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Growth Team Weekly Investment Insights
1) The Potato Economic Indicator
One of the latest bottom-up data points indicating consumer weakness comes from one of the world’s largest potato producers, Lamb Weston. The company reported earnings results that were far below investor expectations, and shares fell more than 30%.
The company said demand for french fries from its fast-food chain customers, including McDonald's and Chick-fil-A, was sputtering as inflation-weary consumers dined out less.
Since COVID-19 hit in 2020, food companies and restaurants have been able to boost revenue by pushing through price increases to offset higher labor and operating costs, but that seems to be reaching its limit. For example, after experiencing steady margin expansion over the past few years, McDonald’s is now lowering its menu prices again and is pushing its $5 meal deals.
2) GDP Surprise
Along with the above potato indicator, we have pointed to other evidence that seem to point to consumer struggles: large US banks have highlighted signs of weakness among lower-income consumers on their earnings calls, unemployment has been rising, job openings have been falling and the amount of auto loans moving into delinquency status has been on the rise.
However, these data points contrast sharply with the GDP report released last week. The Bureau of Economic Analysis reported GDP grew at an annual rate of 2.8% in Q2, versus expectations of 2.0% and a Q1 increase of 1.4%. Consumer spending was a key source of strength.
While it is difficult to interpret all of this data, the main takeaway seems to be that a soft-landing scenario remains on the table. There are no clear signs of a looming recession nor clear signs of an overheating economy that could derail the disinflation trend.
3) Tesla Earnings
According to the Financial Times, Tesla reported Q2 net income of $1.47bn, down 45% and well short of analysts’ $1.9bn consensus estimate. Revenues grew by 2% to $25.5bn, but that was driven by a large sum of regulatory credits and strong results in its energy storage business (~100% growth from Q1). Meanwhile, operating expenses soared 39% during the quarter to almost $3bn, partly due to large investments in its artificial intelligence infrastructure, including extending its Texas “gigafactory” to house a cluster of 50,000 supercomputer H100 chips for full self-driving training.
Musk also announced he was postponing the release of Tesla’s first “robotaxi”, and he mentioned that its autonomous humanoid robot (Optimus) was already performing tasks in Tesla factories and limited production of the robots would begin next year.
Overall, investors did not like what they heard, and shares declined by ~10%. In defense of owning the stock, Musk said “the value of Tesla, overwhelmingly, is autonomy,” he said. “If you believe Tesla will solve autonomy you should buy Tesla stock, and all other questions are . . . noise.”
4) The 357-Day Streak Comes to an End
Tesla’s results helped drive the S&P 500® Index’s worst day since December 2022. The index declined 2.3%, breaking a streak of 357 trading days without experiencing a loss of more than 2%. The NASDAQ Composite Index declined 3.6%, its worst day since October 2022.
Big tech stocks drove losses. Along with Tesla, Alphabet shares declined following its earnings results, despite narrowly beating analysts’ revenue forecasts. Advertising revenue from YouTube missed consensus estimates.
5) Data Centers Require as Much Energy as France
Statista recently released a summary of the U.S. Energy Information Administration 2024 electricity report. Among the highlights: global data centers used about as much electricity as France in 2022 and are expected to need twice as much by 2026.
Even though data centers are getting more energy-efficient, greater demand fueled by the AI hype cycle might be too much to be fully mitigated by efficiency gains. This is especially true for big tech companies
Artisan Partners Growth Team manages portfolios that held securities issued by Alphabet as of 6/30/24. Portfolio securities are subject to change.
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