Weekend Update #170

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This was an important week for stocks as it was the final week of key economic data prior to the Federal Reserve’s first S.E.P. release of the new year. Next Wednesday will get an updated outlook on the shape of monterey policy as the committee members publish their estimates for 2024 and beyond. The S&P 500 index traded in a flat range on the week as price inflation, jobs, retail spending and manufacturing data generally implied a more cautious Fed into the next gathering. Both headline inflation measures, CPI and PPI, showed prices advanced faster than economists expected in February. On Tuesday, Headline CPI year-over-year was 3.2%, coming in above the 3.1% estimate and the 3.1% annual increase in January. Despite the consumer inflation reading coming in hot, markets shrugged the data off and closed on Wednesday up over 1.0% to another record. Headline PPI on Thursday, however, also showed an increase of 1.6% annually, while economists forecast a 1.2% increase, above the 0.9% increase in January. Thursday’s Retail Sales showed a modest rebound in consumer spending for the month of February, although the 0.6% increase fell below the 0.8% expected by economists. Combined with lower-than-expected Initial Jobless claims, the data supported at least a moderate pullback in the pace and frequency of rate cut bets. Effectively all the major readouts up until Thursday came in negatively and markets were forced to acquiesce; the S&P index gave up all of the gains from earlier in the week. On Friday, additional pressure was derived from data that pointed to mixed manufacturing production figures and an increasingly more pessimistic consumer.

Equity market directionality continues to rely on the largest companies in the U.S., but signals after Thursday pointed to an opportunity for gains to broaden out to other sectors like energy and materials. At the same time, record levels for the major indices may be pressured if next week’s summary of economic projections indicate any trepidation in the timing of rate cuts. As of now, at least, markets continue to favor a June rate cut.

Company Specific Highlights from the Week:

Boeing Co. continues to lose favorability in the public eye with a criminal investigation opened by the DOJ on Monday. Concerns around quality assurance have put a halt on the number of Jets the company can produce until certain steps are taken, leaving the door wide open for rival Airbus to gobble up contracts.
Consumer staple Dollar General Co. announced that it will be closing as many as 1,000 stores in an effort to ensure profitability.
Intel Corp. is rumored to have lost the additional $2.5 billion in funding from the Pentagon, ahead of the announcement of CHIPS Act funding next week. The extra funding apportioned to support manufacturing activities now rests on the Commerce Department.
Cryptocurrency broker and custodian, Coinbase inched forward through record closes as Bitcoin momentum surpassed $73,000 before slightly correcting at the end of the week.

Weekly Index Performance

S&P 500 5,117.09 -0.13%
DJIA 38,714.77 -0.02%
Nasdaq 15,973.17 -0.70%

Key Economic Readings Next Week

Tuesday March 19th — Housing Starts
Wednesday February 7th — MBA Mortgage Applications & FOMC Policy Decision/SEP
Thursday February 8th — Initial Jobless Claims, S&P US Manufacturing PMI, Leading Index and US Existing Home Sales

Thank you Blue Room Analyst IAN CARTER

Despite the S&P 500 being slightly down for the week, Fund One managed a gain of close to 1%. Performance was helped by a 16% decline in short position Enphase Energy. The manufacturer of solar energy equipment is facing increasing competition from rival, Tesla. Newer holding Sweet Green continued to produce with an 18% gain for the week. These more than offset our biggest detractors for the week, Atai Life Sciences and Ambarella. We feel that biopharmaceutical company Atai is only taking a breather after a tremendous run this year while vision chip-maker Ambarella is still suffering from its recent report of declining revenues. We remain confident that Ambarella’s revenue trajectory will return to growth as the demand for its AI vision processors, used in automotive camera systems for instance, is accelerating.

Thank you Blue Room Investing President JOHN FENLEY

OVERVIEW
United States Producer Price Index YoY and MoM

PPI is a family of data that gauges the costs of production. There are three areas of PPI classification that use the same pool of data from the BLS: industry, commodity and commodity-based final and intermediate demand (FD-ID).

Finished Goods YoY~ Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.

Final Demand ~ PPI for final demand measures the average change in prices received by domestic producers of goods, services and construction sold for personal consumption, capital, investment, government and export.

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Consumer sentiment moved little this month with a 0.4 index point decrease to 76.5 which is well within the margin of error, and thus sentiment has been steady and essentially unchanged since January 2024.

