Gravitas: FedTech Week

February 02, 2024 | Michael Newton


The Newton Group Insights

This was a rather important week. And volatile. But ultimately profitable. On Tuesday - just ahead of the kickoff to Big Tech results - the Nasdaq fell almost 1%. And then on Wednesday, we witnessed 2024’s first flare up of recession worries, but it will certainly not be the last. Markets wanted Chair Powell to confirm a March rate cut as an insurance policy against a downturn, but he declined. But it only took two days for Big Tech to prove markets wrong. Stellar earnings from two members of the so-called Magnificent Seven, Meta Platforms and Amazon, sparked dramatic rallies in after-hours trading, a mirror to Tuesday’s after-hours selloff for Google parent Alphabet and Apple whose China sales slump spooked investors, was a fly in the ointment, but not enough to spoil the excitement. The bottom line is investors are still not prepared to give Magnificent Seven companies the benefit of the doubt. If convinced, however, s applies to Meta and Amazon, there seems to be no limit to the value they will place on them. (Can you imagine how Meta would be doing if people actually liked the company?) And it’s ever clearer that the giant tech companies have taken on true macroeconomic significance. It can’t be often that two of them simultaneously announce quarterly results so strong that investors write up their value by more than $100 billion. Only 2 of the last 8 US recessions were directly caused by overly tight Fed policy, so concerns on this topic are misplaced. Exogenous shocks (oil price spikes, financial market turmoil) are much more likely to cause a downturn than the shape of the Treasury yield curve. Is this the top in the technology boom? Likely not. Simply because not everyone has jumped into the pool yet. This classic quote from Arnold Van Den Berg summarizes it best “You never get a bubble until the public, the brokerage community, the financial institutions, the pension funds, and even the universities are all involved.” They are not yet.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(new) Alphabet (GOOGL-US) We entered shares after they released Q4 earnings and the stock slipped back on the general consensus is that they missed slightly on advertising spend. Revenues were up by 13%, its fastest sales growth since early 2022. Earnings also came in ahead of consensus due to better margins,. The business is in fantastic financial shape. They have net cash of $100 billion and quarterly free cash flow of around $18 billion. Google's subscription roster now brings in $15 billion a year. This includes YouTube Premium and Google One. Based on fundamentals Google remains one of the cheapest tech stocks, trading at 20 times 2024 earnings. New position in Core, ESG+ and US Portfolios.

(-) Apple (AAPL-US) Shares fell after reporting results. Although its revenue grew for the first time in a year, a 13% decline in Chia sales has investors worried about one of the company’s key growth markets. Other than services and iPad revenues, most other metrics topped estimates. Owned in Core, ESG+, and US Portfolios.

(+) Amazon (AMZN-US) reported better-than-expected results, with revenue jumping 14% YoY. Advertising was again a bright spot, topping estimates by $500 million, while Amazon Web Services (AWS) met expectations at $24.2 billion. While CEO Andy Jassy says that generative artificial intelligence (AI) services remain a “relatively small” business, the company believes they could drive “tens of billions” in revenue within the next several years. As a result, it’s looking to integrate AI across all its business lines. One that investors are excited about is a generative AI shopping assistant, Rufus, which could help drive more sales in its core business over time. Owned in Core, ESG+, US and Opportunity Portfolios.

(+) Canadian Pacific Kansas City (CP-T) A solid quarter for CP with earnings in-line, revenue above consensus and an operating ratio that also beat consensus (higher revenue, solid cost control). What really matters for the shares though is guidance, which RBCCM views as slightly lower-than-expected, with a conservative bias. CP is calling for “double-digit” EPS growth in 2024 on the back of low-single-digit volumes, consistent with previous guidance. CP remains a core holding. Owned in Core and ESG+ Portfolios.

(new) Centrus Energy (LEU-US) engages in the supply of nuclear fuel and services for the nuclear power industry. It operates through the following segments: Low-enriched Uranium (LEU) and Technical Solutions. The LEU segment includes various components of nuclear fuel to utilities from its global network of suppliers. The Technical Solutions segment offers advanced engineering, design, and manufacturing services to government and private sector customers, and is deploying advanced nuclear fuel production capabilities to power existing, and next-generation reactors around the world. The company was founded in October 1992 and is headquartered in Bethesda, MD. New position in Opportunity Portfolio.

(+) CGI Inc. (GIB.A-T) A largely in-line quarter, but we were pleasantly surprised by the strength in new bookings ($4.2B vs consensus at $3.88B). Management highlighted that CGI’s end-to-end IT services offerings, particularly those focused on generating cost savings and accelerating modernization, including through AI, drove the bookings growth. This took the book-to-bill ratio to 116.2% and the backlog to 1.8x annual revenue. Owned in ESG+ Portfolio.

(+) Microsoft (MSFT-US) The tech giant beat on top and bottom lines for its fiscal second quarter but issued a lighter-than-expected third-quarter revenue outlook. Owned in Core, ESG+ and US Portfolios.

(~) Roper Technologies (ROP-US) had a terrific 2023, both in terms of its operational execution and its capital deployment strategy. 2023 is highlighted by having 15% total revenue growth, 8% organic revenue growth, 16% EBITDA growth, and a 32% free cash flow margin. They allocated $2.1 billion toward vertical software acquisitions, highlighted by Syntellis Performance Solutions, which was successfully combined with Strata Decision Technology business during the year. Owned in Core, ESG+ and US Portfolios.

(+) Starbucks (SBUX-US) reported softer than expected 1Q24 results. Overall comp sales growth, revenues, and EPS missed consensus estimates, driven by underperformance in both North America and International segments. Management outlined a number of initiatives to drive sales improvement (e.g. new beverage platforms, increased digital/loyalty focus). While the shares may be range-bound near-term, we would continue to own the stock and are comfortable adding at the current level for long-term yield-oriented investors. Owned in Core, ESG+ and US Portfolios.

(+) Stryker (SYK-US) said that its Q4 earnings increased 15.3% to $3.46 per share. That topped Wall Street’s consensus by 19 cents per share. The company had been expecting $3.21 to $3.31 per share. This was a very good quarter for Stryker. Organic sales rose 11.4%, and the company’s operating margin hit 27.2%. For the year, net sales increased 11.1% to $20.5 billion, and EPS grew 13.5% to $10.60 per share. Owned in US Portfolio.

(+) Super Micro (SMCI-US) The longtime Nvidia partner has dramatically raised its fiscal 2024 revenue guidance — offering yet another reason to stick with the leading AI chipmaker. The company hiked its 2024 revenue guidance to between $14.3 billion and $14.7 billion, a monster revision from its $10 billion to $11 billion projection issued in November. Super Micro makes computer servers for data centers, competing with the likes of Dell and Hewlett-Packard Enterprise. It designs servers for Nvidia’s coveted AI chips. It works with Advanced Micro Devices and Intel as well. Owned in Opportunity Portfolio.

(new) Tourmaline Bio (TRML-US) One has to pay attention when an insider buys a significant number of shares. Director Mark McDade acquired 100,000 shares of the company's stock in a transaction dated Monday, January 29th. The stock was bought at an average price of $32.50 per share, with a total value of $3,250,000.00. The company is a late-stage clinical biotechnology company, which engages in the development of medicines for patients with life-altering immune diseases. The firm offers TOUR006, an anti-IL-6 antibody that exhibits differentiated properties including high binding affinity to IL-6 and a naturally long half-life. It also plans to develop TOUR006 in thyroid eye disease and atherosclerotic cardiovascular disease. New Position in Opportunity Portfolio.

Weekend Reading

Canada's housing market outlook: A tale of two halves in 2024 A pivot toward rate cuts mid-year will get the wheels turning faster over the second half or perhaps even sooner. There will be a lot of pent-up demand to satisfy in the market once confidence returns, which could heat things up in a hurry. RBC

Quitting Time Greatness is a function not just of grit, but of talent, luck, where and when you are born … and knowing when to quit. SCOTT GALLOWAY

Andreessen Horowitz's American Dynamism 50 a16z’s annual spotlight on 50 innovative tech companies advancing the national interest — all harness AI to fulfill their missions. The American Dynamism 50 represents the breadth of AI companies furthering American innovation, from aerospace and defense to climate, education, and manufacturing. ANDREESSEN HOROWITZ

ARK Invest's Cathie Woods Big Ideas 2024 A tradition since 2017, Big Ideas offers a comprehensive analysis of technological convergence and its potential to revolutionize industries and economies. ARK INVEST

Financial planning: Nine key areas of focus Important aspects to consider in organizing your financial picture. RBC WEALTH MANAGEMENT

Entering the Labour Market During Recession Can Leave Lasting Scars First jobs are an important first rung of the career ladder. Entering the job market during a period of elevated unemployment can weaken that rung, leaving scars on workers who are younger and inexperienced. TD ECONOMICS


“Nobody goes there anymore. It's too crowded.”

- Yogi Berra