The "Sun Never Sets" on the US Stock Market, AI "Kills" the Cycle

Hey everyone, I'm Dolphin Analyst.

The analysis of the Q1 financial reports for US and Chinese assets has come to a close. Throughout the quarter, the Hong Kong stock market appeared bleak, with the Hang Seng Index falling by 8.1% and the Hang Seng Tech Index dropping by 14.23%. In stark contrast, the US stock market performed relatively well, with the S&P 500 Index and the Nasdaq Index both showing significant gains and even reaching new highs in recent days as of May 26, 2023.

From a macro perspective, the US stock market also faced challenges this quarter, with the banking crisis looming, inflation remaining high, and the debt ceiling reaching a precarious limit. Under these pressures, the slogan of "recession" still lingers, and the external market environment appears to be unstable.

Although these issues have previously dealt a heavy blow to the stock market, this year's market, which still seems to be walking on a tightrope, appears to be increasingly indifferent to risks and has instead seen a resilient reversal.

Today, Dolphin Analyst will review the Q1 financial reports, which are expected to be divided into two parts: the US stock market and the Chinese concept stocks. We will review the market performance of the entire quarter and focus on the US stock market today.

At the same time, we have compiled all the interpretations of this quarter (including company briefings and meeting minutes that have not been published on our public account but only on the Longbridge APP) into a PDF, covering more than 70 companies in over a dozen industries and nearly 100 research reports. All you need to do is add the assistant's WeChat "dolphinR123" and join the Longbridge investment research exchange group. We will release the PDF in the group on June 1st (Thursday) at 3:00 pm.

Note: Partners who have already joined any Longbridge exchange group do not need to join again; there is a screenshot of the collection content at the end of the article.

I. US Macro: Walking a Tightrope with a Smooth Landing

The slogan of "recession" in the US stock market seems to have been shouted for a long time, but from the recent macro data, everything doesn't seem so pessimistic. In this week's strategy weekly report, Dolphin Analyst pointed out that the actual situation of the US economy in April is that with no decrease in income growth rate, the trend of savings rate is declining, and the resonance of the two has actually raised consumption to a higher level. As long as residents' deposits do not flow out of the entire banking system quickly and systematically, the structural transfer of deposits between different banks will only bring about mergers and acquisitions in the banking industry, and there will be no systemic financial risks of bank bankruptcy that will endanger the pace of interest rate cuts.

1. The Fed's interest rate cuts seem to have reached the end, and the actual leakage rate of inflation is not as fast as imagined. Since 2023, the Fed has experienced three interest rate hikes, each of which was 25 basis points. The May FOMC statement even deleted the wording that implied future interest rate hikes. Based on the Fed's various statements, the market generally believes that the Fed's current interest rate hike cycle has come to an end, and the timing and pace of interest rate cuts will become the focus of the next stage of market games.But Dolphin Analyst found after analyzing economic data that although the unadjusted year-on-year data for US CPI in April seemed to fall faster than market expectations, the actual decline was not significant enough. Core CPI has been hovering around 5.5% for four consecutive months, indicating that the US deflation process is not fast enough overall.

1. The banking crisis stumbled towards stability. With the collapse and takeover of the 14th-ranked First Republic Bank in the United States in early May, followed by several regional bank failures, panic continued to spread. Discussions about the US banking crisis have been ongoing, and Dolphin Analyst has been continuously monitoring local liquidity risks and their spillover effects.

The crisis in small and medium-sized banks was originally a familiar scenario in the interest rate hike cycle, and the appearance of such an event was supposed to accelerate the process of draining liquidity and tightening credit, which would naturally lead to the effect of interest rate hikes.

However, because the toxic assets in this cycle are the transfer of assets and liabilities between the major sectors of the economy (transferring leverage from households and businesses to the government) in the form of government bonds. But due to the special nature of government bonds, the Fed's bottoming out + the Treasury's debt ceiling method has already been resolved, and there has not been a systemic spread of risks to important banks in the short term, which means that the Fed does not need to excessively shift its policy goals towards financial stability.

After this operation, the natural explosion of tightening credit in the original interest rate hike was artificially stopped, and instead, the process of tightening credit was prolonged, showing that the resilience of the US economy in this cycle is particularly strong.

1. The debt ceiling is dangerously close to the limit, and the short-term stalemate has been temporarily eased. In the past 70 years, the US debt ceiling has been raised 78 times, and it has now exceeded $31 trillion, reaching their current debt ceiling. Once this red line is reached, it means that the US Treasury's borrowing authorization is exhausted, and unless Congress authorizes it separately, the White House has no right to continue borrowing.

If this matter gets out of control, it is likely to bring a catastrophic disaster to the world economy. After months of stalemate, on May 28th, US President Biden and Speaker of the US House of Representatives McCarthy reached a preliminary agreement to raise the federal government's debt ceiling, which temporarily reduced investors' concerns, and the US stock market subsequently rebounded significantly, and the stalemate was temporarily eased.

