For the first half of the 20th century, artificial intelligence (AI) remained a subject of intrigue, primarily among science fiction enthusiasts. Characters like sentient machines and androids, frequently depicted in various literary and cinematic masterpieces, embodied the concept of AI at its most imaginative peak. In the second half of the century, scientists and technologists began their diligent pursuit to make AI a reality.
By 2023, the world managed to get an up-close and personal view of the stunning advancements in the field of AI technology. This rapidly evolving innovation is crucial in sculpting the future of humanity across diverse industries. At present, it plays a pivotal role as an impetus behind the emergence of new technologies such as big data, robotics, and the Internet of Things (IoT), to name a few.
Additionally, GenAI, with tools like ChatGPT and AI art generators, is gaining widespread attention. This momentum is anticipated to reaffirm AI’s position as a technological trailblazer for the foreseeable future.
AI has its influence across machine learning, large language models, intelligent applications and appliances, digital assistants, synthetic media software, and autonomous vehicles. Corporations that neglect to invest in AI services and products may face the threat of obsolescence. Company executives project an increase in their expenditure for the year 2024 to modernize data infrastructure and adopt AI.
As AI continues its growth, semiconductors and their components have emerged as key topics of debate in the 2023 business landscape. This technological boom has often drawn parallels to the American Gold Rush of the nineteenth century, with the lucrative vantage point proving not to be the gold miners but the shovel manufacturers. Today, it’s NVIDIA Corporation (NVDA) that positions itself as a prominent “shovel seller” by producing chips; these are rare yet vital resources in the realm of AI development.
Based in Veldhoven, Netherlands, ASML Holding N.V. (ASML) is poised to reap substantial benefits from the swift incorporation of GenAI and machine learning technologies. It is projected that AI will initiate significant growth in leading-edge logic wafer capacity through increased volumes of GPU, CPU, and connectivity chips and escalating die sizes.
ASML holds the unique position of being the sole provider of extreme ultraviolet lithography machines, crucial for generating advanced process nodes, including TSMC’s 5nm and 3nm parts.
This positions chipmakers – who create the bulk of the chips exploited for powering AI training, machine learning, and inference workloads – as dependent on this European equipment supplier.
Before we delve into a comparative analysis of NVDA and ASML to determine a better long-term buy, let’s first individually look at the companies:
NVIDIA Corporation (NVDA)
NVDA, widely acknowledged as the leading U.S. manufacturer of chips and graphics processing units tailored for AI applications, celebrated a banner fiscal year in 2023. The company’s stock skyrocketed over the year, tripling in value, propelled by the introduction of innovative products and a surge in reliance on AI technology. Its third-quarter revenue stood at $18.12 billion, with profits surging nearly fourteenfold from the year-ago quarter to $9.24 billion and pushing the company’s market cap above $1.5 trillion.
NVDA’s reputation for delivering high-quality, AI-ready hardware solutions has earned it a favored status among numerous companies. As a testament to NVDA’s relationship with various multinational corporations, META, a member of the “Magnificent Seven” tech giants, has plans to employ NVDA’s GPUs. With the aim of constructing a “massive compute infrastructure” to meet its ambitious AI objectives, META will integrate 350,000 NVDA H100 GPUs and nearly 600,000 H100 compute-equivalent GPUs into its system by 2024.
Investors’ exuberance for AI can be traced back to OpenAI’s launch of ChatGPT on November 30, 2022. Following this event, NVDA’s shares soared by more than 250%, solidifying the company’s position as an industry frontrunner in semiconductor manufacturing. This upswing guided the S&P 500 Semiconductor stock price index toward a gain of 108%.
As for what’s ahead, NVDA is expanding its production capability for the much-coveted H100 chip.
Further proof of NVDA’s dynamism lies in its net income and EBIT margins of 42.10% and 45.94%, which vastly outperform industry averages of 2% and 4.79%, respectively. Likewise, its trailing-12-months ROCE, ROTC, and ROTA of 69.17%, 33.23%, and 34.88% are also significantly higher than the industry averages of 1.48%, 2.82%, and 0.41%, respectively.
As NVDA gears up for its next earnings announcement on February 21, 2024, anticipation is mounting among investors. Revenue and EPS are projected to be $20.21 billion and $4.52, denoting year-over-year increases of 234.1% and 413.2%, respectively.
That said, investors should stay mindful of potential geopolitical tensions. As history indicates, China is crucial to NVDA, contributing to over 90% of the country’s $7 billion AI chip market. Should the U.S. impose restrictions on high-end chip exports to China, billions of orders could be placed under threat.
Furthermore, with NVDA trading at a forward non-GAAP price-to-earnings (P/E) ratio of 50.82x, it can be inferred that investors are paying a considerable premium, potentially influencing the valuation of the company’s stock. The forward price/earnings-to-growth (PEG) ratio of 0.37, which may seem attractively balanced at first glance, also suggests that any downward revisions to the EPS could trigger a significant decline in stock value. So far, analysts have revised EPS estimates upward. Nonetheless, it should be noted that this trend could reverse if these estimations fail to materialize.
ASML Holding N.V. (ASML)
ASML develops, produces, markets, sells, and services advanced semiconductor equipment systems. Its key product line is high-end, extremely expensive, and intricate systems for semiconductor manufacturing that employ extreme-ultraviolet (EUV) light to print features at a resolution of 13 nm – outpacing the reach of deep-ultraviolet (DUV) lithography, used in another product line that ASML also offers.
The EUV systems, exclusive to ASML, have been tremendously successful, enhancing the company’s profit margins and its stock performance over the past five years. In fact, ASML had emerged as the third most valuable publicly listed firm in European stock markets as of late January.
AI system architecture necessitates the inclusion of chips specifically designed to process substantial quantities of data. High-performance memory chips are crucial to achieving the full potential of AI. The criticality of these chips has prompted chip manufacturers to invest in EUV lithography systems, essential elements of advanced chip manufacturing, made available by ASML. Under normal conditions, the delivery time for ASML’s flagship EUV system ranges from 12 to 18 months.
ASML’s critical tools are required by Taiwan Semiconductor Manufacturing (TSM), Intel (INTC), and Samsung to produce advanced AI chips for both their clients and their own needs. This dependence on ASML’s equipment underscores the company’s pivotal role in the ongoing AI revolution.
In 2023, a lethargic order pace from customers and harsh market circumstances posed challenges for ASML. However, during the same year, the company made a resilient recovery. Its resurgence in orders coincides with the continued competition among top-tier chip manufacturers striving to develop 2-nanometer chips, thus enhancing the computing speed of AI algorithms. The imminent inauguration of several chipmaking facilities is also projected to amplify the demand for ASML machines further.
ASML disclosed solid earnings for the fiscal fourth quarter of 2023. Driven by the demand for the specific equipment necessary for AI chip production, net booking reached €9.19 billion ($9.95 billion), of which €5.6 billion ($5.85 billion) is EUV. Sales escalated to €7.24 billion ($7.84 billion), generating €2.05 billion ($2.22 billion) in profits representing an 8.2% year-over-year increase.
ASML’s order lead time of 12 months to 18 months indicates that customers placing an order now can anticipate delivery during the initial half of 2025. It is projected that the order backlog will maintain its swift growth in subsequent quarters, reinforcing management’s narrative of future growth and market stability at the bottom of the cycle.
ASML was highly profitable last year, with shares peaking in the first half of 2023 before briefly declining and then rebounding to approach historic levels unseen since late 2021. This surge can be attributed to ASML’s well-received earnings report for the fiscal fourth quarter of 2023. However, the company’s current premium valuation and tempered outlook for its 2024 financial performance raise some concerns.
ASML’s non-GAAP P/E ratio of 43.16x suggests a high valuation, indicating the potential for ASML to face some financial pressures. The firm will also need to navigate potential challenges ahead, particularly regarding Chinese chipmakers impacted by export restrictions. Nevertheless, ASML foresees continued robust demand despite potential volatility in this market.
Despite these immediate challenges, ASML remains bullish for the long term about the industry it serves. The company views 2024 as a “transitional” year, predicting that its semiconductor clients are on their way through the bottom of their business cycles and will, therefore, increase demand for its systems significantly in the latter half of 2024 and even more so in 2025. In preparation for this predicted uptick in demand, ASML is actively investing in capacity ramping and technological advancement.
Financial analysis firm Jefferies further supports ASML’s optimistic outlook, declaring that ASML is well-positioned to capitalize on an anticipated surge in AI demand. Based on this projection, it forecasts ASML’s revenue to grow at a 21% CAGR between 2022 and 2025.
Peter Lynch once said, “Everybody is a long-term investor until the market goes down.” During a market crash, plenty of investors retreat hastily, potentially missing out on substantial long-term gains. Therefore, a more prudent strategy would be to stay the course throughout downturns or even increase share purchases via dollar-cost averaging.
Nonetheless, this tactic is only applicable to robust, sustainable companies. Two firms fitting these parameters are NVDA and ASML – both undoubtedly presenting compelling long-term retirement investment opportunities.
However, there are certain factors one should consider. NVDA’s trailing-12-month gross profit margin of 69.85% is higher than ASML’s 51.29%. In addition, NVDA’s trailing-12-month cash from operations of $18.84 billion is higher than ASML’s $6.01 billion. Thus, NVDA seems more profitable.
Turning to growth, NVDA has exhibited an impressive revenue increase at a 44.8% CAGR over the past three years, while ASML trails with a still respectable growth at a 25.4% CAGR. During the same period, NVDA’s net income grew at a 70.3% CAGR compared to ASML’s 30.2% CAGR.
