BCI Worldwide Flexible Fund

Gearing Up – A Semiconductor Story

Semiconductors or chips regulate electrical flow in electronic devices. They are vital for various products like computers, artificial intelligence (AI) systems, smartphones, automotive vehicles, and military equipment. Taiwan Semiconductor Manufacturing Company (TSMC) manufactures roughly 90% of the world’s cutting-edge chips, while ASML crafts lithography machinery essential for making these chips smaller and more energy-efficient.

Last week, TSMC and ASML released their Q1 2024 results. TSMC saw a 16.5% increase in revenue to NT$592 billion (with an average USD/NTD exchange rate of 31.4) compared to the same quarter last year. While ASML reported €5.29 billion in revenue for the quarter, marking a 21.5% decline from the same period last year. Due to the recent interest around AI, high performance computing chips accounted for 46% of TSMC’s revenue for the quarter.

ASML believes that the semiconductor industry is going to go through a transitory year this year. Orders for its machinery for Q1 2024 dipped nearly 4% compared to the same quarter last year and decreased by 60% compared to the previous quarter. Some of ASML’s latest extreme ultraviolet (EUV) machines go for around €350 million each. Consequently, manufacturers must be certain about their timing for acquiring lithography equipment. ASML anticipates its revenue for the year to remain consistent with 2023 levels. Subsequently, it’s positioning itself to escalate production for 2025.

The US Chips Act aims to encourage semiconductor manufacturers to establish plants within the United States. TSMC and Samsung have each secured approximately $6.5 billion in grants and subsidies to construct facilities in the US. ASML stands to benefit significantly from the Chips Act, given its near monopoly on the sale of EUV lithography machinery worldwide. However, due to the scale of these projects, there is an elevated risk of delays. Consequently, ASML faces the challenge of potentially building up inventory without the ability to deliver products, whilst these new facilities are being constructed. This could impact their near-term financial performance. However, when these new facilities are ready, they would need to be furbished with ASML’s lithography machines, which will likely be very positive for ASML.

The demand for more and more computing power to process the growing demand for AI, smartphones, EV’s and larger and more complex cloud service providers; is adding strain to energy grids. This is driving both the design and manufacture of more energy efficient semiconductors, as well as alternative energy solutions.

ASML is held in the Lunar BCI Worldwide Flexible Fund and by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

203.47

This Week

199.38

% Change YTD

5.87%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

75 312

This Week

73 364

% Change YTD

-4.59%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

16 175

This Week

15 282

% Change YTD

1.80%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 123

This Week

4 967

% Change YTD

4.14%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.84

This Week

19.14

% Change YTD

4.59%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.09

This Week

20.41

% Change YTD

1.19%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

90.18

This Week

87.14

% Change YTD

13.21%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Disclosures
Lunar Capital (Pty) Ltd is a registered Financial Services Provider. FSP (46567)
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet can be read here.
This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.

Gearing Up – A Semiconductor Story Read More »

JP Morgan and the Fortress Balance Sheet

Weekly Stocktake / By VCS Agency

Last week, JP Morgan released its Q1 2024 results. The quarterly net revenue increased to $41.9 billion, marking a 9% increase from the preceding quarter. Net income also saw a significant increase, reaching $13.4 billion, up 44% from the previous quarter. Provisions for credit losses witnessed a decline of 32%, settling at $1.9 billion. JP Morgan upheld a steady return on equity of 17%.

Despite the increase in revenue, Net Interest Income (NII) declined 4% due to deposit margin compression and the overall amount of deposits decreasing. This was mainly seen in the Consumer and Community Banking (CCB) section of JP Morgan. However, due to the rise in the US equities market last year, CCB investment assets were up 25%.

JP Morgan expressed that despite the strong economic indicators, such as the strong unemployment rate and wages in the US, there is still a lot of uncertainty in the market such as the ongoing geopolitical tensions and a large number of persistent inflationary pressures. JP Morgan also highlighted that the bank has not experienced this level of quantitative tightening at this scale before. The effects are likely only going to be seen over the long term. These comments likely caused the stock price to slide by just over 6% following the results disclosure.

JP Morgan benefitted from the recent regional banking crisis in the US when they purchased First Republic. This contributed to their growth in assets, revenues, and profits. JP Morgan prides itself on its “fortress balance sheet”; which in turn allows it to take advantage of large deals when they become available.