1. Individual stocks: The AI era is coming, and technology is the only way to cross the cycle.

Looking at the 17 US stocks covered by Dolphin Analyst this quarter, 9 of them achieved gains during the quarter, and the top performers were:

a. The top performer is the most handsome boy on the ChatGPT wave - NVIDIA, which has risen by as much as 166% since the beginning of the year, riding the wave of AI.

b. Microsoft, the only US stock giant that called for AI+ cloud dual drive in 2014, has also had a beautiful market under the patient and wise persistence of AI; TSMC and Alphabet-C are also obvious beneficiaries.c. Apple suffered a decline in core competitiveness under the camp-style competition after losing its leader HW in the Qualcomm camp, bringing Apple's competitive camp-style upward. At the same time, after the global market steadily entered the 4G era, the consumption upgrade of mobile phones in developing markets other than China, the United States, Europe, Japan, and South Korea is also following the old path, and the structural market share of high-end mobile phones is increasing. Without HW, Apple is almost a king in the high-end market.

d. The rebound of Meta has two main factors: 1) The uncertainty of TikTok's operation brings back Meta's users and advertisers' budget; 2) Zuckerberg's obsession with Apple brings Meta's strategic pressure - not betting on AI, but instead pressing on the metaverse, investing without output, and after the mistake, the callback brings a great degree of cost reduction and efficiency improvement.

Specifically:

1. ChatGPT: 2023, the moment of the AI era iPhone

Since its release earlier this year, ChatGPT has attracted much attention. Although countries have gradually strengthened their regulatory rules for ChatGPT and other tools, concerns about security risks, data privacy, ethics, and other issues have gradually surfaced, but the heat has not only not subsided, and competition among major companies has become more intense.

Microsoft announced the open source of Deep Speed Chat, which helps users train large language models such as ChatGPT, and can increase the training speed by more than 15 times and greatly reduce costs; Alphabet-C played a set of AI combinations at the May I/O conference, officially released a new universal large language model PaLM 2; even Amazon announced the launch of Bedrock generative AI services and its own large language model Titan.

Led by giants, ChatGPT has brought a "rise" to the market. Alphabet-C and Microsoft, which Dolphin Analyst pays close attention to, both achieved better-than-expected results in this quarter.

Microsoft's third-quarter fiscal year 2023 financial report showed that total revenue and operating profit were higher than market expectations. Overall, the most core impression of this quarter's financial report can be summarized as "touching the bottom and rebounding." Whether it is the rebound in revenue growth or the growth of profits, which has stopped falling and turned upward and once again leads revenue growth, it reflects that Microsoft has now emerged from the performance trough of the previous quarter and returned to the trend of marginal improvement. For specific financial report analysis, please see "Can Microsoft, the "giant", take off again with the help of ChatGPT?".

Alphabet-C finally achieved a slightly better-than-expected result after short-term macro pressure and continuously lowering market expectations. The resilience of search revenue and the stability of cloud revenue, as well as the profit increase of advertising business reflected on the book after depreciation adjustment, and the cloud business turned losses into profits.However, speaking only of this financial report, it can only be said to be "better than expected" in terms of market expectations. The reason for the increase in revenue growth rate is due to the weakening of the impact of the high exchange rate of the US dollar. For a detailed interpretation, see "Alphabet-C: Against the trend, better than expected? Joy and worry coexist".

2. Semiconductor: Rising from the ashes

After a period of silence in the US semiconductor industry, with Nvidia's "explosive" financial report landing on May 25th, the US stock chip semiconductor mainline is booming. Not only did Nvidia gap up 26%, but TSMC and AMD also followed suit. With the arrival of the era of artificial intelligence, the performance of the giants has shown a strong expectation. Now the Philadelphia Semiconductor Index has exceeded 3500 points, only 500 points away from the historical high at the beginning of the year, with a magnitude of more than ten points.

Dolphin Analyst's review of Nvidia and TSMC's financial reports in the semiconductor sector:

Nvidia's financial report this quarter performed quite well, with revenue significantly exceeding market expectations and gross margin reaching the upper limit of guidance. The inventory situation that the market was concerned about before has decreased by $550 million this quarter, which also means that the company's previous inventory crisis has been completely resolved. This financial report shows that Nvidia has emerged from the trough. What is even more explosive is the company's guidance, and both revenue and gross margin may reach historic highs. Strong guidance shows the strong demand for current AI and large models, and Nvidia, with the world's strongest computing power, will benefit greatly in the AI wave. For a detailed interpretation of the financial report, see "Explosive Nvidia: The new era of AI has arrived".

TSMC's financial report can only be considered to be basically in line with market expectations, with the main focus on the company's gross margin and business progress. The gross margin has experienced a significant decline due to the impact of price declines and cost increases, but it is better than the market expected overall. According to Dolphin Analyst's judgment, TSMC's performance is unlikely to improve in the first half of the year, and it is necessary to wait until the second half of the year to observe the recovery of downstream demand, new machines from major customers, and the production of 3nm. With the release of inventory pressure in the industry chain, the entire semiconductor industry chain is expected to usher in a comprehensive bottoming opportunity. For a detailed interpretation and analysis of TSMC's financial report, see "TSMC: The strongest king, but also difficult to escape the cyclical ups and downs".