However, NVDA carries a heavy price tag reflected by its forward EV/EBITDA multiple of 47.34, higher than ASML’s 33.05. Similarly, NVDA’s high forward EV/Sales of 26.22x, compared to ASML’s 11.31x, further emphasizes the costliness of NVDA stocks.
NVDA possesses an astounding 90% stake in the AI chip market, which, when coupled with its astounding profitability and growth, underscores its industry dominance despite its lofty valuation.
The unprecedented demand surge for ASML machines, prompted by the burgeoning need for AI infrastructure, signifies the pivotal role the company plays in revolutionizing AI technologies. Notably, specialized AI chips, such as those fabricated by NVDA using ASML’s architecture, perpetually dominate the field, stressing the substantial weight ASML carries within the AI sphere.
However, growing production capacity due to ASML’s record orders could produce potential price dips, impacting the industry negatively. The massive investment influx in semiconductor production may reduce pricing power and, contract margins and profits.
Turning a keen eye on dividends, NVDA pays an annual dividend of $0.16 per share, equating to a yield of 0.03%. Meanwhile, ASML offers a substantial dividend of $6.12 per share, yielding 0.70%. Also, ASML’s dividend grew at CAGRs of 34.9% and 30.7% over the past three and five years. Hence, investors aiming for dependable, long-term returns could consider allocating their resources toward incorporating ASML into their portfolios.
Undeniably, NVDA’s robust expansion is praiseworthy, with management consistently portraying an optimistic outlook for the company’s future. However, the firm is not without risk. With NVDA’s shares currently trading at 26.2x sales and 50.8x earnings, these valuations indicate that any slight mishap has the potential to jolt the company’s market standing significantly. Given the prevailing market irregularities, potential hazards, and sluggish price momentum, exercising caution and waiting for a better entry point on the stock may be a sensible strategy.
Since the launch of ChatGPT in November 2022, GenAI has been reshaping the future of work. From automating routine tasks to transforming entire job roles, generative AI is making a significant impact across multiple industries. A rapid acceleration of task automation could assist organizations in driving labor cost savings and boosting productivity.
If generative AI delivers on its promised capabilities, the labor market could face considerable disruption. Using data on occupational tasks in the U.S. and Europe, Godman Sachs Global Investment Research finds that about two-thirds of today’s jobs are exposed to some degree of AI automation. And this technology could substitute up to one-fourth of current work.
Goldman Sachs estimates that GenAI will eventually automate nearly 300 million of today’s full-time jobs globally.
AI’s Role in Latest Tech Layoffs
With just a month into the new year, tech layoffs are starting to pile up; however, analysts consider this a new normal for Silicon Valley in a considerable pivot to AI. The job cuts are not on the same scale as in late 2022 and early 2023 when tech companies got rid of thousands of employees, a blowback from the frenzied hiring that took place during the pandemic when everyday life turned digital.
According to layoffs.fyi, a California-based website that tracks the tech sector, the industry lost around 160,000 jobs last year. So far this year, tech layoffs are at nearly 24,584, the site showed, from 93 companies.
Layoffs.fyi estimates that approximately 20% of job cuts are brought on by AI and restructuring associated with it. Moreover, Silicon Valley jobs are on the front line, with some coding tasks primarily carried out by generative AI.
Cloud-based software provider Salesforce, Inc. (CRM) announced that it will be laying off about 700 employees, roughly 1% of its global workforce, adding to a brutal string of tech layoffs at the start of 2024. This move comes amid ongoing cost-cutting pressures from investors, including activist shareholders like Elliott Management, to boost its profit margins.
A year ago, CRM lowered its headcount by 10% as a part of its rebalancing efforts after a pandemic-era hiring boom.
Despite the recent cuts, Salesforce is still reportedly hiring for 1,000 open roles across the company, indicating that these layoffs could be a part of an adjustment in its workforce. The company’s focus is directing spending toward growth.
An unnamed source cited in the Wall Street Journal report that the latest round of layoffs could be more of a routine adjustment to the company’s headcount rather than a reactive measure to ongoing economic challenges.
Earlier this month, another tech company, Alphabet Inc. (GOOGL), laid off hundreds of employees across the company as it continues to push for efficiency and focus on its biggest product priorities and significant opportunities ahead.
According to the company, the job cuts will impact employees within Google’s hardware, voice assistance, and central engineering teams. Also, other parts of the tech company were affected.
This layoff announcement marks the latest cost-cutting effort at Google as it continues to work to rein in the drastic headcount growth that took place during the pandemic. In January last year, Google cut its workforce by 12,000 employees or nearly 6% of its employee count. Later in the year, the company made other cuts to its recruiting and news divisions.
Moreover, Google shifted its focus to prioritize developments in AI, launching products such as chatbot Bard and the large language model (LLM) Gemini as it aims to keep up with rivals, including Microsoft Corporation (MSFT) and Amazon.com, Inc. (AMZN).
This season’s tech layoffs are being framed more as restructuring rather than cutting down from prior over-hiring efforts; suggesting that even if employees lose their jobs, there could be some security within the industry more broadly. So, investors shouldn’t worry much about the recent job cuts.
Shares of CRM have gained nearly 27% over the past six months and more than 74% over the past year. Meanwhile, GOOGL’s stock has surged more than 14% over the past six months and approximately 55% over the past year.
Now, let’s review the fundamentals of CRM and GOOGL in detail:
On January 14, 2024, CRM, at NRF 2024, announced new data and AI-powered tools for retail to help businesses drive efficiency and deliver connected shopping experiences. The Einstein 1 Platform will power these new retail innovations.
With generative AI built into Commerce Cloud and Marketing Cloud, retail merchandisers and marketers can tap into these generative tools with a real-time understanding of customer behavior and preferences to optimize every customer interaction — enhancing loyalty, boosting revenue, and driving employee productivity.
Also, on December 14, 2023, Salesforce unveiled major updates to its Einstein 1 Platform, adding the Data Cloud Vector Database and Einstein Copilot Search. Data Cloud Vector Database will unify all business data, including unstructured data like PDFs, emails, and transcripts, with CRM data to allow the grounding of AI prompts and Einstein Copilot.
Einstein Copilot Search will offer AI search capabilities to deliver accurate answers from Data Cloud instantly in a conversational AI experience, thereby driving productivity for all business users.
For GOOGL, 2023 was a remarkable year of significant advances in AI and computing. On December 6, Google launched its largest and ‘most capable’ AI model, Gemini, which will be in three different sizes: Ultra, Pro, and Nano.
Enterprises could use Gemini for advanced customer service engagement through chatbots and product recommendations and identifying trends for companies looking to advertise their products. Also, it could be used for content creation.
In November, Google further announced a new DeepMind model, Lyria, in partnership with YouTube. Lyria is an advanced AI music generative model that will create vocals, lyrics, and background tracks mimicking the style of famous artists. This model is available on YouTube through two distinct AI experiments – DreamTrack for Shorts and Music AI tools.
Last Reported Quarterly Results
CRM’s total revenues increased 11.3% year-over-year to $8.72 billion for the fiscal third quarter that ended on October 31, 2023. Its gross profit was $6.57 billion, up 14.2% from the year-ago value. Its income from operations rose 226.3% from the prior year’s quarter to $1.50 billion. The company’s free cash flow came in at $1.37 billion, an increase of 1,088% year-over-year.
In addition, Salesforce’s non-GAAP net income grew 47.9% from the previous year’s period to $2.09 billion. Its non-GAAP EPS came in at $2.11, surpassing the consensus estimate of $2.06 and up 50.7% year-over-year.
For the third quarter that ended September 30, 2023, GOOGL reported revenue of $76.69 billion, compared to analysts’ estimate of $75.73 billion and up 11% year-over-year. Its income from operations grew 24.6% from the prior year’s quarter to $21.34 billion. Its income before income taxes rose 30.6% year-over-year to $21.20 billion.
Google parent Alphabet’s net income increased 41.5% year-over-year to $19.69 billion. It posted net income per share of $1.55, compared to the consensus estimate of $1.45, and an increase of 46.2% year-over-year. Further, as of September 30, 2023, the company’s cash and cash equivalents stood at $30.70 billion, compared to $21.88 billion as of December 31, 2022.
Past And Expected Financial Performance
Over the past three years, CRM’s revenue has increased at a CAGR of 18.7%, and its EBITDA has grown at a 43.4% CAGR. The company’s normalized net income has increased at a CAGR of 188.3% over the same time frame, and its levered free cash flow and total assets have improved at CAGRs of 24.8% and 15.5%, respectively.
Analysts expect CRM’s revenue for the current year (ending January 2024) to increase 11% and 56.5% year-over-year to $34.79 billion and $8.20, respectively. For the fiscal year ending January 2025, the company’s revenue and EPS are expected to grow 10.9% and 16.5% year-over-year to $38.57 million and $9.55, respectively.
GOOGL’s revenue and EBITDA have grown at CAGRs of 20.1% and 26% over the past three years, respectively. Its net income and EPS have improved at respective CAGRs of 23.2% and 26.3% over the same timeframe. Also, the company’s levered free cash flow has increased at a CAGR of 36% over the same period.
For the fiscal year ending December 2024, GOOGL’s revenue and EPS are estimated to increase 10.8% and 15.4% year-over-year to $340.50 billion and $6.69, respectively. Likewise, Street expects the company’s revenue and EPS for the fiscal year 2025 to grow 10.5% and 15.6% from the prior year to $376.34 billion and $7.73, respectively.
In terms of the trailing-12-month EBIT margin, CRM’s 15.87% is 243.7% higher than the industry average of 4.62%. Its trailing-12-month gross profit margin of 74.99% is 54.8% higher than the 48.43% industry average. Moreover, the stock’s trailing-12-month net income margin of 7.63% is significantly higher than the 2.04% industry average.
