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  • 💸 OpenAI Seeks $100 Billion Valuation

💸 OpenAI Seeks $100 Billion Valuation

+ Dell's Strong Earnings + Dollar General's Big Miss

August 29, 2024

Good afternoon! Yelp is throwing down the gauntlet against Google, filing an antitrust lawsuit that claims the tech giant is rigging search results to promote its own services over Yelp’s. Yelp argues that Google’s monopoly on search has significantly reduced its traffic and ad revenues by keeping users within Google's ecosystem for local reviews and information.

Google, fresh from being labeled a “monopolist” in a recent court ruling, is gearing up to fight back, denying Yelp’s claims and planning an appeal. Looks like this tech battle is just heating up.

MARKETS

  • The stock market wrapped up a mixed bag of a day as Wall Street digested Nvidia’s less-than-stellar earnings report. The Dow strutted to a new record high, up 0.59% or 244 points, while the Nasdaq took a hit, dropping 0.23% thanks to Nvidia's continued slump. The S&P 500 played it safe, ending the day pretty much flat.

  • On the bright side, solid economic data offered some optimism. The second-quarter GDP got a boost, jobless claims edged lower, and inflation showed signs of cooling, with the PCE price index slowing to 2.5%. While Nvidia’s rough patch dragged tech stocks down, the rest of the market mostly brushed it off, with five of the “Magnificent Seven” megacaps finishing in the green. Looks like Wall Street is still banking on some good vibes despite a few hiccups.

STOCKS
Winners & Losers

What’s up 📈

  • Affirm ($AFRM) soared 31.92% as it reported fiscal Q4 results that exceeded Wall Street's expectations, paired with strong guidance that impressed investors.

  • Nutanix ($NTNX) gained 20.31% following a better-than-expected fiscal fourth-quarter earnings report, which included an 11% increase in revenue.

  • Best Buy ($BBY) jumped 14.11% after smashing second-quarter earnings expectations and projecting higher profitability for the full fiscal year, despite lower sales forecasts.

  • Li Auto ($LI) surged 10.62% after Morgan Stanley reiterated a Buy rating with a $29 price target.

  • Arm Holdings ($ARM) rose 5.27%.

  • PayPal ($PYPL) was up 3.88%.

  • AppLovin ($APP) increased by 4.10%.

  • SoFi Technologies ($SOFI) climbed 7.21%.

What’s down 📉

  • Dollar General ($DG) plummeted 32.15% after slashing its full-year sales and profit guidance, sending shockwaves through the discount retail sector.

  • Okta ($OKTA) dropped 17.64% despite beating third-quarter estimates, as its guidance missed expectations on some key metrics.

  • Pure Storage ($PSTG) fell 15.80% due to issuing lower-than-expected third-quarter operating income guidance.

  • Dollar Tree ($DLTR) dipped 10.24%, feeling the heat from Dollar General's guidance cut.

  • Cava Group ($CAVA) declined 6.39% after Morgan Stanley downgraded the stock to Equal Weight, despite raising the price target to $110 per share.

  • Nvidia ($NVDA) slid 6.38%, even though it beat fiscal second-quarter expectations with adjusted earnings of 68 cents per share on $30.04 billion in revenue.

  • Birkenstock ($BIRK) slid 16.14%.

  • Sea Limited ($SE) dropped 4.58%.

AI
OpenAI Nears Funding Round at More Than $100 Billion Valuation

OpenAI, the brains behind ChatGPT, is reportedly gearing up to raise a new round of funding that could value the company at a whopping $100 billion. The tech firm, best known for revolutionizing how we chat with machines, is currently deep in discussions to secure several billion dollars from investors.

The major players? Thrive Capital is leading the charge, set to throw in a cool $1 billion. Meanwhile, Microsoft ($MSFT) isn't sitting on the sidelines either. The tech giant, which already has a hefty $13 billion stake in OpenAI, is expected to chip in more funds to keep their AI bromance strong.