JP Morgan is held in the Lunar BCI Worldwide Flexible Fund and by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

200.74

This Week

203.47

% Change YTD

8.04%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

74 775

This Week

75 312

% Change YTD

-2.06%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

16 250

This Week

16 175

% Change YTD

7.75%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 204

This Week

5 123

% Change YTD

7.41%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.70

This Week

18.84

% Change YTD

2.95%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.27

This Week

20.09

% Change YTD

-0.40%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

90.87

This Week

90.18

% Change YTD

17.16%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

JP Morgan and the Fortress Balance Sheet Read More »

Balancing the Scale

Weekly Stocktake / By VCS Agency

When companies grow to become large/mega cap businesses, they face both challenges and opportunities when they try to grow further. The specific circumstances for each company’s position significantly influences the potential or the impediments for continued expansion. Below are a few examples of some of the challenges and opportunities these companies may face.

The Challenges

Acquisitions
In acquisitions, large companies face a limited pool of targets due to fewer medium and large-sized companies compared to the number of small companies. Factors like compatibility and pricing reduce this pool further. With greater financial resources, acquiring companies often pay a premium for these companies to entice them to join. This trend is evident across numerous instances. For instance, in 2014, Facebook acquired WhatsApp for $19 billion. A decade later, WhatsApp boasts over 2 billion users but generates minimal revenue, estimated at around $1.2 billion for the previous year. Warren Buffett also regularly advises the lack of potential acquisition targets that Berkshire Hathaway can make to make a meaningful difference in their portfolio.

Product line and different markets
As companies achieve significant market share in different markets, introducing new products or expanding into new markets may not provide the same revenue and profit increases they previously enjoyed. Nike is currently experiencing this. Despite Nike rolling out numerous new products Nike’s revenue has had a compound annual growth rate of 7.2% for the last 2 fiscal years.

Corporate Constraints
As companies grow, their delivery platforms and teams need to be expanded to support their enlarged customer base and higher volumes. This may have been achieved with previous generation technologies and smaller more agile and flexible teams. With a larger client base and higher volumes and a complex platform, they may not be as agile as they previously were, increasing the time and costs of rolling out new products, services, and features; and allowing smaller, more nimble competitors to steal a march on them. Google is experiencing this with the roll-out of their AI tools, for example.

The Opportunities

Platforms
Businesses built as platforms, i.e. where multiple services are provided to clients, and new products or services can be added very quickly, however have an advantage despite their large/mega size. As platform businesses Microsoft, for example can expand by adding new features and services to their platform and further entrench existing and new customers into their ecosystem. Microsoft’s 365 product suite facilitates bundling various products, making it challenging for customers to switch once integrated. Moreover, they swiftly deploy new products to a vast customer base. For instance, between 2017 and 2023, the number of Microsoft Teams users surged from 2 million to 320 million, solidifying its leadership in virtual meetings arena.

There are many opportunities for companies to grow, but as they keep on growing there are certain challenges that they face. Some companies have a better ability to deal with these challenges than others.

Berkshire Hathaway and Microsoft are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

205.72

This Week

200.74

% Change YTD

6.59%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

74 536

This Week

74 775

% Change YTD

-2.75%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

16 379

This Week

16 250

% Change YTD

8.25%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 254

This Week

5 204

% Change YTD

9.11%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.85

This Week

18.70

% Change YTD

2.19%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.35

This Week

20.27

% Change YTD

0.50%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

86.97

This Week

90.87

% Change YTD

18.06%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Balancing the Scale Read More »

Making Lululemon-ade

Weekly Stocktake / By VCS Agency

Last week, Lululemon, the Vancouver based athleisure company, released their Q4 2023 results. The yearly revenue increased by 18.5% to $9.6 billion, accompanied by an 81% increase in Lululemon’s net income to $1.5 billion. This surge in net income can be attributed mainly to a notable decrease in the 2023 impairment charge. In the preceding year, Lululemon faced an impairment charge of $407 million, whereas this year’s charge stands at $74 million. 2022’s impairment charge primarily comprises of the impairment of its investment in the home-workout product-range: “Mirror.”

