By Kyle Prevost on March 15, 2024 Estimated reading time: 8 minutes
Making sense of the markets this week: March 17, 2024
By Kyle Prevost on March 15, 2024 Estimated reading time: 8 minutes
Oracle shares up 13%, Reddit’s unique IPO, Canadians are gloomier than most on world economic prospects, and Japan’s stock market is finally back on track.
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Photo by Brett Jordan from Pexels
Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, shares financial headlines and offers context for Canadian investors.
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Oracle continues U.S. tech dominance
Whether we’re talking software, streaming, artificial intelligence (AI), computer chips or, now, servers, the U.S. tech sector is booming at the moment. After reporting earnings on Monday this week, shares of server extraordinaire Oracle climbed 13%.
Earnings highlights for the week
All numbers in this section are in U.S. dollars.
Oracle (ORCL/NYSE): Earnings per share came in at $1.41 (versus $1.38 predicted), and revenues were a slight miss at $13.28 billion (versus $13.30 billion predicted).
Dollar Tree (DLTR/NASDAQ): Earnings per share of $2.55 (versus $2.65 predicted), on revenues of $8.64 billion (versus $8.65 billion predicted).
Dollar General (DG/NYSE): Earnings per share of $1.83 (versus $1.73 predicted), and revenues of $9.86 billion (versus $9.78 billion predicted).
Cloud services are Oracle’s bread and butter. And as CEO Safra Catz told reporters on the earnings call, “We signed several large deals this quarter and we have many more in the pipeline.” Oracle’s co-founder and executive chairman Larry Ellison said, “We’re building 20 data centres from Microsoft and Azure. They just ordered three more data centres this week.”
Given that earnings and revenues were consistent with expectations, the massive share price rise for Oracle appears to be driven primarily by general exuberance around the potential for U.S. technology stocks to continue growing at unprecedented rates.
In non-tech earnings news, shares of Dollar Tree sank more than 15% to their lowest level this year in early trading Wednesday. The company revealed plans to close nearly 1,000 stores in a bid to increase profitability.
Discount store rival Dollar General had a better earnings day on Thursday, as shares were up 6% on an earnings beat.
Reddit rewards longtime users with IPO opportunity
After 18 years, Reddit plans to offer its first opportunity for the public and key users to buy its shares on March 21, 2024. (Figures in this section are in U.S. dollars.)
The old-school social media stalwart is looking to raise about $750 million by selling 22 million shares at $34 per share.
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One unique aspect of Reddit initial public offering (IPO) is that the social media company is looking to recognize and reward its key users by reserving 1.76 million shares for moderators (a.k.a. Redditors) to purchase the stocks. These power users will be able to purchase their shares immediately, then sell them on the open market without waiting for expiry of the typical six-month lock-up period that accompanies most IPO share purchases.
Reddit will trade on the New York Stock Exchange under the ticker RDDT. Some notable shareholders in the company include Tencent and AI guru Sam Altman, who was a member of Reddit’s board as recently as 2022.
A few interesting facts about Reddit and its IPO:
The company has yet to make any profits.
It also lost nearly $91 million in 2023.
In 2021, Reddit took the first steps toward going public and was valued at $10 billion; so the current IPO goal represents a 35% reduction in value from that point.
Reddit has 73 million daily users, which is up from 52 million in 2021.
It will be interesting to see how the open market values yet another tech company with big potential and nowhere-to-be-seen profits. Additionally, market watchers will be looking to see how the Redditors handle their opportunity to pre-purchase shares, and how that might contribute to price volatility given their unique ability to sell shares immediately.
If you’re looking to understand a bit more about the mentality behind IPOs for non-profitable companies, the following NSFW clip about revenue and profits from HBO’s Silicon Valley is both amusing and instructive. Some readers may find the language offensive.
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Visual Capitalist published an interesting economic confidence graphic using data collected by Ipsos.
We found the range in responses to be fascinating and somewhat counterintuitive. Here are some initial thoughts:
India’s economy is doing very well, so that makes sense. But 82% of Chinese respondents had confidence the global economy would be doing better?! This from a country currently battling deflation and major housing collapse concerns.
The U.S.A.’s economy is the envy of much of the world at the moment, yet Americans are still more pessimistic than the global average.
Even though Canadians’ outlook was slightly brighter in 2023 than it was in 2022, we’re near the bottom of the pack. Oddly, this lack of confidence in the economy might be good news for inflation hawks, as Canadians who are worried about the global economy are more likely to hold back on making major purchases and borrowing money. At the same time, Canada’s economy is not in that bad of shape, and we don’t think we need to be overly pessimistic about things.