GOOGL’s trailing-12-month gross profit margin of 56.12% is 15% higher than the 48.81% industry average. Its trailing-12-month EBIT margin of 27.42% is 226.8% higher than the 18.39% industry average. Likewise, the stock’s trailing-12-month net income margin of 22.46% is 541.4% higher than the industry average of 3.50%.
The tech industry remains focused on trimming costs via job cuts. More than 20,000 tech employees have been laid off so far in 2024. CRM is the latest tech company to announce about 700 layoffs. However, the company still has plenty of job openings, roughly 1000, suggesting that these cuts might not be a drastic strategy shift but a routine labor force adjustment.
Similarly, tech giant Google signaled layoffs this month. Google CEO Sundar Pichai warned employees of more job cuts this year as the company continues to shift investments toward areas like AI. In a memo titled “2024 priorities and the year ahead,” Pichai stated that the company has ambitious goals and will be investing in its big priorities in 2024.
“The reality is that to create the capacity for this investment, we have to make tough choices,” Pichai said. For some teams, that means eliminating roles, which includes “removing layers to simplify execution and drive velocity,” he added.
Many fear that these job cuts could be related to Google’s rollout of AI across its advertisement department, effectively witnessing the technology replace humans. Also, given Salesforce’s heavy investments in AI, people can’t help but wonder if the technology could be threatening its workforce.
In today’s digital era, AI undoubtedly stands out as one of the most influential forces shaping the future of work. AI technology is making its dramatic impact felt, especially across the tech industry, from automating business operations to transforming entire job roles.
While some tasks/jobs are being automated, replacing humans, new roles are emerging with AI integration. Tech companies’ increased focus on AI is leading to a hiring surge in this area while other sectors face layoffs.
This season’s job cuts in the tech industry are viewed more as restructuring efforts rather than navigating economic challenges or cutting down from previous over-hiring during the pandemic. So, the latest tech layoffs should be the least of investors’ worries, and they can continue to hold CRM and GOOGL shares.
Since the inception of civilization, humanity has perpetually sought the next groundbreaking advancement, extending across diverse fields, including entertainment, fashion, and technology. It is the forecasters, with one foot in the present and the other steering toward the future, whose evolutionary visions brought about automobiles, airplanes, and the internet.
While such visionaries may not always accurately predict the future, their ambitions fuel our relentless quest for innovation. In the spotlight recently has been Artificial Intelligence (AI), notably after OpenAI unveiled ChatGPT, a comprehensive language model that millions employ for diverse purposes such as searching, parsing, and content creation.
In the current digital era, the significance of semiconductors is evident. Powering an extensive array of devices from smartphones to aircraft, these components enhance the utility of modern electronics and act as technological accelerators, driving advancements in AI, machine learning, and quantum computing.
The semiconductor industry displays robust growth and is expected to expand at a CAGR of 9.18% by 2030, reaching $1.03 trillion.
The surge in demand for AI applications across different sectors for effective big data management serves as a key factor propelling the worldwide AI chip market’s growth. Consequently, the market is anticipated to reach about $372.01 billion in 10 years.
Additionally, the rising requirement for quantum computing, especially for handling mammoth datasets linked to operational efficiency, is gaining increased prominence, which is forecasted to drive substantial market expansion.
Chip giant Advanced Micro Devices, Inc. (AMD) is set to officially join the AI chip competition in 2024. At the beginning of the second half of 2023, the tech titan announced the forthcoming MI300x GPU chipset.
According to AMD, the AI chip market, valued at $45 billion, is predicted to soar nearly tenfold to $400 billion by 2027. With an eye on this lucrative landscape, AMD’s newly developed MI300X chipset is designed to vie with the AI-darling Nvidia Corporation’s (NVDA) flagship H100 for AI data center clientele.
According to AMD’s forecasts, the new chips will generate an additional $2 billion in sales in 2024 – a figure some deem conservative considering the immense potential of the total addressable market. In contrast, analysts at Barclays project a figure closer to $4 billion – translating to roughly 18% growth rate based on AMD’s trailing-12-month revenue, assuming all other business operations remain steady.
Over the past three and five years, AMD’s revenue grew at CAGRs of 36.8% and 28.2%, respectively, while its levered FCF grew at 68.2% and 84.4% CAGRs over the same periods.
For the fiscal third quarter that ended September 30, 2023, AMD delivered strong revenue and earnings growth fueled by rising demand for its Ryzen 7000 series PC chips and an all-time high in server processor sales. Its revenue for the quarter stood at $5.80 billion, up 4.2% year-over-year.
AMD’s data center business is on a significant growth trajectory, rooted in the strength of its EPYC CPU portfolio and the accelerated shipments of Instinct MI300 accelerators. These factors have fortified multiple deployments across hyper-scale, enterprise, and AI customer frameworks.
Moreover, its non-GAAP net income and net income per share increased 3.7% and 4.5% from the year-ago quarter to $1.14 billion and $0.70, respectively.
AMD is scheduled to report fourth-quarter earnings on January 30, 2024. AMD EVP, CFO and Treasurer Jean Hu said, “In the fourth quarter, we expect to see strong growth in Data Center and continued momentum in Client, partially offset by lower sales in the Gaming segment and additional softening of demand in the embedded markets.”
Wall Street expects AMD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to be $6.14 billion and 77 cents, up 9.6% and 11.6% year-over-year, respectively. If it delivers on those estimates, it will mark the fastest sales growth in one year. The company has surpassed the consensus revenue and EPS estimates in all of the trailing four quarters, which is impressive.
Shares of AMD jumped 5.9% on January 24, soaring above 140% over the past year. Since October, AMD has seen an approximate increase of 65%, comfortably outperforming the AI darling NVDA and the Philadelphia Semiconductor Index during this period. The S&P 500 registered just a 15% uptick.
This week alone, AMD surged above 12%, trouncing NVDA’s increase. The significant leap in AMD shares is attributed mainly to the burgeoning potential to secure a prominent slice of this year’s AI chip market.
Additionally, this week saw a significant boost when several notable analytics firms – including Barclays Plc, Susquehanna Financial, and TD Cowen – elevated their price targets for AMD.
Barclays emerged with the loftiest target at $200 per share, surging from $120. This optimistic adjustment primarily stems from high expectations for artificial intelligence as a key growth stimulant. Notably, over 70% of analysts monitoring AMD are recommending a buy-equivalent rating.
However, Wall Street analysts expect the stock to reach about $156 in the next 12 months, indicating a potential downside of 12.6%. The price target ranges from a low of $105 to a high of $215.
Growth projections from AMD’s MI300X chip family are a lot to receive from one type of product. Should AMD’s ambitious forecasts regarding AI chip demand materialize, investors could anticipate a considerable escalation in sales in a couple of years.
Investors should remain aware that the AI sector does not exclusively entail a winner-take-all scenario. The market’s rapid expansion could allow multiple companies to carve out their successes. Although entering the market later than others, AMD may establish a competitive edge through cost-effectiveness, nurturing an esteemed standing within a balanced and diversified investment portfolio.
The early adopters of the MI300A/X are unlikely to obtain high profits initially – they will enjoy competitive pricing until demand gains traction. By nature, building momentum takes time, and if AMD stays true to its usual course of action, it will focus on long-term progress rather than immediate financial gain.
AMD’s stock price could fluctuate significantly, and despite positive reports and guidance, it may take several estimated returns to invoke a maximum increase. This is because AMD must substantiate its guidance, requiring, at a minimum, another quarter to validate and replicate its success.
Moreover, there are significant issues like demonstrating market competitiveness, particularly concerning software adoption. Some investors view AMD’s rival, NVDA, as a dominant player in the GPU space. For AMD to make its mark, it must prove its ability to lead on its terms, complementing its other endeavors. This validation process will require time and consistency.
While waiting, macroeconomic risks persist, ranging from ongoing wars to the potential of economic recession and fluctuating interest rates. Staying the course involves maintaining progress amid potentially adverse circumstances.
From an investment standpoint, it is critical to acknowledge AMD’s forward non-GAAP P/E multiple of 67.17, signaling that AMD’s stock is substantially more expensive than the industry average.
Furthermore, AMD’s 12.71x forward P/S is 330% greater than the industry average of 2.95x. Its revenue has increased at a modest CAGR over the past three years, and analysts predict a 15% annual growth rate for the next three years. However, these projections are less robust than the industry average, suggesting a potential shortfall in expected revenue for AMD. It is thus concerning that AMD’s P/S supersedes most within the same industry.
The disquieting underperformance in its revenue projections spells potential risk for AMD’s elevated P/S. If the anticipated revenue trend doesn’t take an upward turn, it could negatively impact the already high P/S. Given the current market prices, it would be prudent for investors to exercise caution, particularly if the situation fails to enhance.
Therefore, investors could wait for a better entry point in the stock.
The past few days have proven to be quite turbulent for Spirit Airlines, Inc. (SAVE), with notable fluctuations in its market value. From a federal judge opposing a proposed merger, sending SAVE stock into a nosedive, to David Portnoy investing in and promoting the company on January 18, resulting in SAVE’s share price surge – the airline stock garnered significant attention.
The initial blow to the ultra-low-cost carrier’s stock unfolded last week when JetBlue Airways Corporation’s (JBLU) $3.8 billion bid to takeover SAVE was thwarted by court intervention. This resulted in a sharp drop of as much as 74% over three days, throwing the fate of the previously secure deal into uncertainty. This drew attention to the mounting question about the survival prospects for SAVE.
