Global Market Comments
June 4, 2024
Fiat Lux
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I am constantly looking for “tells” in the market, little nuggets of information that no one else notices, but give me a huge trading advantage.
Well, there is a big one out there right now. The bottom feeders are pouring into San Francisco commercial real estate, taking advantage of valuations that sometimes reach negative numbers. Owners are walking away from buildings, mailing in the keys, and going into default rather than keeping up mortgage payments. What’s worse is refinancing at today’s lofty rates. That’s what you would expect with a 36% vacancy rate.
The message for you traders is loud and clear. You should be picking up the highest quality technology growth stocks on every substantial dip, such as Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Meta (META), and NVIDIA (NVDA). For they all know some things that you don’t. Their businesses are about to triple, if not quadruple over the coming decade thanks to AI. For every abandoned building out there are 200 new AI start-ups taking advantage of today’s bargain basement rates, and ALL of them use the services of the five companies above.
Technology stocks, which now account for an eye-popping 30% of stock market capitalization, will make up more than half of the market within ten years, much of that through stock price appreciation. And they are all racing to lock up the office space with which to do that….now.
San Francisco office rents reached a record pre-pandemic as the continued growth of tech — now turbocharged by nearly $100 billion in new capital raised in a series of initial public offerings — met a severe space crunch.
Asking rents rose to a staggering $84.16 per square foot annually for the newest and highest quality offices in the central business district, and citywide asking rents for such spaces, known as Class A, were up over 9% from the prior year. The citywide office vacancy rate was 5.5% in June, down from 7.4% a year ago.
In addition, local Bay Area home prices could get a turbocharger by the fall, when interest rates are expected to start falling.
San Francisco companies that have gone public continue to grow by leaps and bounds. Pinterest (PINS), Slack (WORK), and Uber (UBER) also signed office leases this year, with room for thousands of new employees.
Tech companies Autodesk (ADSK) and Glassdoor also signed deals at 50 Beale St. in the spring. In a sign of the city’s rapidly changing economy, old-line construction firm Bechtel and Blue Shield, the legacy health insurer, are both moving out of 50 Beale St. Sensor maker Samsara, software firm Workday (WDAY), and Sony’s (SNE) PlayStation video game division also expanded.
Globally, San Francisco has the seventh-highest rents in prime buildings. It’s still behind financial powerhouses Hong Kong, London, New York, Beijing, Tokyo, and New Delhi (San Francisco’s average office rents beat out New York.)
Only a handful of new office projects are being built, and future supply is further constrained by San Francisco’s Proposition M, which limits the amount of office space that can be approved each year. That is creating a steadily worsening structural shortage. Only two large office projects are under construction without tenant commitments.
Suddenly, it’s Not Crowded in San Francisco
It’s hard to imagine that Microsoft’s earnings report on Wednesday will be anything other than remarkable as their growth drivers plow ahead in a digital-first economy.
The only risk that could soften shares following the report is the forward guidance.
Bill Gates asserted that the U.S. economy will come back to “semi-normal” in the next 2 months, and I wouldn’t bet against management putting a positive spin on the path going forward tying the company’s short-term prospects with the comeback of the wider economy. By semi-normal, he means still falling economic growth, just at a slower rate.
There is a high probability that this “semi-normal” state of the economy will last for longer than we think, but even in that scenario, Microsoft will outperform competition widening the gap between the haves and have nots.
Another theme picking up traction is the massive volume of business that will migrate digitally and will want to work with a quality cloud provider who is not their direct competitor Amazon.
What is there to like about Microsoft?
Almost all of it is the short answer.
Momentum in Microsoft’s cloud computing platform is strong and has experienced a surge in usage becoming a lifeline to many companies that have been forced to go all digital.
Even in the cutthroat COVID-19 environment, I still believe Microsoft’s Azure cloud expanded 50% year over year in the past quarter.
Even more successful, Microsoft’s workspace communication product, Teams, has seen a dramatic surge in popularity as co-workers try to solve company problems remotely.
Teams broke a daily record of 2.7 billion meeting minutes, up 200% from 900 million minutes on March 16.
In late March, Teams has 44 million daily active users (DAU), and 93 firms have implemented Microsoft Teams in the Fortune 100.
Another strong data point is Microsoft 365 and Dynamics 365 suite of solutions.
Every company needs these platforms as a utility to boost enterprise productivity.
The subscriber base has benefited from the avalanche of remote workers with their array of tools.