The Americas segment, making up 79% of total sales, experienced a modest revenue increase of nearly 12%. In contrast, the international segment, representing the remaining 21% of sales, witnessed a robust 54% revenue surge. During the earnings call, management articulated their aspiration for the international segment to contribute 50% of sales in the future. They acknowledged a deceleration in the demand growth rate for their products in the Americas’ market. Consequently, they adjusted their annual sales growth projection to around the mid-teens. This adjustment led to a 15% decline in Lululemon’s share price on the day.

Lululemon is investing for growth, primarily targeting the expansion of its brand visibility and bolstering its presence in international markets, particularly in China, where demand for its products has been substantial. To enhance brand recognition, the company is focusing on sponsoring athletes and teams. Notably, they are backing the Canadian national team for the 2024 Summer Olympics. Lululemon intends to address underrepresented markets by opening around 10 stores in the US and 30 stores in other parts of the world.

Lululemon contends with lots of competition in the athleisure sector, including major players like Nike, as well as various niche athleisure brands. Lululemon is a luxury brand within this competitive landscape. Amidst heightened global economic uncertainty, consumers tend to slow down their spending on luxury goods.

Lululemon is held in the Lunar BCI Worldwide Flexible Fund. It is also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

204.52

This Week

207.32

% Change YTD

10.08%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

72 991

This Week

73 254

% Change YTD

-4.73%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

15 973

This Week

16 429

% Change YTD

9.44%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 117

This Week

5 234

% Change YTD

9.74%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

20.44

This Week

19.00

% Change YTD

3.83%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

85.27

This Week

20.62

% Change YTD

2.23%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

81.82

This Week

85.58

% Change YTD

11.19%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Making Lululemon-ade Read More »

Wal-smart

Weekly Stocktake / By VCS Agency

Over the last few decades, Walmart has become the largest retailer in the world. Back in 1962, Sam Walton opened the first Walmart store in Arkansas. The cornerstone of the company’s strategy was delivering a diverse array of products at consistently low prices. With a keen eye on expansion, Walmart targeted the underserved rural regions of America. Today, Walmart operates over 10,000 stores worldwide.

Walmart is able to offer “everyday low prices” by focusing on the following:

Economies of scale: Walmart leverages its immense purchasing power to secure bulk deals with suppliers, enabling them to extend significant cost savings to their customers.
Supply chains: Using AI technology, Walmart has refined its supply chain operations to optimize inventory management and streamline product distribution.
Variety of products: From groceries to appliances, Walmart boasts a diverse product range, establishing itself as a go-to destination for consumers seeking a wide array of goods. By selling higher-margin items like appliances, Walmart can balance out the sale of lower-margin products while ensuring profitability.
Omnichannel Strategy: Walmart has recently enhanced its online shopping platform, enhancing customer convenience. Additionally, the company has expanded its advertising business, enabling suppliers to directly target consumers.
Membership: Walmart offers a membership program designed to further incentivize customer loyalty. By participating in the program, customers gain access to exclusive benefits and capitalize on the company’s competitive pricing.

A few weeks ago, Walmart released their Q4 2024 results. Revenues increased 5.7% to $173bn for the quarter. While operating income increased by 30.45% to $7.3bn. Walmart, along with other retailers are operationally leveraged. If their revenue increases at a higher rate than their operating costs, their operating income grows at a higher rate than their revenue. The converse is true if their operating expenses grow at a higher rate than their revenue.

Walmart is held in the Lunar BCI Worldwide Flexible Fund. It is also held by Lunar Capital’s Offshore Portfolio clients

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

206.27

This Week

204.52

% Change YTD

8.60%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

73 718

This Week

72 991

% Change YTD

-5.07%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

16 085

This Week

15 973

% Change YTD

6.41%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 124

This Week

5 117

% Change YTD

7.28%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.70

This Week

18.77

% Change YTD

2.57%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.45

This Week

20.44

% Change YTD

1.34%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

81.82

This Week

85.27

% Change YTD

10.78%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Wal-smart Read More »

Shoprite-aholics

Weekly Stocktake / By VCS Agency

Companies striving for growth in a sluggish economy face formidable challenges when trying to grow, particularly those operating as supermarket retailers with an already large presence in the country. Another way for expansion involves gaining market share from competitors, a strategy used by Shoprite, South Africa’s largest supermarket retailer. Shoprite’s strength comes from the some of the following attributes:

They boast an established portfolio of brands, each uniquely tailored to appeal to distinct customer segments. The Usave, Shoprite, and Checkers brands cater to specific markets based on customer income levels and range of products sold.
Shoprite employs a centralized distribution model, leveraging large distribution centers around the country. This strategic approach enables them to maintain high stock levels in their stores while simultaneously managing costs. Their stores will also hold products with similar levels of quality.
Shoprite distinguishes itself by predominantly owning and controlling its stores, in contrast to competitors like Pick ‘n Pay and Spar, which have a higher reliance on franchise outlets. This ownership structure allows Shoprite to swiftly implement business changes and ensures a superior level of consistency compared to its competitors.
Shoprite also employs AI to do its purchasing from its suppliers. Shoprite had a 98% in-stock levels for the period. Shoprite are able to maintain a high in-stock levels, while still keeping their prices low, partially because of this.

Last week, Shoprite released their H1 2024 results. Revenue for the business increased by 13.9% to reach R121.1bn for the period. Excluding the revenue growth attributable to the acquisition of Massmart stores, Shoprite’s supermarket segment grew by 11.2%. While Gross Profit increased by 14.7% to R28.6bn, representing a 23.6% gross margin. Trading profit for the period increased by 10.7% to R6.7bn.

One of the standout metrics was Checkers Sixty60. Its revenue has grown by more than 60%. The app is leading more customers to the Checkers brand, resulting in market share growth. Checkers also use their stores as mini distribution centers, which means they don’t have to build and create new distribution centers for the Sixty60 purpose. Pieter Englebrecht, the CEO, has said these are the reasons this segment in profitable.

The supermarket retail arena is fiercely competitive, with customers primarily prioritizing price and product availability. Supermarkets operate within a framework of relatively low gross and net margins, making them highly susceptible to shifts in costs. Their path to profitability predominantly hinges on scaling their business to achieve higher sales volumes while concurrently maintaining consistent operating costs.

Shoprite is held in the Lunar BCI Worldwide Flexible Fund.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

205.68

This Week

206.27

% Change YTD

9.53%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

72 775

This Week

73 718

% Change YTD

-4.13%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

16 274

This Week

16 085

% Change YTD

7.15%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 137

This Week

5 124

% Change YTD

7.42%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

19.09

This Week

18.70

% Change YTD

2.19%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.68

This Week

20.45

% Change YTD

1.39%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

83.33

This Week

81.82

% Change YTD

6.30%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Shoprite-aholics Read More »

Snowflake – Trying to be a Snowball

Weekly Stocktake / By VCS Agency

Beneath every artificial intelligence application lies a vast sea of data. Snowflake allows companies to store their structured, semi-structured, and unstructured data in one location, and access it from anywhere around the world. Moreover, companies can seamlessly tap into third-party datasets through Snowflake’s Market Place. Currently, Snowflake is expanding its suite by integrating Generative AI tools into their products, enabling users to interact in natural language with Snowflake applications. Sridhar Ramaswamy has replaced Frank Slootman as CEO, as Snowflake tries to further develop its AI strategy. Ramaswamy held the position of Senior Vice President of AI at Snowflake.

For Q4 2024, Snowflake’s net revenue increased 33%, reaching $775 million. Simultaneously, Snowflake’s operating loss increased by 5.7%, now standing at ($276mn). A positive shift is evident in Snowflake’s gross margin, which increased from 73% a year ago to 74% this quarter. Additionally, the operating loss margin improved, decreasing from -44% a year ago to -36% this quarter.

Breaking down the expenses, Sales & Marketing, and Research & Development each constituted 47% of the revenue. Notably, a significant portion of this allocation was attributed to stock-based compensation. This practice is prevalent among smaller companies like Snowflake that have limited financial resources and use stock options to top up cash payments for staff. The aim is to incentivise employees to stay at their company for longer by offering them a higher amount of equity. In contrast, larger entities such as Microsoft, Amazon, and Meta, can rely more on cash-based compensation to secure top-tier talent.

Snowflake faces stiff competition from other well-resourced AI businesses, including Microsoft and Amazon. This compels them to make significant investments in sales and marketing for customer acquisition and engagement. Snowflake operates on a pay-per-use model, which has its own set of challenges. Companies tend to utilise less of their Snowflake credits during times of perceived uncertainty. Snowflake’s focus is to get more businesses to join their data cloud, while making their products easier for individuals to use.