Navigating the airline industry presents several complications. The inevitable costs associated with acquiring aircraft and employing relevant staff mount up, especially considering the volatile nature of jet fuel prices. This renders the sector vulnerable to bankruptcy, as demonstrated by prominent airlines, such as Pan Am, and countless smaller entities. Occasionally, airlines can re-emerge post-Chapter 11 restructuring, emulating the revival of American Airlines in 2013.
In other instances, they vanish indefinitely, leaving travelers in the lurch. According to TD Cowen analyst Helene Becker, SAVE may also be at risk.
Additionally, there is fervor among the investment community fueled by a return to bullish attitudes and a robust performance by S&P 500 and Nasdaq in the past year. Such success encourages “get rich quick” mentalities, evidenced by a flood of social media messages advocating for SAVE shares to skyrocket imminently without any factual basis.
Despite this, some analysts do not predict either a bankruptcy or a dramatic escalation for SAVE. Furthermore, the company reaching a book value of $12.06 per share is also not anticipated.
This article sheds light on the latest updates, evaluates SAVE’s fundamentals, and provides prospective investors with guidance regarding SAVE’s future value.
The proposed merger would position JBLU as the fifth-largest airline in the U.S., vigorously contesting long-standing dominators Southwest, American, Delta and United Airlines. With an estimated domestic market share of 10%, it promised to diversify flight options and stimulate industry competition.
The acquisition was conjectured to enhance JBLU’s cancellation policy through the planned substitution of SAVE’s non-refundable fares with JBLU’s Passenger Bill of Rights, which ensures an automatic reassessment upon inevitable delays and cancellations. The resultant entity could minimize flight delays and cancellations due to the availability of an expanded fleet and heightened pilot workforce following the merge.
Furthermore, JBLU’s route network was expected to broaden, encompassing SAVE’s reach in Central and South America and the Caribbean, supplementing its existing local and international destinations.
A federal judge, however, recently blocked the merger, arguing that SAVE’s cost-sensitive customer base could be harmed. The court determined that the consolidation would infringe on antitrust law, which is designed to prevent anti-competitive harm to consumers. The decision highlighted a potential decrease in affordable ticket options for price-conscious travelers nationwide.
Concerns were voiced about escalating ticket prices, particularly for low-cost seekers, considering JBLU’s previous estimation of a 30% price hike in the absence of SAVE as a competitor.
A surge in SAVE’s market value triggered by the proposed merger piqued the interest of arbitrage investors looking to capitalize on price gaps between company equity and the offer price. However, the merger’s block prompted investors to withdraw, subsequently depreciating SAVE’s stock value.
A joint appeal by JBLU and SAVE against the ruling in hopes of reviving the merger is another interesting twist in the carriers’ merger attempt. SAVE’s stock price experienced a slight rebound in response to this move.
SAVE’s stock witnessed an upward trend after Barstool Sports founder Dave Portnoy took to Twitter and openly commended SAVE’s value. His proclamation of SAVE as a “mega buy” sparked a late-week rally.
Despite these developments, it seems improbable that the judicial verdict will be overturned. The merger blockage is anticipated to persist. Potential investors should assess SAVE on individual merit and without expectations for the completion of such a corporative action.
Let’s delve deeper into the fundamentals of SAVE.
The airline, with a market cap of approximately $898 million, boasts an extensive workforce numbering over 11,000 employees. The ownership structure of the company shows a mix of roughly 0.5% insiders and about 67.7% institutional holders.
Since the onset of the COVID-19 pandemic, SAVE has grappled with financial sustainability. Their ticket sales have not seen recovery at the pace anticipated, and several of its planes are being temporarily grounded due to engine problems necessitating inspection and possible replacements. SAVE anticipates an average of 26 grounded aircraft, over 10% of its fleet, during 2024. As a result, Pratt & Whitney engines on numerous Airbus jets could drastically hamper immediate growth predictions for the company.
SAVE raised $419 million through the mortgage of many of its airplanes. However, the future options for raising liquidity seem limited. As per results for the fiscal third quarter that ended September 30, 2023, SAVE’s overall operating revenue stood at $1.26 billion, a 6.3% year-over-year decline. The net loss for the quarter was reported at $157.55 million, a 333% rise year-over-year, while net loss per share surged by 336.4% from the year-ago quarter to $1.44.
The precarious liquidity situation at SAVE is hinted at by its quick ratio of 0.69. Its Total Debt/Equity ratio exceeding 500% indicates that for every dollar of equity, the company holds five dollars in debt. This high leverage exposes the company to greater risk while settling its debt.
On December 31, 2023, SAVE’s liquidity stood at $1.3 billion, including unrestricted cash and equivalents, short-term investment securities, and $300 million under a revolving credit facility. The company is currently in talks with Pratt & Whitney to negotiate compensation for the geared turbofan engine faults that may provide significant liquidity in the next few years.
While SAVE is not bankrupt and still commands liquidity, they are not without challenges. Their $1.3 billion is barely above their debt due in 2025 – amounting to $1.1 billion, which is slated for restructuring next year.
Given that higher risk-free rates have led to a cooling of corporate debt markets, creating an unfavorable environment for debt refinancing, SAVE’s management team must explore severe measures to ensure the corporation’s ongoing viability, especially when the likelihood of the merger being off the table is high.
Credit rating company Fitch has issued a warning regarding the “significant refinancing risk” SAVE is expected to encounter in the coming year due to the $1.1 billion debt owed by its loyalty program, which is due for repayment in September 2025. Although Fitch has maintained a B/Negative credit rating for SAVE’s debt, it has encouraged the airline to formulate a near-term strategy to increase liquidity, reduce refinancing risk, and boost profitability to prevent further negative ratings.
Details concerning this scenario are expected to emerge on February 8, 2024, when the company will disclose its 2023 fourth-quarter results.
Despite the challenges, SAVE is optimistic about its future earnings – projecting that total revenue will surpass prior estimations. The airline anticipates its fourth-quarter revenue to come at $1.32 billion, which exceeds the higher benchmarks established in its prior projection. This optimistic outlook is primarily attributed to the robust bookings received during the 2023 year-end travel peak.
The airline also forecasts a fuel cost reduction that would help relieve some revenue pressure and enable increased earnings. Operational costs for the quarter are expected to be lower than predicted, primarily due to decreased fuel expenses driven by improved fuel efficiency, reduced airport costs, and other factors. Additionally, SAVE predicts a significant contraction in its negative margin, foreseeing it to shrink down to between 12% and 13% from the previously anticipated negative margin of up to 19%.
Is SAVE a Worthy Investment?
When a stock encounters difficulties as notable as those faced by SAVE, the conversation invariably turns toward short-squeeze speculation. Despite recent losses, SAVE’s share trajectory appears to have rebounded. However, it’s plausible that this upward momentum results in more from short-squeeze speculation among retail investors than it does from positive news about the airline itself.
The current high level of short interest in SAVE stock further buttresses this theory. Data pulled from the short analysis platform Fintel corroborates this, showing that the short interest is 19.75%. Short sellers presently only have a minuscule 0.27-day window to cover their positions.
Considering SAVE’s shaky foothold, Citi’s analyst, Stephen Trent, has downgraded the company from a Hold to a Sell, simultaneously lowering the price target from $13 to $4.
While there remains the possibility of an appeal, Trent questions its logic, stating, “…it is unclear why JetBlue wouldn’t cut its losses here and recognize that it avoided a risky bid on a highly levered carrier with steep losses.”
He further predicts that SAVE’s EBITDA isn’t likely to turn positive until 2025. A bond yield surpassing 40% augments the hurdles SAVE faces in securing another merger proposal.
Undoubtedly, the previous week proved to be a stormy period for SAVE. However, some observers are optimistic that the company may recover and could potentially regain its value.
The future now hinges on the appeal filed jointly by SAVE and JBLU; its potential impact on the stock price in the coming weeks remains unknown.
Given the various challenges currently plaguing SAVE, the trend of short selling seems almost unavoidable. Indeed, SAVE presents a distinct possibility for a short squeeze, given its bleak future, which might include bankruptcy or liquidation. It’s feasible that investors could identify it as their subsequent target. Nevertheless, this offers no guarantee of sustained squeeze or any significant profits.
It becomes crucial for investors to closely monitor SAVE’s overall performance moving forward. Unlike its competitors, the company hasn’t been able to recover due to a host of difficulties. This includes the availability of pilots, engine malfunctioning, saturation in certain domestic markets, and pronounced exposure to regions impacted by air traffic control adversities.
Considering the broader context, investors are advised to exercise caution and look for more favorable entry points in the stock.
On January 10, 2024, the Securities and Exchange Commission (SEC) authorized 11 U.S.-listed exchange-traded funds (ETFs) focused on Bitcoin investments, subsequently unlocking a new asset class for a broad spectrum of investors and simplifying the path to gaining direct exposure to the digital currency.
This highly anticipated decision garnered significant participation from institutional and retail investors in the cryptocurrency market, spurring substantial inflows. Notably, new U.S. spot Bitcoin ETFs witnessed $4.6 billion in volume on their inaugural trading day, as per data from the London Stock Exchange Group.
A week after the launch of these ETFs, intriguing patterns began to materialize. Spot Bitcoin ETFs currently command more than 100,000 Bitcoin, which implies an Asset Under Management (AUM) estimated at approximately $4 billion. This important revelation signifies the escalating amalgamation of Bitcoin into traditional financial systems and underlines the amplified role of cryptocurrency within the investment community.
Grayscale, leading the pack as the largest Bitcoin holder in the ETF segment, remains at the cutting edge of this Bitcoin acquisition drive. Its holdings reached an impressive tally of 552,681.2268 BTC. This substantial investment further solidifies Grayscale’s standing as a major contributor in the crypto sphere and hoists Bitcoin ETFs above Silver to rank them as the second-largest commodity ETF based on holding size.
