VIDEO: AI Chip and Software Positions Get Good News

In today’s Daily Rundown video, Chris Versace reviews the market’s reaction to the November employment report and discusses why next week's inflation data could force the market to think again about December rate cuts. 

Chris also reviews quarterly results from HP Enterprises HPE and Foxconn’s November revenue report, telling why they are positive for several portfolio positions. 

Chris also explains why the current share price in this holding is a nice entry point for newer members and those who have yet to jump on board. 

Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here Friday, December 6. End of the week and the market is looking to close it out on a positive note, reacting positively to what it saw in the November employment report. But if you saw our alert, you know that when we break down the innards of that November employment report, look at the pace of job creation, what we saw on the wage front, and some other things, that we are not quite in-sync with the market reaction, especially when it comes to the upward climb that the CME FedWatch tool is showing for a December rate cut.

Our thinking is kind of more in line that with the wage inflation moving higher and the other things that we saw this week, particularly with ADP's wage data, what we saw on the November ISM services PMI price paid index, that more likely than not, the Fed is leaning towards a rate cut pause at the December meeting. But we also realize that we do have a couple Fed speakers to go today, so the market and we will be listening to that. But that's ahead of the Fed's blackout period that really starts next week.

And as we think about that happening, we also have to recognize that we have the November CPI and PPI data coming. And just given the data that we've seen, the likelihood that those reports, particularly on a core level, show inflationary mating, potentially sticky or ticking a little higher compared to the most recent months. Continuing that upward trend, or as we're saying, moving in the wrong direction relative to what the Fed wants to see, its likely.

So we're not going to say that the market is getting ahead of itself, but it could very well have to rethink that prospect for a rate cut once we get these additional data points. Near term, are we going to enjoy the continued melt up in the market? We are, but we are mindful that there is increasingly a frothy environment that is going to lead us to tread carefully, be selective in the actions that we make in the very near term with the portfolio, especially as we wait for these upcoming inflation reports and what they may show.

Now, we've also said that we are going to start the process of updating and refreshing the portfolio for the coming quarters. Kind of psychologically, we're coming to the end of 2024, as you know, and will soon be getting 2025. So it's a great time for us to sit back, take stock, no pun intended, of what we have and how we might want to, again, refresh the bullpen and eventually refresh the portfolio for what lies ahead.

I hope you saw our alert yesterday. We kind of ran through what some of the EPS screens kind of kicked out. That's an initial step. We have more work to do not only with those names, but we also want to keep in mind that things do change. Well, what do I mean by this?

Just case in point, Starbucks, yes, they have a new CEO. And Brian Niccol is starting to make the rounds, sharing some of his thoughts about how he can overhaul the company, get it back on track. McDonald's, the CDC ruled this week that it's e.Coli problem is over. So I'm not saying that we're going to be going into Starbucks or going into McDonald's, but those are examples of how we need to understand that the landscape continues to evolve, and we have to keep examining opportunities across a wide spectrum.

So whether it's looking at EPS numbers as an initial screen, the changing landscape, rest-assured that we are taking a hard look at the evolving landscape so we don't miss opportunities for the portfolio as it relates to the coming months ahead. Now, let's turn and check in on some other developments as late. Last night, HP enterprises reported and man, demand for its AI systems remains strong. Latest positive signal as it relates to not only chip demand but ramping AI adoption in the enterprise.

So just some numbers that stood out. Their server revenue at HP enterprises was up 32% year-over-year in the quarter. Their new orders brought their total AI systems backlog to over 3.5 billion. But it was the two other comments on the company's earnings call last night that really stood out.

The first one is that it is beginning to see customers accelerate digital transformation projects in order to execute on AI strategies. This is obviously going to be very good for our shares of ServiceNow and Elastic, but also Microsoft. And then HP Enterprises, excuse me, also said that in-networking it expects demand will recover throughout the year.

Now, that really supports the outlook that Marvell offered earlier this week. And remember, it just kind of fits with our thinking that as AI adoption rises both in the enterprise for the consumer, enterprise networking carrier infrastructure, we're going to see a rebound in capital spending on those areas as network capacity continues to tighten. So again, positive for a number of our positions.

We also had Foxconn report its November revenue. Foxconn, remember, they are also known as Hon Hai. They're a key partner for Apple and others in the smartphone computing space, but also for NVIDIA given its work in servers. So what did Foxconn have to say? Well, its November revenue was up almost 4% on a year-over-year basis, but it was down compared to November.

Now we have to be careful with this because when we trace the data back over the last several years, that's the typical seasonal pattern. We see November revenue decline a little bit or more, depending on the year, compared to October. So I think the smarter way for us to analyze Foxconn's recent revenue stream is to look at October and November combined, both compared to what we saw in the prior quarter and on a year-over-year basis.

And when we do that, we see that Foxconn's October and November-- blah. Excuse me, members-- that Foxconn's October and November revenue, combined, is up about 6% year-over-year. Very nice. But also when we look at the combined October and November revenue compared to the combined July and August revenue-- in other words, the same first two months of the prior quarter-- Foxconn revenue is up a staggering 30% plus.

All right, so what does all this tell us? Well, first and foremost, that the seasonal trend is definitely playing out. But we're also seeing stronger demand on a year-over-year basis. Obviously, that's going to bode extremely well for AI and data center and server. That's very good news for NVIDIA, as well as Marvell. But we're also likely seeing that seasonal strength in the smartphone market.

Remember, that pretty soon Apple is going to publicly release its 18.2 iOS update that will bring Apple intelligence and richer features. So we'll want to watch what we see with Foxconn's revenue in the coming months. But so far, it says that the seasonal ramp in smartphone is good. This supports, for sure, our position in Qualcomm. It's also a very positive development for the shares of Universal Display. And OLED shares have been languishing.

Let's just call it near oversold territory. I think it's a really good risk reward entry point for members that haven't built up their position yet or for newer members. So I would encourage you to take a look at those shares. Remember, we're not only seeing the seasonal strength emerge, but soon we will be digging through press releases and announcements come January with the Consumer Electronics Show or CES 2025.

That tends to be a bonanza of events, and I suspect that we're going to see a number of announcements, whether it's smartphone screens, foldable smartphones, gaming monitors, PCs, notebooks or other applications. Talking about the adoption of organic light emitting diodes, that will be a nice catalyst for our shares of Universal Display. Now, that is our video today.

I'm going to say I wish you all a happy, healthy, wonderful weekend. But I will also say, please be sure to continue to check your emails. Why? Well, we'll have some more comments today, but we're also going to have our weekly roundup. Tomorrow, we'll have our Saturday signals.

And then Sunday, if you look on the larger pro-page, you'll see our Sunday Soup Article with some things that are catching our eye, whether it's articles, streams, or even a new book to read. So be sure to take a look at all of that and I will see you back here on Monday. Again, folks, have a great, great weekend. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio had no positions in any securities mentioned.