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  • Etsy drifts further away from its roots with first Super Bowl ad

    Etsy drifts further away from its roots with first Super Bowl ad


    Etsy Inc., once known as a quirky marketplace for handmade, artisanal and vintage items, seems to be moving further away from its origins amid a much tougher e-commerce landscape and the impact of AI.

    Etsy
    ETSY,
    +4.83%

    will be marketing to a whole new audience on Sunday, when its first Super Bowl commercial will run. The 30-second ad is quirky; it depicts a generic 19th-century American leader who’s flummoxed over how to reciprocate France’s gift of the Statue of Liberty. With the help of an anachronistic smartphone, he and his team search on Etsy using its new Gift Mode option, and find its “Cheese Lover” category after determining that the French love cheese. Voilà — they decide to send the French some cheese.

    The commercial is part of Etsy’s push of a new user interface featuring Gift Mode, which lets shoppers search for gifts for a specific type of person or occasion — combining generative AI and human curation to give gift buyers some unusual options.

    But are these moves desperate and costly efforts to try to reach potential new buyers, coming on the heels of Etsy’s plans to lay off 11% of its staff?Or could running a TV ad at the most expensive time of the year actually lead to more sales on the once-fast growing marketplace?

    Etsy believes these moves will help the company grow again, and its research shows the average American spends $1,600 a year on gifts. “There is no single market leader and Etsy sees a real opportunity to become the destination for gifting,” Etsy’s Chief Executive Josh Silverman said in a recent blog post.

    Etsy is clearly under pressure after seeing its gross merchandise sales more than double in 2020 during the pandemic, when it became a go-to place to buy handmade masks and all kinds of items for the home, from vintage pieces to antiques to castoffs. From personal experience as an Etsy seller, I saw sales at my own small vintage-clothing shop more than double in 2020 and then fall back in 2021, while still remaining higher than in 2019. In the last two years, sales have slowed, and some other sellers have witnessed similar patterns, based on their comments in seller forums.

    The number of sellers and buyers on the platform has increased on the same level as gross merchandise sales. But e-commerce competition has also gotten more fierce.

    “Our main concern with Etsy is growing competition in the space from new players like Temu,” said Bernstein Research analyst Nikhil Devnani, in an email. Temu and fellow Chinese online retailer Shein have raised a lot of investor jitters, as Etsy’s gross merchandise sales have slipped over the last year and are forecast to fall again in its upcoming fourth-quarter earnings report later this month.

    Devnani said a Super Bowl ad could potentially help the marketplace gain visibility, something it has always lacked.

    “One dynamic they’ve talked about a lot is that brand awareness/recollection is still low, and this keeps frequency low,” he said, noting that Etsy buyers shop on the site about three times per year, on average. “They want to be more top-of-mind … Super Bowl ads are notoriously expensive of course, but can be impactful/get noticed.”

    The company’s big focus on Gift Mode, however, could be a risky strategy. How many times a year do consumers look for gifts? And in a note Devnani wrote in October, before the company’s Gift Mode launch, he said that one of the concerns investors have is that Etsy is too niche. “’How often does someone need something special?’ is the rhetoric we hear most often,” he said. Etsy, then, is counting on buyers returning for other items for themselves.

    Etsy CEO Silverman believes buyers will come back again and again to purchase gifts. Naved Khan, a B. Riley Securities analyst, said in a recent note to clients that he believes Gift Mode plays to Etsy’s core strengths, offering “unique goods at reasonable prices” versus the mass-produced products sold on Shein, Temu, Amazon.com Inc.
    AMZN,
    +2.71%
    ,
    and other sites.

    Consumer spending has changed, though. At an investor conference in December, Silverman said that consumers are spending on dining out and traveling, instead of buying things.

    But while investors still view Etsy as a niche e-commerce site, some buyers and sellers see it overrun with repetitive, non-relevant ads. Complaints about a decline in search capabilities, reliance on email and chat for support, and constant tech changes are common on seller forums and Facebook groups. AI-generated art offered by newer sellers as a side hustle has also become a thought-provoking, debated issue. And there are complaints about mass-produced items making their way on the site.

    Etsy said that in addition to its human and automated efforts, it also relies on community flags to help take down infringing products that are not allowed on its marketplace, and that community members should contact the company when if they see mass-produced items for sale on the site.

    It also continues to work on search. On its last earnings call, Silverman said the company was moving beyond relevance to the next frontier of search, one “focused on better identifying the quality of each Etsy listing utilizing humans and [machine-learning] technology, so that from a highly relevant result set we bring the very best of Etsy to the top — personalized to what we understand of your tastes and preferences.”

    The pressure could build on the company if its latest moves don’t generate growth. Etsy recently gave a seat on its board to a partner at activist investor Elliott Management, which bought a “sizable” stake in the company in the last few months. Marc Steinberg, who is responsible for public and private investments at Elliott, has also has been on the board at Pinterest
    PINS,
    -9.45%

    since December 2022.

    Elliott Management did not respond to questions. But in a statement last week, Steinberg said he was joining the board because he “believe[s] there is an opportunity for significant value creation.” Some sellers fear that the pressure from investors and Wall Street will lead to Etsy allowing mass-produced products onto the site. In its fall update, Etsy said the number of listings it removed for violating its handmade policy jumped 112% and that it was further accelerating such actions.

    Etsy’s stock before the news of Elliott’s stake was down about 18% this year. Its shares are now off about 3.65% this year, after recently having their best day in seven years on the news that Steinberg joined the board.

    Etsy is a unique marketplace that for many years had a much better reputation than some of its rivals, like eBay
    EBAY,
    +0.98%
    .
    But since going public and answering to Wall Street, the need to provide growth and profits for investors has become much more of a driver. The Super Bowl ad and Gift Mode may bring a broader awareness to Etsy, but will it be the right kind of awareness? Sellers like me hope these new efforts will stave off the continuing fight with the likes of Temu and other vendors of mass-produced products, and help Etsy retain the remaining unique aspects of its marketplace.



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  • How to navigate market risk from interest rates, the economy and politics in 2024

    How to navigate market risk from interest rates, the economy and politics in 2024


    As the U.S. Federal Reserve’s three-year reign in the headlines potentially comes to an end, an analysis of this year’s market themes can offer valuable insights for predicting trends and ensuring attractive returns in 2024.

    Beyond the central bank’s actions, pivotal factors shaping the investment landscape this year include fiscal policies, election outcomes, interest rates and earnings prospects.

    Throughout 2023, a prominent theme emerged: that equities are influenced by factors beyond monetary policy. That trend is likely to persist. 

    A decline in interest rates could significantly increase the relative valuations of equities while simultaneously reducing interest expenses, potentially transforming market dynamics. Contrary to consensus estimates, 2023 brought a more robust earnings rebound, leaving analysts optimistic about 2024.

    The 2024 U.S. presidential election, meanwhile, introduces a new element of uncertainty with the potential to cast a shadow over the market during much of the coming year. 

    Choppy trading, modest earnings growth

    Anticipating a choppy first half of the year due to sluggish economic growth, we see a better opportunity for cyclicals and small-cap stocks to rebound in the latter part of the year. As uncertainty around the election and recession fears dissipate, a broad rally that includes previously ignored cyclicals and small-caps should help propel the S&P 500
    SPX
    higher. 

    Broader macroeconomic conditions support mid-single-digit growth in earnings per share throughout 2024. Factors such as moderate economic expansion, controlled inflation and stable interest rates are expected to provide a conducive environment for companies, enabling them to sustain and potentially improve their earnings performance. We estimate EPS growth of 6.5%. This projected growth aligns with the broader market sentiment indicating a steady upward trajectory in earnings for the upcoming year, fostering investor confidence and supporting valuation expectations across various sectors.

    If the economy has not been in recession at the time of the first rate cut but enters one within a year, the Dow enters a bear market.

    When it comes to U.S. stock-market performance around rate cuts, the phase of the economic cycle matters. When there has been no recession, lower rates have juiced the markets, with the Dow Jones Industrial Average
    DJIA
    rallying by an average of 23.8% one year later.

    If the economy has not been in recession at the time of the first cut but enters one within a year, the Dow has entered a bear market every time, declining by an average of 4.9% one year later. Our base case is a soft landing, but history shows how critical avoiding recession is for the bull market as the Fed prepares to ease policy.   

    Big on small-caps

    This past year has posed a hurdle for small-cap stocks due to the absence of a driving force. These stocks typically perform better as the economy emerges from a recession. While they are currently undervalued, their earnings growth has been notably lacking. If concerns about a recession diminish, a normal yield curve could serve as a potential catalyst for small-cap stocks.

    Growth vs. value

    The ongoing outperformance of megacap growth stocks that we saw in 2023 might hinge on their ability to sustain superior earnings growth, validating their current valuations. Defensive sectors in the value category, meanwhile, are notably oversold and might exhibit strong performance, particularly toward the latter part of the first quarter. Should concerns about a recession dissipate, cyclical sectors within the value category could outperform, particularly if broader market conditions turn favorable in the latter half of the year.

