Market Pulse
Saturday, June 1, 2024
Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our three stories this week:
Cyril (CIO), and the rest of the Sidekick team.
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Salesforce, a provider of enterprise cloud software, reported disappointing first quarter earnings this week. The shares fell almost 20%, the stock's worst day since 2004.
Salesforce revenues grew by a record low of 11% in the last quarter and they guided for sales growth to decelerate even more, to 7%, in the current quarter. Billings, or the total amount of new business transacted over the quarter, fared even worse, growing only 3% compared to last year[1].
In the earnings call, management said weak results and guidance are due to software subscription deals being delayed, and when they eventually get done, they are smaller than usual. They also added that customers who went on a software buying spree during the pandemic are now in a phase of integrating and rationalising their purchases, leading to a lower level of software spend.
Weakness in software billings isn’t limited to Salesforce. The recent earnings season has been a difficult one for cloud software providers more generally. We believe the slowdown we are seeing in enterprise software spending is partly due to high spending during the pandemic but also due to increased spending in other areas, especially AI. Companies appear to be shifting their IT spending towards AI, benefitting the big cloud compute providers like Microsoft, Amazon and Google, at the expense of enterprise cloud software providers like Salesforce and Atlassian.
While cloud software providers are clearly facing short-term headwinds we believe they could also benefit from AI, it might just take a little longer. Which ones do we think will come out on top? That is difficult to say but we think, as AI models become increasingly commoditised, the long-term value ultimately lies in proprietary datasets. It’s been said data is the new gold, so, to find the winners of tomorrow we’re looking at who’s sitting on the richest data veins.
Note: We hold Salesforce in Flagship.
We’re admittedly not political experts but it should come as no surprise that politics, financial markets and the real economy are closely intertwined. This means we have to spend time thinking about how politics might shape the economy and markets over the medium term.
Since prime minister Rishi Sunak announced an earlier than expected election we have been asked many questions about what might lie ahead. We address some of them briefly.
We can only speculate of course but we believe they opted for an earlier election to make the most of recent good economic data to boost their chances. Two pieces of good news in particular stand out. Firstly, the UK recently emerged from a recession as GDP returned to growth in the first quarter. Secondly, inflation is falling towards target, coming in at 2.3% in April. If these are the main reasons the Conservatives opted for an earlier election it raises an obvious question. Do the Conservatives expect weaker economic data or increased inflationary pressures over the coming months? This is an area we are keeping a close eye on.
It would come as a surprise to us if Labour does not win an outright majority. Current betting odds imply a 95%+ probability of a Labour majority[2]. Keir Starmer being our next PM is our current base case.
To try and answer this question we look at the proposed policies of the current shadow chancellor, Rachel Reeves. We focus especially on her tax policies and attitude to business.
UK public finances is in a tricky situation after covid and the government has to make some difficult choices between borrowing more, spending less on things like public services or increasing taxes. Given that the tax burden in the UK is the highest in more than 70 years, it's no surprise Rachel Reeves has already said that Labour will not raise income taxes or NI contributions[3].
She made clear they will instead aim to raise tax revenue by focusing on windfall taxes on energy companies, imposing VAT on private school fees and taking a closer look and making sure private equity bonuses are ‘taxed appropriately’. A recent survey suggests voters are somewhat sceptical about pledges not to raise taxes, regardless of who wins.
So far, Rachel Reeves seems relatively business friendly. In a recent speech she made it clear that one of her key priorities is stimulating growth and investment through close partnerships with business. In a recent letter, 120 current and former business chiefs endorsed Labour and criticised the way in which the Conservatives handled the economy[4]. These are encouraging signs that Labour party policies could be supportive of economic growth and investment.
While the Labour party has a strong lead, elections often deliver surprises and, if this happens, it could mean some stock and bond market volatility over the coming months.
Elon Musk’s xAI is chasing OpenAI and the $6bn he recently raised should help. xAI was founded just a year ago and the recent funding round puts its valuation at $24bn, overtaking Anthropic valued at $18bn. This makes xAI the second most valuable AI startup after OpenAI[5].
Investors in the recent round include some very well known Silicon Valley firms including Sequoia and Andreessen Horowitz. This new round brings the total funds raised by xAI to $7bn.
xAI already has an AI model, Grok 1.5, and while it’s not quite as advanced as industry leading ChatGPT 4o and Claude 3 Opus, it's not far behind on various benchmark tests. Elon Musk hopes this can change and said xAI would catch up to rivals by the end of 2024. He’s hoping access to proprietary data from his social media platform X, and real world video collected by millions of Tesla cars, can help give xAI an edge.
According to various sources xAI currently rents somewhere between 10,000 - 20,000 Nvidia H100 GPUs from Oracle and Elon Musk plans to increase this 5-fold to 100,000. He is building, what he calls, a ‘gigafactory of compute’. This supercomputer, when completed in 2025, will be at least 4x bigger than the largest existing GPU cluster today[6].
It’s clear who benefits in the short term. Nvidia. Assuming xAI buys another 80,000 H100 GPUs at $30,000 each, it could result in additional $2bn-$3bn revenues to Nvidia. While this sounds like a lot, and it is, it's becoming a smaller and smaller part of Nvidia total revenues, expected to be over $120bn this year. Put another way, each new xAI, with 100,000 H100 GPUs, might only add 2%-3% to Nvidia GPU revenues. How many more will / can there be? Food for thought.
Note: We hold Nvidia, Microsoft, Amazon and Alphabet in Flagship.
[2] https://www.betfair.com/sport/politics/uk-next-general-election/11339499
[3] https://www.ft.com/content/7749757c-a00f-4e34-b15c-f5bb33e5ee85
[4] https://www.ft.com/content/c61fed37-e5a3-472f-8dc4-8a85c7d927c5
[6] https://www.hpcwire.com/2023/08/17/nvidia-h100-are-550000-gpus-enough-for-this-year/
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
