Where Will Earnings Sizzle?
Winning themes, sectors, and names in 2024: MedTech, Shipping, Security, Biotech, Rest of AI
I have gone nowhere like the markets the last few days. I picked up COVID and stayed in quarantine waiting for the all clear signal. I am almost there and feel well enough to finish this article I wanted to get out last Friday.
The markets themselves are awaiting an all clear signal after earnings and the Fed this week. While that is interesting in the short run, I think what is more interesting are the investable trends developing with the advancements of technology, instability, and aging.
I highlight what I think are major areas of opportunity over the rest of 2024 that can benefit from these trends. The benefits will show in trends that last beyond this immediate earnings season. The biggest of beneficiaries are:
💡The Expanding AI Supply Chain & Solution Providers
As always, hop around to the section that is interesting.
The sections cover the broad index and individual names. I hope you enjoy reading it as much as I enjoyed researching and writing it. Society and solutions are changing at an amazing rate!🚀
This post is on the longer side and I will develop these themes further throughout the year. Let’s get into it.
THE MAJOR INDICES
The major indices start out strong again after an early Jan stumble. They are up 3-4% so far this year as the markets wait for a very busy week of activity. We have earnings from all of the major tech names in the next few days, the Fed conference call, and slew of economic data.
If this month closes out unchanged or higher from here, people are citing a continued run-up. I am not sure how high but just stay invested.
Another huge boost: in an election year the market almost never goes down. Why? Because politicians find ways to get re-elected.
Coming into this month, we have the perfect cocktail of economic data with a strong employment, falling inflation, and sustainable growth as we discussed last week.
Small caps are still lagging this year after a tremendous November and December. If the market stays positive, these could see another revival of interest as they have 2 tailwinds: 1) the potential of lower interests and 2) continued strength in consumer activity.
Now let’s go under the surface to see what sectors and individual names are interesting.
LOOONNNGG AI GRAVY TRAIN KEEPS GROWING
While there are AI winners already thriving — AI data center infrastructure and chips— new areas of growth are sprouting up. We are still in AI spring.
The biggest story of investing continues still to be AI. AI is best viewed as an evolution not an event.
Every day in my business I am finding more and more use cases for AI and so are billons across the world. Behind those use cases are real world and digital solutions that will take time to build out. Just like the computer, the internet, and every other technology before, the entire AI stack will require time to build out. There is infrastructure like data centers.
And need for chip fabricators and chip manufacturers to produce GPUs (graphic processing units which are at the core of running AI calculations). There’s a shortage of GPUs as the demand for generative AI, which is often trained and run on GPUs, grows. Nvidia’s best-performing chips are reportedly sold out until 2024. The CEO of chipmaker TSMC was less optimistic recently, suggesting that the shortage of GPUs from Nvidia — as well as from Nvidia’s rivals — could extend into 2025.
There is also the shortage of talent:
And let start there. With Amazon.
AMAZON
Amazon is in a prime spot to benefit from AI in 2 ways. Like any cloud business, the AWS cloud business is seeing increasing demand for compute intensive AI applications. Amazon will embed AI solutions and services throughout its corporate solutions.
SEMICONDUCTOR MANUFACTURERS
The clear winner here is still Nvidia. Mainly because of their complete hardware + software solution and because they have made tremendous inroads into numerous industries. We will come back to them in the biotech space.
But the pie is big and there is room for more at the table.
AMD is a second runner up and is expected to fill unmet demand for AI horsepower as they presented on their AI day. There are tremendous expectations baked in for both companies as the stock prices have run 20%+ in a few short weeks. More impressive number could extend these runs to the disbelief of many investors as they try to play catch-up.
Broadcom beat on earnings was “driven by investments in accelerators and network connectivity for AI by hyperscalers.” Broadcom’s semiconductors are in a number of categories, including networking, broadband, server storage, wireless, and industrial. Some of the company’s chips have exposure to generative artificial intelligence applications.
Taiwan Semiconductor kicked off semiconductor earnings earlier this year with a big earnings beat and mouth watering forecasts. They projected 20% growth in 2024 revenue on booming demand for high-end chips used in for AI applications, compared to an over 4% drop last year.
At this point these semiconductors have run up too quickly for investors to assess their true valuation. They are being driven by lofty projections. We will need more insight from earnings to see if growth prospects match valuations.
Picking them up before earnings is too risky.
