’s last year shut the last of its 29 stores there after seven years of failing to impress anyone other than sad American tourists and nowhere near reaching its target of 880 stores.

We now feel like ordering one – Image credit: Tenor

But that was a sideshow compared to what it’s facing now. Fourth quarter sales grew by less than 1%, delivery same-store sales dropped 6.6%, profit margins got crushed, and the shares collapsed nearly 12% overnight.

Having been a star during the pandemic as homebound consumers ordered in like crazy (with shares almost doubling from start-2020 to end-2021), Domino’s faces inflation-squeezed customers put off by ever-higher delivery fees (and slower delivery times) and cutting back on online orders of pizzas and chicken wings. Like many other restaurants, Domino’s was forced by higher labour and commodity costs to hike both delivery charges and menu prices over the past year, leading more to cook at home instead of ordering in… even despite data today showing the average cost for food consumed at home climbed 11.3% in January from a year earlier.

And when they can’t face cooking at home yet again, many are choosing to dine out more cheaply, e.g. at McD’s and Yum!’s Taco Bell, now that they can.

But deliveries haven’t cratered everywhere: fellow pandemic stars Doordash and UberEats have been reporting a surge in orders for food, groceries, and petcare items along with deals and free deliveries with subscription passes, potentially a permanent shift in the landscape.

📖 MoneyFitt Explains

🎓️ Short selling

If you believe that a stock will go down for whatever reason (perhaps it is expensive relative to its prospects or if you suspect fraud), you can sell the shares you have.

But if you don’t own any of its shares, you can still sell them by first borrowing shares for a fee from an existing shareholder via your broker and then selling them on the market. (This can also be done through derivative instruments.)

If you’re right, then you can buy them back (known as covering your shorts) at a lower price and pocket the difference, less the fee you paid to borrow the shares.

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