    Handling uncertainty

    The Fed’s enduring influence regarding the prospect of a soft landing in 2024 remains a pivotal point in the market’s focus. Considering the themes of the past year and the multifaceted influences on equities beyond monetary policy, investors are advised to navigate through uncertainties stemming from unintended fiscal shifts, upcoming elections and the impact of fluctuating interest rates. While a potentially choppy start to the year is anticipated, it could create opportunities for cyclical and small-cap stocks later in the year.

    Ed Clissold is chief of U.S. strategies at Ned Davis Research.

    Also read: Mortgage rates dip after Fed meeting. Freddie Mac expects rates to decline more.

    More: After the Fed’s comments, grab these CD rates while you still can



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  • 'Smidcap' companies are becoming a big deal. Here's a look at some of the best.

    'Smidcap' companies are becoming a big deal. Here's a look at some of the best.

    The stocks of long-neglected small companies are finally showing signs of life as the market rally broadens. But these tiny companies still remain vastly undervalued. So, they are one of the best buys in the stock market right now.

    Small- and medium-cap companies, or smidcaps, have not been this cheap since the Great Financial Crisis 15 years ago. “Smidcaps relative to large caps look very attractive,” says says portfolio manager Aram Green, at the ClearBridge Select Fund LBFIX, which specializes in this space.  “Over the long term you will be rewarded.” 

    Green is worth listening to because he is one of the better fund managers in the smidcap arena. ClearBridge Select beats both its midcap growth category and Morningstar U.S. midcap growth index over the past five- and 10 years, says Morningstar Direct. This is no easy feat, in a mutual fund world where so many funds lag their benchmarks. 

    The timing for smidcap outperformance seems about right, since these stocks do well coming out of recessions. Technically, we have not recently had a recession. But there was an economic slowdown in the first half of the year, and the U.S. did have an earnings recession earlier this year. So that may count. 

    To get smidcap exposure, consider the funds of outperforming managers like Green, and if you want to throw in some individual stocks, Green is a great guide on how to find the best names in this space. 

    I recently caught up with him to see what we can learn about analyzing smidcaps. Below are four tactics that contribute to his fund’s outperformance, with nine company examples to consider.  

    1. Look for an entrepreneurial mindset: Green’s background gives him an edge in investing. He’s an entrepreneur who co-founded a software company called iCollege in 1997. It was bought out by BlackBoard in 2001. He knows how to understand innovative trends, identify a good idea, secure capital and quickly ramp up a business. This experience gives him a “private market mindset” that helps him pick stocks to this day. 

    Founder-run companies regularly outperform.

    Green looks for managers with an entrepreneurial mindset. You can glean this from company calls and filings, but it helps a lot to meet management — something most individual investors cannot do. But Green offers a shortcut, one which I regularly use, as well. Look for companies that are run by founders. This will give you exposure to managers with entrepreneurial spirit. 

    Here, Green cites the marketing software company HubSpot
    HUBS,
    +0.79%
    ,
    a 1.9% fund position as of the end of the third quarter. It was founded by Massachusetts Institute of Technology college buddies Brian Halligan and Dharmesh Shah. They’re on the company’s board, and Shah is chief technology officer. 

    Academic studies confirm founder-run companies regularly outperform. My guess is this is because many founders never lose the entrepreneurial spirit, no matter how easy it would be to quit and sip Mai Tai’s on a beach after making a bundle.  

    In the private market, Green cites Databricks, a data management and analytics company with an AI angle. This competitor of Snowflake
    SNOW,
    -0.92%

    is likely to go public in 2024. If you feel like an outsider because you lack access to private market investing, note that Green says he typically buys more exposure to private companies on the initial public offering (IPO), and then in the market.  “We like to spend time with them when they are private so we can pounce when they are public,” Green says.

    2. Look for organic growth: When companies make acquisitions their stocks often decline, and for good reason. Managers make mistakes in acquisitions because they overestimate “synergies.” Or they get wrapped up in ego-enhancing empire building. 

    “We favor entrepreneurial management teams that do not make a lot of acquisitions to grow, but use their resources to develop new products to keep extending the runway,” says Green. 

    Here, he cites ServiceNow
    NOW,
    +2.62%
    ,
    which has grown by “extending the runway” with new offerings developed internally. It started off supporting information technology service desks, and has expanded into operations management of servers and security, onboarding employees, data analytics, and software that powers 911 emergency call systems. Green obviously thinks there is a lot more upside to come, given that this is an overweight position, at 4.6% of the portfolio (the fund’s biggest holding).

    Green also puts the “Amazon.com of Latin America” MercadoLibre
    MELI,
    +0.17%

    in this category, because it continues to expand geographically and in areas such as logistics and payment systems. “They have really morphed into a fintech company,” Green says. He puts HubSpot and the marketing software company Klaviyo
    KVYO,
    -5.73%

    in this category, too. 

    3. Look for differentiated business models: Green likes companies with offerings that are special and different. That means they’ll take market share, and face minimal competition. They’ll also enjoy pricing power. “This leads to high margins. You don’t have someone beating you up on price,” he says. 

    Green cites the decking company Trex
    TREX,
    +0.10%
    ,
    which offers composite decking and railing made from recycled materials. This gives it an eco-friendly allure. Compared to wood, composite material lasts longer and requires less maintenance. It costs more up front but less over the long term. Says Green: “The alternative decking market has taken about 20% of the market and that can get to 50%.”

    Of course, entrepreneurs notice success, and try to imitate it. That’s a risk here. But Trex has an edge in its understanding of how to make the composite material. It has a strong brand. And it is building relationships with big-box retailers Home Depot and Lowe’s. These qualities may keep competitors at bay. 

    4. Put some ballast in your portfolio: Green likes to keep the fund’s portfolio balanced by sector, size, and business dynamic. So the portfolio includes the food distributor Performance Food Group
    PFGC,
    -1.69%
    .
    The company is posting mid-single digit sale growth, expanding market share and paying down debt. Energy drinks company Monster
    MNST,
    -0.85%

    also offers ballast. Monster’s popular product line up helps the company to take share and enjoy pricing power, Green says.

    It’s admittedly unusual to see a food companies in a portfolio loaded with high-growth tech innovators. But for Green, it’s all part of the game plan. “Rapid growth, disrupting businesses are not going to work year in year out. There are times they fall out of favor, like 2022. So, having that balance is important because it keeps you invested in the equity market.” 

    In other words, keeping some ballast means you’re less likely to get shaken out by sharp declines in high-growth and high-beta tech innovators when trouble strikes the market.

    Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN, TSLA and MELI. Brush has suggested AMZN, TSLA, NOW, MELI, HD and LOW in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks

    More: Nvidia, Disney and Tesla are among 2023’s buzziest stocks. Can they continue to sizzle in 2024?

    Also read: Presidential election years like 2024 are usually winners for U.S. stocks

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  • Why Sam Altman is a no-brainer for Time’s ‘Person of the Year’

    Why Sam Altman is a no-brainer for Time’s ‘Person of the Year’

    Nothing has changed our lives more this year than the advances made in artificial intelligence — and they have the potential to alter our lives in even more dramatic ways down the road.

    So it’s a no-brainer that Sam Altman, co-founder and recently returned chief executive of the once-little-known OpenAI, should be named “Person of the Year” by Time Magazine when the selection is announced Wednesday.

    Altman has already cracked Time’s shortlist, joining candidates from varied backgrounds, including world leaders like Xi Jinping and entertainment phenomenon Taylor Swift. The selection ultimately comes down to an “individual or group who most shaped the previous 12 months, for better or for worse.”

    But Time has often given “agents of change” its yearly honor — just look at 2021 winner Elon Musk — and Altman certainly fits that bill.

    No other innovation in the past year has had an impact in such disparate realms. OpenAI publicly launched its ChatGPT chatbot late last year, and as the technology grew viral in 2023, it upended the stock market, Silicon Valley and companies that wouldn’t normally be classified as technology businesses. The ensuing product development and surge in generative AI investment revitalized a tech industry that had sunk into the doldrums amid a pandemic hangover.

    Admittedly, it will take time for companies to realize the true financial benefits of AI: Nvidia Corp.
    NVDA,
    -2.68%

    is among the few to generate serious money from the frenzy so far. But market researcher IDC predicted that global spending on AI, including software, hardware and services for AI-centric systems will reach $154 billion this year, up 27% from a year ago. That total could zoom above $300 billion by 2026.

    Also read: One year after its launch, ChatGPT has succeeded in igniting a new era in tech

    And AI isn’t only impacting the corporate world. The technology is already affecting our daily lives, and it will have even deeper effects going forward. Chatbots are getting smarter on websites, facilitating better customer service. They’re starting to alter the workplace as well, spitting out mostly coherent marketing copy, research and even, gasp, news articles — albeit with plenty of errors.

    At first, ChatGPT seemed like a fun way to kill time or get homework help, but the chatbot and its ilk will seriously alter the working world, helping to eliminate perhaps millions of jobs. Morgan Stanley recently predicted that more than 40% of occupations will be affected by generative AI in the next three years.