IBM - AI CONSULTING & SERVICES
IBM is known for consulting and also as one of the original pioneer of an early AI solution, Watson. After many years of investor indifference to Watson, the Street is in frenzy.
The stock is up over 10% after earnings. “Client demand for AI is accelerating and our book of business for WatsonX and generative AI roughly doubled from the third to the fourth quarter,” Chief Executive Arvind Krishna said in an earnings release.
Services include AI model development, AI infrastructure, and AI governance. Here is their AI landing page.
CLOUDFLARE - INFERENCE AND SECURITY
Let me introduce you to an important AI term. Inference. Inference is the process of running live data through a trained AI model to make a prediction or solve a task. First AI models are made at a firm, like say OpenAI, and then deployed for usage by users. The stage of commercial use is the inference stage.
Clearly as new AI applications proliferate inference will go up. The next problem to solve is how and where inference handled. Cloudflare, which focuses on security, has added inference solutions in its product line. In its incarnation, Cloudflare solving for inference by adding inference solutions (chip and software) to corporate data stacks.
In their previous earnings call Cloudflare pointed to this a hot growth area to complement their security business. They have all the customers so in theory this opens distribution for this second line of business.
After a few years of going nowhere, the stock jumped last November.
DELL
Dell is in a unique spot as it can benefit from the launch of AI-capable PCs in 2024 and see a revenue boost in its server business from AI. The former is still some time in the future as computers can’t handle the current compute power needed for AI. Dell’s server business is profiting handsomely from the AI winds as per their last earnings call.
SEMI EQUIPMENT PRODUCERS
The semiconductor manufacturers all power their chip production with chip fabrication solution from equipment providers. These providers are expected to receive a boost from AI for years to come. Even if earnings are little less than expected this quarter, investors are thinking about the longer arc.
Applied Materials
Applied Materials is in ideal spot to unlock additional capacity for Nvidia and other chipmakers. ASML and Lam Research earnings call suggest there is plenty of opportunity ahead. Applied reports on Feb 15th.
ASML
ASML jumped 8% after earnings. The results saw ASML outperform analysts' expectations following forecasts it would generate EUR1.87 billion in profits on EUR6.9 billion in sales.
AI will need “massive amounts of computing power and data storage. I think without ASML, without our technology, that’s not going to happen,” CEO Peter Wennink said in an interview with Bloomberg TV. “It’s going to be a big driver for our business,” he added.
Most promising: record orders in the fourth quarter, which tripled from the quarter before.
Lam Research
Lam forecast third-quarter revenue largely above analysts' estimates and topped expectations on Wednesday, as chipmakers placed orders for the company's manufacturing equipment on a rebound in demand for electronics products.
Some of those categories are showing signs of recovery just as a boom in artificial intelligence is prompting chip firms to expand capacity.
After 3 quarters of decline, Chief Executive Tim Archer said the latest quarter's results were a solid and added:
"We are in a strong position to benefit as innovations such as AI power robust semiconductor industry growth in the years to come.”
SMCI - HONORABLE MENTION
Last week, Super Micro shares soared by 36% after the high-end AI server maker said it would beat its previous December quarter revenue guidance by 30%. That is roughly double the prior year.
I need to research this name better understand where the fit into the AI ecosystem and their long term competitive advantage.
BIOTECH
Biotech firms are built for eventual acquisition. Biotechs build drug pipelines and novel solutions which are mostly purchased by larger pharmaceutical firms. They are big pharma R&D. After years of no new activity, largely due to interest volatility, there has been a slew of transactions since late December.
There have been at least a dozen with more in the pipe. Combine that with an aging and unhealthy population, we are sitting on top of massive unmet demand for biotech innovation and sustainable drug development.
Another accelerant of the biotech revolution - AI. This is so compelling that Nvidia presented at the annual JP Morgan biotech conference. Companies were demonstrating tools shrinking drug discovery from weeks to minutes (listen to 14:12 here).
Here are examples of some notable acquisitions:
Johnson & Johnson will acquire cancer drug developer Ambrx Biopharma for $2 billion in cash. Ambrx is aiming to target multiple cancers with drugs called antibody-drug conjugates, or ADCs, which are described by researchers as “guided missiles” to directly target and kill cancer cells while limiting damage to healthy cells. This will help J&J fill a revenue hole approaching when its top-selling drug, Stelara, begins facing generic competition next year.
