In this week’s Financial News Update, we’re going to cover the news about the Fed’s interest rate decision, how Tesla’s Supercharging network is running rings around the competition, and the AI battle between AMD and NVIDIA. So stick around to get the inside scoop.
The Fed paused its rate hike this week
The US Federal Reserve has decided to pause their rate hike on Wednesday, skipping an increase after raising rates 10 times in a row since March 2022. Fed officials explained that they need time to assess the effectiveness of the rapid rate increases in slowing down the overheating economy. As a result, the rates are currently held at a range of 5%–5.25%.
Gradual progress in slowing inflation down
“The process of reducing inflation will be gradual and take some time,” said Jerome H. Powell, the Fed chairman, at a news conference following the decision. However, given the significant increase in rates, he also hinted that “a more moderate pace is appropriate,” implying that it might not be the end of the rate hike.
This is “a rate hike pause, but not the end”
The US inflation rate in May was down to 4.05%, continuing its downward trend from the peak of 9.06% in June 2022. With this moderate but sticky inflation, the officials signaled that there will be 2 more rate hikes over the course of the Fed’s 4 remaining meetings, keeping the goal of the terminal rates at 5.6% by the end of the year.
During the news conference after the announcement of the rate pause, the Fed chair emphasized that taking a breath this month did not mean the Fed was giving up on its push to tame inflation. He kept his firm stance and added, “We understand that allowing inflation to get entrenched in the US economy is the thing that we cannot allow to happen,” affirming that bringing inflation back under control was the Fed’s top priority.
How did the market react to the pause?
The market first took a nosedive right after the Fed’s policy statement and economic projections were released, but regained its footing during Mr. Powell’s news conference as he reminded investors that the forecasts are estimates and not set in stone.
However, investors are preparing for another rate hike in July but not expecting any beyond that, which varies from the expectations of some Fed officials.
- The Fed has paused rate hikes after 10 consecutive increases since March 2022.
- The Fed chair emphasized that inflation is still present and that bringing it back is the Fed’s top priority, and they expect two more rate hikes this year.
Tesla’s Supercharging network dominates the EV market with incentives and new partnerships
Tesla (NASDAQ:TSLA) is currently offering a special offer on its Model 3 sedans in inventory. Customers who buy a Model 3 by June 30 in the US and Canada are qualified to receive 3 months of free charging at Tesla’s Supercharger Network. Moreover, Tesla is giving away 3 years of complimentary Supercharging for new purchases of its higher-end Model S and Model X vehicles.
Investors understand the offering as the company’s strategy to boost its quarterly delivery numbers and shrink Model 3 inventory, which is deemed positive news for the company.
Tesla’s Supercharging network is dominating the EV market
It seems Tesla is really hitting the gas with their Supercharging incentives after closing 2 major charging deals, potentially putting their NACS (North American Charging Standard) connector in the driver’s seat as the default standard in the US.
General Motors (NYSE: GM) recently announced that it is teaming up with Tesla to use its Supercharger Network starting next year. By 2025, GM anticipates its EVs will have Tesla’s NACS connector built-in, meaning GM’s cars will have direct access to Tesla Superchargers. This GM move came hot on the heels of Ford’s (NYSE:Y) announcement of a similar partnership with Tesla 2 weeks ago. So far, 2 giant car manufacturers are joining Tesla for its NACS connector.
With this catalyst, Tesla’s stock has been performing extremely well recently—a 13-session winning streak that ended on Wednesday. In just a short time, Tesla shares skyrocketed by a whopping $240 billion in market value.
AI battle: who will be the winner in semiconductor space?
With the recent surge of interest in AI, the semiconductor industry has caught the attention of investors due to its fundamental support of GPUs. The two giants in the field, AMD (NASDAQ: AMD) and NVIDIA (NASDAQ: NVDA), have gained over 90% (US$64.02 as of Jan 3 to US$124.24 as of Jun 16) and 200% (US$143.15 as of Jan 3 to US$426.53 as of Jun 16) year to date, respectively. So, the question before us now is: Are these AI stocks overvalued? Should you buy AMD or NVIDIA? Let’s hear what the analysts have to say.
NVIDIA: The giant in the semiconductor market with established partnerships
NVIDIA currently dominates the market with roughly 85% market share. Their long-running history and established long-term partnerships with developers make it difficult for other competitors to enter the market. Additionally, Google Cloud and Microsoft Azure have signed deals to collaborate with NVIDIA to develop enterprise-ready generative AI, further setting up obstacles for their competitors.
AMD: The underdog to challenge the giant
AMD is the underdog in the semiconductor market, facing an uphill battle against NVIDIA. The question for AMD is whether it can turn the tables by gaining developer support and having them switch to the AMD ecosystem. However, as most AI developers already use NVIDIA’s CUDA programming, it may be difficult for AMD to compete.
NVIDIA and AMD: Which one should you buy?
Another point to consider is that AMD’s P/E ratio is still lingering around 515, compared to NVIDIA’s P/E ratio of 221. This might be a signal for the high-performance stock in the future.
In terms of revenue estimates, NVIDIA and AMD are predicted to have $25.88 billion and $23.02 billion, respectively. Both have a relatively close figure for revenue.
Plus, NVIDIA’s market capitalization is $1.05 trillion, which is 5 times higher than AMD’s market cap of only $200 billion. One possible explanation for this difference is that investors are forward-thinking and are focusing on NVIDIA’s potential for growth, which may be driving up NVIDIA’s stock price.
More AI stock options
The game is not only about NVIDIA and AMD. There are also other AI stocks worth considering to ride the wave.
On January 23, 2023, Microsoft announced that they were investing a whopping $10 billion in the startup OpenAI, which is the mastermind behind text generator ChatGPT and image generator Dall-E. This is not the first time that Microsoft has backed OpenAI; they also invested in the company in 2019 and 2021. Microsoft is not just providing its Azure cloud computing infrastructure for OpenAI, but it is also integrating OpenAI models into its enterprise and consumer software products. So, it is widely speculated that Microsoft may acquire OpenAI in the future.
Palantir is off to a strong start with its AI platform and has developed a product that serves both government and commercial clients. Their software allows for the upload of large amounts of data, which is then processed into useful insights. Palantir allows customers to make data-driven decisions quickly with the aid of AI, such as when a 911 dispatcher and a hospital collaborate to determine the best route for an ambulance. The software has been used by various government agencies and the military for many purposes, giving Palantir a broad customer base.
With the rise of generative language models such as ChatGPT posing a threat to the lucrative search revenue industry, Google’s stock has now become more affordable to purchase. The price may soon rise with their new release of the AI chatbot Bard, which may be the key to maintaining a competitive edge in the world of digital advertising.
It is also worth noting that Alphabet’s operating income has increased significantly from $28.9 billion to $74.8 billion in the past 5 years, and this upward trend is projected to persist. It shows the company’s position is too strong to be easily toppled.
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