But that’s not all. Rumor has it Apple and Nvidia might also join the investment frenzy, with Apple looking to integrate ChatGPT into Siri, making your iPhone chats a whole lot smarter. Nvidia, a key supplier for OpenAI’s AI infrastructure, could benefit from increased demand for their chips as OpenAI’s need for computing power grows.

The AI Arms Race is On

OpenAI’s latest funding effort isn't just about beefing up its balance sheet; it's about keeping its place at the forefront of the AI arms race. The startup is racing against heavyweights like Google, Amazon, and Meta, each pouring billions into developing their own AI tech. Google and Amazon recently backed Anthropic, an OpenAI rival, while Meta is giving away its AI models for free.

With AI predicted to transform the global economy, all the big players are jostling for a piece of the pie. OpenAI’s annualized revenue hit $3.4 billion earlier this year, a figure that's sure to swell as the company rolls out more products and services.

Cash to Burn

What’s driving this scramble for funds? OpenAI’s ambitions are as high as its valuation. CEO Sam Altman is chasing the lofty goal of creating artificial general intelligence (AGI) – machines that can outperform humans at just about any job. But achieving AGI isn’t cheap. Building their latest model, GPT-4, set them back over $100 million, and the next one will likely cost even more.

In-house perks: The new funding round could also benefit OpenAI’s employees, who might get the chance to cash in some of their shares later this year, according to a memo from CFO Sarah Friar. It’s a sweet deal in a speculative market that isn’t yet raking in cash at the same pace as it’s spending.

Bottom Line

OpenAI is pushing hard to stay on top in the AI world, and it’s getting the cash to do it. With investors lining up to back the startup, all eyes will be on how it uses these billions to outmaneuver the competition and build the next generation of AI tech. And with Apple and Nvidia potentially joining the fray, the battle for AI supremacy just got even more interesting.

NEWS
Market Movements

EARNINGS
Dell Delivers Strong Earnings on AI Server Boom

Dell Technologies ($DELL) is riding the AI wave, and it’s paying off big time. The tech giant reported a 9% jump in total revenue to $25 billion for the fiscal second quarter, crushing Wall Street’s expectations. The driving force? A surge in demand for AI-optimized servers.

AI Servers: The Star of the Show

Dell’s AI-optimized server sales skyrocketed to $3.2 billion in the second quarter, up from $2.6 billion in the prior period. The server unit, part of Dell's Infrastructure Solutions Group, saw a 38% increase in sales to $11.65 billion, beating estimates by a wide margin. Dell's success is largely tied to the booming demand for AI servers, especially those built around Nvidia’s ($NVDA) chips.

Despite some concerns over margins due to the high costs of AI servers and a competitive pricing environment, Dell's operating margin for its infrastructure unit improved to 11%, up from 8% last quarter. This easing of margin worries suggests Dell’s investments in AI are beginning to pay off.

PC Sales Still in a Slump

While AI servers are flying off the shelves, Dell's traditional PC business is struggling. Revenue from personal computers dropped 4% to $12.4 billion, with consumer sales plummeting 22% from a year ago. The decline reflects the ongoing challenges in the PC market as the pandemic-driven surge in laptop purchases continues to cool down.

Business PC sales remained flat, a stark contrast to rival HP Inc., which saw an 8% gain in enterprise PC sales during the same period. Dell’s COO, Jeff Clarke, noted that recovery in the PC market is still "a little further out" than previously anticipated.

SecureWorks: On the Chopping Block?

In a move to streamline operations, Dell is reportedly exploring the sale of SecureWorks Corp. ($SCWX), a cybersecurity company it currently owns a majority stake in. This isn’t Dell’s first attempt to offload SecureWorks; a previous sale effort back in 2019 fell through. With a market value of about $772 million, SecureWorks’ future under Dell’s umbrella remains uncertain.

What’s Next for Dell?