Merck is in talks to buy Harpoon Therapeutics for roughly $700 million. Harpoon is also operating in the cancer space, developing drugs that harness the power of the body’s immune system to treat a variety of diseases. It recently reported positive data for its lung cancer treatment in an early-to-mid-stage trial.
While not a biotech deal, Boston Scientific did pick up medical device maker Axonics for $3.7 billion in cash. Boston Scientific will acquire its slate of products for bladder and bowel dysfunction, strengthening its overall urology business portfolio. The deal is anticipated to close during the first half of this year, and Axonics will become a wholly-owned subsidiary.
Bristol Myers Squibb, which is acquiring Rayze Bio, a radiopharmaceutical therapeutics company for $62.50 per share in cash. Radiopharmaceuticals, or medicinal radiocompounds, is a new and novel group of pharmaceutical drugs containing radioactive isotopes.
Next up, AstraZeneca is buying China-based cell therapy biotech Gracell for $1.2 billion.
Picking individula biotech names from the field is a difficult and dangerous propositions. Names can move 300% up or 70% down on the right news. The best way to participate for anyone who is not a biotech expert is to pruchase the Biotech ETF (IBB):
After a massive run in 2023, IBB has been sitting in a tight range, waiting for the right catalysts in 2024. Another ETF that focuses on smaller cap biotechs is XBI.
MEDICAL DEVICES
Aging human bodies need surgeries as much as they need drugs. Surgery demand will go up as everyone returns to hospitals to take care of postponed surgeries. Humana, a leading health insurer, already highlighted in patient and outpatient surgeries are increasing.
Investors punished these stocks around the scare that GLP weight loss drugs (Ozempic, etc) would solve every health issue and massively reduce the need for surgeries. The reality of those delusional assumptions is starting to show between Humana and some other early reports.
People will need surgeries and medical monitoring devices and will continue to invest in their health through these technologies. The whole field is interesting and the ticker to watch for this is IHI, the US Medical Devices ETF.
Here a few interesting names to consider.
DEXCOM
Dexcom makes glucose monitoring devices (CGMs) which are critical for diabetic and pre-diabetic patients. Ahead of earnings they reported, preliminary, unaudited Q4 and full-year 2023 revenue of at least $1.03 billion and approximately $3.62 billion respectively which exceeded forecasts. Diabetes are on the rise across developed markets largely due to poor nutritional patterns and habits which are not easy to change. Growth should persist for many years to come as only 3 million of 500 million diabetics use their products.
Even better, weight loss drugs are a plus for Dexcom. Management said that doctors are prescribing CGMs at a faster clip for patients that are starting GLP-1s such as Ozempic. In the coming months, Dexcom is also implementing AI solutions to enhance the insights it can extract for patients from the constant stream of data.
INTUITIVE SURGICAL
Intuitive Surgical produces the Da Vinci machines for operations. Intuitive reported last week and said procedures with its surgical robot da Vinci rose 21% in Q4. They reported a non-GAAP Q4 net income of $1.60 per share, improving on a $1.23 per share adjusted profit during the year-ago period. Analysts had expected $1.49 per share. It was
Following the report the company received numerous upgrades. As hospitals and the medical sector remains short staffed, automation is really the only solution.
The stock already jumped to an all time high in the beginning of the year ahead of earnings when the company announced preliminary earnings. I expect the company to continue to grow its sales. As I write this, the stock price is inching back up.
STRYKER
Stryker is another medical device company known for its spine, orthopedic, and neurotechnology divisions. Earlier in the year, they announced that they surpassed $20 billion in annual sales for the first time in its history during the month of December 2023. This has been a perennial winner and with surgery volume increasing, the company should shine in 2024.
This is an industry to watch as I am sure there are many more winners to discover during earnings.
ENTERPRISE SOFTWARE: MATURITY & DOUBLE HUMPS
There was a mania in enterprise software names during COVID. And many crashed last year.
Now they are rightsizing their businesses and focus on scale. Scale requires the right leadership for the next level of growth, tighter margins, more efficient workforces (smaller and more productive), and profitability. Growth at all costs is dead. This is music to Wall Street’s ears.
Even if some of these firms will never make it to all time highs, at their current profitability profile and valuations, they are compelling targets. For example, Docusign has listed as a possible acquisition target. Last year, Splunk, Alteryx, VMWare, and others were acquired at much higher levels than the stock market valuation at the time.
