Weekly Reads - April 10, 2023
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The flight of deposits is spreading across the entire U.S. banking system, potentially forcing a widespread repricing of deposit rates putting pressure on already fragile regional banks and the returns on capital of the largest U.S. banks .
The largest U.S. banks are expected to report that customers withdrew billions of dollars in deposits so far in 2023 even after benefiting from the collapse of SVB. Analysts believe that depositors are seeking higher returns and are moving capital to money market funds with depositors pulling nearly $100 billion from the largest banks in the first three months of 2023. The largest banks were seen as winners from the SVB collapse taking in new deposits and customers who fled smaller banks for the safety of large banks like Bank of America, JPMorgan Chase, and Wells Fargo. Now it seems that short term tailwind is subsiding with depositors tiring of low savings rates and looking to alternative investment vehicles. This is a trend that started before the collapse of SVB but now is picking up steam potentially forcing banks to battle for deposits by offering higher rates. A repricing in deposit rates would pressure net interest margins and reduce the returns on equity these banks could generate which would have a negative impact on equity valuations. While the repricing of deposit rates would pressure the profit margins of big banks short-term it is unlikely that these banks would feel any lasting impact, unlike smaller banks which are teetering on the edge of failure. Unlike large banks with deep deposit reserves and shorter duration loan books smaller banks have loan books that are higher duration and are more susceptible to declines in deposits. If smaller banks are forced to reprice their deposit rates, we could see many smaller banks fall into situations in which they are losing money over the next few years and external capital is required to keep these banks operational.
The rising competitiveness of internally designed chips by the largest tech companies indicates that the competitive moat for 3rd party chip designers is narrowing and the space will likely be commoditized over the upcoming decade.
With AI as the buzz word of 2023 we have seen shares of AI adjacent stocks skyrocket to 52 week highs. The most notable has been NVIDIA which has seen its shares climbing 88% YTD on the back of the AI craze sweeping the market. NVIDIA has been the key innovator in AI GPUs and has positioned itself to take advantage of growing AI workloads. Despite a massive lead over its competitors Alphabet recently reported their Tensor Processing Unit(TPU) which they use for their internal AI work was 1.7x to 1.9x faster and more power efficient than NVIDIA’s A100 chip. NVIDIA has responded to this claim not denying its accuracy but telling the public that its new 5thgeneration chip has outperformed Alphabet TPU 4th generation chip in tests. The fact that NVIDIA did not dispute Alphabet tests indicate that NVIDIA’s lead in AI is slowly dissipating and there becomes little incentive for big tech companies to outsource chip design to companies like NVIDIA. We are already seeing this trend happen in CPU with Apple in housing chip design to save on costs and maximize device performance. It is not unreasonable to think that this will happen in the AI field with the largest users of AI (Alphabet, Meta, Apple, Microsoft) looking to reduce costs and differentiate their chips via internal design. Since almost every chip is manufactured by Taiwan Semiconductor using the same manufacturing equipment there is very little way to differentiate a chip outside of design. With massive R&D budgets and top industry talent it is foolish to believe that these tech giants won’t be able to replicate the design and performance of NVIDIA chips over time. If these tech giants are able to inhouse all AI chip design the AI growth opportunity for NVIDIA could be smaller than investors and the market are expecting.
To satisfy long term financial targets and investor demand for profitability over growth we are likely to see more announcements of emerging market exits from Uber in the next twelve to eighteen months.
Uber has announced the sale of a $400 million stake in Careem, a Middle East based ride hailing company which Uber bought in 2019 for $3.1 billion. Specifically, Uber is selling their 50% stake of the Careem Super App (now known as Careem Technologies) which was spun off from Careem into its own business. Careem Technologies will consist of operations in food and package delivery, bus services, and credit transfers. This news follows previous exits of emerging markets such as Egypt, Honduras, Romania, and Saudi Arabia in 2019/2020 with more likely to come. Since it's IPO Uber has been under pressure to rein in their growth ambitions and focus on markets that are profitable or trending toward profitability. While Uber has done some work in exiting unattractive emerging markets it is still in 70 countries worldwide and continues to invest in new unprofitable ventures to chase growth. With macro conditions worsening and investors becoming increasingly impatient with Uber we believe that we are at tipping point of more geographic exits for Uber. Uber’s long term take rate, revenue, and profitability targets have not yet been achieved by the company and the clock is ticking. With Uber profitable on a GAAP basis in many mature markets like the U.S. it would make sense that management exit or reduce exposure to markets that are significant drags on overall profitability and take rates. Uber’s operations in these local emerging markets could be monetized like they did with Careem, and capital can be deployed in large markets trending toward profitability or returned to shareholders. It wouldn’t surprise us if we see more news reports of Uber scaling down their global operations to meet their financial targets.