Looking ahead, Dell has projected fiscal third-quarter revenue of around $24.5 billion, in line with analyst expectations. The company also revised its full-year guidance slightly upwards, now expecting between $95.5 billion and $98.5 billion in revenue, up from a previous range of $93.5 billion to $97.5 billion.

Dell’s stock has been on a tear this year, up 48% so far. With AI server demand showing no signs of slowing, the company seems well-positioned to capitalize on the artificial intelligence boom. However, challenges in the PC market and questions about long-term profitability remain on the horizon. For now, though, it seems like Dell is enjoying its moment in the AI spotlight.

EARNINGS
Dollar General’s Big Miss: What Happened?

Dollar General ($DG) just experienced its worst day ever on Wall Street. The discount retailer's shares nosedived 32% after the company slashed its full-year forecast, citing a tough financial climate for its core customers—those living paycheck to paycheck. This is the biggest drop since the company went public in 2009.

The Bad News

CEO Todd Vasos reported that the company had to cut its 2024 forecasts for comparable sales and earnings due to customers tightening their belts, particularly on essential goods. Dollar General now expects same-store sales to rise only 1% to 1.6% for the year, down from an earlier estimate of 2% to 2.7%. The company’s profit forecast was also reduced, predicting earnings per share between $5.50 and $6.20, significantly lower than the previous $6.80 to $7.55.

Sales in the second fiscal quarter fell short of expectations, with earnings per share at $1.70 compared to the $1.79 analysts had anticipated. Revenue was also below forecasts, coming in at $10.21 billion against the predicted $10.37 billion. Despite a slight uptick in traffic, shoppers are spending less per visit, hitting Dollar General where it hurts—right in the sales figures.

Blame Game

Vasos blamed the poor performance on weakening consumer sentiment among lower-income shoppers, who are finding it harder to make ends meet due to economic pressures like high interest rates. However, other discount retailers like Walmart are reporting strong sales, indicating that the problem might not just be with consumers but also with Dollar General’s execution.

Dollar General is now focusing on “controlling what we can control,” as Vasos put it. This includes efforts to improve store operations and inventory management, but it seems the company still has a long road ahead to turn things around.

The Ripple Effect

Dollar Tree ($DLTR) wasn’t immune to Dollar General’s woes, with shares sliding 10.24% in sympathy. Big Lots ($BIG) also took a hit, plummeting 38.35%. Meanwhile, Best Buy ($BBY) saw a surge of 14.11%, buoyed by its stronger-than-expected earnings report and a more optimistic consumer outlook.

What’s Next For The General?

Dollar General’s game plan involves cutting back on new store openings, slashing inventory, and focusing more on essential goods. However, with customers running out of funds towards the end of each month and competition from big players like Walmart, the retailer will need more than just tweaks to its operations to get back on track.

Despite the grim outlook, some analysts are still holding out hope. With an average price target of $144, there’s a belief that the stock could rebound—if Dollar General can address its operational shortcomings and the economic pressure on its customers eases. But for now, it’s a tough time to be a bargain hunter—or a shareholder—in Dollar General.

Calendar
On The Horizon

Tomorrow

Earnings season is winding down, so don’t expect any blockbuster announcements tomorrow. But before you check out for the long weekend, there’s one final, crucial piece of economic news on the horizon.

The Personal Consumption Expenditures Price Index (PCE)—the Fed’s go-to inflation gauge—is set to drop. For those who aren’t economists in their spare time, PCE measures how much prices are rising or falling across the U.S. economy. The “core” PCE strips out food and energy prices (you know, the stuff that makes your wallet cry at the pump or grocery store) to give a clearer picture of underlying inflation.

And here’s the thing: Everyone is banking on the Fed to start cutting interest rates at its September meeting, no matter what tomorrow’s PCE report shows. But this is the last major inflation reading before the Fed gathers to make its big decision, so the numbers could sway just how aggressive they go with those rate cuts. In other words, tomorrow’s PCE could be the final puzzle piece in the Fed’s inflation-fighting game.

NEWS
The Daily Rundown

RESOURCES
The Federal Reserve Resource

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