Following Grayscale’s lead, BlackRock’s ishares Bitcoin Trust (IBIT) secures its position as the runner-up in terms of Bitcoin holdings with an impressive 39,925 BTC in its vault. Fidelity Wise Origin Bitcoin Fund (FBTC) continues to hold robust with 34,126 BTC. These figures exhibit significant engagement from leading financial institutions in the expanding cryptocurrency market, marking a considerable shift toward digital assets in investment strategies.
Upon winning ETF approval, Bitcoin’s price momentarily soared to $48,000, only to face a subsequent downturn. This volatility alludes to an unpredictable market where current selling pressures seem to outweigh buying activities.
Adding to the uncertainty is BitMEX founder Arthur Hayes foreseeing a further dip in Bitcoin’s value below the $40,000 mark, a prediction affirmed by acquiring 29Mar $35k strike puts. Hayes’ cautious approach mirrors his acquisition, amounting to 5 BTC, revealing a reserved perspective for the immediate future of this cryptocurrency.
The existing market landscape, combined with expert evaluations and forecasts, hints at a potential slump for Bitcoin in the near term. While the approval of spot Bitcoin ETFs stands as a critical step in Bitcoin’s mainstream acceptance, the path ahead presents an element of vagueness.
U.S. Spot Bitcoin ETF fluctuations could be rooted in various factors apart from Bitcoin’s price oscillations. The spot Bitcoin ETFs depend on Authorized Participants (APs) to create and redeem ETF shares in return for Bitcoin. These APs procure Bitcoin from varied platforms, which might differ in liquidity levels, fees, and risks; these variations can impact the price of the ETF and the NAV of funds. Furthermore, management fees could also have an impact on the returns on ETFs.
Of the 11 freshly introduced spot ETFs, two funds particularly stood out in terms of net inflows: BlackRock’s ishares Bitcoin Trust (IBIT) and Fidelity Wise Origin Bitcoin Fund (FBTC).
BlackRock and Fidelity commanded the investors’ attention, jointly netting 68% of all inflows during the first week (IBIT accounting for 37% and FBTC for 31%). IBIT swiftly amassed $1 billion in assets within four days of trading, while FBTC achieved the same feat on the fifth trading day. The two funds have each generated over $2 billion in trading volumes since inception.
The regulatory nod sparked intense competition for market share among the issuers. The issuers have deployed strategies to cut expense ratios and offer fee waivers. For instance, the FBTC underwent an initial proposal of a 0.39% fee, which was later reduced to 0.25%, coupled with a fee waiver effective until July 2024. Meanwhile, IBIT charges a 0.12% fee for the first 12 months for assets up to $5 billion. Both IBIT and FBTC charge 25 basis points in fees.
Investors considering a Bitcoin ETF should bear in mind that although these ETFs generally operate in a similar fashion with minor disparities, the expense ratio remains a pivotal factor in the decision-making process.
Let’s delve deeper into the Bitcoin ETFs leading the pack now.
ishares Bitcoin Trust (IBIT)
IBIT, the BlackRock-owned Bitcoin ETF, emerges as a leading choice for retail investors due to its superior liquidity and affordable expense ratio. As a titan in the financial world, BlackRock remains unparalleled in its position as the most extensive ETF manager globally, with an AUM of $3.5 trillion across its portfolio of global ETF investment vehicles as of December 31, 2023. This powerhouse backing makes IBIT an assured choice for those seeking Bitcoin offerings buttressed by a sophisticated and large-scale financial structure.
The planning is such that IBIT vows an accessible expense ratio of 0.12% for the fund’s initial $5 billion in assets over the ensuing year. An annual expense ratio of 0.25% is projected to kick in from January 2025.
Standing true to its promise of liquidity, IBIT has already amassed over $1 billion worth of Bitcoin in its reserves, a feat rivaled only by the SPDR Gold Trust (GLD), which impressed the markets by garnering $1 billion in assets within three days of its inauguration in 2004.
As of January 22, IBIT had $1.34 billion in AUM and an impressive NAV of $22.86. It registered net inflows of $1.12 billion over the past five days. IBIT holds about 39,925 BTC, valued at roughly $1.62 billion.
Despite experiencing a dip of 7.2% over the last five days, closing the last trading session at $22.95, IBIT maintains its allure among investors. Its swift popularity underscores it as an ideal option for those looking to diversify their portfolio with cryptocurrency and cultivate growth over time.
Fidelity Wise Origin Bitcoin Fund (FBTC)
FBTC, another notable name in Bitcoin ETFs, boasts a low expense ratio. However, investors with significant capital ready for deployment into Bitcoin ETFs are in luck, as FBTC has decided to waive even these modest fees until August 1, 2024. After this date, it will implement an expense ratio of 25 basis points.
Notably, Fidelity serves as the largest 401(k) plan and service provider in the nation. This development positions both individual investors and asset managers to seamlessly incorporate Bitcoin into comprehensive retirement strategies.
Crypto bears might argue against such a move, but it’s worth considering: Would a competent asset manager willingly forsake prospective gains by excluding a Bitcoin ETF from their client portfolio? Allocating even a small portion toward this asset could potentially yield substantial returns in relation to the total investment, given Bitcoin’s impressive performance trajectory over the past decade. Concurrently, with individuals reevaluating their 401(k) strategies leading up to 2024, a surge of capital directed toward FBTC is predictable.
As of January 22, FBTC had $1.21 billion in AUM and an NAV of $35.08. Its net inflows were $1.07 billion over the past five days. FBTC holds about 34,126 BTC, valued at roughly $1.37 billion.
Despite these positive indicators, FBTC plunged 7.3% over the past five days, closing its last trading session at $35.18.
With the advent of Bitcoin ETFs, investing in this unique asset class has become less complex, potentially elevating its position within the financial industry. These recently launched ETFs provide a broad spectrum of investors with a simpler approach to gaining exposure to the crypto asset.
Shortly before the SEC approved the ETFs, it re-emphasized its previous “no FOMO” cautionary message to investors. Aimed at highlighting the volatility of digital assets, the warning underlines how investments tied to current popular trends like cryptocurrencies can experience periods of severe fluctuations, translating into drastic changes in value both positively and negatively.
The SEC’s approval brings much-needed standardization and regulatory supervision to digital asset investment. However, experts are advising mainstream investors to proceed with caution, pointing out that Bitcoin still distinguishes itself as a speculative asset.
News of Bitcoin ETFs has made headlines, even though their trading results may not meet the initial hopes of crypto bulls. Nevertheless, many see brighter days closing in. Potential future record cash inflows into these funds might be on the horizon as financial advisors and wealth managers consider incorporating them into their clients’ diversified portfolios.
Bitcoin’s primary utility arises from its function as a form of value storage akin to gold. The day that central banks initiate the acquisition and storage of Bitcoin will signify its arrival at the forefront of the financial world. The price is now around $39,000, and it appears to be headed lower. After the establishment of a true base, a progressive increase in its price over time could be projected as governments devalue their fiat currencies.
With the introduction of spot ETFs, we’re starting to see the beginnings of real price discovery. This process could further develop in a couple of months.
Prestigious investment managers such as Fidelity and BlackRock’s iShares should not be overlooked in this space. Their competitive edge in the traditional ETF fees arena may eventually give them an advantage over smaller rivals. Considering the slight disparity in fees between these funds and market leaders, long-term Bitcoin ETF investors might consider opting for these established alternatives.
Although the issuer’s role is arguably minor, ETFs governed by larger asset managers could be more resistant to liquidity issues arising from insufficient demand.
As an example, the IBIT ETF concluded January 22 trading at a 0.41% premium to its net asset value, indicating high demand. On the other hand, the FBTC traded at a 0.30% discount relative to its net asset value, suggesting weaker demand.
In view of the overall market situation, adopting a strategic position in IBIT and FBTC once the price stabilizes would be prudent.
Please enjoy this updated version of weekly commentary from the Reitmeister Total Return newsletter. Steve Reitmeister is the CEO of StockNews.com and Editor of the Reitmeister Total Return.Click Here to learn more about Reitmeister Total Return
SPY – Once again stocks flirted with the all time highs for the S&P 500 (SPY). This has happened 2 times recent both leading to failure and this 3rd time doesn’t seem to be the charm either. What is holding stocks back from making new highs? And what should an investor do to find better performance? 43 year investment veteran Steve Reitmeister shares his view including a preview of his 11 favorite stock picks now. Read on below for the answers…
In my recent commentaries I have speculated that we were due for a trading range to digest some of the rampant gains at the end of 2023. However, so far it has been more of a consolidation under the all time highs at 4,796 for the S&P 500 (SPY).
Consolidations are simply much tighter trading ranges. That investors refuse to have a serious sell off while also not being ready to climb higher. Kind of feels like cars revving up at the starting line of a race…lots of noise, but going nowhere.
We will discuss more of the reasons behind this consolidation and when stocks should be ready to race ahead.
Stocks have tried twice over to make new all time highs above 4,800 for the S&P 500. And twice thwarted at that level followed by share pullbacks.
Yes it looks like Thursday’s action signals a 3rd such attempt. Yet that was a very hollow rally with the usual suspects in the S&P 500 doing well with small caps and other riskier stocks lagging. That is not the sign of a healthy bull. And give very low odds of breaking to new highs.
(1/20/24 update: Yes, the S&P 500 officially made new highs above 4,800 on Friday. I honestly thought it was a fairly hollow rally mostly led by the usual mega cap tech stocks and not such a broad rally. Meaning I do not believe this rally has staying power and likely will fall back below 4,800 this coming week. And at best we consolidate just above 4,800 with little true upside coming in the days ahead).