    Altman himself has been the face of OpenAI in the past year. He’s talked up the technology, but he also appeared at congressional hearings in May to discuss potential regulation of AI, testifying that “if this technology goes wrong, it can go quite wrong.” His recent firing and quick rehiring by OpenAI and its small, nonprofit board late last month fueled a veritable media storm before the Thanksgiving holiday in the U.S.

    Time chooses its persons of the year for their impact, not because they’re saints. And Altman’s own story is not without controversy. The recent brouhaha over his leadership of OpenAI is believed to have been caused by a deep schism over the ethics of AI development. The board seemingly wanted more guardrails and precautions, and feared that rushed development could irrevocably doom mankind.

    Read in the Wall Street Journal: How effective altruism split Silicon Valley and fueled the blowup at OpenAI

    Altman, who also wooed Microsoft Corp.
    MSFT,
    -1.43%

    to become an investor in OpenAI, emerged the victor in the upheaval with his own company’s altruistic board. Had Altman truly been fired from OpenAI, Microsoft was planning to hire him, and nearly every employee at OpenAI was ready to quit and follow him there. While OpenAI faces plenty of competition, including from Alphabet Inc.’s
    GOOG,
    -2.02%

    GOOGL,
    -1.96%

    Google, Altman should continue to be the face of AI development, for good and for bad, even as he has advocated industry regulation.

    The debut and influence of ChatGPT and follow-on AI products are having the biggest impact on tech development since the invention of the iPhone. Altman is at the center of it and leading the charge. Whether he can keep the lid on Pandora’s Box or not depends on many factors, but he and the company he leads are clearly driving a new tech movement that affects us all, whether we like it or not.

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  • Remote workers are flexing their muscle, and the best-run companies won’t fight them

    Remote workers are flexing their muscle, and the best-run companies won’t fight them

    When COVID-19 struck, companies had little choice but to adapt swiftly. Office spaces were replaced by living rooms and in-person meetings transitioned to virtual calls — a temporary solution, or so it was thought.

    But months have turned into years, and now it’s clear this is not just a fleeting phase but a profound transformation in work dynamics.

    The…

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  • Elon Musk’s X apocalyptic moment

    Elon Musk’s X apocalyptic moment

    Is this the beginning of the end for X, the social-media site previously known as Twitter?

    In the last two days, major advertisers, ranging from IBM Corp. IBM, Apple Inc. AAPL, Lions Gate Entertainment Corp. LGF.A, Walt Disney Co. DIS, even the European Union, have pulled their ads from X, after Elon Musk appeared to endorse antisemitic conspiracy theories and because these big spenders weren’t thrilled with the algorithm’s product placement nestled alongside pro-Nazi posts.

    Earlier…

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  • Sluggish EV and auto sales could continue next year, based on what these chip makers just said

    Sluggish EV and auto sales could continue next year, based on what these chip makers just said

    A couple of lesser-known chip companies and a battery maker have confirmed growing fears among investors about the slowdown in electric-vehicle and overall auto sales, which appears likely to continue into next year.

    Monday was loaded with bad news from companies that make industrial chips for the auto industry, as earnings reports from On Semiconductor Corp.
    ON,
    -21.77%

    in the morning and Lattice Semiconductor Inc.
    LSCC,
    -4.05%

    in the afternoon disappointed Wall Street with their forecasts.

    If inflation and high interest rates continue into next year, which is feasible, the slump in auto sales is expected to continue.

    “We think it will carry through into the first part of next year, with most cycles running six to nine months,” said David Williams, an analyst with Benchmark who had predicted that the outlook for On Semi would have to be tempered.  “However, the reduced consumer buying power and overall macro backdrop will likely keep buyers on the sidelines for the next couple of quarters.”

    On Semi said that because of the shortfall in an order from one unnamed automotive customer in Europe, it now expects to ship $200 million less this year of its silicon carbide chips, which are used in EVs. The company did not give further details on its customer, but pointed out that at $800 million, its 2023 revenue will still be four times higher than 2022.

    Last year, On Semi touted a new plant in Hudson, N.H., to make chips out of silicon carbide, an energy-efficient semiconductor material made of silicon and carbon, and predicted those chips would exceed $1 billion in sales in 2023.

    “EVs are going to grow,” On Semi Chief Executive Hassane El-Khoury said Monday. “They’re going to grow for us in the fourth quarter as well. It’s just not going to grow in the fourth quarter at the rate that we expected… I think EVs are a long-term growth opportunity — even with the backdrop of a lot of the headlines that we’re seeing, customer designs have not slowed down.”

    Even as company executives spun the positives, investors were rattled and On’s shares tumbled nearly 22%. Lattice Semiconductor also disappointed Wall Street with its outlook for the fourth quarter. Lattice sells chips that are used in advanced driver-assistance systems in cars, and shares tumbled 13% in extended trading after its fourth-quarter outlook came in lower than expected, due to fewer customers in Asia.

    “In the last kind of four to six weeks of Q3, we started to see demand soften from our industrial and automotive customers,” Lattice CEO Jim Anderson told analysts. “I would say that it was really localized to the Asia geography, and we expect that softness we started to see at the end of Q3 extend into the current quarter.”

    In addition, Tesla Inc.’s battery partner, Panasonic Holdings
    6752,
    -8.35%

    of Japan, said it was slashing its production by 60% due to slower sales of some models to Tesla. That fueled a 4.8% drop in Tesla stock
    TSLA,
    -4.79%
    ,
    to its lowest close since late May. Investors have been nervous about the EV market, especially after Ford
    F,
    -1.91%

    executives said last week that consumers were unwilling right now to pay a premium for EVs.

    Semiconductor companies are often harbingers of future end-product demand in a wide variety of industries. Now that automakers use so many semiconductors, they can also be a big indicator of auto demand, especially in the hot arena of EVs. And those indicators don’t look good in the short term.

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  • Microsoft and Alphabet results show Wall Street only cares about AI

    Microsoft and Alphabet results show Wall Street only cares about AI

    Microsoft Corp. and Alphabet Inc. both reported mostly strong results Tuesday, but the disparate reactions from investors showed that Wall Street only cares about artificial intelligence right now.

    While Microsoft shares
    MSFT,
    +0.37%

    rose 4% in after-hours trading following the company’s latest report, Alphabet shares
    GOOG,
    +1.61%

    GOOGL,
    +1.69%

    dropped 6% as Wall Street got the sense that AI is manifesting differently in the companies’ cloud businesses.

    Microsoft surprised investors with 28% constant-currency growth in its Azure cloud-computing business, above the company’s own forecast and the projection for 25.6% growth that analysts were modeling on average. While Microsoft continues to see “optimization” challenges as customers remain conscious about their spending, the company is also benefiting from AI tailwinds in the cloud.

    Companies looking to beef up their AI offerings are often looking to add AI services for their customers through additional cloud services, so they don’t have to do as much internal development themselves. In addition, AI offerings ranging from chatbots to tools that can streamline the writing of reports require ever more computing power, and both Azure and Google Cloud are starting to offer new software applications to address those needs.

    Microsoft Chief Executive Satya Nadella called AI a “unique and different” factor that was helping Azure trends. “Given our leadership position, we are seeing complete new project starts, which are AI projects,” he said in response to an analyst question about the sustainability of cloud growth rates.

    In addition, Microsoft, which has invested heavily in ChatGPT-creator OpenAI, offers an Azure OpenAI service that more than 18,000 organizations are now using. Some of these customers are new to Azure.

    Microsoft Chief Financial Officer Amy Hood forecast that Azure revenue growth should be around 26% in constant currency in the fiscal second quarter, driven by new workload trends and with the growing contributions from AI.

    Investors seem less confident that Alphabet is seeing the same tailwinds in its Google Cloud business, especially as that segment showed its slowest quarterly growth since Google began breaking out results that way back in 2019. Cloud revenue of $8.4 billion, with growth of 22%, was $250 million shy of consensus estimates on Wall Street, according to Colin Sebastian, an analyst with Baird. That overshadowed an upbeat performance in the company’s advertising business.

    When one analyst asked Alphabet executives about the deceleration in the revenue growth of its cloud business, Chief Executive Sundar Pichai was vague but said that customers are being selective of where they are spending their IT budgets.

    “On cloud, what I would say is overall, we have definitely started seeing customers looking to optimize spend,” Pichai said. “We leaned into it to help customers, given some other challenges they were facing, and so that was a factor.”

    Alphabet is seeing “a lot of interest in AI,” but it remains to be seen whether that’s contributing materially to its financial performance just yet.

    “Google Cloud missed consensus revenue expectations (although in line with Baird) on slowing growth, and we believe consistent with the view that newer Gen-AI workloads will take time to move the needle,” Sebastian wrote in a note to clients.

    Insider Intelligence senior analyst Max Willens added that Google Cloud is facing tough competition, and while the business seems to have traction with AI startups that “may bear fruit in the long run, it is not currently helping Google Cloud enough to satisfy investors.”

