Makers and Takers

This morning brought the push/pull nature of pricing to the fore.  Stock traders were initially enthusiastic after another round of solid earnings and guidance from Micron Technology (MU) after yesterday’s close but were then taken aback by Apple’s (AAPL) announcement of price increases.  These two stories are inextricably related and have led to a session that has caused major indexes to search for direction.

The positivity after MU’s report was quite understandable.  Sales, earnings, and guidance all blew past expectations.  Fiscal Q3 revenues were $41.46 billion, far above expectations for $35.7 billion, and EPS were $25.11, way above the $20.49 analyst consensus.  MU also indicated that the good times would continue for at least another quarter when it offered revenue guidance of around $50 billion, far beyond prior estimates of $43.2 billion.  That, dear readers, is what we call a blowout, especially after a two-day pullback of roughly 15%.  The stock recovered all those losses and more on the open, though around noon it was trading around Monday’s record close.  It’s been quite a wild week for this market leader, with more than $100 billion swings in this trillion-dollar company’s market capitalization.

MU, 1-Week, 5-Minute Candles (including after-hours trading)

Source: Interactive Brokers, past performance is not indicative of future returns.

One of the keys to MU’s astounding run is its ability to steadily increase its operating margins.  The company reported an astonishing gross margin of 84.9%, up from an already impressive 74.9% in the prior quarter.  This is more than double the 39% it reported just a year ago.  An increase of that magnitude implies that MU’s revenues are increasing far faster than its costs thanks to an ability to raise prices for willing customers.  That is a highly enviable position for any company.

The big buyers of those chips are data centers, rushing to build out AI computing capacity.  But they are not the only buyers of those chips, as AAPL reminded us this morning when it announced substantial increases for its computers and related products.  It squarely placed the blame on the rising costs of memory, saying that the rapid data center buildout “created an extraordinary surge in demand for memory and storage,” and that it has “never seen a component price increase this much, this quickly.”  That was quite a splash of cold water on the chip-centered enthusiasm.

AAPL’s announcement widened the schism between the manufacturers of the components required for data centers and the companies who are their key consumers.  Let’s call them “makers” and “takers,” to use a common trading terminology.  All the Mag7 stocks are lower this morning, led of course by AAPL.  The list is dominated by the type of hyperscalers who are spending billions in a race to build data centers lest they risk being left behind.  But this morning’s news reminds us that the semiconductor manufacturers and other suppliers are gaining at the expense of their largest customers. 

This dichotomy has caused major indices to search for direction this morning.  Key indices like the S&P 500 (SPX) and Nasdaq 100 (NDX) got off to very fast starts but hit some air pockets and updrafts throughout the morning.  As I type this, SPX is roughly unchanged while NDX is about 0.5% higher; both are well off their highs and lows.

We noted yesterday that popular inflation hedges have been doing rather poorly since last week’s FOMC meeting.  But there is one inflation hedge that has done rather well – semiconductor stocks.  They are able to raise prices, and investors in those companies have reaped the benefits.  But we need to wonder how far they can push those prices. 

AAPL has told us that from its standpoint, it can’t bear those increases without passing them along to customers – and AAPL’s consumers are not nearly as price-insensitive as those building out data centers.  Yet at some point, we have to consider when the hyperscalers might reach a similar conclusion.  We have stated that one of our key fears is that a company like Alphabet (GOOGL, GOOG) or Microsoft (MSFT) decides that it has reached a limit for how much it is willing to spend.  It would not need to turn off the faucets entirely to spook the markets; it needs only to announce it is no longer increasing its spending.  It seems unthinkable, but if AAPL can succumb to relentless price pressures, so might some of its Mag7 peers.

Today, SPX (1-Minute Candles), NDX (blue line)

Source: Interactive Brokers, past performance is not indicative of future returns.