Some are pointing to economic data being too weak as the problem. Such as the horrific -43 showing for the Empire State Manufacturing Index on Tuesday.
While others are pointing to economic data being too strong like Retail Sales being above expectations on Thursday. This had 10 Year Treasury rates breaking further above 4% and also lowered the odds of the first rate cut coming at the March Fed meeting.
Sorry folks…you can’t have it both ways. And perhaps the answer is that neither of these theses are correct.
Meaning I don’t believe that investors are truly worried about a looming recession. Nor are they fearful of rates spiking again as they did in the Fall of 2023.
Simply, the market has come a long way from bear market bottom in October 2022. A total gain of 37% from that valley to now is a lot of profit in a short time when the long term average annual gain for the S&P 500 is only 8%.
So now is a healthy time for an extended pause. The same way you would take a long break after running a marathon.
Rest is what is needed. And then gaining the strength for the next run higher.
In the stock market world that typically comes hand in hand with a pullback in price leading to a trading range. Along with that you will see these investment terms show up more often:
Change of leadership
Buy the Dip
The Pause that Refreshes
And so on…
Yet right now the most apt term is consolidation. As shared up top, that is simply a very tight trading range right under a point of resistance. Currently that resistance corresponds with the all time closing highs at 4,796…but for simplicity easier to think of it as 4,800.
The point is at this stage it is healthy and normal for stocks to relax after such a long run higher. Don’t be surprised if the consolidation does turn into a wider trading range with a subsequent test of the 50 day moving average at 4,628 being a likely downside target.
Moving Averages: 50 Day (yellow), 100 Day (orange), 200 Day (red)
A break below 4,600 is unlikely without some greater fundamental concerns arising. But let’s do appreciate the 2 next levels of price support rest at 4,488 for 100 day moving average and about 4,400 for the 200 day moving average.
Your trading plan should be to stay bullish. Use any subsequent pullback as a buy the dip opportunity. NOT for the stocks that led the charge in 2023. That game plan is played out.
Instead valuation and quality will be held in higher regard this year as the overall PE of the market is not cheap. GAARP is fine (Growth At A Reasonable Price)…but not growth at ANY price like last year.
If you want my favorite stock ideas for 2024, then read on below…
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Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)CEO, StockNews.com and Editor, Reitmeister Total Return
About the Author
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
Giant private asset manager BlackRock, Inc.’s (BLK) CEO, Mr. Larry Fink, made a modest prediction recently that the global economy might be on the brink of an “infrastructure revolution.” This forecast was made in the wake of BLK’s largest acquisition announcement in over 15 years.
With an initiative to invest in and own infrastructure, BLK is seeking to accelerate growth by announcing its plan to purchase Global Infrastructure Partners for $12.5 billion.
New York-based GIP owns and controls companies in sectors like energy, transport, water, and waste. If the acquisition goes ahead, it will be BLK’s largest since it procured Barclays’s asset management business in 2009.
GIP, led by Adebayo Ogunlesi, is considered the third-largest infrastructure investor worldwide, falling behind Macquarie in Australia and Brookfield in Canada. Its assets are quite diverse, ranging from Gatwick Airport to Melbourne’s Port.
The cash and stock transaction between these two investment manager titans is slated for completion in this year’s third quarter, pending federal antitrust approval in the U.S.
This assertive acquisition represents a significant strategic push by BLK into the alternative investment sector, further securing its position as a dominant player in global finance.
Most of GIP’s ownership resides with its six founding partners, five of which, including Bayo Ogunlesi (the CEO), will be joining BLK. Consequently, Ogunlesi will be tasked with leading BLK’s forthcoming infrastructure group while also becoming a board member and resigning from his position as the key director at Goldman Sachs.
BLK is strategizing to develop its private market operations, which suggests faster growth and higher possible returns when compared to its core business of trading down-priced passive investment products like exchange-traded funds. This deal will likely augment BLK’s private assets by roughly 30% and double the baseline management fees for its private markets.
With GIP, BLK is purchasing an infrastructure fund manager that manages around $100 billion, with a combined revenue of $80 billion from its portfolio companies.
After finalizing this acquisition, BLK aims to establish a separate Global Infrastructure Partners entity that melds the newly acquired firm with current BLK infrastructure teams.
The newly formed entity is projected to rank as the second-largest private infrastructure manager on a global scale, boasting over $150 billion worth of assets under its management – Brookfield Asset Management being the only firm outpacing this figure.
With government deficits on the rise, the demand for private financing for large-scale infrastructure projects has grown, and attractive investment subsidies may be key to meeting this need.
BLK’s CFO, Martin Small, expressed that BLK’s preference for acquiring GIP over opting for a traditional private equity buyout firm stems partially from the perception that the era of peak returns from private equity, facilitated by zero interest rates, might be on the decline.
BLK holds investments in several GIP funds, and there has been considerable competition for deals between the two entities. As Larry Fink propelled BLK to prominence in the field of traditional asset management, Adebayo Ogunlesi rose to head Credit Suisse’s investment banking and fostered GIP in 2006 with his pool of fellow alumni from the now-defunct bank, who will also join BLK.
Acquiring GIP will promptly double BLK’s management fees from private markets, highlighting that Fink appears to have found the prominent deal he has been seeking.
Nevertheless, BLK, as a publicly traded asset manager, faces the necessity to delicately balance the retention and motivation of GIP’s top talent with the interests of its shareholders.
As part of striking a balance, it was decided that BLK would receive all the management fees on GIP funds in addition to 40% of the performance fees accruing from all future funds. GIP employees would retain all the carried interest in its existing funds and those slated for future raising.
To acquire GIP, BLK agreed to an amount of $3 billion in cash and 12 million of its shares, approximately equating to around $9.5 billion.
GIP is predominantly owned by its six founding partners, who will collectively ascend to become some of BLK’s most significant shareholders, possessing about 8% of its outstanding shares.
BLK intends to distribute 7 million shares to the six GIP founders immediately and will add 5 million more in five years. A portion of this equity will be allocated to employees as a part of a retention strategy. As a result, the collective GIP team will ascend as the second-largest shareholder in BLK, binding them to the ongoing fortunes of their new proprietor.
But why is BLK pouring billions on infrastructure?
The evolution of the intervention of private investors in infrastructure began during the 1990s and early 2000s. Western governments burdened with mounting debts sought private investors to purchase and overhaul outdated infrastructure, from airports to water pipelines. Subsequently, numerous companies across industries, from energy providers to telecom operators, started selling assets such as pipelines and cell towers to these investors.
Presently, the demand for infrastructure investment is escalating, fueled by three significant trends:
Decarbonization: In order to achieve global climate objectives, approximately $8 trillion is required to be spent on developing renewable energy infrastructure, storage batteries and transmission lines within this decade. Significant investments are also needed in hydrogen facilities to manufacture carbon-free fuel for aviation and maritime transport and in carbon capture technology.
Digitization: While the software is increasingly dominating the world, it relies heavily on tangible assets, including fiber-optic cables, 5G networks, and data centers.
Deglobalization: A shift in supply chains away from China has spurred demand for capital-intensive factories and new transport infrastructure to facilitate overland and sea freight movement. This trend has been further galvanized by increased calls for energy security in Europe following Russia’s incursion into Ukraine, stimulating the construction of liquefied natural gas terminals to import fuel from less aggressive nations.
This skyrocketing demand for investment coincides with an era where government and corporate balance sheets are under significant stress. America’s federal debt, nearing $34 trillion, is projected to continue snowballing throughout the following years. Additionally, several European governments face daunting debt burdens.
Rising interest rates have made these liabilities more burdensome to service and pose challenges to corporations that have capitalized on inexpensive debt to boost shareholder yields. Consequently, their capacity to finance substantial investments will be curtailed in the ensuing years. As a result, infrastructure investors are set to bridge this gap, having expressed their readiness and willingness to invest heavily.
Private equity groups anticipate growing their footprints in sectors like debt or infrastructure investment – sectors that are expected to profit from higher interest rates – either by incorporating public shareholders or merging with larger organizations. This approach extends beyond merely corporate buyouts, an area experiencing deceleration due to soaring financing costs.
The swift surge in interest rates has instilled caution among many investors, tempering commitment to fresh funds and stunting the utilization of existing ones. These prevailing circumstances present compelling reasons for independent firms to contemplate seeking out more substantial partners.
Fund managers hoping to benefit from the predicted influx of wealth from affluent individuals into private markets must heavily invest in novel products and distribution networks. Additionally, significant financial input into technology is essential to adapt to the advances in artificial intelligence.
The acquisition potentially furnishes BLK with a strategy to broaden its investment portfolio, thereby decreasing its vulnerability to market volatility. This is mainly due to the generally lower correlation that infrastructure investments bear with divergent asset classes and their reduced sensitivity to economic fluctuations.
Moreover, availing BLK of a comprehensive array of infrastructure assets could confer it with significant advantages. These mostly stem from those assets’ capacity for long-term growth potential coupled with steady cash flows.
Following the acquisition, BLK is poised to emerge as a global leader, offering eminent infrastructure capabilities to its clientele. Clients who are persistently scouting for assets to counterbalance their extensive liabilities and diversify their portfolios may find solace in BLK’s offerings.
Especially factoring in the prevailing economic conditions, this acquisition could prove to be a significant milestone for BLK. It would empower the company to effectively utilize its combined platform to capture a larger slice of the market share, churn superior returns, and seamlessly address the growing challenges and demands of its clients amidst the swiftly transforming infrastructure landscape.
Throughout 2023 and well into 2024, two key trends have emerged within the financial sector: the escalating importance of private capital for infrastructure projects and the growing appeal of infrastructure assets amid economic uncertainty.