Snowflake, Microsoft, and Amazon are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

207.05

This Week

205.68

% Change YTD

9.21%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

74 213

This Week

72 775

% Change YTD

-5.36%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

15 997

This Week

16 274

% Change YTD

8.41%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 089

This Week

5 137

% Change YTD

7.70%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

19.31

This Week

19.09

% Change YTD

4.32%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.89

This Week

20.68

% Change YTD

2.53%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

81.66

This Week

83.33

% Change YTD

8.26%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Snowflake – Trying to be a Snowball Read More »

Nvidia – Fear of Missing Out

Weekly Stocktake / By VCS Agency

Companies and nations are investing substantial funds to keep pace in the AI race, focusing on establishing their proprietary artificial intelligence infrastructure. Nvidia is currently reaping the rewards of this trend. They are a semiconductor designer specializing in high-powered chips crucial for training models in accelerated computing and generative AI applications. In addition to these chips, Nvidia provides the essential components that link them, forming supercomputers. This ranges from the switches and wiring to the requisite coding language (CUDA) necessary for running these advanced models on their chips.

Last week, Nvidia unveiled its Q4 2024 results. Their revenue surged by 126% compared to FY2023, reaching $60.1 billion for FY2024. Net profit increased by 581%, soaring to $29.7 billion. Noteworthy is the substantial improvement in the gross profit margin, escalating from 56.9% in FY2023 to an impressive 72.7% in FY2024. Nvidia, as the designer, relies on semiconductor fabrication plants, such as TSMC, for chip manufacturing. This explains the disproportionately higher growth rates in gross and net profit compared to revenue, highlighting Nvidia’s operational leverage.

Companies and countries can’t get enough of Nvidia’s chips, with demand surpassing their current supply capabilities. Nevertheless, there remains a significant concentration among chip buyers. In Q4 2024, 40% of Nvidia’s data centre revenue was attributed to the three primary cloud service providers – Alphabet, Microsoft, and Amazon. These industry giants are still in the early phases of developing accelerated computing and generative AI products. This prompts the following questions:

Is AI a true megatrend, or will it fade away?
Will companies be able to generate sufficient additional revenue or enhance productivity to justify their expenditures on AI technology, including Nvidia’s chips?
What are the enduring implications on society?

Nvidia’s stock price has surged by more than 230% in the past year due to their rapid capacity expansion amid growing demand. However, formidable challenges persist. Intense competition looms, with Microsoft, Amazon, and Google striving to develop their own semiconductors for data centres, aiming to reduce dependency on Nvidia. The company faces towering expectations, and even minor deviations from anticipated performance can have a significant impact on their stock price.

Nvidia, Microsoft, and Amazon are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

203.05

This Week

207.05

% Change YTD

9.94%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

73 616

This Week

74 213

% Change YTD

-3.49%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

15 776

This Week

15 997

% Change YTD

6.56%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 006

This Week

5 089

% Change YTD

6.69%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.87

This Week

19.31

% Change YTD

5.52%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.34

This Week

20.89

% Change YTD

3.57%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

83.23

This Week

81.66

% Change YTD

6.09%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Nvidia – Fear of Missing Out Read More »

ON Top of It

Weekly Stocktake / By VCS Agency

Founded in 2010, ON is a sports apparel and shoe brand established in Zurich, Switzerland. Olivier Bernhard, a retired athlete, envisioned crafting a running shoe that offered a completely different running sensation compared to what was on the market. Early prototypes featured sections of hosepipes attached to the bottom of the shoe.

In their most recent financial report as of September 30, 2023, ON revealed total sales amounting to CHF* 480 million (USD/CHF = 0.915) and a net income of CHF 58 million. Both revenue and net income experienced impressive growth, surging by 47% and 184%, respectively, compared to the corresponding quarter of the previous year. Notably, ON’s gross margin expanded from 57.1% in Q3 2022 to 59.9% in Q3 2023. This expansion was attributed to ON’s strategy of refraining from discounting products to boost sales, coupled with an increased proportion of direct consumer sales through their website.

