Investment Strategy Review: Adjusting AI Investment Structure, Maintaining High Positions
In January, we made minor adjustments to our AI-related holdings by reducing positions in AI hardware companies that had significant gains, where market expectations were fully priced in, and which had limited room for future returns. However, we increased our investments in semiconductor foundries and design tools companies that also benefit from AI, have a good competitive landscape, high certainty, insufficient market reaction, and decent returns potentials. We continue to prioritize holding companies involved in AI's B2B applications, as well as internet companies that reflect future lifestyle changes and brand consumer products. In January, we began experimenting with establishing some short positions (the investment method is the same as for long positions, just the criteria are reversed) to add alpha returns to our portfolio. We maintained high positions in January with little structural change. The industry focus remains on cloud computing, advanced process semiconductors, the internet, and brand consumer goods. The proportion of overseas assets (excluding U.S. Treasury bonds) remains around 80%, with AI investments accounting for about 40%.
Market Overview: U.S. Economic Resilience and Tech Giants' Solid Earnings Highlights
The market shifted its expectations for a rate cut from as early as March at the beginning of January, to a more likely scenario in May, with the anticipation for six cuts throughout the year increasing. Additionally, stronger-than-expected employment in the U.S. suggests resilient consumer spending for the year, with no significant changes observed in China's situation.
January saw earnings reports from Microsoft, Meta, Amazon, and Google, with several key takeaways:
The impact of AI on IaaS cloud services is evident, as seen with Microsoft Azure's AI revenue share increasing from 3% the previous quarter to about 5%, driving Azure's overall business growth to 30% (up from 29% the previous quarter and 26% in Q2 2023). Amazon's AWS experienced a similar trend, with growth rates previously slowed down by corporate cost-cutting measures rebounding from 12% to 13%. Google Cloud's growth rate accelerated from ~23% in Q3 2023 to ~26%, thanks to AI-driven growth.
AI software is just beginning to be rolled out and will need time to demonstrate its effectiveness. Microsoft is at the forefront with its Copilot now available to all customers. Although not yet evident in financial contributions, it has led to more users upgrading to E3/E5 licenses and increased ARPU. Office 365 commercial customer revenue saw a 17% year-over-year increase, with user growth at 9% and ARPU up by 7%. While Copilot's direct contribution is pending, a 10% penetration among E3/E5 customers could lead to an annual revenue of around $4 billion (7% of the Office business), with rapid growth expected thereafter.
Capital expenditures have increased, with Meta and Google raising their investments, Microsoft investing as anticipated, and Amazon showing a less significant increase. The combined capital expenditures of these four giants could reach $190 billion in 2024, a $40 billion increase from 2023, with a large portion likely allocated towards AI. This level of investment is significant, especially considering AI's nascent stage in generating revenue, setting high expectations for server GPU chips and related product sales to reach nearly $100 billion.
Meta has fully overcome the challenges of data privacy and competition from TikTok, with Reels contributing to user growth and engagement. AI-driven recommendations have become more precise, and China's cross-border e-commerce has significantly contributed to the online advertising market, with advertising prices turning positive year-over-year and quarterly revenue growth reaching 25%, with future guidance at 29%. Furthermore, after improving efficiency, profit margins have continued to increase, with net margins improving from a previous low of 14% to 35%, nearing the historical high of 40%. Meta also announced dividends starting from Q1 2024, balancing AI investment with shareholder returns. Cross-border e-commerce, despite being impacted by renewed trade war concerns between China and the U.S., remains an area we are optimistic about. The risk of trade protectionism exists, especially from the U.S., but the small scale of cross-border e-commerce and its non-involvement in security issues mean its risk is considerably lower compared to sectors like new energy, semiconductors, and biomedicine.
Market Outlook & Strategy
Macro Overview: Cautious Domestically, Optimistic Internationally with FlexibilityOur macro perspective remains steady. Domestically, we are cautious, focusing on international expansion opportunities. Internationally, the concern over rate cuts has lessened. The current resilience of the economy suggests numerous opportunities.
Opportunities Ahead:
AI as a Long-term Alpha Source: The increasing value of human capabilities, coupled with AI's potential to enhance or even replace human effort, underscores AI's growing importance. This journey has only begun, with a vast potential yet to be unlocked.
Lifestyle Changes Towards Health and Self-Care: The evolving consumer preferences towards healthier living and increased self-awareness open continuous opportunities in the consumer sector.
Post-Inflation Purchasing Power: The rise in purchasing power following inflation may create room for price adjustments in certain products/services, boosting the competitiveness of value-for-money offerings.
Entering a Rate Cut Cycle: Previously, rising interest rates clouded the assessment of risks in various sectors. Companies with solid competitive landscapes and promising long-term prospects, having managed short-term interest rate challenges, might uncover new opportunities with the onset of a rate-cutting phase.
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