Sentiment remained almost 25% above November 2023 and is currently halfway between the historic low reached during the peak of inflation in June 2022 and pre-pandemic readings.

Small improvements in personal finances were offset by modest declines in expectations for business conditions.

After strong gains between November 2023 and January 2024, consumer views have stabilized into a holding pattern — Consumers perceived few signals that the economy is currently improving or deteriorating. Indeed, many are withholding judgment about the trajectory of the economy, particularly in the long term, pending the results of this November’s election.

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Gena Wang – Barclays – Analyst
Good afternoon, everyone, and welcome to Barclays Global Healthcare Conference. My name is Gena Wang, I cover U.S. small/mid biotech.

It is my great pleasure to introduce our next presenting company, Beam Therapeutics. With us today, we have Pino Ciaramella, President.

Okay. So, maybe, Pino, before I ask specific questions, do you want to give a brief overview?

Giuseppe (Pino) Ciaramella – President
Yes, absolutely. So, first of all, thank you for having us. My name is Pino Ciaramella, I'm President at Beam Therapeutics. I've been with the company pretty much since the beginning, just over six years ago.

Beam Therapeutics is a company that has been formed around the next generation of gene editing technology called base editing. It's a technology originally developed in Professor David Liu's lab at Harvard, now at [the] Broad [Institute of MIT/Harvard], which uses Cas9 protein as part of the editing machinery, but has modified the Cas9 in two important ways. The first one is that it has eliminated the possibility of this Cas9 protein to make double-stranded break, which we believe is quite a situation in which it could cause some unwanted consequences in the cell.

And then also modified it so that attached to this protein, there is an additional human enzyme called deaminase that can actually directly convert a nucleotide to another. We have a C deaminase that converts a C to a T, and an a deaminase converts an A to a G. And of course, if you go on the top strand or the bottom strand, you can actually convert four bases to – with two editors.

The Cas9 protein obviously provides us still the opportunity to use exactly the same guide RNA strategy to be able to deliver that protein in different parts of the genome depending on the guide that you use. So, we can build a lot on what has been learned by the sort of initial first-generation nuclease based editing technologies.

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Globalfoundries has two primary growth markets in high end mobile and automotive. In early 2024, the company won a manufacturing agreement with Infineon, which was an agreement that began in 2014. This means it takes about 10 years to go from contract to product. On automotive, revenue in 2022 was $375 million, in 2023 it was $1.0 billion, and despite the industry wide reversion of growth trends, GFS expects to grow again in 2024.

The company only adds capacity as customers commit, in order to maintain cash flow to shareholders and prevent market degradation on utility charges. Within that, the company’s long term CAPEX goal is 20% of sales. The company forecasts 3 million wafer capacity by the end of 2024.

CEO, Thomas Caulfield feels good about the recovery in the second half after inventories peaked. At the same time inventories are at record highs industrywide. This is a good or bad thing depending on the end market. GFS is hoping that handsets bounce back after two straight down years.

There are concerns that GFS’s 12 nm and above business will lose share over time to sub 12 nm businesses, but Caulfield believes that this will not occur. He attributes higher attention to smaller nodes is due to cyclicality and that 12nm+ end markets will return to growth after a period of mix shift. Another concern is the black box around the business, meaning that it is difficult for a company to switch manufacturers because of GFS’s process, but it is also offsettingly difficult to poach customers from other platforms.

Lastly, China always remains a concern from a competitive standpoint, but Globalfoundries believes that the technology and investment that the company’s made thus far will continue to put them ahead from a product standpoint. Caulfield also added that Chinese companies that want global scale cannot safely manufacture with Chinese fabs due to increasing geopolitical tensions.

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AGCO at 2024 J.P. Morgan Industrials Conference Key Takeaways:

Corn prices trending currently at $415-430 will be modestly supportive of farm income in 2024, which has come down from peaks but is still in line with the 20-year average
The age of fleet in North America is also in line with the historical average
The expectation is North America demand is down ~10%
AGCO is dampening the cyclicality of the industry with the shift to high margin and high growth businesses — Fendt, Precision Ag, and Parts
Pricing for 2024 will be +1.5% with bigger pricing decreases in South America and pricing in excess of 1.5% for North America and Europe
FarmerCore is enabling mobile service for up to 85% of the service work needed on farms
Trimble’s ag business wil be accretive to the business and margins as there is minimal overlap between the two product portfolios — it was “the missing piece” for the future of the platform
AGCO believes the company will continue to outpace industry growth by 4-5% for the next couple of years

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Some investors wonder how Nvidia has been able to manage the supply chain to go from low single digits in data center revenue in one year to almost 20 billion in the next, to which the CFO posits that the strength of the product and the strength of demand allows the company to have the confidence of adding capacity with additional suppliers (outside of TSMC).

