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Growth Team Weekly Investment Insights

1) Another Disappointing Inflation Data Point

Expectations of a 2024 rate cut were further hampered last week when both the personal consumption expenditures (PCE) and core PCE inflation measures came in higher than expected.

 

 

 

Source: FactSet, US Bureau of Economic Analysis. As of 4/29/2024

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 4/29/2024

Furthermore, the silver lining of economic strength driving sticky inflation took a hit as preliminary GDP growth came in at an annualized pace of 1.6% Q/Q versus expectations of 2.2%. However, within the GDP data, consumer spending continued to look strong.  

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, US Bureau of Economic Analysis. As of 4/29/2024

2) Defense Spending

Our team has been looking at companies in the defense industry as conflicts around the world are leading to sizable upticks in global spending. As this Financial Times article points out, military spending around the world rose almost 7% to a record $2.4tn last year, the steepest annual increase in 15 years. In particular, European defense spending rose 16% to $588bn.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3) Alphabet

Alphabet surged ~10% after reporting strong fundamental results and its first-ever dividend.  

• Revenue rose 15% in the first quarter to $80.5bn from $69.8bn a year ago, beating analysts’ expectations for $79bn.
  • Advertising revenue through search and YouTube, which accounts for more than three-quarters of Google’s top line, grew 13% to $61.7bn, compared with analysts’ consensus forecast for $60.2bn.
• Net income was $23.7bn, up 57% from $15.1bn in the same period a year earlier, beating analysts’ consensus of $19.1bn.
• The first-quarter dividend of $0.20 a share is worth almost $2.5bn.

4) Big Tech Artificial Intelligence (AI) Spending is Accelerating

We have been closely watching for signs of what future datacenter capex may look like for major enterprises and hyperscalers, which was recapped in this Financial Times article. 

• First up was Meta. Shares fell 11% after Mark Zuckerberg said he would spend billions more than planned on AI, warning costs would have to increase “meaningfully before we make much revenue from some of these new products.”
• We also heard similar narratives from both Microsoft and Alphabet.
  • Alphabet’s capital expenditure rose to $12bn—more than the $10bn forecast—and chief financial officer Ruth Porat said the company would spend at least that amount per quarter for the rest of the year. That means spending would rise to at least $48bn this year from $32.3bn in 2023, an increase of almost 50%.
  • Capex at Microsoft similarly rose during the quarter.

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 4/29/2024

We believe these rising capex numbers indicate continued tailwinds for companies selling into different parts of the datacenter supply chain, such as graphic processing units, networking equipment, power management, liquid cooling and electrification.

5) Spotify’s Margin Explosion

Spotify reported net income of €197mn on €3.6bn in revenue in Q1. In the same period a year ago, it lost €225mn on €3bn in revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 4/29/2024

As outlined in this Financial Times article, Spotify has been more focused on cost discipline, including cutting more than 2,000 employees (roughly a quarter of its workforce) last year. This helped Spotify’s gross profit margins in the quarter rise to 27.6%, up from 25.2% a year ago.

However, one negative in the recent report was a disappointing monthly active user number. The total number reached 615 million, lower than the 618 million Spotify had forecast, which it blamed on “moderated marketing activity.” In addition, the company only reached its paying subscriber forecast of 239 million, an increase of just 3 million.

Overall, investors cheered the report and sent Spotify's shares up over 10%. The company’s stock has more than doubled over the past year.

Artisan Partners Growth Team manages portfolios that held securities issued by Alphabet, Microsoft and Spotify as of 3/31/24.  Portfolio securities are subject to change.