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13
sie

Be careful what you wish for…

Autor: Jarosław Jamka

In Japan, the life after the carry trade unwind seems to be slowly returning to normal… Figure 1.

Today is another day of the yen weakening against the dollar.

Interestingly, the BoJ was probably not entirely satisfied with what it really wanted to achieve, i.e. strengthening the yen, also at the expense of investors trying to weaken it further. See Figure 2, where I marked probable interventions by the BoJ trying to strengthen the yen, then it succeeded, but probably to a great extent than expected… hence Shinichi Uchida’s statement (August 7) that „BoJ won’t hike interest rates when markets are unstable.”

But what may be one of the main root causes for the strong yen… are upcoming rate cuts in the US.

In 2022, the yen began to weaken sharply 12 days before the Fed’s first rate hike – see Figure 3.

Niniejszy materiał jest informacją reklamową. Ma charakter edukacyjno-informacyjny i stanowi wyraz własnych ocen, przemyśleń i opinii autora. Niniejszy materiał służy jedynie celom informacyjnym i nie stanowi oferty, w tym oferty w rozumieniu art. 66 oraz zaproszenia do zawarcia umowy w rozumieniu art. 71 ustawy z dnia 23 kwietnia 1964 r. – Kodeks cywilny (t.j. Dz. U. z 2020 r. poz. 1740, 2320), ani oferty publicznej w rozumieniu art. 3 ustawy z dnia 29 lipca 2005 r. o ofercie publicznej i warunkach wprowadzania instrumentów finansowych do zorganizowanego systemu obrotu oraz o spółkach publicznych (t.j. Dz. U. z 2022 r. poz. 2554, z 2023 r. poz. 825, 1723) czy też oferty publicznej w rozumieniu art 2 lit d) Rozporządzenia Parlamentu Europejskiego i Rady (UE) 2017/1129 z dnia 14 czerwca 2017 r. w sprawie prospektu, który ma być publikowany w związku z ofertą publiczną papierów wartościowych lub dopuszczeniem ich do obrotu na rynku regulowanym oraz uchylenia dyrektywy 2003/71/WE (Dz. Urz. UE L 168 z 30.06.2017, str. 12); Niniejszy materiał nie stanowi także rekomendacji, zaproszenia, ani usług doradztwa. prawnego, podatkowego, finansowego lub inwestycyjnego, związanego z inwestowaniem w jakiekolwiek papiery wartościowe. Materiał ten nie może stanowić podstawy do podjęcia decyzji o dokonaniu jakiejkolwiek inwestycji w papiery wartościowe czy instrumenty finansowe. Informacje zamieszczone w materiale nie stanowią rekomendacji w rozumieniu przepisów Rozporządzenia Parlamentu Europejskiego i Rady (UE) NR 596/2014 z dnia 16 kwietnia 2014 r. w sprawie nadużyć na rynku (rozporządzenie w sprawie nadużyć na rynku) oraz uchylające dyrektywę 2003/6/ WE Parlamentu Europejskiego i Rady i dyrektywy Komisji 2003/124/WE, 2003/125/WE i 2004/72/ WE. (Dz. U UE L 173/1 z dnia 12.06.20114). NDM S.A., nie ponosi odpowiedzialności za prawdziwość, rzetelność i kompletność oraz aktualność danych i informacji zamieszczonych w niniejszej prezentacji. NDM S.A. nie ponosi również jakiejkolwiek odpowiedzialności za szkody wynikające z wykorzystania niniejszego materiału, informacji i danych w nim zawartych. Zawartość materiału została przygotowana na podstawie opracowań sporządzonych zgodnie z najlepszą wiedzą NDM S.A. oraz przy wykorzystaniu informacji i danych publicznie dostępnych, chyba, że wyraźnie wskazano inne źródło pochodzenia danych.

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Microsoft Q2 2024 (calendar) earnings review

Autor: Jarosław Jamka

My key takeaways:

1) Total revenue increased in Q2 2024 (Q4 2024 on fiscal basis) by 15.2% YoY to $64.73 billion (slightly beating expectations of $64.52 billion). The average YoY growth for the last 6 years is 14.48%. Overall, it is “a growth company”… with a company of this size, it is not that easy to increase revenues from $30 billion per quarter to $65 billion per quarter in 6 years. See Figure 1.

2) Microsoft divides revenues into 3 segments:

– First, Productivity and Business Processes (e.g. Office and LinkedIn are here)
$20.23 billion (+0.54% beat, +11.1% YoY – Figure 2),

– Second, Intelligent Cloud (e.g. Azur, Server Products)
$28.52 billion (-0.75% sales miss, +18.8% YoY – Figure 3,

– Third, More Personal Computing (e.g. Windows, Gaming, Search)
$15.90 billion (+2.32% sales beat, +14.3% YoY – Figure 4).

3) Azur is still a big success story. Revenues grew +29% YoY (GAAP) and +30% (constant currency, in line with expectations). Figure 5. „Azur and other cloud services” is part of the Intelligent Cloud segment, which, compared to the competition, is both the largest and the fastest growing (on a $ basis) – see Figure 6.

4) (AI-related) Capex is still growing at a rate of approximately 80% YoY, in Q2 2024 (Q4 2024 fiscal) it amounted to $19.0 bln. See Figure 7.

5) Solid outlook, see Table 1.

SATYA NADELLA, CEO, on Azur:

“We expanded our datacenter footprint, announcing investments across four continents. These are long term assets around the world to drive growth for the next decade and beyond. We added new AI accelerators from AMD and NVIDIA, as well as our own first party silicon Azure Maia.
(…) We continued to see sustained revenue growth from migrations. Azure Arc is helping customers in every industry, from ABB and Cathay Pacific, to LALIGA, to streamline their cloud migrations. We now have 36,000 Arc customers, up 90% year-over-year. We remain the hyperscale cloud of choice for SAP and Oracle workloads. (…) With Azure AI, we are building out the app server for the AI wave, providing access to the most diverse selection of models to meet customers’ unique cost, latency, and design considerations. All-up, we now have over 60,000 Azure AI customers, up nearly 60% year-over-year, and average spend per customer continues to grow. Azure OpenAI Service provides access to best-in-class frontier models, including as of this quarter GPT-4o and GPT-4o mini. With Phi-3, we offer a family of powerful, small language models, which are being used by companies like BlackRock, Emirates, Epic, ITC, Navy Federal Credit Union, and others. And with Models as a Service, we provide API access to third party models, including as of last week the latest from Cohere, Meta, and Mistral. The number of paid Models as a Service customers more than doubled quarter-over-quarter (…)”.

AMY HOOD, CFO on Azur and AI services demand:

“Azure and other cloud services revenue grew 29% and 30% in constant currency, in line with expectations and consistent with Q3 when adjusting for leap year. Azure growth included 8 points from AI services where demand remained higher than our available capacity. In June, we saw slightly lower-than-expected growth in a few European geos”.

AMY HOOD on CAPEX:

“Capital expenditures including finance leases were $19 billion, in line with expectations, and cash paid for P, P, and E was $13.9 billion. Cloud and AI related spend represents nearly all of total capital expenditures. Within that, roughly half is for infrastructure needs where we continue to build and lease datacenters that will support monetization over the next 15 years and beyond. The remaining cloud and AI related spend is primarily for servers, both CPUs and GPUs, to serve customers based on demand signals. For the full fiscal year, the mix of our cloud and AI related spend was similar to Q4”.

AMY HOOD on CAPEX outlook:

“To meet the growing demand signal for our AI and cloud products, we will scale our infrastructure investments with FY25 capital expenditures expected to be higher than FY24. As a reminder, these expenditures are dependent on demand signals and adoption of our services that will be managed thru the year”.

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09
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05
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Risk-off on risk assets

Autor: Jarosław Jamka

The correction in risk assets intensified over the weekend. The drawdown on the S&P500 (-7.7%) is still within the range of previous corrections starting from the 2022 low – see Figure 1.

The Nasdaq100 is falling the most (drawdown) in this bull market, by as much as 14.4%. The rate of return after such a decline, counting from 12-Oct-2022, is currently above 64% for the Nasdaq100 and over 46% for the S&P500.

Markets are changing quickly now, just a moment ago the market was pricing in a 100 bps cut in the fed funds rate at FOMC meeting on September 18 (as of writing this comment it is only 75 bps).

All-in-all, the correction is sharp, but there is no sharp change of data at the macro level.

Even the US labor market report for July cannot be classified as „extremely bad”. Similarly, the decline in ISM Manufacturing will not result in a sudden recession. Financial markets are sometimes all about emotions, and we have such a situation today.

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Bonds just wanna have fun!

Autor: Jarosław Jamka

Not all asset classes are struggling today.

Bonds and gold are a natural hedge against difficult times. Gold is currently only 1.3% below the all-time high of $2,468.8 (at closing prices), and during the last session was only 0.24% from its intraday ATH of $2,483.6.

However, bonds (iShares 20+ Year Treasury Bond ETF: TLT) are at a local high and have increased by 7.7% since July 24 – see Figure 1. Figure 2 shows the rate of return on TLT since the bottom of the cycle.

However to really have some fun, the bonds should go to its own ATH, which is some 60% up ! See Figure 3. 😊

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03
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28
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Alphabet Q2 2024 earnings review

Autor: Jarosław Jamka

During earnings call the word “AI” was mentioned 91 times (“only” 65 times during Q1 2024 call).

The best summary of Q2 2024 results is as follows:

1) Strong business performance, especially in Search and Cloud,

2) Strong AI investment and leadership,

3) Many examples of AI use at both the consumer and enterprise level, but it is still too early for (wide) monetization of AI.

Alphabet beat the revenue consensus for the 6th quarter in a row, in Q2 2024 Wall Street expected $84.35 billion, Alphabet delivered $84.74 billion (+0.5% beat). See Figure 1.

Other key data:

-2.5% miss: “Revenues excluding TAC” $71.36 billion (expected $73.20 billion), Figure 2,

+1.8% beat: „Google Search & Others” revenues $48.509 billion (expected $47.638 billion), Figure 3,

-3.2% miss: „YouTube Ads” revenues of $8.663 billion (expected $8.946 billion), Figure 4,

-5.5% miss: „Google Network” revenues of $7.44 billion (expected $7.87 billion), Figure 5,

+0.2% beat: „Google Advertising” revenues of $64.616 billion (expected $64.518 billion), Figure 6,

+2.6% beat: „Google Cloud” revenues of $10.347 billion (expected $10.088 billion), Figure 7,

+2.7% beat: EPS diluted $1.89, estimate $1.84, Figure 8

Sundar Pichai, CEO:

“(…) we are uniquely well-positioned for the AI opportunity ahead. Our research and infrastructure leadership means we can pursue an in-house strategy that enables our product teams to move quickly. Combined with our model building expertise, we are in a strong position to control our destiny as the technology continues to evolve. Importantly, we are innovating at every layer of the AI stack, from chips to agents and beyond, a huge strength”.

On Google Search:

“With AI, we are delivering better responses on more types of search queries and introducing new ways to search. We are pleased to see the positive trends from our testing continue as we roll out AI Overviews, including increases in Search usage and increased user satisfaction with the results. People who are looking for help with complex topics are engaging more and keep coming back for AI Overviews”.

On Waymo (autonomous ride-hailing service):

“Waymo served more than 2 million trips to date and driven more than 20 million fully autonomous miles on public roads. Waymo is now delivering well over 50,000 weekly paid public rides, primarily in San Francisco and Phoenix. And in June, we removed the wait list in San Francisco, so anyone can take a ride. Fully autonomous testing is underway in other Bay Area locations without a human in the driver seat”.

AI will take some time… to unlock value:

“ (…) if you take a look at our AI infrastructure and generative AI solutions for cloud across everything we do, be it compute on the AI side, the products we have through Vertex AI, Gemini for Workspace and Gemini for Google Cloud, etc., we definitely are seeing traction. People are deeply engaging with the Gemini models across Vertex and AI studio. We now have over 2 million developers playing around with these things, and you are definitely seeing early use cases. But I think we are in this phase where we have to deeply work and make sure on these use cases, on these workflows, we are driving deeper progress on unlocking value, which I’m very bullish will happen. But these things take time. But if I were to take a longer-term outlook, I definitely see a big opportunity here”.

On the AI capex:

“I think the one way I think about it is when we go through a curve like this, the risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where if it turns out that we are over-investing, we clearly — these are infrastructure which are widely useful for us. (…) But I think not investing to be at the front here, I think, definitely has much more significant downside”.

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How important is AI for Mag7 ?

Autor: Jarosław Jamka

How important is artificial intelligence for Mag7 companies?

Interesting conclusions can be drawn by analyzing how many times the word “AI” was mentioned during the earnings conference call. You can analyze absolute levels or the increase/decrease in the count of AI mentions over time…

A table is attached. Enjoy.

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27
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Tesla Q2 2024 earnings review

Autor: Jarosław Jamka

Tesla is a combination of a traditional car manufacturer and a technology company. Hence the high valuation compared to „only traditional” car manufacturers. Technology is autonomy.

Elon Musk:

“As I said this before in earning calls, it — the value of Tesla overwhelmingly is autonomy. These other things are, I think, no way it’s relative to autonomy. So I recommend anyone who doesn’t believe that Tesla would sell vehicle autonomy should not hold Tesla stuff. They should sell their Tesla stuff. If you believe Tesla will sell autonomy, you should buy Tesla stuff. And all these other questions are in the noise”.

However, this time investors focused more on traditional things and less on future technology – hence the negative reaction to the Q2 2024 results.

Key takeaways:

1) Tesla beats Revenue Consensus: Q2 Revenue $25.5bln, up 2% YoY, and beating estimates of $24.63bln – see Figure 1,

2) But EPS and margins below expectations turned out to be crucial for the market’s reaction to the results,

3) Q2 adjusted EPS 52c, down 43% YoY, and missing estimates of 61c – this is the fourth quarter in a row below expectations – see Figure 2,

4) Regulatory credits save the day… in the amount of $890 million, which means a YoY increase of 218% – see Figure 3,

5) As a result, the „Automative Gross Margin ex-regulatory Credits” margin dropped significantly. Currently, it is only 14.6% (it was 30.5% in Q3 2021 – see Figure 4),

6) Tesla is doing very well in other business segments: while Total Automative Revenues decreased year-on-year by 6.54% (Figure 5), Energy Generation revenues increased year-on-year by 100% (Figure 6), and Total revenues Services +21% (Figure 7),

7) In the long term, the most important are: autonomy and robotaxi, cheaper Tesla models, artificial intelligence software and hardware.

Elon Musk on autonomy and robotaxi:

“Regarding full self-driving and Robotaxi, we’ve made a lot of progress with full self-driving in Q2. And with version 12.5 beginning rollout, we think customers will experience a step change improvement in how well supervised full self-driving works.

Version 12.5 has five times the parameters of 12.4 and finally merged the highway and city stacks. So the highway stack at this point is pretty old. So often the issues people encounter are on the highway. But with 12.5, we finally merged the two stacks”.

About Optimus robots:

“we expect to have several thousand Optimus robots produced and doing useful things by the end of next year in the Tesla factories. And then in 2026, ramping up production quite a bit.

And at that point, we’ll be providing Optimus robots to outside customers. That will be a production Version 2 of Optimus”.

On energy business:

“This is growing faster than anything else. This is — we are really demand constrained rather than production constrained.”

On when to expect the first robotaxi ride:

“(…) my predictions on this have been overly optimistic in the past. So I mean, based on the current trend, it seems as though we should get miles between interventions to be high enough that — to be far enough in excess of humans that you could do unsupervised possibly by the end of this year. I would be shocked if we cannot do it next year”.

About Nvidia chips:

“I’m incredibly impressed by NVIDIA’s execution and the capability of their hardware. And what we are seeing is that the demand for NVIDIA hardware is so high that it’s often difficult to get the GPUs. And there just seems this — I guess I’m quite concerned about actually being able to get steady out NVIDIA GPUs and when we want them”.

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Is China facing a lost decade?

Autor: Jarosław Jamka

Just like it was in Japan after the bubble burst in 1989? If we look at the Chinese real estate market and falling housing prices, and at the similarly falling prices of Chinese stocks, we can say that something is probably going on.

According to the latest data for June, housing prices in China continue to decline. In the case of newly built residential buildings, prices fell in June by an average of 0.67% MoM (in the 70 largest cities).

In the case of apartments on the secondary market, prices fell in June by 0.85% MoM (in the 70 largest cities).

From the market top in 2021, price drops are already 6.94% (primary market), and on the secondary market by 12.8%. Similarly, according to quarterly BIS data, apartment prices have already fallen by 9.9% (until Q1 2024). See Figure 1.

After the real estate bubble burst in 1991 in Japan, housing prices fell for 18 years and dropped overall to a trough in Q2 2009 by 46.5% (BIS data). Chart 2 shows housing prices in Japan since 1955, including housing prices in China (2021 market peak in China = 1991 market peak in Japan).

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18
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Small is magnificent, sometimes.

Autor: Jarosław Jamka

Small American companies (Russell 2000) have their moments in the cycle when they outperform large companies (S&P500). Figure 1 shows returns since 2006, including the size of drawdowns (bottom panel).

The S&P500 increased by 447% (yearly +8.41%) during this period; while the Russell 2000 increased by 333% (yearly +6.69%).

Since 2019, the Russell 2000 has actually had one long period of beating the S&P500… right after the 2020 recession, as stock markets rebounded strongly after previously falling by more than 30%. See Figure 2 and 3.

In 2024, however, the Russell 2000 was flat from the beginning of the year until July 9, when the combination of corrections in big tech and the development of the so-called „Trump trade” led to the Russell 2000 rising by more than 10% in a few days – see Figure 4.

The next test of momentum for small companies is the currently published results for Q2 2024. And if the US economy continues to slow down in the following quarters, the results of small companies may be the first to suffer.

Figure 5 shows the monthly and quarterly returns of the S&P500 and Mag7. July is still positive for both (after exceptional May and June).

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It’s demography, stupid

Autor: Jarosław Jamka

Potential GDP growth is the sum of the change in productivity and the change in population size. A growing population therefore means higher potential GDP growth. Descending population means lower GDP growth.

According to the UN projection, China’s population will decrease by 160 million people by 2050, and by as much as 790 million people by 2100. This is more than a 55% decline compared to 2024 levels. See Figure 1.

In the case of China, the population decline by 2050 is „only” 11.3%. It will be much worse in Japan (-15.1% by 20250 – see Figure 2) and in Poland (-14.9% by 2050 – see Figure 3).