CFO, Colette Kress mentions that data center spending has remained constant on and industry basis of about $250 billion per year for 15 years, but recently generative AI and other AI use-cases are driving a step up in investment. She said that this is because everyone wants to be competitive in AI, and that it would be unwise to be left behind as an enterprise.

Because the process to set up accelerated computing systems is so difficult, Nvidia’s partners work with them early on. This means that Nvidia now has a large visibility on the backlog and on future demand for iterative generations. She still says, however, that some customers that want H100s haven’t been able to get them even now, so there may still be demand for H100s as B100s release.

China remains a concern and there doesn’t seem to be a clear path forward to selling into the region.

The overall takeaway is that Nvidia has a large opportunity in not only GPU sales, but also in software services with all of their platforms from Nvidia Clara to Omniverse. We already model a large portion of Nvidia sales coming from software, but there’s still an underlying opportunity for growth through this vector.

Nvidia began leveraging accelerated computing for healthcare in 2008 working in areas of medical imaging, and is adding AI support platforms to its list of services alongside hardware. Mrs. Powell notes that every individual with healthcare or healthcare needs is a patient and a target market. This means that at least 4 billion people globally should theoretically interact with AI in healthcare at some point.

Nvidia Clara, named after Clara Barton, is the overall suite of products and services. It includes Holoscan (medical devices), Monai (medical devices and developer kits for imaging), FLARE (for domain agnostic SDKs for federated learning) BioNeMo (for biomolecular LLM training and deployment in drug discovery), and access to GPU acceleration via Parabricks and Rapids.

Customers of NVIDIA’s healthcare suite include Medtronic, GE Healthcare, Amgen, Moon Surgical, Genentech, Mitsui and others.

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Key Takeaways:

Shopify’s headcount is donw from 14,000 to 8,000, and the company is running very efficiently
The key competitive advantage for Shopify is the mindset of how to deliver products that bring merchants value, with a company full of entrepreneurs
Consumer behavior is shifting to rewarding their favorite brands with purchases, but not indiscriminately purchasing like in the pandemic
Shopify today accounts for 11% of U.S. e-commerce, making it the second largest check out platform after Amazon
Working with Stripe, Adyen, and PayPal, Shopify is looking to renegotiate agreements to gain more margin leverage
Shopify’s checkout combined with Shop Pay converts purchases 50% more than Salesforce
When Shopify onboards enterprise customers, they can bring $1 billion in GMV alone on day 1
Much of the future growth will come from the enterprise side as Shopify has the best product and focus on developing new tools every day to meet the needs of those customers

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Key Takeaways:

With 21 divestitures over the last 4 years, Trimble is focused on simplifying their portfolio
In 2023, the business had $2 billion in ARR growing double digits year-over-year
The Connect & Scale strategy is bringing solutions into unified ecosystems to make it easier for customers to do business with Trimble as they simplify customers’ workflows
Software services recurring revenue is expected to be 75% of sales after the closing of the AGCO JV
Free cash flow conversion will also head toward 1x going forward as Trimble laps transaction fees
2024 is expected to have 100-200 bps of gross margin expansion
The U.S. Infrastructure Bill spending will benefit Trimble but it may be a bit lumpy with the contributions
The real competitive advantage for Trimble will come as contractors are getting more competitive in trying to win deals by implementing more technology and efficiencies — where they will turn to Trimble for solutions

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Gena Wang – Barclays – Analyst
Welcome to Barclays Global Healthcare Conference. My name is Gena Wang. I cover small-mid biotech. It is my great pleasure to introduce our next presenting company, Moderna. With us today, we have Lavina Talukdar, SVP and Head of Investor Relations. So, Lavina, I think we don't need to have an overview. Everyone knows Moderna very well. And I will start with COVID revenue regarding 2024 guidance.

You do give guidance of $4 billion in total revenue, and within that, you have say $1 billion is from COVID-APA, and there are $2 billion plus of US revenue and additional $1 billion is ex-US COVID plus – sorry, the RSV and the international COVID, right? So maybe starting with APA. How confident we are with this $1 billion that will be executed in 2024?