The recent landmark deal acts as a quintessential example of the consolidation trend that industry insiders have been forecasting. BLK has strategically secured a robust position in a market valued at $1 trillion today. Moreover, infrastructure is projected to be one of the most rapidly expanding segments of private markets in the foreseeable future.
While some caution against possible cultural discrepancies and potential conflicts of interest, the early market response to the deal appears stable. Shares of BLK surged by 1.3% immediately after the announcement.
Mr. Fink maintains his belief that the driving force behind their acquisition strategy has always been growth. With the acquisition of GIP, he firmly believes a similar scenario will likely play out. The efficacy of Mr. Fink’s belief is pertinent not just for BLK’s shareholders but also for the entire industry that has billions invested in this premise.
The main query for BLK is whether this deal will finally serve as the key to unlocking a sector where it has previously found it challenging to gain substantial traction.
Besides the acquisition, there are numerous factors investors should consider during their assessment of the company. However, it might be prudent for them to wait and assess how this deal plays out.
Therefore, keeping BLK on the watchlist might be prudent at this juncture.
The New Year has just begun, and thousands of technology and startup employees find themselves unemployed. Layoff monitoring website, Layoffs.fyi, reports that by January 17, some 51 technology firms had terminated the employment of 7,528 individuals.
These terminations imply that 2024 might bring more hardships for the tech sector, following massive layoffs in the preceding year when over 1,150 tech companies laid off over 260,000 employees in 2023.
Alphabet Inc.’s (GOOGL) Google is reducing its workforce, dispensing with several team members from their digital assistant, hardware, and engineering sectors, as stated by the company.
A spokesperson from Google said, “Throughout the second half of 2023, a number of our teams made changes to become more efficient and work better, and to align their resources to their biggest product priorities. Some teams are continuing to make these kinds of organizational changes, which include some role eliminations globally.”
Affected staff include those associated with the voice-activated Google Assistant and the augmented reality hardware team. Additionally, professionals within the central engineering department are also bearing the brunt of these layoffs.
The initial layoff reports concerning the Google Assistant team came from Semafor, while 9to5 Google reported the structural changes affecting the hardware team first. Notifications of the termination have been sent to the involved staff members, with the opportunity extended to them to apply for other open positions within Google.
However, the Alphabet Workers Union, representing a portion of its workforce, has voiced displeasure over these job cuts. The union claimed that it was unethical of GOOGL to continue with the layoffs, especially during a period of significant profit growth for the company. For reference, the tech giant made $76.69 billion in revenues during the third quarter of 2023, recording a net income of $19.69 billion.
Google CEO Sundar Pichai told employees to anticipate more job cuts throughout the year. He further disclosed that the downsizing efforts for the current fiscal year are aimed primarily at eradicating complex levels to streamline execution and accelerate momentum in some areas. The move adds to signs that staff reductions will continue this year as numerous corporates proactively adopt AI and automation solutions to potentiate their operational efficiency.
But why direct resources to AI?
In 2023, GOOGL shares made a dramatic comeback, rocketing by an impressive 54%. This uptick marked a drastic shift from its disappointing 2022 performance, which saw the stock tumble by 39%.
The previous downswing was mainly triggered by a bear market, which severely impacted GOOGL’s primary revenue source: digital advertising. With the marketing budgets reduced to preserve financial health during harsh economic conditions, many companies cut back on ad spending, causing a significant drop in GOOGL’s year-over-year revenue. As a frontrunner in the online advertising landscape, GOOGL’s performance was particularly negatively affected.
However, with the economy rallying back in 2023, companies were more generous with their advertising budgets, prompting a rebound in spending that benefitted GOOGL. That said, it was the technological leaps in AI that truly catalyzed GOOGL’s renaissance.
While AI has been on the tech horizon for several years, GOOGL has successfully harnessed this technology to enhance the precision and applicability of its search engine, target digital advertisements, and streamline controls for its Waymo self-driving vehicles.
The advances in GenAI have opened new avenues of opportunity for GOOGL. GenAI is equipped to generate unique content, concise email replies, craft presentations, obtain relevant data from the internet and company databases, and even articulate and debug computer code.
GOOGL’s strategic investment in AI and GenAI fuels innovation and augments development for its suite of products and services, including Google Search, Assistant, Cloud, and Workspace.
Directing resources to AI could support the enhancement and expansion of GOOGL’s emerging functionalities. Moreover, GOOGL is committing to GenAI to develop revolutionary platforms and tools, like Google AI Studio and Bard that empower developers and users to modify and harness robust AI architectures.
This proactive move also aims to elevate and broaden the realm of AI R&D and fore-front discussions on the ethical and societal implications of AI technology.
What could be the probable impacts of the layoffs?
On a positive note, the impending layoffs at GOOGL have the potential to decrease operating expenses, secure considerable savings, and enhance earnings per share. This could also facilitate GOOGL’s increased focus on AI, a critical factor for future growth and attaining competitive leverage.
Conversely, these layoffs pose a risk to GOOGL’s innovative potential and capacity to retain talent. The company has garnered acclaim for its unprecedented and multifarious projects that necessitate significant investment and experimentation.
Moreover, these projects create valuable patterns of intellectual property and potential innovations. The workforce reduction may impede GOOGL’s long-term objectives and creative potency. It risks tarnishing the brand’s reputation as a preferred employer, making it challenging to entice and retain top-notch talent within the industry.
Layoffs can potentially diminish a firm’s competitive advantage – conveying a message of weakness or instability to consumers, investors, and rivals. Furthermore, they may pave the way for newcomers or startups who can employ those made redundant or exploit market gaps.
Ultimately, the aftermath of the layoffs is contingent upon GOOGL’s ability to navigate the transition effectively while harmonizing its short-term deliverables with long-term aspirations.
For the fiscal first quarter ending March 2024, GOOGL’s revenue and EPS are expected to increase 12.5% and 26.5% year-over-year to $78.48 billion and $1.48, respectively.
Wall Street analysts expect the stock to reach $155.91 in the next 12 months, indicating a potential upside of 8.4%. The price target ranges from a low of $140 to a high of $180.
While the continued improvement of the economy has worked in GOOGL’s favor, it is the company’s increased interest in AI that has captured investors’ attention. The anticipated outcome of this venture, particularly the positioning of Gemini Ultra in comparison to competing brands, remains uncertain.
However, as AI and Language Model (LM) technologies are becoming increasingly ubiquitous, companies successfully implementing these into specialized enterprise verticals for productivity and service enhancements are poised to emerge as leaders. GOOGL is ideally positioned due to its ability to integrate these technologies intensively across myriad business verticals.
Concerns, nevertheless, persist. Reduction in search market share, a core revenue stream for GOOGL, is one such issue. An offsetting strategy could be advanced monetization techniques of emerging developments expected to supersede the search paradigm. Given their broad-based customer (individual and enterprise) network, the potential for effective monetization is promising.
Culture, though, is another concern. Critics have cast doubt on the sustainability of GOOGL’s innovative ethos, arguing that as a company grows becoming more bureaucratic, its innovative drive dwindles. A shift from a startup-oriented innovative approach, coupled with financial engineering strategies aimed at appeasing shareholders (including share buybacks) and the departure of employees, may have catalyzed cultural shifts. Notably, GOOGL has endured an exodus of talent into startup ventures and might witness more of it because of additional layoffs.
Beyond affecting employees and their families, layoffs can have a negative long-term impact on a company’s performance. Investor confidence in a company’s ‘going concern’ has a direct correlation to its share price.
Although there may be temporary upward spikes in share prices following job cuts, this usually reverses when unemployment surges, leading to a market recession.
Given these factors, investors might find it prudent to place GOOGL on their watchlist, awaiting an opportune moment for investment.
Please enjoy this updated version of weekly commentary from the Reitmeister Total Return newsletter. Steve Reitmeister is the CEO of StockNews.com and Editor of the Reitmeister Total Return.Click Here to learn more about Reitmeister Total Return
SPY – Stocks keep flirting with the all time highs for the S&P 500 (SPY) and keep falling short. Meaning this is proving to be a stubborn level of resistance at 4,800. Why is that happening? And when will stocks finally break above? 43 year investment veteran Steve Reitmeister shares his view including a preview of his favorite stock picks now. Read on below for the answers…
As suspected, the market is not ready to make new highs above 4,796 for the S&P 500 (SPY).
That was quite evident Thursday as stocks jumped out of bed in the morning to touch those previous highs only to find stubborn resistance with the broad market heading lower from there.
Why are stocks struggling at this level?
And what is an investor to do about it?
The answers to those vital questions will be at the heart of today’s commentary.
Some investment writers will have a fairly short hand, and highly inaccurate, way to describe what happened on Thursday.
They will tell you that the CPI inflation reading was hotter than expected on Thursday morning. And that caused the stock market sell off that followed.
That is simply not true.
Here is what really happened. The CPI report came out an hour before the market open. And yet still the market leapt higher out of the gate. But once it touched the hem of the previous highs (4,796) a more than 1% intraday sell off that ensued.
That pain is not so evident in the late session bounce and modest loss for S&P 500. Yet is a lot more apparent in the -0.7% showing for the small caps in the Russell 2000 on the session.
Thus, the problem for lack of further stock advance is not about CPI report. Just a statement that investors are not prepared to breakthrough resistance to make new highs.
So, what is holding stocks back?
I discussed that in greater detail in my last commentary: When Will the Bull Market Run Again?
The essence of the story is that investors have less clarity on the next moves for the Fed than they had after the November and December meetings that sparked a tremendous end of year rally. Unfortunately, there has been a mixed bag of inflation and economic data that calls into question when rate cuts will begin.