We’re not psychologists, but there has to be some sort of non-mathematical answer to why people are feeling the way they are. Is it some sort of media bias in certain countries versus others? Is there a cultural lean towards optimism in certain countries?
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There appears to be a strong inverse correlation between levels of post-secondary education of its residents and their confidence in the world’s economy. Does that make people in the countries at the top of this list naive? Or, is it a matter of more educated people actually having a factually-incorrect negative bias?
While there are always risks to the global economy, and arguments can be made about our impending doom, we think, on balance, there are more reasons to be hopeful than not these days.
For a few decades now, stock-market skeptics could always be counted on to say, “Now show Japan” whenever an optimistic long-term forecast is made. They may soon have to find a new hymnbook from which to sing.
The Nikkei 225 (the 225 biggest stocks in Japan, and the main index used to indicate the overall health of the Japanese stock market) has consistently hit new highs the last few weeks. While that’s not all that unique right now, despite the pessimism expressed above, many countries have stock markets currently hitting all-time highs. What makes Japan different is how long Nikkei 225 investors have been waiting for these new highs.
American investors had to wait 746 days (beginning January 2022) for the S&P 500 to reach its new high.
Japanese investors had to wait more than 16 times as long—34 years!
Business textbooks are always teaching the Japanese business concepts of Kaizen, Kanban, Andon and just-in-time production. But despite this, the actual market valuations of Japanese businesses have been falling behind for a long time now (basically my entire life).
What some investors fail to understand about this historical anomaly is just how massively overvalued the vast majority of companies were in Japan in 1989. It’s as if Japan’s entire stock market had Tesla- or Nvidia-level expectations of world domination.
From 1956 to 1986, land prices in Japan increased by 5,000%, even though consumer prices only doubled in that time.
At the market peak, the grounds on the Imperial Palace were estimated to be worth more than the entire real estate value of California or Canada.
In 1989, the price-to-earnings (P/E) ratio on the Nikkei was 60x trailing 12-month earnings.
Japan made up 15% of world stock market capitalization in 1980. By 1989, it represented 42% of global equity markets.
From 1970 to 1989, Japanese large-cap companies were up more than 22% per year. Small caps were up closer to 30% per year. That’s incredible growth for a 20-year period.
Japan was trading at a CAPE ratio (cyclically adjusted P/E, which uses 10 years of inflation-adjusted earnings in its calculation) of nearly 100 times, which is more than double what the U.S. was trading at during the height of the dotcom bubble.
So, in regard to the constant naysayers who want to compare the “lost decades” of the Japanese stock market to current market conditions, we can only say there is no data to support this level of pessimism. In other words, there are market bubbles, and then there’s the Japanese bubble.
As usual, celebrated investor and CEO of Berkshire Hathaway, Warren Buffett was a bit ahead of the curve on this one. He’s been buying up Japanese assets for several years. Buffett was quoted by CNBC back in 2023 as saying, “We couldn’t feel better about the investment [in Japan].”
It’s also worth noting that even Japanese stocks win “in the long run.”
If you put $1 a day into Japanese stocks starting in 1980 (~$10,500 in total), you'd have over $17,000 today (thanks to recent all-time highs).
This is true despite Japan experiencing one of the worst equity market returns in history during this time period. pic.twitter.com/2t8SG9xJfV
As Nick Maggiulli, author of Just Keep Buying (Harriman House, 2022), says in the above tweet, if you had started investing in the Nikkei 225 in 1980 (in the run-up to the Japanese bubble), you’d still have a real annual return of 3.5% today (inclusive of dividends).
Carlson also points out that if you invested in a Japanese stock index back in the early 1970s, your returns would still be about 9% a year, despite the biggest bubble of all time bursting in the middle. It’s just that all future returns were pulled forward due to manic speculation—and investors have been waiting for companies to “grow into their valuations” ever since. After waiting a long time for the earnings growth spurt to kick in, it appears the valuation shoes finally fit.
Of course, no such Japanese index fund existed at the time. Today, Canadian investors can efficiently get Japanese exposure through exchange-traded funds (ETFs), such as the iShares Japan Fundamental Index ETF (CJP) or the BMO Japan Index ETF (ZJPN).
Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.
Canadian’s probably see the economy as bad because it hurts in places that matter to them: housing and food. Food is much more expensive, whether through inflation or increased profit margins, or both, and buying a home to start a family is unachievable (unless you live rural, where there are very few jobs).
Canadian’s probably see the economy as bad because it hurts in places that matter to them: housing and food. Food is much more expensive, whether through inflation or increased profit margins, or both, and buying a home to start a family is unachievable (unless you live rural, where there are very few jobs).