    Wall Street clearly is looking to AI to fuel better growth rates and help offset sluggish macroeconomic trends. The poster child for that dynamic is Nvidia Corp.
    NVDA,
    +1.60%
    ,
    which is expected to single-handedly drive earnings growth for the information technology sector thanks to booming demand for its AI hardware.

    Read: Big-tech results will decide ‘where we go from here’ amid investor caution. They would fall if it weren’t for this one company

    Given economic pressures, it’s becoming obvious that companies without much of an AI story to contribute this quarter will continue to fall out of favor with investors.

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  • AI stole the show this year, but earnings will drag Wall Street back to reality

    AI stole the show this year, but earnings will drag Wall Street back to reality

    Nearly a year ago, OpenAI released ChatGPT 3 into the world, and investors got visions of dollar signs in their heads as they imagined the ways that artificial intelligence could make big money for businesses.

    Wall Street’s now coming to terms with the fact that those sorts of paydays are going to take time. As investors have already seen from the past two quarters of earnings, AI has only really delivered financial benefits for a select few hardware companies so far — while spurring new costs for many others.

    “The AI boom has already bifurcated into the contenders and pretenders,” said Daniel Newman, chief executive and principal analyst of Futurum Research. And while Advanced Micro Devices Inc., Intel Corp. and Arm Holdings PLC
    ARM,
    +0.38%

    have stirred up interest, Nvidia Corp.
    NVDA,
    -4.68%

    has established itself as far and away the greatest “contender,” with AI driving strong demand for its chips tuned for AI training.

    Nvidia last quarter reported record earnings, including a 141% jump in revenue for its graphics chips used in AI infrastructure building up data centers. Nvidia, which reports near the end of earnings season on Nov. 21, posted record revenue of $13.5 billion last quarter and is expected to easily top that with $16 billion in the most recent quarter, a surge of 170% versus a year ago. Those estimates include $12.3 billion of revenue coming from data-center sales.

    Other chip companies could post gains from AI as well, but to far lesser extents. Candidates include Broadcom Corp.
    AVGO,
    -2.01%

    and system maker Super Micro Computer Inc.
    SMCI,
    +2.35%
    ,
    as well as Marvell Technology Inc.
    MRVL,
    -0.91%
    ,
    which last quarter told analysts that it expects to end the year at a revenue run rate of about $800 million this year from cloud/data-center chips related to AI.

    “This is well above what we had outlined last quarter. Put this in perspective: This would put us at the run rate we had previously communicated for all of next year,” Marvel Chief Executive Matthew Murphy told analysts.

    Super Micro is also riding the AI wave with its customized data-center servers that are designed to consume less power. But revenue in the September quarter is forecast to rise just 15% from a year ago and drop on a sequential basis, as supply constraints from Nvidia likely hampered Super Micro’s ability to meet all its demand.

    Much as Advanced Micro Devices Inc.
    AMD,
    -1.24%

    and Intel Corp.
    INTC,
    -1.37%

    want to be in the AI conversations with the graphics chips they hope will be used for AI data-center applications, they won’t see much of an impact yet from AI revenue. Plus, those companies are experiencing a slowdown in PC sales that may overshadow any small benefit from AI chips.

    The AI boom in chips is clearly not providing enough of a boost to lift finances for the overall semiconductor sector, which is forecast to see earnings fall 3.3% in the third quarter and post a revenue decline of 0.6%, according to FactSet. The industry is being dragged down in part by Micron Technology Inc.
    MU,
    -0.12%
    ,
    which reported a 40% drop in revenue and a whopping fiscal fourth-quarter loss in late September for the quarter ended Aug. 31, which is included in FactSet’s third-quarter data. Even so, the company called a bottom to the memory-chip downturn.

    Read also: Micron’s AI focused chip won’t help financial results anytime soon.

    “Most of the consumer-based tech is still struggling, [including] PCs, laptops and to a certain extent smartphones,” said Daniel Morgan, senior portfolio manager at Synovus Trust Co. Wall Street has tempered expectations related to the impact of Apple Inc.’s
    AAPL,
    -0.88%

    iPhone 15 launch on the quarter, as estimates call for an overall 1% drop in September-quarter revenue. Last quarter, Apple executives forecast that both Mac and iPad sales would be down by double-digits and that revenue performance would be similar to its June quarter, when revenue fell 1.3%

    In addition, when asked about AI, Apple CEO Tim Cook said the company views AI and machine learning “as core fundamental technologies that are integral to virtually every product that we build.” Those comments, though, can also apply to the bulk of tech companies, where AI is built into software as another layer to improve a product. Internet companies such as Meta Platforms Inc.
    META,
    +0.89%

    and Alphabet Inc.
    GOOG,
    +0.36%

    GOOGL,
    +0.45%

    incorporate AI into their software and algorithms but don’t treat it as a specific, revenue-generating product.

    Other software companies are building AI into their products as separate features or add-ons, but they are still in the early stages of seeing whether or not customers will pay more for them. Take Microsoft Corp.,
    MSFT,
    -0.17%

    which has showed off Copilot, an extra AI feature for customers of Microsoft 365.

    “[Microsoft] can distinguish itself by providing more details around its AI revenue
    ramp since we don’t expect much information from Google, who really doesn’t seem
    to have the monetization plan for Bard and AI-assisted search (SGE) ready to
    articulate yet,” Melius Research analyst Ben Reitzes said in a note to clients this week. He also noted that the cost of offering AI products to consumers is steep, and requires lots of investment.

    “There are sophisticated issues to contend with for Microsoft, including balancing the potential for higher revenue from Copilots with the high costs per query and much-needed investment,” Reitzes said. “The balance of AI adoption vs. cost was implied when Microsoft guided to flat operating margins year over year for fiscal 2024.”

    Earlier this year, the Information reported that OpenAI, the creator of ChatGPT and recipient of a hefty investment from Microsoft, has costs of up to $700,000 a day, because the massive amounts of computing power needed to run queries. In February, OpenAI launched ChatGPT Plus, for $20 a month, a service that will give subscribers access to its AI during peak times and faster response times.

    Another example is Adobe Inc.
    ADBE,
    +1.70%
    ,
    which has a few AI offerings, including a subscription service called Generative Credits, tokens that let customers turn text-based prompts into images. Another is Firefly, a generative AI service for images, and an AI option in Photoshop, currently called Photoshop Beta AI, to help users fill in images and other collaborative tools. Adobe did not provide any forecasts on potential revenue generation during its analyst day earlier this month.

    Toni Sacconaghi, a Bernstein Research analyst, said AI could drive a massive increase in enterprise productivity, and companies could dramatically increase IT spending on servers in order to invest in productivity-enhancing AI. “However, we note that enterprise adoption appears to be in early stages,” he said in a recent note to clients, adding that it was feasible that spending on AI infrastructure could take money away from other IT projects in process. “We do worry that projected AI infrastructure build out may be occurring too quickly, necessitating a digestion period, which could result in a commensurate stock pullback in AI-related names.”

    Overall, the information-technology sector itself is expected to see anemic revenue growth this quarter. The consensus on FactSet forecasts a meager 1.35% revenue uptick in the third quarter, with earnings growth of 4.65%. FactSet’s estimates for IT companies exclude internet companies like Meta and Alphabet, which are under the category of communications/interactive media services. That sector is expected to see sales growth of 12%, and earnings growth of 51%, thanks to a 116% boost in Meta’s net income, after it hit a low point in the year-ago quarter.

    Amazon.com Inc.
    AMZN,
    -0.81%
    ,
    in the category of consumer discretionary/broadline retail, is forecast to see earnings growth of 109%, and revenue growth of 11%. Amazon’s cloud services business, AWS, is expected to also see a potential uplift from customers spending money on AI projects, according to a TD Cowen & Co. survey, in which 41% of respondents said they were “highly considering” allocating a budget for generative AI.

    “This trend could bode well for Amazon’s AWS,” TD Cowen analyst John Blackledge said in a recent report, adding that he expects AWS revenue growth to reaccelerate in the second half of this year and in 2024, boosted by the move of additional workloads to the cloud, possibly including generative AI.

    As companies build up their infrastructure, or their spending on cloud computing to add or improve AI capabilities, they are seeing higher costs, which is affecting margins — especially if revenue has slowed down, as it has in some sectors. Across both the broader S&P 500
    SPX,
    and the IT sector, earnings are lower than a year ago.

    As Newman of Futurum pointed out, “AI stole the budget this year.” And that is a mixed bag for tech.

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  • Government shutdown looms: Here’s how to help preserve your investment portfolio.  

    Government shutdown looms: Here’s how to help preserve your investment portfolio.  

    The economic impact of a shutdown and the potential implications on your portfolio depend largely on how long the shutdown lasts.

    The potential for a U.S. government shutdown can raise alarm for investors and send the phone of a financial adviser like me ringing off the hook. Headlines in front of them, my clients are increasingly asking about potential portfolio implications and how they should respond.

    There is certainly a measured response, which includes not overreacting to the headlines and sticking to your long-term investment plan, and I’ll show you how to draw it.