At the earliest those cuts could come at the March 20th meeting. But I sense that the more readings we get like Thursday’s CPI report, or last Fridays stronger than expected employment report…the more likely those first cuts get pushed off to either the May 1st or June 12th Fed meetings.
Digging into the CPI reading we find that inflation was expected to come in at 3.1% yet spiked to 3.4% on this reading. Core CPI was even worse at 3.9% year over year. Just still too far away from the Fed’s target of 2%.
For the “wonks” out there you should dig into the Sticky Price resources created by the Atlanta Fed. To put it plainly, sticky inflation remains too sticky. The main elements are housing and wages that are not coming down as quickly as expected.
When you appreciate the conservative nature of the Fed…and that they state over and over again that they are “data dependent”, then its hard to look at the recent data and assume they are ready to lower rates any time soon.
Long story short, I don’t think that investors are ready for the next bull run to make new highs until they are more certain WHEN the Fed will finally start cutting rates. That delays the next upside move to March 20th at the earliest with May or June becoming all the more likely.
Hard to complain about settling into a trading range for a while given the tremendous pace of gains to end 2023. So this seems like a reasonable time for stocks to rest before making the next big move.
The upside of the current range connects with the aforementioned all time high of 4,796…but really easier to think of the lid as 4,800.
On the downside, that is a bit harder to infer. Typically trading ranges are 3-5% from top to bottom. So, for quick math let’s say around 4,600 on the bottom. This also represents the previous resistance point that took a long time to finally break above in early December.
The good news is that I expect quality stocks to prevail even in a range bound market. Meaning that last year pretty much any piece of beaten down junk was bid higher. That party is OVER!
Instead, when you have a pretty fully valued market as we have now, then there will be a greater eye towards quality of fundamentals and value proposition. I spelled that out pretty completely in last week’s article: Is 2024 Prime Time for Value Stocks?
The answer to the question posed in the headline is…YES. Meaning that 2024 is lining up nicely for value stocks.
Case in point being the early results this year with our Top 10 Value strategy up +3.70% through Wednesday’s close vs. breakeven for S&P 500 and -2.80% for the small caps in the Russell 2000.
I strongly believe that edge for value will continue as the year rolls on. And the best way to take advantage of that is spelled out in the next section…
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Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)CEO, StockNews.com & Editor, Reitmeister Total Return
SPY shares were trading at $475.88 per share on Friday afternoon, down $0.47 (-0.10%). Year-to-date, SPY has gained 0.12%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
The U.S. Securities and Exchange Commission (SEC) gave its approval to 11 spot bitcoin exchange-traded funds (ETFs) on January 10 after months of speculations. These newly approved ETFs diverge from previously dubbed “Bitcoin ETFs,” which were tied only to future contracts or shares of Bitcoin-entwined corporations. The current batch of sanctioned funds directly hold Bitcoins, aligning more accurately with the spot price of Bitcoin over time and offering a relatively simplified means of investment in the cryptocurrency compared to independent crypto wallets.
This endorsement by the SEC can be seen as a significant validation of Bitcoin’s prospective mainstream status. Cryptocurrency optimists are considering this regulatory green light as a potential booster for BTC’s price, possibly catapulting it to a six-figure high.
Since October’s end, with the growing buzz around the SEC’s decision, BTC has climbed over 60% and is currently trading at an almost two-year peak. Despite much anticipation, the market response post-approval remained muted, with the large-cap token witnessing a marginal rise on the following day – a pattern typically observed when investors ‘buy the rumor and sell the news.’
In the aftermath of the first wave of ETFs commencing trading on January 11, BTC’s price plunged, falling nearly 8% in just five days, estimating a value of roughly $42,700.
Predicting the volatility of BTC’s price remains challenging. Its historical best stands at approximately $69,000 during the apex of the crypto surge in November 2021, yet it plummeted to a mere $16,000 by 2022 end. Factors such as increasing interest rates deterring speculative investments, failure of various high-profile tokens and exchanges, and rising apprehensions over stricter crypto regulations largely contributed to this plunge.
However, 2023 witnessed BTC’s price soaring over 150% to over $42,000, spurred on by slower rate hikes and renewed market interest in cryptocurrency. This resurgence was also fueled by the anticipation of the SEC’s approval of Bitcoin’s maiden spot-price ETFs.
Consequently, the recent setback only wiped out BTC’s gains earned at the onset of 2024. The dip suggests quick-profit short-term traders possibly inflating the digital currency’s price in anticipation of recent ETF approvals, only to capitalize on the profits following the initial excitement.
Market observation currently highlights a heated contest between bullish and bearish forces. A significant recovery appears elusive for buyers of the currency, hinting at sustained pressure from bearish influences. Moreover, BTC is trading below the 10-day and 50-day moving averages, indicating a downturn and reassertion of control by bearish forces.
Typically, if BTC dips below the $42,000 threshold, accelerated selling could follow, potentially driving its value further down. As for those bullish on the asset, they will need to push BTC above the 10- and 50-day EMA to avert a negative outcome.
Moreover, Bloomberg ETF analyst Eric Balchunas said that the newly launched ETFs witnessed inflows of $1.4 billion. On the contrary, the Grayscale Bitcoin Trust (GBTC) saw an outflow of $579 million. However, the net inflows in two trading sessions across the ETFs were $819 million.
This initial flurry of activity aligns with James Seyffart’s earlier forecasts. He projects that Bitcoin ETFs could succeed in drawing in around $10 billion within their inaugural year on the market.
But are there any long-term catalysts?
While BTC’s price adjusts in response to the pressure of recent ETF approvals, prospects indicate a significant potential for the cryptocurrency’s growth.
The primary outcome of the ETF approvals is to enhance accessibility for large-scale institutional investors to accumulate Bitcoin in an open market setting. Investment powerhouse Fidelity, already having launched the Fidelity Wise Origin Bitcoin Fund (FBTC), has projected a soaring Bitcoin value, with expectations of a $1 billion valuation by 2038.
A similarly bullish stance lives within Standard Chartered, whose strategists postulate that spot ETFs could generate between $50 billion and $100 billion in inflows for Bitcoin within this year alone. They further predict a stunning price peak of $200,000 by the close of 2025.
Ark Investment’s Cathie Wood, managing the recently approved Ark 21Shares Bitcoin ETF (ARKB), anticipates that the price of Bitcoin could hit $1.5 million by 2030. But why such astronomical levels? Her projections stem from a belief in BTC’s value growing with increased institutional adoption, positioning it not merely as a preferred choice for encryption enthusiasts but also acting as a pivotal tool in robust, institutional-grade risk diversification.
The fixed supply cap on Bitcoin at 21 million coins sharply contrasts the inflating supply of fiat currencies, thus potentially amplifying its appeal as a deflationary asset.
The projected trajectory primarily hinges on the pronounced network effect within BTC, where its value heightens with an increase in blockchain users and transactions – supported by ongoing technological advancements and enhanced accessibility.
While certain aspects of these long-term forecasts may appear overly optimistic, it is logical to conclude that Bitcoin ETF approvals will introduce a modicum of stability to its volatile pricing structure. This stabilization could prompt return investment from larger entities and propel BTC prices closer to their historical peak levels.
Also, past trends hint toward any halving year being a catalyst for a bullish surge, traditionally followed by a bull run in the succeeding year. This pattern, chiefly attributed to expanding public interest, augmented risk activity, and heightened discourse surrounding digital currency futures, places Bitcoin squarely at a vantage point. Potential factors such as reduced Bitcoin supply due to halving and the prospects of fresh investments via ETFs could introduce unprecedented market dynamics.
Moreover, anticipation of interest rate reductions in the U.S. intensifies predictions for bullish BTC pricing in 2024. Furthermore, the looming shadows of sticky inflation may steer a wave of investors toward acquiring Bitcoin as safeguards against the devaluation of their fiat currencies.
Pre-launch speculation surrounding Bitcoin spot ETFs had heightened anticipation. However, when regulatory approval did not spur an upward reaction, traders may have chosen to capitalize on profits, leading to a substantial market recoil.
Not all of the financial world is swayed by optimistic BTC price targets. For instance, former PIMCO CEO Mohamed El-Erian indicated in a recent post that although the SEC’s approval could be a pivotal moment for cryptocurrency, it would unlikely broaden Bitcoin’s utilization. The outlook remains more constrained.
The SEC itself voices reservations about BTC’s investment potential. In a separate announcement, Chair Gary Gensler dubbed Bitcoin as “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”
While the markets can be unpredictable, lower price points might draw in long-term investors who keep a close watch on the Bitcoin halving and institutional influx into Bitcoin spot ETFs over the forthcoming weeks.
Despite the prevailing belief that institutional monetary allocation will take time to transpire, it is argued that the subsequent price dip wasn’t exactly favorable to capital inflows. Agreeingly, there was substantial conjecture around the concept of selling the fact, so maybe there would be a twist when or if Bitcoin prices begin to ascend again. But at this juncture, one would need to see it to believe it!
The ETFs have yet to gather steam in terms of trading volume fully. Investment giant BlackRock has reportedly bought a staggering 11,500 BTC from the available supply during the latest dip since the launch of its spot Bitcoin ETF. This amount is significant, considering that only 900 BTCs are issued daily. BlackRock’s purchase effectively represents about 13 days’ worth of Bitcoin production taken on by a single entity, creating speculation of supply concerns.
The presumption pointed toward an immediate and dramatic financial inflow into the Bitcoin ETF may be misguided. There has always been the potential for Bitcoin to experience consistent – even if relatively slow – capital inflows.
The circumstance represents a quintessential pattern of overestimating short-term impacts while concurrently underestimating long-term potentials. The situation underscores a transition phase in market realignment, signaling a need for cautious optimism.
Given the current landscape, investors should proceed with caution venturing into this space.