ThePeachPit Vol. XXXIII: Shifting Winds

If you cannot hit the target, move the target. A 2% inflation target has been the norm for ages. Even economics textbooks verify this target inflation rate, suggesting that it may be the optimal growth rate and that it should theoretically mirror GDP growth. The target appears to have shifted up and out, moving closer to 2.8-3% over the next 5 years.

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Though inflation appears to have been beaten down, I have reason to believe we aren’t out of the woods quite yet. The International Longshoremen’s Association agreed to keep ports open until January 15, 2025, while accepting a 62% pay raise. The biggest hang-up by the union is the fear of automated processes. In my view, automating port operations will inevitably be the likely scenario, regardless of what the ultimate deal may look like. There is little to no reason as to why this bottleneck shouldn’t be. The only factor that comes to mind is the intermittent outages at the Port of Los Angeles. The port itself has experienced 9 power outages due to equipment failure, likely the result of dependence on renewable energy sources and electrification of equipment. Combining the two sets the port up for massive failures.

In other union-related news, the Wall Street Journal reported on Monday that union workers are defying union heads’ deals and are now revolting internally. This may place Boeing (BA), AT&T (T), and Textron (TXT) in a sticky situation. Perhaps the tight labor market is to blame for such energized strikes across the nation.

Though I support fair pay for employees, I do not support a unilateral package for all employees. To overgeneralize, different employees perform at different levels. Union contracts do nothing but normalize the pay rate and guarantee the poorest of the poor performers receive equal pay to the star performers of the labor force. My mantra is that if you want better pay, do a better job. Having talked with peers working in more corporate environments, this mantra doesn’t necessarily hold true as non-sales-oriented jobs do not compensate for efficiency. From what I understand, employees are compensated to execute the minimum requirements within the expected time frame. Perhaps Elon Musk needs to pull forward the development process of Optimus. For $20-30k and no health benefits, humanoid robots can replace the vast majority of the physical labor force.

Last week’s CPI print suggests that the annualized CPI reading came in at 2.4% with energy leading as the biggest decliner in terms of price. Food in aggregate increased by 2.3% on a year-over-year basis. Vehicle prices continue to experience significant downward pressure with the used vehicle market declining -5.1% from the previous year’s prices. Though vehicle prices appear to be falling in reverse, I believe this is more of a normalization to historical trends as opposed to a real decline in prices. Given the loosening of the automotive supply chains, prices are set to back up into a more normalized range.

Despite this factor, I have reason to believe the automotive market may be facing a challenging year going forward as a result of stringent emissions policies set forth. One could argue that the US government and EU policy relating to emissions can and will cripple the automotive industry, pricing out domestic production while taxing Chinese-made EVs to make domestic EV markets all but nil. This very conundrum is one Tesla (TSLA) is competing with on a more effective basis when compared to traditional OEMs. Somehow, Tesla can sell EVs at an 18.5% gross profit. Traditional OEMs continue to burn cash beyond the vehicles’ values as battery materials eat away at any hope of a margin.

Consumer preferences have and will be a major factor when domestic OEMs reenter the market with the next generation of EVs. Consumer preferences lean towards CUVs and trucks. The hope for a profitable electric vehicle depends on the sedan, a model that fell out of favor years ago. Perhaps it’s time to bring back risqué car commercials to make sedans appealing again; or perhaps it’s time to make the next James Bond drive a Ford Focus.

Stocks To Trade

Tesla (NASDAQ: TSLA)

Tesla Will Likely Unveil More Humanoid Capabilities At Robotaxi Day

Tesla unveiled the next step in the company’s progress towards complete autonomy, ushering in a new era of humanoid robots and self-driving robotaxis. In an event that could possibly resemble a prequel to Will Smith’s feature film iRobot, Elon Musk presented the official lineup of Optimus robots that resemble a blank face with a robotic white body as well as the robotaxi & vans that will autonomously transport residents without the need of a personal vehicle, let alone a driver. The vehicles presented were a two-seater taxi and a multi-row van that will both be called through the Tesla app.

Investors weren’t too pleased with the production, sending shares down ~12%. I’m not sure what groundbreaking feature investors were looking for that pushed Tesla stock down to levels last seen on September 9, 2024; much of the information presented during the event has been discussed in previous calls. The only difference is that we now have an image to match the description. I put out some pre-event commentary that more or less speculated on what inevitably occurred.

One factor that should excite investors isn’t necessarily the vehicles or the robotics. Tesla is dishing out some serious cash to Nvidia to build a 50,000 GPU data center at its Texas gigafactory. Tesla is also developing its AI5 chip that will essentially compete with the B100 for internal use, similar to what Google, Amazon, and Microsoft are leveraging in their own respective data centers. The purpose-built chip can optimize power efficiency and feature better performance when compared to a more generally designed GPU that Nvidia has to offer.

Alphabet Inc. (NASDAQ: GOOG)

Google Needs To Scale Cloud Or Fall Behind

Speaking of custom chips, Alphabet is making strides to compete with the big boys as the hyperscaler falls short of both scale and margins. Google’s technology stack primarily caters to AI developers, creating a relatively niche market that is expected to grow exponentially throughout the duration of the decade. One area Google falls short in is the lack of a strong presence in business applications that makes the global presence more useful for enterprises. A few aspects that can be seen as strengths for Google is Vertex AI, Google’s training and inferencing platform specific to AI applications and last year’s acquisition of Mandiant, the clean-up crew for all major cybersecurity breaches.

Though I didn’t necessarily provide a bullish rating for Google, I do believe that the firm has one catalyst that can potentially launch the stock’s valuation to meet its peers. Google’s cloud platform margins are significantly slacking, falling far behind Microsoft’s and Amazon’s profitability margins. If Google can improve this growing segment’s profitability, I anticipate the original search firm will realize strong investor sentiment and realize some level of mean reversion to the peer average of 21x EV/EBITDA.

Hewlett Packard Enterprise Company (NYSE: HPE)

HPE Laid Out Its Integrated Tech Stack At AI Day

I was asked to provide some commentary for Seeking Alpha’s newsletter covering HPE’s AI Day and decided to update my model and guidance as a result. You can read Seeking Alpha’s newsletter with the link below:

HP Enterprise's AI day draws mixed reaction from investors, analysts

HPE laid out the groundwork for the next round of investing across enterprises and hyperscalers for their AI factories. This includes HPE’s fanless direct liquid cooling system, AI network fabric, and tying everything together, the latest and greatest update to HPE’s Green Lake private data center offering. HPE primarily partners with Nvidia for H100 GPUs for both infrastructure sold and infrastructure used in its tech stack at its private data center, providing customers a modular out-of-the-box, plug-and-play offering for AI applications development. For those still seeking to invest in the AI race but are uncomfortable with investing in high premium companies, HPE is the value strategy at large that can offer investors a solid return without all the volatility and noise as experienced with other AI plays.

Trump Media & Technology Group Corp. (NASDAQ: DJT)

DJT May Hold Some Upside Risk Going Into The Election

As a disclaimer, covering the stock should not be taken as an indication of my political beliefs.

DJT very well could be the ultimate presidential election play for those seeking some high-throttle risk. The stock has experienced significant volatility after de-SPACing and is one of the primary vehicles for retail traders as it pertains to the election. I personally wouldn’t put money into this stock myself given the fundamental headwinds posed as a social media platform.