    Government shutdown explained

    First, it’s important to understand what is happening. During a shutdown, the federal government will suspend all services that are deemed nonessential until a funding agreement is reached. This is much different than a default — which can happen when the government can’t pay its debts or satisfy its obligations. A default can have significant ramifications on U.S. creditworthiness and in turn, the global financial system. You may recall lawmakers’ discussions earlier this year regarding raising the debt ceiling — a solution to avoid defaulting. 

    A U.S. default has never happened, but shutdowns have occurred more than 20 times since 1976. Unlike a default, a shutdown does not affect the government’s ability to pay its obligations, and many critical government services, like Social Security may continue. When weighing the two, one can presume that markets may react more negatively to a default.   

    Markets may experience heightened volatility in response to the shutdown uncertainty, but markets do not react consistently to the news. In the past we have seen U.S. stocks — as measured by the S&P 500
    SPX
    — finish positively after more than half of these shutdowns. Results are similar for fixed-income securities, as we’ve seen an even split between positive and negative returns in the bond markets in shutdowns since 1976. 

    Of course, all investing is subject to risk, past performance is not a guarantee for future returns, and the performance of an index is not an exact representation of any particular investment. 

    The economic impact of a shutdown — and the potential implications on your portfolio — depend largely on how long the shutdown lasts. The longer the shutdown, the more Americans experience dampened economic activity from things like loss of furloughed federal workers’ contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which lowers private-sector activity). 

    Read: Government shutdown: Analysts warn of ‘perhaps a long one lasting into the winter’

    A measured response 

    A government shutdown is just one of many factors, both positive and negative, that can cause fluctuation in the market, so it’s important to treat it just as you would other fluctuations.

    With so many variables, it’s impossible to precisely predict the effects the shutdown will have or determine how long it will last. This can seem scary for many, so it’s important to remember your long-term financial plan and focus on the factors you can control.  

    First, do not try to time the market. Doing so based on short-term events is never a good idea, and volatility is unpredictable. Even if the markets fall, we don’t know when they might recover. If you make an emotionally charged decision, you run the risk of missing out on potentially substantial market gains. 

    Instead, focus on the following: align your asset allocation with your risk tolerance; control your costs; adopt realistic expectations; hold a broadly diversified portfolio and stay disciplined. Doing so can help you weather any form of market uncertainty, including a shutdown.

    Stick to healthy financial habits

    In addition to not making any sudden moves in your investment portfolio, now is a suitable time to make sure you are keeping up with healthy financial habits, especially if you are a federal employee facing a furlough. This can look like readjusting your budget based on your current needs, keeping high-interest debt to a minimum, paying the minimum on all debt to keep your credit score in good standing and continuing to save.

    Remember, using your emergency fund to navigate tight times is exactly what you have saved for and tapping it in this instance is considered a healthy financial habit. Just be sure to replenish it when you have the funds to do so. As a good practice, Vanguard recommends having three- to six months of expenses saved in readily accessible investments.

    With a level, long-term approach and a personalized financial plan, you can be prepared for this potential storm and the inevitable ones to come. 

    Lauren Wybar is a senior financial adviser with Vanguard Personal Advisor. 

    More: Bill Ackman says Treasury yields are going higher in a hurry, and that investors should shun U.S. government debt

    Plus: Social Security checks will still come if there’s a shutdown. But there are other immediate threats to America’s benefits.

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  • By buying Splunk, Cisco is closer to becoming a software company

    By buying Splunk, Cisco is closer to becoming a software company

    With Cisco Systems Inc.’s pending acquisition of Splunk Inc., the networking giant is making another major step toward becoming a software company.

    On Thursday, Cisco CSCO said it was buying Splunk SPLK in a deal valued at about $28 billion, or $157 a share in cash, for the cloud-security company. The match had been speculated about for years, and Cisco has been on a buying binge this year, as it seeks to grow with more security and software offerings.

    “Together, we will become one of…

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  • Stocks are trapped in a trading range. Something’s got to give.

    Stocks are trapped in a trading range. Something’s got to give.

    The U.S. stock market, as measured by the S&P 500 Index SPX, is trapped in a trading range, and volatility seems to be damping down considerably. The significant edges of the trading range are support at 4330 and resistance at 4540. Both of those levels were touched in the latter half of August. A breakout from this range should give the market some strong directional momentum. 

    Since Labor Day, prices have hunkered down into an even narrower range. Typically, the latter half of September through the early part of October…

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  • Retire to Arizona? Seriously?

    Retire to Arizona? Seriously?

    The traditional Sunbelt retirement has lost its appeal: Brett Arends

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  • Sorry, Elon, a ‘super app’ is never going to fly in the U.S.

    Sorry, Elon, a ‘super app’ is never going to fly in the U.S.

    “Super apps” have never truly existed in the United States, and it is apparent at this point that they never will.

    That isn’t stopping some executives and investment analysts from still dreaming of becoming one-stop shops for their users’ needs, something only a small handful of apps in Asia have managed to do. The most prominent is Elon Musk, the Tesla Inc. TSLAchief executive who purchased Twitter last year and has proclaimed that he will turn it into an “everything app” called X that resembles super apps in China.

    “I…

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  • ‘Oppenheimer’ gives stock investors another reason to be bullish about nuclear energy

    ‘Oppenheimer’ gives stock investors another reason to be bullish about nuclear energy

    One of the hottest movies of the summer is the staggeringly good biopic “Oppenheimer,” about the man who oversaw the frantic race to develop the atomic bomb during World War II. 

    The atom bomb dropped on Hiroshima, Japan on Aug 6, 1945 was a fission-style device. This also happens to be the same basic physics behind nuclear reactors that are in use today. It’s a reminder that technology can be, at its essence, agnostic: Whether it is used for malevolent or benevolent purposes (in nuclear fission’s instance, an instrument of death or clean, carbon-free electricity) depends upon the intent of the user. 

    Fission reactors generate about 10% of the world’s electricity today. The United States gets even more of its electricity this way, about a fifth.

    These percentages are likely to rise as global demand for electricity — and concerns about global warming and climate change — rise. This will present opportunities for long-term oriented investors. The lion’s share of this demand — about 70%, says the Paris-based International Energy Agency (IEA), will come from India, which the United Nations says is now the world’s most populous country, China, and Southeast Asia. Put another way, “the world’s growing demand for electricity is set to accelerate, adding more than double Japan’s current electricity consumption over the next three years,” says Fatih Birol, the IEA’s executive director.

    While fossil fuels remain the dominant source of electricity generation worldwide — the Central Intelligence Agency estimates that it provides about 70% of America’s electricity, 71% of India’s and 62% of China’s, for example—the IEA report says future demand will be met almost exclusively from two sources: renewables and nuclear power. “We are close to a tipping point for power sector emissions,” the IEA says. “Governments now need to enable low-emissions sources to grow even faster and drive down emissions so that the world can ensure secure electricity supplies while reaching climate goals.”

    The Biden administration is a big booster of nuclear energy.

    It’s helpful that the Biden administration is a big booster of nuclear energy, which the White House sees as an integral part of its broader effort to move the U.S. economy away from fossil fuels. The Department of Energy says that the country’s 93 reactors generate more than half of America’s carbon-free electricity. But price pressures from wind, solar and natural gas (which the feds call “relatively clean” even though it emits about 60% of coal’s carbon levels) have putseveral reactors out of business in recent years. 

    The bipartisan infrastructure bill that Biden signed into law in November 2021 includes $6 billion, spread out over several years, for the so-called Civil Nuclear Credit Program, designed to keep reactors — and the high-paying jobs that come with them — running. If a plant were to close, it would “result in an increase in air pollutants because other types of power plants with higher air pollutants typically fill the void left by nuclear facilities,” the administration says. U.S. Energy Secretary Jennifer Granholm has said the Biden administration is “using every tool available” to get the country powered by clean energy by 2035.

    The private sector is beginning to stir. Last week, Maryland-based X-Energy said it would build up to 12 reactors in Central Washington state, for Energy Northwest, a public utility. These wouldn’t be the behemoth-type reactors we’re used to seeing, but “advanced small, nuclear reactors.” X-Energy, which is privately held,  has also been selected by Dow
    DOW,
    -1.40%

    to construct a similar facility in Texas.  

    Other companies are also rolling out new technology to meet demand. Nuclear fusion — a breakthrough in that it creates more energy than the Oppenheimer-era fission model and at a lower cost — is likely to be the basis for reactors in the years ahead; the Washington, D.C.-based Fusion Industry Association thinks the first fusion power plant could come online by 2030. After seven rounds of funding, one fusion company, Seattle-based Helion Energy, is currently valued at around $3.6 billion, and appears headed for a public offering.    

    Here too, the Biden administration is getting involved. In May, the Department of Energy announced $46 million in funding for eight other fusion companies. “We have generated energy by drawing power from the sun above us. Fusion offers the potential to create the power of the sun right here on Earth,” says Granholm.  

