[SSR TMT] Ten Investable Things that We Think Will Happen in 2024

2023 was all about anything GenAI. Our predictions for the year were mostly right with a few real clunkers. For example, we were dead on in anticipating aggressive regulators targeting tech and calling for a collapse of linear TV advertising, but we had to quickly pivot away from our assertion that GenAI was a bit ahead of itself. In 2024, we expect the picture of winners and losers in the AI era to get a bit sharper. GOOGL is likely to make a splash with a serious GenAI upgrade to its Assistant that will push AMZN and AAPL to follow suit with Alexa and Siri. GOOGL will also press its advantage with Waymo, now running nearly unopposed in the nascent robo-taxi market. AI will also prove a boon to cybercriminals, prompting upside spending on cybersecurity tools for another year. ?While NVDA was the big AI winner in 2023, we see risks – customer concentration, inventory levels, proprietary ASIC processors – that could trigger a miss in 2024. With that, we also fear that the semiconductor upcycle will be a bit underwhelming. We are bullish on residential 5G FWA, bearish on VR/AR headsets, and expect AVOD to drive accelerating growth for streamers, especially NFLX. EdTech has been a mess, but we see K-12 and career development courses as real growth opportunities. Our top three longs – NFLX, GOOGL, and LRN; Our top three shorts – AAPL, AI, and NVDA.

1.????? Voice assistants will be back in a big way. 5 years ago, smart speakers with AI-powered voice assistants were all the rage. While sales of AMZN Echoes and GOOGL Hubs continue to grow, the use cases have remained very narrow – i.e., playing music, accessing smart home functions, and answering simple questions, most often about the weather. GenAI can supercharge those assistants, greatly improving their ability to understand requests, respond appropriately, and act on the user’s behalf. Expect a marketing blitz and list of new use cases to revitalize this space.

2.????? Waymo presses its advantage. GM’s Cruise has taken a big step back after losing its approval to run driverless taxis in SF. Meanwhile, GOOGL’s Waymo is touting its exceptional safety record as it expands in its newest markets - LA and Austin. In 2024, we expect to increase its coverage of existing markets and to announce plans to enter at least 2 more major cities. We see San Diego, Dallas, Miami, and Las Vegas as the most obvious targets.

3.????? AI fueled cyberattacks will sustain the pace of security spending growth. Consensus keeps projecting a deceleration in cybersecurity spending. This will be proved wrong again in 2024 as AI fuels a new wave of more sophisticated and disruptive attacks. Look for names like CRWD, ZS, NET, and others to continue the streak of upside surprises in the new year.

4.????? NVDA misses a quarter. To date, NVDA has been the biggest AI winner, more than doubling its sales YoY and joining the trillion-dollar market cap club. However, we see risks looming ahead. First, given current product shortages, we fear double-ordering from customers could trigger a significant inventory glut once production catches up to demand. Second, demand is increasingly concentrated in the biggest cloud platforms, companies that have a history of lumpy, unpredictable demand. Finally, MSFT, AMZN, and META are following GOOGL’s lead in developing proprietary AI processors. As the AI market consolidates to a handful of adaptable foundation models maintained by these companies, these ASICs could seriously dampen demand for NVDA’s GPUs. Against enthusiastic forward estimates for nearly 60% YoY sales growth, we see a substantial risk of disappointment.

5.????? The semiconductor cycle turn disappoints. The potential of an NVDA miss aside, 2024 should bring a recovery in chip demand, but not as big a turn as bulls expect. Datacenter, automotive, and industrial spending will be the primary drivers, but the smartphone and PC markets, which account for 40% of chip demand may deliver modest low single digit YoY growth. Memory makers and contract fabs will benefit but will struggle to top expectations for 20% sales growth. Possible delays in expected 3D manufacturing processes could also weigh on the sector.

6.????? FWA will take a meaningful share of US residential broadband. Fixed wireless access via 5G wireless networks is poised to more than triple its share of US residential broadband connections in 2024, going from less than 3% to nearly 10% by year end. This will capture all of the growth in the market and then some, with further pressure on wired carriers from younger cohorts going mobile only. This is a hard negative for cable MSOs, a mixed bag for telcos who compete in both wired and wireless access, and a clear boon for T-Mobile and for its suppliers.

7.????? VR/AR headsets will disappoint. Industry analysts estimate that between 8.5 and 10.5 million AR/VR headsets were sold in 2023, roughly flat vs. 2022. Optimists believe that AAPL’s entry into this market with its $3,500 Vision Pro product will spur the overall market to growth. We are skeptical that AAPL will be able to deliver high volumes for its 1H24 launch and see no real killer applications to make mixed reality devices a must have purchase for consumers. IDC projects a massive surge in demand fueling 45%+ unit growth in 2024. We believe actual sales will grow less than 20%.

8.????? Ad-supported streaming takes off. In 2023, nearly every US subscription video streaming service raised its monthly price by as much as 40%, as traditional media companies grappled with multi-billion-dollar losses in the segment. At the same time, these platforms also launched ad-supported versions (AVOD) at lower price points. These AVOD tiers are now taking 30%+ of new sign ups. We expect AVOD to drive upside revenues for streaming in 2024, siphoning off revenues for linear TV nets.

9.????? EdTech soars as AI revolutionizes online learning. Increasing dissatisfaction with K-12 schooling, more favorable government treatment, and rising awareness will accelerate a shift by US families to adopt homeschooling and supplemental online courses. These platforms will employ GenAI to personalize instruction plans and offer cost-effective one-on-one tutoring. The extraordinary growth of online professional education will continue as well, enabling EdTech platforms to outperform.

10.? Our top picks for the year. Long: NFLX – As rivals struggle to reach breakeven, NFLX will deliver accelerating results on the rise of AVOD and higher prices; GOOGL – GOOGL will flex its GenAI muscle after spending most of 2023 playing catch up; LRN – A company in the right place at the right time, LRN will surprise skeptical investors. Short – AAPL – A disappointing smartphone recovery and a dud launch for Vision Pro keep the valuation pressure on all year; AI – Highly dependent on a single customer with a coming contract expiration, AI has a premium valuation despite rising competition; NVDA – If we are right about NVDA missing a quarter, it will underperform.