TSM Brings Some Tonic for Big Tech and AI Stocks
Will upcoming Fed heads push back on market expectations for multiple rate cuts this year?
Following yesterday’s drubbing of Big Tech stocks that pressured the Nasdaq Composite into its worst day since 2022, equity futures point to a rebound following better than expected quarter results from Taiwan Semiconductor (TSM).Revenue for TSM’s June quarter rose 32.8% year over year with smartphone rising in line with the overall revenue increase but once again the company’s High Performance Computing segment, the one that houses AI and data center, was the champ. That revenue soared almost 57% year over year and 24.7% compared to the March quarter.
In terms of TSM’s outlook for the current quarter, on its earnings call the company shared that “Over the past three months, we have observed strong AI and high-end smartphone related demand from our customers, as compared to three months ago…” That sequential improvement led management to issue September quarter guidance that, at the midpoint calls for revenue to climb 32% year over year (10% sequentially). We see folks circling back to companies housed in our Artificial Intelligence, Digital Infrastructure, and Cloud Computing models. The next set of catalysts to watch will be capital spending comments from Alphabet (GOOGL), Meta (META), Amazon (AMZN), Microsoft (MSFT), and others when they report their June quarter results in the coming days and weeks.
Homebuilder DR Horton (DHI) also reported this morning sharing the number of homes closed during the June quarter rose 5% year over year to 24,155. Management’s guidance for 90,00-90,500 homes to be closed for the 12-months ending with the current quarter, implies September quarter home closings rising 4%-7% compared to the year-ago quarter. This builds on the recent positive action for our Homebuilding & Materials model, and we’ll look for confirmation when PulteGroup (PHM) reports next week.
Even after yesterday’s market action, the Homebuilding & Materials model’s quarter to date move showcases the market’s growing confidence in multiple rate cuts before the end of the year. We acknowledge the market could once again be out over its skis with its thoughts for three rate cuts, but over the next 12-18 months we do see the Fed returning monetary policy to a more neutral stance compared to the current “restrictive” level cited by central bankers.
Still, we could see the stock market jostle around further if upcoming Fed head speakers today and tomorrow push back on the number of potential rate cuts this year. Our thinking is they did not miss the upward climb in year over year core PPI data for the last few months. That and the potential for a volatile earnings season that could see the market trade day-to-day based on the latest high profile earnings report, we’re glad we have the Market Hedge model in our stable.
Model Musings
Cloud Computing, Cybersecurity
“Cloud computing has quickly become the bedrock of modern business operations, offering teams scalable, flexible and cost-effective data solutions. Yet, according to a recent Cloud Security Alliance survey, only 23% of organizations reported “full visibility” into their cloud environment. A full 77% of respondents also “feel unprepared to deal with (related) security threats.” Read more here
Cybersecurity
“The nation's car dealerships experienced total losses of more than $1 billion as the result of a nationwide hacking and ransomware attack on their software and systems last month, according to a new estimate from East Lansing-based consulting firm Anderson Economic Group.” Read more here
“Rite Aid, the third-largest drugstore chain in the United States, says that 2.2 million customers' personal information was stolen last month in what it described as a "data security incident." Read more here
Data Privacy & Digital Identity
“Open Rights Group (ORG), a UK-based membership organization that campaigns to protect privacy and free speech online, pointed out that Meta emailed Facebook and Instagram users in the UK at the end of May to warn it would introduce changes to its privacy policy on June 26. According to the ORG, Meta would “rely on the legal basis called legitimate interests” to use individuals’ information for its AI development.” Read more here
Digital Infrastructure
“The Romanian government this week announced Prime Minister Marcel Ciolacu had a meeting with Google and participated in the signing of an MoU between the Government of Romania and the company for ‘projects in digital infrastructure, innovation, and research.” Read more here
“As of 2023, the hyperscalers operated nearly 992 data centers worldwide, with capacity doubling over the past four years. The big four, Amazon, Meta Platforms, Microsoft, and Alphabet, are expected to spend $200 billion on capital expenditures in 2024, an increase of more than 35% YoY… Existing mobile connectivity infrastructure is insufficient to handle the massive amounts of data AI systems generate. Seamless connectivity and data transmission to end users requires an extensive expansion and enhancement of cell towers, particularly in dense urban areas.” Read more here
“A cloud data center building boom will help boost global IT spending to $5.26 trillion in 2024, increasing 7.5% year over year… AI consumption will also contribute to significant software market growth, driving spending to $1.1 trillion this year, up from $974 billion in 2023…” Read more here
Digital Lifestyle
“The month of June ushered in another blazing summer of streaming. According to Nielsen’s June 2024 report of The Gauge™, time spent streaming soared to 40.3% of total TV usage, topping the previous single category record set by cable in June 2021 (40.1%) and notching the highest share of TV ever reported in The Gauge. Across streaming platforms, four notched double-digit usage growth including Disney+ (+14.8%), Tubi (+14.7%), Netflix(+11.8%) and Max (+11.0%)… “ Read more here
“A Meta plan to use personal data to train its artificial intelligence (AI) models without seeking consent came under fire from advocacy group NOYB on Thursday, which called on privacy enforcers across Europe to stop such use.” Read more here
“Consumer spend in the U.S. for the first day of Amazon Prime Day recorded 11.7% year-on-year growth according to data by Adobe Analytics… Adobe’s report noted that consumers spent $7.2 billion on the first day as compared to $6.4 billion on the first day in 2023… Adobe said that its Buy Now Pay Later (BNPL) option clocked 17.1% growth year-on-year driving $540 million in sales.” Read more here
Homebuilding & Materials
“Filling the housing shortage is the long-term answer to making housing more affordable. We are in a big hole, and it is going to take more than the status quo to dig ourselves out of it." Across the country in 2022, there were roughly 8.09 million "missing households" — individuals or families living with nonrelatives. Compare that to 3.55 million housing units that were available for rent or for sale, and there is a housing shortage of more than 4.5 million.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.