    There are several opportunities here for long-term investors. You can pick your way through any number of publicly held companies, including more traditional utilities, or spread your bet across the industry through a handful of exchange-traded funds. The largest of these is the Global X Uranium Fund
    URA,
    +0.78%
    ,
    with about $1.6 billion in assets. It’s up about 9% year-to-date. The VanEck Uranium + Nuclear Energy Fund
    NLR,
    +0.41%

     is up almost 10% and sports a 1.8% dividend yield. These are respectable year-t0-date returns, even though they lag the S&P 500
    SPX,
    +0.32%

    (up close to 19%) by a wide margin. 

    More: Net-zero by 2050: Will it be costly to decarbonize the global economy?

    Also read: Fukushima’s disaster led to a “lost decade” for nuclear markets. Russia, low carbon goals help stage a comeback.

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  • After Microsoft defeat, ‘toothless’ FTC needs to pick better battles if it wants to rein in Big Tech

    After Microsoft defeat, ‘toothless’ FTC needs to pick better battles if it wants to rein in Big Tech

    The U.S. Federal Trade Commission’s defeat as it sought to block Microsoft Corp.’s acquisition of videogame maker Activision Blizzard is yet another setback for an increasingly toothless regulator that needs to pick better battles with Big Tech.

    On Tuesday morning, a federal judge denied the FTC’s injunction that was seeking to block the software giant’s proposed $69 billion acquisition of Activision
    ATVI,
    +10.02%
    ,
    best known for its hit videogame “Call of Duty.” The FTC argued that Microsoft
    MSFT,
    +0.19%

    could withhold “Call of Duty” and other Activision games from rival console platforms such as Sony’s PlayStation, and keep the games on its Xbox only.

    Microsoft, in a show of faith, committed in writing to keep “Call of Duty” on PlayStation on parity with Xbox for 10 years, agreed with Nintendo
    7974,
    +1.10%

    to bring “Call of Duty” to Switch and entered into several pacts to bring Activision content to several cloud gaming services, U.S. District Court Judge Jacqueline Scott Corley noted in her decision.

    “With these 10-year contracts that Microsoft made across the board with so many vendors, Nvidia
    NVDA,
    +0.53%
    ,
    Nintendo and others, 10 years is a really long time, in my opinion,” said Sarah Hindlian-Bowler, an analyst at Macquarie Equity Research, in an interview Tuesday. “It is long enough to cover the arrival and maturity of the cloud gaming market….She understands  that 10 years is a very long long time to make a guarantee of this kind.”

    Also read: Regulators face an antitrust dilemma after Meta launches Threads

    Hindlian-Bowler said that she had been in the minority of Wall Street analysts in not believing the U.S. government would be able to block this deal.

    “The assumption that this somehow decreases the market is going to prove to be wildly incorrect,” she said, adding that she does not believe that the U.K.’s  Competition and Markets Authority will be able to block the deal either.

    The latest upset at the FTC was also not too surprising to other Capitol Hill watchers, especially in the light of other high-profile setbacks by the agency and its once-heralded commissioner, Lina Khan. When she was sworn in as chair of the FTC in mid-2021, Khan was hailed as the sheriff who would rein in Big Tech.

    “It’s hard to say I am surprised by the ruling because Khan has had a fairly unsuccessful track record,” said Owen Tedford, a senior research analyst at Beacon Policy Advisors. “The regulators are pushing the boundaries, deals that previously would have gone unchallenged have now gone challenged. And they are breaking precedent because Khan and company have expressed a dislike of settlements.”

    The FTC’s attempts to sue Meta Platforms Inc.
    META,
    +1.42%

    have had some defeats so far. In February, a California judge denied the FTC’s attempts to block Meta from buying a virtual-reality startup called Within Unlimited. The FTC’s suit to reverse Meta’s acquisitions of WhatsApp and Instagram, filed in 2021, is still plodding along.

    Additionally, the FTC recently filed a suit against Amazon.com Inc.
    AMZN,
    +1.30%
    ,
    alleging that it is too difficult for consumers to cancel their Prime accounts, and the agency is reportedly also mulling another far-reaching suit against Amazon alleging that the e-commerce giant punishes merchants who do not use its logistics services. One analyst has already made a case that the FTC will lose that fight too.

    “I think that the FTC is in need of some change, in need of some refreshing and in need of doing a much better job of picking their battles,” said Hindlian-Bowler. “This does feel toothless, a lot of the fights they are picking are toothless. And unfortunately, they are missing the real battle. They are missing TikTok, they are missing the real fights where we actually have national security at risk.”

    In February, one of the Republican commissioners on the FTC resigned, and wrote an op-ed in the Wall Street Journal accusing Khan of disregarding the rule of law and due process.

    Compared to the European Union, which has had far more success implementing regulation to rein in Big Tech, the U.S. is still much weaker. “The EU seems to be having somewhat more success, levying big fines, getting these companies to change,” said Beacon’s Tedford. “The EU has passed these bills, but the U.S., despite these efforts, has not gotten there and is not going to get there for the next two years.”

    Money spent by Big Tech to lobby Congress in a huge part of the problem, whereas in Europe, “those lawmakers feel less beholden,” he added.

    More than a century ago, President Teddy Roosevelt, known for his “speak softly and carry a big stick” foreign policy, also used his bully pulpit to bust industrial monopolies.

    If Khan and her staff want to follow his lead and rein in Big Tech, they need to start picking their future battles more carefully — and carry bigger sticks.

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  • Why Amazon clicks with shoppers — on Prime Day or any day

    Why Amazon clicks with shoppers — on Prime Day or any day

    Some time ago, I was standing in the vitamin aisle of my local pharmacy, struggling to locate a specific bottle of pills that my doctor had recommended. It was seemingly nowhere to be found. And based on my experience at this particular store, I knew that even if I was able to track down an employee for help, I wasn’t likely to receive much in the way of assistance.

    Then, a solution to my dilemma suddenly dawned on me: Amazon
    AMZN,
    -2.17%

    ! I looked up said bottle, found it within almost no time and ordered it. By the next day, it had arrived. And it probably cost me a couple of dollars less than what I would have spent at the pharmacy — if I had ever located it there.

    Of course, you don’t need to be in search of a hard-to-find item to appreciate the wonders of the online retail giant that Jeff Bezos founded from his garage in 1994. Millions of us are likely to be on the site this week for Amazon’s annual Prime Day event running July 11 and 12 this year, which is a sales extravaganza that one bargain-mad colleague likened to “basically my Super Bowl.” To take advantage of the deals, you’ll naturally have to be an Amazon Prime member, which carries an annual fee of $139. But it’s not like that’s a small number of folks: Amazon says there are now more than 200 million such members worldwide.

    Read more: 5 hacks to get the best deals on Amazon Prime Day — and other summer sales

    And: What not to buy on Amazon Prime Day — and why discounts may be even bigger this year

    I’ve been one of those Prime people for years — if nothing else, for the free two-day shipping it offers. But even before I signed on for Prime, I ordered plenty from Amazon. My purchases over the past decade have ranged from a super-hot horseradish to a pair of armrest slipcovers to a folding exercise bike. Actually, I ordered the three items I just mentioned during the first couple of months of the pandemic, when Amazon became a kind of lifeline given the health risks of shopping in person. But if I go back in time, I find countless purchases for books (Amazon’s original specialty), clothes and margarita mix (there’s a brand I like that I often can’t find at the supermarket).

    At this point, Amazon isn’t just a company. It’s an institution woven into the fabric of our lives.

    And yet, I know there are plenty of people, including some of my friends and relatives, who boycott Amazon. They point to the oft-cited criticisms of the company, such as the treatment of its workers (in 2019, the company’s employees were injured on the job far more than the national average in the warehousing and storage sector) to the broader notion that online retailers hurt the brick-and-mortar stores that have been a traditional bedrock of our communities.

    Criticizing Amazon has become almost a sport unto itself. There are books devoted to the subject, such as Alex MacGillis’ “Fulfillment: Winning and Losing in One-Click America” (ironically, I purchased my copy of it on Amazon). Heck, there’s even a whole Wikipedia page detailing the criticisms.

    I get the issues that many people have. And it’s not like Amazon doesn’t recognize them, either: The company has acknowledged the injury situation, for example, but has also pledged to cut incidents in half by 2025, according to The Wall Street Journal.

    When I reached out to Amazon for this column and cited the various criticisms made of the company, Amazon responded with a statement that, among other things, said it works “hard to be a good neighbor…with communities across the country” and that it creates “good jobs with competitive pay and benefits, including health care from the first day, up to 20 weeks paid parental leave, and full college tuition.” Amazon also cited some of its philanthropic initiatives, including its Amazon Housing Equity Fund, a $2 billion program to build or preserve affordable homes.

    All of this is what you expect from a giant corporation trying to defend itself. I’m not going to get into the weeds about the particular criticisms and whether Amazon makes a successful case for itself or not. But I will say that people vote with their wallets. And they’re reelecting Amazon on a daily, if not hourly, basis with all their purchases.

    People vote with their wallets. And they’re reelecting Amazon on a daily, if not hourly, basis with all their purchases.

    Ultimately, Amazon is about convenience combined with competitive pricing — a formula that’s hard to beat. It launched the era of online retailing, and it has mastered the art of it to this day. When I hear people bemoan the fates of all those brick-and-mortar stores, I admit to thinking to myself, “OK, but do you still want your mail delivered by the Pony Express?” Or, “Do you still want to do your shopping at ye olde general store?”

    The point is that we evolve as a society and new forms of commerce and communication take over. Yes, there are prices to be paid for that. I admit to missing some of the brick-and-mortar stores and chains that were part of my youth — I’m 59 years old, and remember spending practically entire days in neighborhood bookshops long gone. For that matter, I don’t condone bad behavior by large multinational companies; though, like I said, I’ll let others debate some of the specifics regarding Amazon.

    But let’s face it: At this point, Amazon isn’t just a company. It’s an institution woven into the fabric of our lives — and for good reason, I’d argue. I don’t care about shopping on Prime Day, though I know there are a few deals to be had. Mostly, I just increasingly rely on Amazon to make my life easier by selling me any number of things I need on a daily basis, including household staples (yes, you can buy toilet paper on Amazon — the company even sells its own brand). And that’s to say nothing of the services the company offers, including its Prime Video streaming (you can thank Amazon for the truly marvelous — and Emmy-winning — “The Marvelous Mrs. Maisel” series, for example).  

    Could someone come along and invent a better version of Amazon, one that might not be as widely criticized? Perhaps, but that’s probably years, if not centuries, down the road. In the meanwhile, we have the Amazon that we have. Now, let me see if I’m out of toilet paper…

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  • Driverless cars are driving San Francisco crazy — ‘They are not ready for prime time’

    Driverless cars are driving San Francisco crazy — ‘They are not ready for prime time’

    A street was blocked for road work in my San Francisco neighborhood this month, with a worker holding a large STOP sign to direct traffic.

    A white car did as instructed, stopping in the middle of the intersection and blocking traffic at the four way intersection. No one was in the driver’s seat and there were no passengers, nor any training drivers — it was a Cruise driverless car, one of many that have flooded streets in the city in the last two years.

    The public works employee holding the sign was flummoxed as how to get the car to move away. After several minutes, the car slowly backed its way out and crossed the street, but ended up on the wrong side. After another 10 minutes, it managed to pull itself together, get in the right lane and drive down the hill.

    Most San Francisco residents can tell a similar story. The growing driverless car fleets in San Francisco are both a fascinating glimpse of science fiction come to life and a scary example of how Big Tech and auto companies have run roughshod over a congested city, with technology that really isn’t ready yet and little regulation to keep it at bay.

    Now, the problem is coming to a head. San Francisco public officials have had enough, and are speaking out about safety threats ahead of a hearing next month that could let companies expand into larger fleets of fare-generating robotaxis.

    “They are not ready for prime time,” San Francisco Fire Chief Jeanine Nicholson told MarketWatch in an interview.

    “They have run over our hoses, they have blocked our fire engines from going on calls, they have just blocked our vehicles from getting down streets where there is a possible fire. They have just done a multitude of things. We had to break the window of one once because we could not get its attention,” Nicholson said.

    While the average citizen can laugh at the stalled cars in city streets, the vehicles represent a major impediment for first responders. The San Francisco fire chief believes they put the city’s firefighters and residents at risk.

    “Response time matters — a fire can double in size in a minute,” she said.

    Aaron Peskin, president of the city’s Board of Supervisors, said there have been 66 incidents in which driverless cars interfered with first responders this year. But the city has little control over the cars operated by Cruise, a unit of General Motors Co.
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    and Waymo LLC, a subsidiary of Google parent Alphabet Inc.
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    Both companies already have Department of Motor Vehicle permits to deploy a driverless passenger taxi service, a process Peskin described as “Kafka-esque.”

    “You have this thing where the DMV colluded with the industry to redact information that otherwise was public,” he said, referring to the result of a lawsuit Waymo filed last year against the DMV to keep its crash data private, arguing that it held trade secrets. “The funny thing is it’s not like San Francisco is trying to say ‘let’s put the genie back in the bottle.’ We are trying to ensure that our streets are safe. They have become too congested.”

    Both companies are seeking to expand their operations into fare-generating robotaxis in San Francisco, leading to a crucial meeting of California’s Public Utility Commission now slated for July. Waymo is seeking to begin passenger robo-taxi service in the city, while Cruise is seeking to expand its passenger robo-taxi service to the entire city, 24 hours a day, and remove exclusions of steep hills and roundabouts, deploying 100 vehicles. Helpfully for the companies, one PUC commissioner appointed by Gov. Gavin Newsom in 2021 is John Reynolds, who was managing counsel of Cruise until 2019.

    Resistance is building locally and nationally. Cathy Chase, president of Advocates for Highway and Auto Safety, a nonprofit in Washington seeking more regulation and data transparency on autonomous vehicles as part of its mission for more highway and road safety, said it was “illogical and irresponsible at best, and dangerous and deadly at worst, to go forward with any expansion until the significant problems have been resolved.”

    The San Francisco Municipal Transportation Authority (SFMTA) wrote letters of protest to both company’s applications. In May, the SFMTA said that since it wrote its first letter in January, “new hazards from driverless AV operations in San Francisco have been reported, and general public complaints about driverless AV operations have increased significantly.”

    In May, a Waymo vehicle hit and killed a small dog that was off leash, while a test driver was at the wheel, in what the company said was an unavoidable accident. In June, a Cruise vehicle with no driver started to enter a mass shooting scene in the Mission District, and a video on Twitter showed a police officer yelling to get the car removed. Cruise said a lane was open for emergency vehicles and that its car did a U-turn and pulled over. In April, five Waymo cars stopped and blocked traffic in the Balboa Terrace area, in dense fog, a big problem for the vision systems.

    The letters note that both Waymo and Cruise have “committed numerous violations that would preclude any teenager from getting a California’s Driver’s License.” The SFMTA also calls out the PUC for relying on the DMV for approvals, saying that its draft resolution to approve expansions of both companies is an attempt to “deflect rather than exercise the Commission’s duty to protect public safety.”

    Waymo said it has been working with public safety officials and provides them a phone number to reach Waymo directly in the event that one of its cars stop. Cruise said it is proud of its safety record “which is publicly reported and includes millions of miles driven in an extremely complex urban environment.” Both companies have over 30 letters of support for their plans, from a range of groups including many representing the disabled, such as the National Federation of the Blind of California.

    “It’s because of the donations,” Peskin said.

    But the city’s fire chief Nicholson said there needs to be more from the companies than PR statements and lessons on how to stop their vehicles.

    “They really need to sit down with us and figure out a solution,” she said, adding that when the fire department is in the middle of putting out a fire or rescuing victims or dealing with a health emergency, “to have to handle one of their vehicles, it’s just ridiculous.”

    As is the case with many new technologies, history does tend to repeat itself.

    Chris Gerdes, a professor of mechanical engineering at Stanford University and co-director of the Center for Automotive Research at Stanford (CARS) said that as part of work he has been doing with Ford Motor Co.
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    he has been researching ethical and legal issues associated with automated vehicles. These same issues came up when the first automobiles started to arrive on public streets at the turn of the 20th century, clashing with horses and buggies.

    “You go back and look at the debates when the car came out,” Gerdes said, and “there were a lot of debates around should these things be allowed on the road, should they be allowed everywhere? These questions that are coming now were asked about cars back in the day. They can block the road, they can scare horses. Is this something we want to have on the roads? Is it even legal for them to be on the roads?”

    But there is a need to demonstrate that driverless cars are compatible with existing laws and the uses of the roads, he said. “The question becomes at what point do these isolated incidents add to up to danger, to what extent do these compromise the city’s priorities or mobility and traffic flow.” He said they need to compare the autonomous-vehicle data with that from human drivers.

    The SFMTA provided comparison data in its letters of protest. According to the SFMTA, based on data filed with the NHTSA, Cruise’s injury crash rate is estimated to have been 506 injury crashes per 100 million vehicle miles traveled (VMT) between June and November, 2022—approximately 6.3 times the 2021 national average, which is 80 injury crashes per 100 million VMT. Waymo’s injury crash rate is estimated to be 104 injuries per 100 million VMT, approximately 1.3 times the national average, the SFMTA said, when looking at the same period.

    “The collision rate from that small fraction of Cruise driverless operations appears to exceed the collision rate for human drivers,” the SFMTA said in its Cruise letter. For Waymo, the agency said it recommends the commission expand on the findings with a more thorough analysis. “Within the complex driving environment of San Francisco city streets, we must conclude that the technology is still under development and has not reached this goal,” the SFMTA said in its Waymo letter.

    Some in San Francisco are hopeful the delay of the PUC meeting to July 13 is a good sign that the commission is listening to more input from city officials. In its letters, the SFMTA and the San Francisco City Attorney hint at the next step they could take, noting that the PUC “must conduct an environmental review” of Cruise’s and Waymo’s expansion plans, because its actions could cause environmental impacts. What goes unsaid is that the city could seek to compel such a review with a lawsuit.

    Peskin said he has received letters from former employees of the companies saying that autonomous robotaxis are, as the fire chief said, “not ready for prime time.” The workers said they had signed nondisclosure agreements that kept them from saying so publicly. Peskin suggested it could end up like the tobacco industry’s whistleblower case.

    “We would rather work with them than waste taxpayers’ money on lawsuits,” Peskin said, adding that the companies could continue to test their cars with test drivers — an option that is not likely to be acceptable by the companies seeking to make money from their big investment.

    “San Francisco is the perfect place to test them,” he said. “But they still haven’t worked these kinks out.”

    The city of San Francisco is beaten down at the moment, thanks in part to its past close relationship with tech. As the downtown core suffers from the departure of the tech workers that defined it for the past decade, city officials are doing what they can to ensure that the technology some of them created does not become the next hated addition to the city.

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  • Can the coming AI boom help Micron outrun negative China effects?

    Can the coming AI boom help Micron outrun negative China effects?

    Micron Technology Inc. could be approaching a big new semiconductor cycle as it predicts a huge boost from artificial intelligence, but there could be a roadblock in the path.

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    reported a third-quarter loss and a 57% drop in revenue Wednesday, after the chip industry’s oversupply hit the memory-chip maker hard. On the bright side, Micron Chief Executive Sanjay Mehrotra said he believed the memory industry “had passed its trough” and that the company’s margins should improve as the supply-demand balance is gradually restored.

    Another big issue for the stock right now, though, is China’s decision to recommend that “operators of critical information infrastructure in China should stop purchasing Micron products.” Mehrotra told analysts on the company’s conference call that the decision will impact about 50% of its products sold in China.

    “We currently estimate that approximately half of that China-headquartered customer revenue, which equates to a low double-digit percentage of Micron’s worldwide revenue, is at risk of being impacted,” Mehrotra said on the call. “This significant headwind is impacting our outlook and slowing our recovery.”

    More from Therese: AI has given a big boost to stock of this lesser-known Silicon Valley computer maker

    He said Micron will work with its long-term customers who are not impacted by China’s decision, and hopefully will increase its share with those customers.

    On the plus side, Micron expects to see a substantial boost to its memory business as a result of companies gearing up to run generative AI on their own servers or clouds. “Generative AI [is] becoming a big opportunity and we look at it for 2024 as a big year for AI and for memory and storage, and Micron will be well-positioned,” in the data center with its products, Mehrotra said. He added that it is “very, very early innings for AI,” which is really pervasive. “It’s everywhere.”

    Full earnings coverage: Micron CEO calls bottom in memory-chip market, but weak PC, smartphone forecasts cut into expected AI gains

    He said it will be in both cloud and enterprise server applications, and due to confidentiality of data, enterprises will be building their own large language models, adding that the DRAM (dynamic random access memory) content required for AI in servers is driving higher demand for memory and storage in servers. In super cluster configurations, for example, the DRAM content can be as much as 100 times higher.

    Investors appeared to maintain some caution about when the AI impact will kick in, even as some analysts have forecast that AI demand will lead to a general supercycle for many hardware companies. Micron’s shares see-sawed in after-hours trading Wednesday, ending the extended session up about 3%.

    See also: Will generative AI complete the cloud transition? One prominent executive thinks so.

    In a note ahead of the company’s earnings, Raymond James analyst Srini Pajjuri said that the impact from China “should be short-lived given the commodity nature of Micron’s products.”

    Right now, it’s too early to say how long China may be a drag for Micron, but if Mehrotra is right, investors should take heart that the company is going to be another beneficiary of the coming AI boom.

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  • The banking crisis has eased but a credit crunch still threatens the U.S. economy

    The banking crisis has eased but a credit crunch still threatens the U.S. economy

    Financial disruptions in 2008 contributed to the deep economic downturn that came to be known as the Great Recession. Could recent bank failures similarly lead to a broad U.S. recession?

    The $532 billion of assets of the three banks that failed in March and April 2023 exceed the inflation-adjusted value of $526 billion of assets of the 25 banks that failed in 2008. Yet the current situation differs in many ways from the underlying economic circumstances at the outset of the Great Recession.

    Still, that experience, as well as others, show how financial distress can lead to macroeconomic weakness which then contributes to further financial distress, resulting in a downward spiral during which credit becomes tight, investment is curtailed and growth stalls.

    Bank distress can have adverse consequences for borrowers and the broader economy. One source of recent U.S. bank vulnerabilities is the rapid increase in interest rates. Banks take in deposits that can be withdrawn in the short term and use them to make loans and invest in securities at interest rates that are fixed for some time.

    As interest rates rise, the value of banks’ existing portfolio decreases as new investments at higher rates are more attractive. By one estimate, the U.S. banking system’s market value of assets is $2.2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity.

    These book losses are realized if banks have to sell those assets to cover withdrawals from depositors. At the same time banks face challenges in maintaining deposit levels, depositors are less willing to place their money in low-return checking and savings accounts as higher-interest opportunities become increasingly available. 

    Banks that failed in 2023 have had specific weaknesses that made them particularly vulnerable. Silicon Valley Bank (SVB), for example, was particularly exposed to risk from rising interest rates as it had heavily invested in longer-term government bonds which lost market value as interest rates rose and its management failed to hedge against this risk.

    SVB was also especially vulnerable to a run by depositors because over 90% of the value of its deposits exceeded the $250,000 amount guaranteed by the Federal  through the Federal Deposit Insurance Corporation (FDIC). Depositors holding accounts in excess of this guaranteed amount, both individuals and companies (whose accounts were used for making payroll, among other reasons) are only partially protected in case of bank failure so they have an incentive to withdraw funds at the first sign of trouble.

    Moreover, depositors were connected to each other through business and social groups, so news traveled quickly seeding the conditions for a classic bank run at Twitter speed. Signature Bank also had about 90% of its assets uninsured and its portfolio was heavily concentrated in crypto deposits. Both banks grew rapidly with inadequate risk and liquidity management practices in place and, while regulators had raised concerns about these risks, they had not taken more forceful actions to address them, according to a GAO report. Meanwhile, First Republic Bank, catered to wealthy depositors and for this reason also had a high share of uninsured deposits that made it more vulnerable to a bank run as its bond assets lost value amidst rising interest rates.

    Commercial banks reduce lending when their deposits fall or when they otherwise cannot meet regulatory requirements. Deposits represent an important source of banks’ ability to lend. As a bank’s deposits decrease, it has less resources available for lending since other sources of funds are not as easily obtained.

    A bank may also cut lending in an effort to satisfy regulations such as meeting or exceeding the Capital Adequacy Ratio. Regulators require banks to have enough capital on reserve to handle a certain amount of loan losses. The Capital Adequacy Ratio decreases when loans fail and the bank sees its loan loss reserves decline. The bank can then increase its Capital Adequacy Ratio by using funds that would otherwise be devoted to commercial loans or by shifting from loans to other assets that are less risky (such as government securities).

    There is evidence that this effect contributed to the cutback in bank lending in New England in the 1990-1991 U.S. recession when there was a collapse in that region’s real estate market. A bank may choose to reduce lending if there are concerns about solvency even if it is not yet hitting up against the formal capital adequacy ratio requirement. 

    Read: San Francisco at risk of more falling ‘dominos’ as $2.4 billion of office property loans come due through 2024

    A credit crunch occurs when borrowers who would otherwise receive loans are precluded from doing so because of a restriction on the supply of loans by banks. But a reduction in bank lending could also reflect a decrease in borrowers’ demand for loans.

    Researchers have used a variety of methods to identify when there is a credit crunch rather than just a lower demand for loans. For example, a credit crunch could be identified through looking for differential borrowing, employment, and performance patterns by bank-dependent companies as compared to those that have access to financing through bond or equity markets. Bank-dependent companies are typically smaller than those that have access to other types of financing.

    Credit crunches due to bank distress can undermine investment and economic growth. An early and influential analysis by Ben Bernanke, who went on to chair the Federal Reserve and served during the 2008 Great Financial Crisis, analyzed the effects of bank failures during the Great Depression. He found that bank failures had a particularly strong effect in reducing the amount of borrowing by households, farmers, and small businesses in that period, which contributed to the severity and duration of the Great Depression.

    The U.S. banking system has been made more resilient since that time, but there is still evidence of the effect of a credit crunch on regional U.S. economies. The April 2023 IMF Global Financial Stability Report argued that a credit crunch in the United States could reduce lending by 1%, which would lower GDP growth by almost 0.5 percentage points.

    Michael Klein is the executive editor of EconoFact. He is the William L. Clayton Professor of International Economic Affairs at The Fletcher School at Tufts University.

    This commentary was originally published by EconoFact: Banks, Credit Crunches, and the Economy.

    More: Justice Department to weigh updating banking competition rules

    Also read: Senators make headway on clawing back pay from failed banks’ CEOs, as key committee advances bill

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