What has survived is going to have the strongest of the bunch.
SERVICENOW
Servicenow runs numerous cloud based solutions for the enterprise and is considered a bellweather in the software space. They ran up 14% into earnings. That is a great sign for the rest of the sector.
The CEO was ecstatic about the expectations crushing results saying “it was a great quarter, great year”. He had the following to say about AI’s impact:
“Generative AI is injecting new fuel into our already high-performing engine…This is a breakthrough moment.”
“The productivity AI delivers is undeniable, and the savings will be incredible.”
MONDAY.COM
Monday delivers productivity and communication solutions for the enterprise. It is a little clunky to use at first but I have noticed that wherever I have worked, the users who learn to use it are true fans and never let it go. The firm must be doing something right as they raised full year guidance last year. From the chart they look poised for a rebound.
TWILIO
Twilio is the latest firm to announce corporate changes with hopes of improving profitability. Jeff Lawson, the cofounder, is stepping down as CEO to transfer the reigns to the next leaders for the next stage of growth.
Twilio provides communication best known for allowing computer to phone communication campaigns. As it looks to build its business the stock price has fallen from nosebleed levels and activist investors are pushing company to expand sales and profits. The stock has seemed to have found a floor. Any improvements in the business could launch the stock price up by 100% over the next year.
SNOWFLAKE
Snowflake is the world’s data bazaar for B2B. Corporations large and small globally store and share data with their customers on Snowflake. Snowflake has become the standard for companies who see data as a living, breathing output and not something to sit on the shelves and collect dust.
One issue in using Snowflake in the past was organizing and searching the data. If I am a corporate customer, I am using Snowflake to access your company’s data because I am searching for it in a dynamic way. What I don’t want it massive stack of data to shift through.
AI is seen as a massive value unlock for the Snowflake solution. The value did not show up in the last earnings call but investors are expecting more progress this time around. Snowflake’s chart, looks like Twilio and Monday’s chart. Sitting in a range and coiling to takeoff.
SEABORNE SHIPPING
Disruption in the Red Sea has sent shipping prices spiking as global operators reroute their cargo to avoid attacks by Iran-backed Houthi militants. About 30% of global container ship volumes move through the Suez Canal (linking the Red and Mediterranean seas). Meanwhile, an alternative route through the Panama Canal, which handles 8% of shipping volume, is operating at reduced capacity due to drought. For now high prices = higher profit.
The increased shipping times and prices are again straining global supply chains, which have recovered but are still vulnerable following the COVID-19 pandemic. For now the lessons of COVID has helped global organizations prepare for instability. But if this escalates quickly — all it takes the death of 1 person too many or the “wrong” person — expect tensions to flare and trade to get squeezed. And prices to go much higher.
And the Houthi’s continue a persistent spark on a powder keg. Look at the photo below. The Houthis released it. The want a fight! They are being very public and want to poke the lion. So far the lion cares little.
And remember it is not reality that determines prices but the expectations or perceptions about the future that move prices. We have no major sentiment shift en masse yet. But some shipping stocks have started to move. Look at Genco, Teekay, Scorpio, Frontline, ZIM shipping, and Torm.
Jefferies had this to say about ZIM
⚠️ KEEP IN MIND: If a ceasefire does happen however, these stocks will drop dramatically. That is the big risk.
For other ways to play the Middle East melee: How Hedge Fund Trade Shipping Disruption. They are thought provoking perspective to investing instead of just buying stocks.
SECURITY
We have covered a considerable amount in this newsletter. A few quick words about security. AI has unleashed new power and creativity in cyberattacks compounded more rogue actors and nation states intent on harm. It’s a Pandora’s box of cyber invasion.
Cybersecurity needs continue to mount in the long run. Three very well run companies include Zscalar, Cyberark, and Palo Alto Networks. I have invested in all 3 in equal amounts as I don’t know enough to know which one stands out.
Another way to approach this sector is purchasing the Cybersecurity ETF, HACK, which only last year emerged from 5 years of going nowhere.
If you have any questions, leave a comment. Thanks for reading Embrace the Chaos! Sharing perspective that makes sense.
Much effort and research went into making this 15-minute read. If you found it valuable, please help me out by clicking the like button ❤️ and sharing this article.
- Vikas Kalra, CFA