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Growth Team Weekly Investment Insights

In this week's blog post we cover a series of economic data (employment, PMI readings and the first Q3 GDP growth estimate), Super Micro Computer's round trip, big tech capex spending, Arm's transition into data centers and rising demand for transformers. 

Did They Forget a Zero?

The October jobs number came in at just 12,000. An extra zero would have been much closer to the consensus expectations of 112.5K, according to FactSet. However, despite this shocking number, markets largely took it in stride since it was explainable due to hurricanes and the ongoing strike at Boeing causing temporary employment disruptions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services Strength Continues

There continues to be a large divergence between the goods and services areas of the economy. On November 1, the Institute of Supply Management reported the October ISM manufacturing index fell further into contractionary territory with a reading of 46.5 (versus a consensus estimate of 47.6).

However, making up for this is strength within services. On November 5, the ISM services index came in at 56, beating the consensus estimate of 53.8 and the prior month's reading of 54.9.

 

 

 

 

 

 

 

 

 

 

 

 

 

Q3 Economic Growth

Overall, the economy has continued its upward trajectory. The initial estimate of third-quarter economic growth was 2.7%, compared to consensus expectations of 2.5%.

 

 

 

 

 

 

 

 

 

 

 

 

The Trump Trade

Adding fuel to market sentiment was the election of Donald Trump, which was seemingly welcomed by markets based on stock market performance. However, a look under the hood showed significant dispersion.

Winners

• From a market cap standpoint, US small caps were the clear winner. Given the concerns around the economic impact of tariffs, the relatively higher percent of US-based revenues of smaller-sized US securities could mean they are relatively better positioned. Regional bank stocks fared particularly well, bolstered by the prospects of less regulation (i.e., lower reserve requirements) and economic strength.

Losers

• On the other side, areas of the equity market that could be in the crosshairs of tariffs fell, such as China’s exporters or companies where tariffs may lead to higher prices and falling demand.
• There was a large dispersion between companies exposed to different sources of energy production. While companies exposed to oil and nuclear energy rallied, those leveraged to wind and solar generation fell due to the prospect of waning regulatory support.

The prospects of a strengthening US economy also meant that interest rates rose and the dollar strengthened against most global currencies. Just one month ago (the yellow bar), the market thought there was a 40% chance of the Fed cutting rates to the 400-425bps range at its December 18 meeting. That probability is now nearly 0%.

 

 

 

 

 

 

 

 

 

The Super Micro Computer Round Trip

We wrote about the Super Micro Computer phenomenon back in February 2024. “At the beginning of 2023, the company had a 0.33% position in the Russell 2000® Growth Index that grew to 1.07% by the end of the year after stellar performance of nearly 250%. The company’s momentum has continued in 2024. It has returned another 182%, grown to a market cap of over $40B and contributed most of the index’s YTD return (as of 2/16/2024).”

If you were an active manager without exposure to Super Micro Computer, it has been a frustrating year.

As you can see in the first chart, the company experienced a meteoric rise in the first few months of the year, moved sideways for a few months and has now fallen all the way to a YTD decline!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

However, as you can see from the second chart, the security’s weighting within the Russell 2000® Growth Index grew from 100bps to 300bps-400bps throughout the first half of the year and subsequently declined to 0bps after it was reconstituted out of the index.

Managers experienced the headwind on the way up but experienced none of the tailwind on the way down.

 

 

 

 

 

 

 

 

 

 

 

 

 

Big Tech Capex Plans Continue to Grow

Now that US mega-cap technology companies have reported their earnings, a key takeaway is that capex trends remain intact. Capital spending is on track to surpass $200bn this year and rise even further in 2025.

Robust capex means the tailwind to companies exposed to the data center supply chain remains intact. However, Wall Street is growing anxious about what sort of returns can be generated from these soaring artificial intelligence (AI) investments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arm’s Transition from Mobile Phones to Data Centers

Speaking of data center spending, this article from the Financial Times provided an interesting overview of the rise of Arm. Some of the highlights are below:

• Nearly 20 years ago, Apple approached Intel about producing a chip that could be used within its mobile phone business. Intel said no, handing Arm a monopoly on the mobile phone market.
• Arm does not currently make its own processors. Instead, it licenses its designs. Its designs have shipped in 300 billion devices.
• Now the company is benefiting from AI growth. Its role in the AI spending spree is principally as an ally to NVIDIA. Arm-based central processing units (CPUs) are being installed alongside NVIDIA’s new Blackwell series of AI processors in data centers.
• Breakneck expansion of these vast server farms is already putting strain on the power grid, boosting demand for Arm’s energy-efficient tech.
  • Goldman Sachs estimated earlier this year that data centers’ global power demands will grow 160% by 2030. The bank’s analysts say data centers will use 8% of US power by 2030, up from 3% in 2022. In Europe, these facilities will need as much energy as Portugal, Greece and the Netherlands combined by the end of this decade.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transformers

On the topic of electricity consumption needed for data centers, the world’s largest producer of transformers has warned its industry is “overwhelmed” and unable to meet exploding demand for grid equipment.

The CEO of Hitachi Energy, a rapidly growing division at the heart of Japan’s third-most valuable public company, said transformer manufacturers would be hard-pressed to boost output quickly enough to meet the demand to upgrade grids, with supplies strained by the growing needs for data centers.

Transformers are vital to change the voltage of electricity to enable power to flow efficiently from power plants to end users. They can be the size of a house, weighing between 400 and 500 tons. Transformers had long been readily available within six to eight months when manufacturers suffered from a glut for years, but demand in the $48bn market has suddenly rocketed. Its size is expected to reach $67bn by 2030, according to estimates by consultancy Rystad Energy. Utilities now have to wait three to four years if they have not reserved one already.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Artisan Growth Team manages portfolios which held securities issued by ARM, Advanced Micro Devices, Apple, Microsoft, Alphabet and Amazon as of 9/30/24.  Portfolio securities are subject to change.