Lavina Talukdar – SVP, Head of Investor Relations
Well, thank you, Gina, for having us. I'm delighted to be here.

And you're right. So we gave guidance for COVID this year of $4 billion in total, and that just includes, as you said, international contracts signed with a number of companies that amount to a billion dollars. And those are signed contracts. So we'll be delivering against those contracts in the second half of this year for that fall season in the Northern Hemisphere, mostly.

The second bucket is a revenue guidance of about $2 billion in the US, and that assumes a similar kind of uptake to what we saw in the 2023 season for us COVID sales. And then that third bucket with additional international COVID sales, plus RSV, makes up the remaining $1 billion. And in that international COVID bucket recently we were having conversations with other countries not included in the EPA that we talked about earlier, and that includes the EU, for instance, who recently opened up a tender process that we said we would be participating in. And that tender process is for up to 36 million doses for up to four years each year. And so that process is still very early currently, but that would be an example of what would go into that bucket. And then also, as you mentioned, whatever our revenues are for the RSV launch later this year.

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Key Takeaways:

2 of 3 doctors plan to increase their frequency of Cologuard ordering based on BLUE-C Cologuard Plus data, out of 340,000+ total ordering providers
The discovery of 5 new highly discriminant multi-omics markers drove the improved sensitivity and specificity vs. the more inefficient inclusion of 11 markers in first-generation Cologuard
Cologuard Plus drives better production and analysis efficiencies with the innovative workflow, so it leads to 40% increased lab capacity vs. first-gen Cologuard
The study included 20,176 participants which found 98 cancers — the population was diverse and well representative of the real-world U.S. population — and Cologuard Plus was compared head-to-head with the FIT test
BLUE-C enrolled patients starting at age 40 to support future USPSTF guideline changes to recommendations for earlier CRC screening
The study also included patients with a first-degree relative with known history of CRC
Together, the 22 million age 40-44 Americans and the 13 million Americans with a family history of colorectal cancer would increase Cologuard Plus’s TAM by $6 billion
Despite the lower prevalence of CRC in age 40-44, the earlier you detect cancer, many more life years are gained vs. catching CRC later in life — which would be the rationale for earlier screening and reimbursement
Cologuard Plus will be the only non-invasive test on the USPSTF’s efficient frontier of life years gained per follow up colonoscopy, including annual FIT tests and blood-based tests at both 1 and 3 year intervals
Precancer detection accounts for 60-80% of life years gained in USPSTF models, so Exact believes Cologuard Plus’s test profile is the only screening test that can support efficient screening as a first-line test
Exact will take the updated data directly to Chief Medical Officers and health systems’ directors in order to educate decision-makers on the increased benefits
The main benefit for physicians is the 30% improvement in false positives, which doctors have been asking for and also increases the rescreening potential of Cologuard Plus
GIs are tracked and measured based on the key quality metric of finding adenomas in colonoscopy — the rate of findings in the follow-up colonoscopy went up from 55% to 70% with Cologuard Plus, and with a positive Cologuard test, that rate of GI findings should go up further based on published literature
Exact is now in the financial position to expand Cologuard internationally, which they have a team devoted to — Over the next 2 years, Exact will strategically roll out in countries where patients can pay out of pocket until European and Asian agencies can support reimbursement

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Key Takeaways:

Gen Z social media users expect different things from the service, where they really want to help open up their world, pursue interest, and see content from everywhere
AI processing recommendations is where Facebook focused a lot of time to be able to sort through billions of pieces of content
Facebook Video accounts for over 50% of time spent on the service, and within that 1/3 is Reels and 2/3 is still the traditional Video product
Reels on Facebook is growing 70% year-over-year and 30% of posts are delivered by the recommendation system, up 2x over the past 2 years
Meta’s recommendations are processing a larger dataset than even large language models because they have data points on every interaction from billions of people every single day
Time spent isn’t the biggest focus of Facebook if they can place ads effectively even with less time on the platform
Meta has a technology roadmap laid out to 2026 for Facebook and gen AI text-to-video will be possible within that timeframe
Costs per click are going down for advertisers using Advantage+ tools as the AI tools are driving great advertising efficiency
Tom Alison is personally most excited about the prospect of Meta’s Ray-Ban smart glasses and the potential applications of augmented reality in the future

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