Microsoft’s professional network LinkedIn platform is likely to show outperformance adding to the top line in the quarter to be reported.
Another outstanding segment that can’t be overlooked is gaming, and specifically a meaningful increase in the Xbox Live monthly active users and a boost in the adoption of Game Pass subscriptions.
The only negative segment that is probable will most likely be the hardware segment as a deteriorating trend in PC shipments in the first quarter rears its ugly head because of coronavirus crisis-induced supply constraints.
A demand shock doesn’t help as well.
Consumers just don’t have the cash to upgrade their Microsoft Surface computer-tablet hybrid device.
Total PC shipments in first-quarter 2020 declined 12.3% year over year to 51.6 million units.
Another damper on profitability could come in the form of higher investments in cloud and AI engineering, amid stiff competition from Amazon (AMZN) in the cloud computing vertical and Slack (WORK) in enterprise communication domain.
Even with the global economy coming to a standstill, growing cloud sales by 50% would represent a massive relative victory in the broader scheme of things.
As the economy opens back up, Microsoft is well-positioned to capture much more of the rapid transformation into digital the has been a dramatic side-effect form this pandemic.
The company is already worth over $1.3 trillion and in a new economic world where big tech gets bigger, I see nothing in their path that will slow them down.
The anticipation of the new reality that Microsoft will become more influential post-COVID gives way to a rapid recovery in shares that will only gain steam as the 5G revolution approaches.
Microsoft will easily become a $200 stock and if the U.S. economy opens up sooner than people expect, then nail down this stock for a price of $230 a share by year-end.
I am strongly bullish Microsoft for the rest of 2020.
The second tier of social distancing tech stocks will do well in this brave new world in which digital lives have superseded physical ones.
Sure, most of you already know that Amazon (AMZN), Slack (WORK), Microsoft (MSFT), Zoom Communications (ZM), and Teladoc Health (TDOC) are the crown jewels of current social distancing tech stocks, but there is another group that should also outperform.
Here are 4 that you should take a look at with DocuSign being the best of the bunch:
DocuSign (DOCU)
Teleconferencing and other niches have come front and center and consummating deals have migrated to one place since people cannot physically sign their name from pen to paper.
Electronic signatures were basically a cottage industry when it came out, but it is here to stay and this company has investors buzzing. Although the volume of business agreements being signed globally may temporarily slip, those that are continuing to work are enabled by DocuSign to close agreements without meeting eye to eye.
I expect resiliency in the type of products DocuSign provides and the remote implementation options.
DocuSign is well-positioned within the defensive category of digital transformation spend. Their recent acquisition of Seal Software will help boost DocuSign’s ability to leverage the power of artificial intelligence in the domain of contract analytics.
The opportunity to mitigate time spent on manual workflows through the addition of Seal to the portfolio can bolster the value proposition and drive ROI (return on investment) for customers.
The trajectory of the company was validated by DocuSign’s strong fourth-quarter earnings results with adjusted earnings increasing 12 cents per share which is a 100% increase year over year.
Just as impressive, DocuSign posted quarterly revenue of $274.9 million, an increase of 38%. As the data suggests, the signals all point to this company continuing its outperformance.
The e-document market has been monopolized by DocuSign with competition shut out, and as business goes 100% virtual in the current environment, this should have a positive network effect that will resonate when the world opens back up.
The next 3 stocks aren’t growth companies like DocuSign but are cheap stocks under $10 that might be worth a look.
Sirius XM Holdings (SIRI)
With all the extra time at home, satellite radio has hit the jackpot, making their services much more appealing.
Since Sirius and XM Radio merged in 2008, the combined Sirius XM Holdings has enjoyed a near-monopoly on satellite radio.
Sirius built on that with the 2018 acquisition of Pandora, the music streaming product, helping to fill the sails again with rapid revenue growth; its audio products now reach more than 100 million people.
Sirius' situation is appearing healthy and added a further 1.1 million subscribers in 2019 alone, bringing its total paying subscribers to roughly 30 million. The company's audacious strategy of partnering with auto manufacturers to pre-install SiriusXM in new models should help steadily grow the business.
Zynga (ZNGA)
This video game stock is cheap and could be a beneficiary of the stay at home revolution.
Zynga's portfolio of popular games, combined with hyper-charged growth, makes it one of the best cheap stocks to buy under $10.
Last quarter, the social gaming developer behind franchises like Words With Friends, Zynga Poker, CSR Racing, and FarmVille set new company revenue records up 48%.
While growth is likely to decelerate quickly from such temporary coronavirus catalysts, I expect double-digit revenue growth in 2020.
Still, Zynga is holding up remarkably well, especially in the COVID-19 era, as people increasingly turn to mobile devices for entertainment.
Nokia Corp. (NOK)
Nokia's expected earnings growth is impressive with Wall Street looking for an 8% bump in 2020 and roughly 30% profit growth in 2021.
Cheap stocks to invest in under $10 don't often come in the form of well-oiled global corporations valued at $15 billion.
The Finnish communication equipment telecom is one of the rare exceptions against the rule.
Sales have grown 14% annually for the last five years. Nokia may end up one of the 5G stocks to watch in the coming years because of the stigma of Huawei forcing many Europeans to go with brands closer to home.
Nokia pays a hefty 8% dividend as well and will never need a last-second bailout.
Tech stocks that are begging to be picked up on the back of the coronavirus pandemic are Netflix (NFLX), Zoom Video Communications (ZM), workplace collaboration service Slack Technologies (WORK), and Peloton Interactive (PTON), the spin bike company.
Their short-term outperformance indicates that these stocks work well during mass pandemics shelving most outdoor activity and commerce.
The basket of 3 stocks has easily beat the S&P 500 since the coronavirus emerged as a threat in mid-January.
Home sitting doesn’t generate a net output of business activity unless that job is digital.
The majority of workers still commute in a physical car only to sit in an office, restaurant, or some other type of self-contained space.
That is the underlying problem that has no solution, and any rate cut by the Fed cannot ultimately solve consumers holed up in their house.
If the companies that could opt to go pure digital do take up the option, the number of remote workers would rise and digital products would be the ultimate beneficiary of this trend.
Companies that promote remote working such as Slack (WORK) and Google Hangouts are in pole position to reap the rewards.
These services include video conferencing software, logistical services, administrative services, network security services, ecommerce and any service that aids in generating digital content like Adobe and its umbrella of assets.
The trend was already transforming American culture, but the virus vigorously pulls forward a trend that was already in overdrive.
Enabling information workers to produce outside the traditional office environment is one of the lynchpins of the Silicon Valley model.
Companies will ultimately realize that spending big bucks on business travel to meet face to face for 30 minutes is probably not an optimal allocation of resources.
Business travel is getting cut with a cleaver such as Amazon.com (AMZN) who are forcing employees to avoid all nonessential travel for now, including within the U.S. Much of that travel could be replaced by video calls.
Other companies will get in on the action by directing their employees to work from home in the coming weeks.
Coronavirus mania has reached the U.S. shores with consumers stocking up on all the essentials at the local Costco.
If this gets worse, there is no solution unless a viable medical solution starts improving the health crisis.
There are still only 7 known fatalities from the coronavirus, all in the state of Washington, and limiting that number is critical to the health of the tech market.
Another company is Okta (OKTA), a leader in authentication security cloud software.
The company’s offering allows employees to use corporate applications on-site and remotely and protecting their access to their digital services is just as important as the work itself.
As consumer spurn movie theaters, concerts, and gyms, the entertainment space will give way to digital entertainment that includes Netflix (NFLX) and Roku (ROKU).
Roku is a great place to hide out in the world where Covid-19 meets daily consumers in the U.S. in a more meaningful way during 2020.
Netflix is a company that has defied gravity this year by bull-rushing its way through the competition and proving there is space for everyone.
The increase in incremental demand for digital content will only help Netflix claim a bigger part of the pie.
We can also lump the videogame industry into this cohort such as Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO).
They have faced serious headwinds from gaming phenomenon Fortnite, but prolonged home sitting will even boost their shares.
The spine of digital services will receive a boost as well from the usual cast of characters such as Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB).
As investors wait for the climax of the coronavirus and the Central Bank has indicated that they are open to more accommodative policy, we could be ripe for more volatility.
Chinese coronavirus cases have started to taper off and if the rest of the world trends in a similar fashion, this virus scare could be in the history books in 2-3 months.
However, the trajectory of the virus is still a massive unknown in the U.S. and winning the health battle is the only panacea to this dilemma.
Global Market Comments
July 16, 2019
Fiat Lux
Featured Trade:
(THE BIGGEST TELL IN THE MARKET RIGHT NOW),
(GOOGL), (FRC), (PINS), (WORK), (UBER),
(ADSK), (WDAY), (SNE), (NVDA), (MSFT),
(POPULATION BOMB ECHOES),
(CORN), (WEAT), (SOYB), (DBA), (MOS)