3. New energy: The price war is coming to an end, and the sound of "rising" brings positive signals

After a "price war" led by Tesla, new energy vehicles have competed for market share. Although Tesla has stabilized its sales, its gross margin has seriously collapsed. After entering May, Tesla China has raised prices twice in a row, which may cool down the price war and stimulate demand to rebound.The market generally interprets it as a positive signal, which is conducive to improving consumers' wait-and-see attitude.

In Tesla's Q1 2023 report, it was another quarter where the automotive business fell short of market expectations on a large scale, with prices falling too quickly and gross margins severely lost. Dolphin Analyst believes that when Tesla reaches over 200 yuan, it seems that its own Alpha attractiveness is insufficient, and more is the stock price volatility brought by Beta changes, without the driving force of popular new cars and the investment value brought by Tesla's super drop. For detailed financial report interpretation of Tesla, see "Tesla: Drawing Big Years, Landing Small Years, and "Long-term Accompaniment" is Too Difficult".

1. Technology: Winter is not over yet

According to the global smartphone market data for Q1 2023 released by the market, the market is still declining. Counterpoint data shows that the global smartphone shipments in Q1 2023 fell by 14% year-on-year and 7% month-on-month to 280.2 million units; Canalys data shows that the global smartphone shipments in Q1 2023 fell by 13% to 270 million units. Although the entire industry is looking forward to consumer recovery and demand warming, there is no obvious improvement at present.

Dolphin Analyst pays close attention to Apple and Qualcomm's financial reports. Apple's data performance exceeded market expectations, but Qualcomm's performance was not satisfactory. Apple's financial report performance this time is still good, and both revenue and net profit exceeded market expectations. This is mainly because, in the case of weak demand for electronic products such as mobile phones, the market's expectations for Apple this quarter are not high. However, the company still handed in some bright spots in this financial report, proving that the company has its own alpha. Although the industry is facing headwinds, Apple's financial report this time shows the ability to turn the tide against the wind. For detailed financial report interpretation analysis, see "Apple: Turning the Tide Against the Wind is the True "King of Machines"".

Qualcomm completed the market expectations on the revenue side, but the gross margin and profit were not satisfactory. Since the company's largest revenue comes from the mobile phone business, the global mobile phone shipments in the first quarter fell by double digits, which directly led to the company's performance this quarter not being ideal. Although the company has entered the bottom with the industry, the company's "inaction" may wait longer in the cold winter. Poor performance is not terrible, mainly because hope can be seen, but it has not been seen yet. For detailed financial report interpretation analysis, see "Qualcomm: Chip "Big Brother" Hides Big Thunder, and the Cold Winter Will Last Longer".5. Streaming Media: Macro Downturn, User Growth Becomes a Major Challenge

A few years ago, streaming media experienced explosive growth, but in recent years, it has been trapped in an endless internal competition. From the replacement of Disney's CEO and the decline in stock prices, to Netflix's multiple rounds of layoffs and budget controls, it can be seen that overseas streaming media platforms are not doing well. "Cost reduction" is not the only way out. Increasing membership revenue has become a necessary way to generate revenue, but this may also lead to user loss. In the first quarter, while the revenue of Disney and Netflix both grew, their user base either slowed down or declined.

Disney's second-quarter results for the 2023 fiscal year, both at the group level and in specific business segments, showed varying degrees of improvement in profitability, especially in the streaming media business, which has been a long-term loss. However, surprisingly, the number of streaming media subscribers plummeted. In the long run, we are optimistic about the profit repair space of Disney's business after the new management team's reform and the value return of the century-old entertainment leader, but the short-term pressure on some businesses cannot be underestimated. For a detailed interpretation of Disney's financial report, please see "Disney: Sacrificing Growth to Protect Profits, How to Deal with the Dilemma?".

Although Netflix has made some significant operational moves in the past quarter, such as advertising, account sharing, and significant price cuts in some regions, the actual effect on performance is still lower than expected. The most obvious problem is that user growth is lower than expected, due to the market underestimating the short-term user loss caused by account sharing. For a detailed analysis of the financial report, please see "Freeloaders are Hard to Beat, Mature Netflix Can't 'Fly'".

In the next article, we will review the performance of Chinese concept stocks in the second quarter. Stay tuned for discussion.

Screenshot of Research Reports:

Dolphin Analyst's Review of Q1 and Q2 Financial Reports:

"Q3 Review: Counterattack in Desperate Situation, This is a Show of Chinese Concept Stocks"

"Q2 Review: 'Eagle's Cry' is Loud, Collective Crossing is Difficult"

"Q1 Review: The Arm and Rebirth Under Life and Death"Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure