🚨 Morgan Stanley’s cycle model is flashing “downturn”

Nvidia beat expectations last quarter | Alibaba outdid everyone’s expectations |

Hi Reader, here's what you need to know for February 24th in 3:15 minutes.

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Today's big stories

  1. Chipmaker Nvidia gave an upbeat results update, boosted by AI demand
  2. Here's why the economy could be entering a downturn – Read Now
  3. Alibaba smashed through earnings expectations last quarter

Nviable Results

Nviable Results

What’s Going On Here?

Nvidia wowed investors with some AI-powered quarterly results.

What Does This Mean?

Being a chipmaker is no great shakes these days. After years of pandemic-powered hyper-growth, Nvidia’s gaming business is still taking a hit – and the wider slowdown in the PC market has also been dragging on results. But there’s one thing that stands out as buoying things up for Nvidia right now: artificial intelligence (AI). See, Nvidia’s chips are exactly the kind of high-octane offerings needed to train software and make sense of big data sets – in short, to do what AI services need to do. And with tech companies going big on AI development, Nvidia’s data center segment has kept on growing. So sure, overall revenue was down 21% – but that drop wasn’t as sheer as analysts expected. That, and the firm’s impressive outlook, meant investors initially sent shares up 8%.

Why Should I Care?

The bigger picture: Leaning in.
Nvidia dominates the AI chip space, providing about 80% of the processors used to power the sector. That bodes well for the firm, especially since AI is one of the few things cost-cutting Big Tech is still splashing out on. In fact, analysts are now estimating that AI-based demand could add another $14 billion to the firm’s revenue by 2027, an opportunity that it seems determined to grasp: Nvidia just announced a new service allowing companies to access its processing power through the cloud, instead of having to build their own infrastructure. That bid could speed up the development of AI, and turn into a nice revenue stream before long.

For markets: AI entryway.
With opportunities like that ripe for the picking, it’s no wonder the firm’s stock is up 65% this year – a surge that’s returned Nvidia to the throne as the world’s most valuable chipmaker. And Wednesday’s update only seemed to confirm what some observers already suspected: that Nvidia could be emerging as the single most promising AI play right now.

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Analyst Take

Morgan Stanley’s Cycle Model Is Flashing “Downturn”

Morgan Stanley’s Cycle Model Is Flashing “Downturn”
Photo of Stéphane Renevier

Stéphane Renevier, Analyst

The economy tends to fluctuate in a cyclical pattern, with alternating periods of expansion and contraction. 

So, you’d think it’d be easy to figure out where we are in the cycle and when it’s truly changing. 

But sometimes the economy sends conflicting signals

Luckily, Morgan Stanley’s got a business cycle model for this. But unluckily, it’s sending a clear message: the economy’s just entered the “downturn” phase.

That’s today’s Insight: what Morgan Stanley’s cycle model says now and what it means for your portfolio.

Read or listen to the Insight here


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Alibaba’s Treasure

Alibaba’s Treasure

What’s Going On Here?

Alibaba reported a trove of glittering results on Thursday.

What Does This Mean?

It’s not for nothing that Alibaba’s market value is currently around $600 billion lower than its 2020 peak: since then, the Chinese government’s been on a tech-sector crackdown, and oversaw a few years of economy-hitting lockdowns. But China’s eased up on both those fronts lately, and things are looking up for Alibaba too. Admittedly, the company’s biggest segment, its commerce division, brought in 1% less revenue than last year – but it still managed to better the retail sales dropoff in the country at large last quarter. What’s more, the firm’s international segment actually increased its revenue, keeping overall revenue growth in the green. With some deep cost cuts also helping out last quarter, profit came in 69% higher than at the same time last year – and lovestruck investors sent shares up 6%.

Why Should I Care?

The bigger picture: Overcoming obstacles.
Analysts are betting that Alibaba’s revenue growth will gather momentum as the effects of China’s reopening ripple through the economy – but it’s worth remembering the firm still faces some obstacles. For one, Chinese internet giants like JD.com and Pinduoduo have been upping their competitive efforts ever since the tech crackdown eased up. And for another, getting Alibaba’s cloud segment back on track will be no mean feat. Analysts at Morgan Stanley believe in the company, though – naming it their top pick in the Chinese tech sector for the first time in three years this week.

For markets: Enamored managers.
Fund managers aren’t hesitating to buy into China. A recent survey of some high-rollers – who manage $763 billion in total – showed that buying Chinese stocks was their most popular trade for the first time in the survey’s 38-year history. And they might have still more to rise: a key valuation metric suggests the Chinese stock market’s still cheaper than wider emerging markets, even though its earnings growth forecast is much higher.

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