🎙️ Corporate Retreat

AI is creating uneven outcomes in markets, even among tech giants who collectively sit at the forefront of such innovation ⚡️

Alphabet (Google’s parent) fell over 9.5% — adding to the Nasdaq 100’s worst day of 2023 — following its earnings report on Tuesday, while Microsoft’s stock moved 3% higher after also reporting earnings.

The differential isn’t totally due to AI, but it’s a factor. Microsoft effectively outlined how AI was driving product sales, while investors worried Google’s AI additions to search tools were ‘nice’ but don’t clearly drive better returns for the company.

💭 More on this below (including a visualization of Microsoft’s earnings breakdown.)

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• What’s behind Microsoft’s earnings beat and guidance

• The corporate retreat from Hong Kong

• Why Bitcoin is on a hot streak

All this, and more, in just 5 minutes to read.

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IN THE NEWS

📈 Microsoft Shares Rise on ‘Strong Execution’ in AI Rollout

Oops! Tech behemoth Microsoft did it again, reporting strong sales in its latest quarter thanks partly to its big bets on generative artificial intelligence and its cloud computing product (Azure).

In short:

• Microsoft posted $56.5 billion in sales last quarter, up 13% year-over-year.
  

• Profit was up to $22.3 billion, up 27%, beating expectations and sending the stock about 3% higher Wednesday. Microsoft (ticker: MSFT) is up about 41% this year.

Patience will be required for Microsoft investors after executives told investors that AI wouldn’t start putting a dent in earnings until sometime next year. But Microsoft is widely seen as a leader in AI thanks to its $13 billion investment in OpenAI, which introduced ChatGPT nearly a year ago.

Redefining Microsoft? Microsoft’s Azure grew 29%, up 26% from the previous quarter, another signal of strength. More than 18,000 companies use Microsoft’s AI-powered services.

• “Azure again took share as organizations took their workloads to our cloud,” CEO Satya Nadella said. “We are using this AI inflection point to redefine our role.”

A league of its own: Forward guidance was optimistic, and Microsoft said it’s investing in building more data centers to support the demand for AI and Azure.

• One analyst told Yahoo, "Microsoft is in a league of its own when it comes to enterprise software.”
  

• Said another: “It’s a ‘flex the muscles’ moment for Microsoft.”

In November, Microsoft will launch a new AI-powered assistant for Microsoft 365 (Word, Excel, etc.) called Copilot.

• One analyst called it “the most anticipated new product we have ever seen released in our long time covering the software industry.”

Why it matters:

Microsoft is one of the first big tech companies to report this earnings season, along with Google parent Alphabet, which reported a miss in its cloud business that overshadowed otherwise strong earnings.

• Though Microsoft largely blew away expectations, it’s not all sunshine and rainbows: The company has undergone several rounds of layoffs this year, including a round in January that cut 10,000 employees.
  

• Questions also remain about whether it can keep growing its cloud and AI businesses at such high rates.

Land of CapEx: Microsoft’s advantage lies in the structure of its business model. It sells software and cloud products to many businesses that already pay for its Word and PowerPoint creations.

• Microsoft had a record $9.9 billion in capital expenditures (CapEx) last quarter. CapEx is the money companies put toward assets like buildings, property, and equipment. That figure could soon push closer to $15 billion.

In AI, Microsoft has taught us that you have to spend a lot of money to make a lot.

Read more

⚠️ The Corporate Retreat From Hong Kong Is Accelerating

International companies have had enough from Hong Kong.

Over the last few years, firms have trickled out of Hong Kong, mostly around concerns that the financial hub has tightened ties to mainland China. What was once a slow trickle, though, has become a broader series of departures involving banks, tech companies, and other firms.

• The number of U.S. companies in the city has dropped four straight years, down to about 1,200 last summer, the fewest in 19 years.
  

• In 2022, mainland Chinese companies with regional headquarters in Hong Kong outnumbered American ones for the first time in more than 30 years.

The city’s transformation: Establishing roots in Hong Kong was once a “fairly risk-free matter,” per one researcher, and it appealed to foreign companies because it was close to China but had a separate legal system with Western-style freedoms.