During their earnings call, ON emphasized a strategic focus on increasing sales through their Direct-to-Consumer (DTC) channel while also nurturing relationships with third-party sellers. Despite being in its relative infancy, ON is gearing up for expansion by diversifying its product lines to captivate a broader customer base. Like many sports brands, ON is leveraging the allure of sports stars to enhance brand recognition. Given ON’s size, they need to use innovative approaches to attract “superstar” athletes. In 2019, they successfully secured Roger Federer as a collaborator by issuing equity to him. ON’s recent successes on the sports field include Helen Obiri winning the Boston Marathon wearing ON CloudTr1 1 and Iga Swaitek who also wears ON shoes on the tennis court.

Retail brands operate in a fiercely competitive environment. They generally require years to establish genuine customer loyalty. To stay competitive, these companies must consistently invest in brand and product development, while maintaining their brand identity.

*CHF = Swiss Francs

On Holdings is held in the Lunar BCI Worldwide Flexible Fund. It is also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

202.23

This Week

203.05

% Change YTD

7.82%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

73 423

This Week

73 616

% Change YTD

-4.26%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

15 991

This Week

15 776

% Change YTD

5.09%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 027

This Week

5 006

% Change YTD

4.94%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

19.04

This Week

18.87

% Change YTD

3.11%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.54

This Week

20.34

% Change YTD

0.84%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

81.92

This Week

83.23

% Change YTD

8.13%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

ON Top of It Read More »

Novo – Lilly: Building Capacity

Weekly Stocktake / By VCS Agency

Eli Lilly and Novo Nordisk are both major pharmaceutical giants with a focus on developing drugs for chronic diseases. Two of the main common areas they focus on are diabetes and, most recently, obesity. The diabetes and obesity drugs that the two companies are developing are glucagon-like-peptide-1 (GLP-1) agonists. These medications mimic the actions of the GLP-1 hormone which regulates blood sugar, slows digestion, and suppresses appetite.

Last week, Eli Lilly released their Q4 2023 results; and the week before, Novo Nordisk released their Q4 2023 results. Eli Lilly’s revenue increased by 28% to $9.4 billion while its profit increased by 13% to $2.2 billion for the quarter. The lower profit percentage increase was a result of expenses incurred in the acquisition of a few up-and-coming companies.

Novo Nordisk’s revenue grew 37% to DKK 65.9 billion. And their net profit grew 62% to DKK 21.9 billion. As of 9 Feb 2024, 1 USD = 6.9 DKK. Novo Nordisk recently became the largest listed company in Europe and has been a material contributor to Denmark’s economy.

Since the beginning of the year, Eli Lilly and Novo Nordisk’s share prices have increased by 24.9% and 18.7% respectively. In the US, it is estimated that around 40% of adults suffer from obesity. The recent drive in the share price for Eli Lilly and Novo Nordisk has mainly been driven by the demand for their obesity drugs.

Novo Nordisk and Eli Lilly are at different stages in the production and approval of their respective obesity drugs.

Novo Nordisk’s Wegovy has been available in eight countries since 2021 but only reached approval for all dosage levels in the US in December 2022. Due to overwhelming demand and limited supply, Novo Nordisk had to halt the sale of lower dosages to prioritize patients requiring higher doses who were facing stock shortages. The efficacy of the treatment is contingent on consistent, long-term commitment to the prescription and treatment regime. Novo Nordisk is actively working to expand production capacity to meet the needs of patients relying on these drugs.
Eli Lilly’s Zepbound obesity product received approval and was launched in the US in the last quarter of 2023. Notably, even before securing approval for the drug’s sale, Eli Lilly had initiated the construction of production capacity to ensure a they could hit the ground running once they received approval.

As of now, Novo Nordisk holds the lead in the race. However, the demand for these treatments remains substantial, providing ample opportunity for both Eli Lilly and Novo Nordisk to thrive in the market.

Novo Nordisk and Eli Lilly are held in the Lunar BCI Worldwide Flexible fund. They are also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

195.68

This Week

202.23

% Change YTD

7.38%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

74 174

This Week

73 423

% Change YTD

-4.51%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

15 629

This Week

15 991

% Change YTD

6.52%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

4 959

This Week

5 027

% Change YTD

5.38%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.90

This Week

19.04

% Change YTD

4.04%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.37

This Week

20.54

% Change YTD

1.83%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

77.40

This Week

81.92

% Change YTD

6.43%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Novo – Lilly: Building Capacity Read More »