To The Moon

Big-Tech’s Performance

Finally Fed pivot came in December FOMC, with treasury yields and dollar index plunge. Rate cut benefits interest-rate-sensitive sectors and innovative stocks. But big techs’ trading are also active, with Apple reaching a new historical high after Microsoft.

As of the close on December 14th, the performance in the past week: $NVIDIA Corp(NVDA)$ +3.76%, followed by a rebound $Tesla Motors(TSLA)$ +3.47%, $Meta Platforms, Inc.(META)$ at +2.01%, $Apple(AAPL)$ at +1.98%, $Amazon.com(AMZN)$ at +0.37%, $Microsoft(MSFT)$ at -1.35%, and $Alphabet(GOOG)$ at -3.64%.

Big-Tech’s Top Newsfeed

- Apple achieved a seven-day consecutive rise to reach a historical high.

- In the dispute between Apple and music streaming company Spotify, Apple is expected to face the impact of an antitrust order from the European Union.

- Apple's Vision Pro is set to be released.

- Cathie Wood increased holdings in Microsoft and Meta stocks.

- Google released the music AI tool MusicFX.

- Shoppers on Pinduoduo's Temu platform spend nearly twice as much time as on major competitors like Amazon.

- Amazon significantly reduced commission fees for apparel sellers.

- Intel released the Gaudi 3 processor, claiming its performance exceeds Nvidia's H100.

- $Taiwan Semiconductor Manufacturing(TSM)$ is about to finalize its future 3nm and 2nm customers, and will begin production of 2nm chips in 2025.

- The US Department of Commerce is discussing sales of AI chips to China with Nvidia.

- Tesla is recalling over 2 million vehicles to fix safety defects in its assisted driving system.

- Tesla's Optimus second-generation robot will be released in December 2023.

- Tesla has been approved to build a super factory in Mexico.

Big-Tech’s Key insights

Big tech companies were the main contributors to the significant index gains in 2023, so with the consistent "turning point" in the interest rate cut cycle in 2024, will big tech companies still have a bright future?

Apple

Bloomberg's consensus forecast: Revenue in 2024 is expected to be $397.3 billion, with a year-on-year growth rate of 3.67%, showing a recovery from the year-on-year decline in 2023; EBIT profit increased by 5.94%, with a profit margin of 30.55%, both reaching new highs.

After all, the current price has also reached a new high. The target price is expected to be $198.9, although this is an average, and many investment banks have set target prices above $200, so it is not ruled out that they will continue to increase.

There are two main drivers supporting the continued large-scale revenue growth in 2024: 1. the new product Vision Pro; 2. service revenue. Geopolitically, despite facing declining demand, the Chinese market remains the most important.

We believe that the price increase of traditional devices may not necessarily offset the decline in demand, especially for Mac, which may be a cyclical issue. The biggest enhancement known for the iPhone 16 is the optical lens, which still makes sales in the short video kingdom of China important. Is the Indian market worth looking forward to? Although Indian Wall Street analysts may be optimistic about this, if we look at the globalization pace of Netflix, the Indian market may not be able to achieve both profitability and incremental growth.

On the other hand, the App Store, accounting for 25%, has grown at a compound annual growth rate of 21% since 2017, and the "Apple tax" share of software companies may be the biggest dividend. But it is uncertain whether this will be subject to more stringent regulation.

Of course, if the improvement of AI products such as Siri exceeds expectations and can quickly bring about qualitative changes to products, that will be another driver.

The growth rate of cash flow is also a key indicator of the company's valuation reasonableness. In order to prove that the $3 trillion valuation is reasonable, Apple must increase its free cash flow at a compound rate of over 5%.

Currently, many investors hold a large amount of Apple stock through retirement accounts, and the market's trading congestion is also high. The re-concentration of index weights may also lead to another round of weight adjustments. At the same time, the rate cut is far less favorable for Apple's "AAA" rated corporate bonds than for other lower-rated bonds, which may cause investors to adjust their risk positions to other growth stocks.

Therefore, under normal circumstances, Apple is more likely to achieve a profit growth rate higher than revenue in 2024, or "profits are more likely to exceed expectations, while revenue may fall short".

Microsoft

Bloomberg's consensus forecast: Revenue in 2024 is expected to be $234.2 billion, with a year-on-year growth rate of 14.8%; EBIT profit increased by 14.5%, with a profit margin of 43.05%, both reaching new highs.

The target price is expected to be $413.10, which has some room compared to the current $365.93.

Unlike Apple, Microsoft's incremental funding in 2023 mainly came from investments in the AI industry, including Cathie Wood, a risk-averse investor who also took positions. In 2024, investors will further consider the ability of existing AI products to land and monetize.

Microsoft has the ability to fully leverage the potential of its commercial cloud and GenAI, and 365 Copilot has also become an important engine for changing the industry. The key to Microsoft's ability to gain a larger market share in the coming year lies in the launch of cloud services and the Azure chip. In the past few quarters, the competition between Azure, AWS, and Google Cloud has been intense, and it now appears that each of them has a great opportunity.

Microsoft is also a cash cow, a key factor supporting its valuation. Due to acquisitions and AI-related expenses, free cash flow in 2023 has declined, but it is expected to rebound to $65.2 billion in 2024. Capital expenditure accounts for an average of 12.8% of revenue, with a return on invested capital (ROIC) of 28.1%. The current high level of capital intensity is a good thing.

The stability of Microsoft's stock price is higher, so the volatility is relatively small. In 2023, with the help of AI, the year-to-date return was just over 54%, but this also means that the magnitude of the pullback will be smaller.

It is expected that in 2024, Microsoft will still be a stabilizing force among major tech companies.

The Big-Tech Portfolio

We combine the seven companies with the highest weight into an investment portfolio, called the "TANMAM" portfolio.

By backtesting this portfolio using equal weights and adjusting the weights quarterly since 2015, the performance has far exceeded the S&P 500, with a total return of 1445.57%, setting a historic high, while the $SPDR S&P 500 ETF Trust(SPY)$ only had a return of 156.61% during the same period, still not reaching a historical high.

YTM return is 104.18%, higher than the 24.81% of SPY. The Sharpe ratio is 26.6, while SPY for the same period is 13.2.

The return of the portfolio this week is 0.9%, while the SPY return is 3%.