But “now, it’s not a risk-free place. There are question marks over everything.”

• In recent years Hong Kong has embraced tighter national-security restrictions. There’s also an economic slowdown, which doesn’t help, and growing tension between the U.S. and China.
  

• “Hong Kong is now seen as an extension of China,” said one financial executive who left Hong Kong for Singapore in 2019.

Follow the money: Investors are also bailing on Hong Kong’s stock market, where many big Chinese companies are listed.

• Hong Kong’s benchmark, the Hang Seng Index, has fallen about 13% this year, a much different story from the S&P 500 (+9% YTD) and the bull market in Japan.

Why it matters:

Many companies are choosing to either be in mainland China or Singapore, Hong Kong’s rival as a financial center.

• Further, tensions between China and the U.S. have driven executives to simply stay away and go someplace else.
  

• Strict measures during the pandemic to contain the virus also pushed many companies to leave. They haven’t returned, citing relocation costs.

OK, it’s not all bad: Hong Kong is still attractive for some Western companies thanks to its low taxes, elite infrastructure, and a developed financial market.

For example, global investment banks still have a strong presence there. And China (and Hong Kong) is still a vital market in the global picture.

• But opportunities are shrinking. Goldman Sachs and Morgan Stanley have cut jobs in the city, and assets under management (AUM) for the city’s private banks and wealth managers fell 15% last year, while net fund inflows plummeted 80%.

Read more

MORE HEADLINES

👞 The lab-grown leather industry attracts more investment

💡The very best inventions of 2023

🤳 Dozens of states are suing Meta for getting kids addicted to Instagram

❄️ Forecasts predict an El Niño winter — what does that mean?

🏠 U.S. new home sales surged in September despite high prices and rates

💳 A new bill in Congress is going to “kill” credit card rewards programs

🚀 Bitcoin Is Once Again ‘Going to the Moon’

Bitcoin is so back. At least, that’s what crypto bros are thinking. But it’s not just anons on X/Twitter with NFTs as their profile pic piling into this rally.

Bitcoin spiked above $35,000 on Tuesday and is up over 100% on the year. Possible acceptance into the mainstream finance world is fueling the excitement, with rumors about a pending bitcoin ETF approval spurring speculation.

• After a decade of deliberation, the feeling is very much that the U.S. Securities and Exchange Commission (SEC) will finally authorize an ETF to trade publicly.

What it means: An ETF would make bitcoin investing far more accessible — anyone could use their existing brokerage account to begin trading the digital asset (and not have to use shady exchanges like FTX).

• It would make bitcoin’s pitch to financial advisors more appealing since non-ETF funds like the popular Grayscale Bitcoin Trust trade at substantial discounts to the value of their bitcoin holdings.
  

• And an ETF also enables advisors to allocate funds to bitcoin without directly custodying bitcoin on behalf of clients, which can create technical headaches.

Why it matters:

Bloomberg called Bitcoin’s 2023 a “surprising resurgence” following “a tumultuous 2022 that had some skeptics predicting the demise of digital assets.”

In the courtroom: A victory in federal appeals court on Monday for Grayscale Investments LLC — owner of the Grayscale Bitcoin Trust mentioned above that trades at a discount — is adding to the momentum of ETF approval.

• Grayscale hopes to convert its massive bitcoin trust into an ETF, and the courts acknowledged that the SEC’s original reason for declining the company’s ETF application was flawed.
  

• An ETF conversion would eliminate the trust’s discount to net asset value and likely allow the firm to attract a much larger inflow of investment funds.

There might be geopolitical factors, too, driving bitcoin’s rise:

• One market strategist suggested, “investors are thinking that the increase in geopolitical hotspots in the world is raising the odds crypto will be an important currency quicker than previously thought.”

Read more

QUICK POLL

Yesterday, we asked: Are you more of a “hermit” consumer after the pandemic?

— 62% of you said that the pandemic made you more of a hermit, at least as a consumer

— 38% said “No”

— As one reader put it, “In hermit hibernation mode I made a kid, now I’m forced to be a hermit.” Another reader commented, “Greedflation has caused me to stay home more.”

See you next time!

That's it for today on We Study Markets!

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