🎙️ Time Curve

More relief is here for the American wallet: Inflation fell in August to new three-year lows, further preparing the Federal Reserve to cut interest rates at its September meeting next week. That helped stocks rise sharply on Wednesday afternoon in a seesaw trading day.

The consumer-price index (CPI) rose 2.5% from a year ago, decreasing from 2.9% in July and extending its cooling streak to five months. Core inflation, which excludes volatile food and energy costs, came in slightly higher than expected at 3.2%.

Stop us if you’ve heard this before: Inflation is falling, but housing costs remain stubborn. Shelter costs accounted for over 70% of the year-over-year rise in core prices.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Can Under Armour be fixed?

• Breaking down the AI spending spree

This, and more, in just 5 minutes to read.

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In The News

👕 Can Kevin Plank Revive Under Armour After Major Slump?

Sometime around 2015, Under Armour was humming. Revenue growth had been soaring, its stock was on a tear, and some people thought it could be on a path to rival Nike. 

But the firm was peaking and hit a wall by 2017, with stagnating numbers since. 

Founder Kevin Plank, who stepped down from his CEO role in 2019, is back in charge. He hopes the company can one day become a premium sports brand by simplifying: It’s cutting the number of products it sells by 25% and reducing discounts, among other measures. 

Not BlackBerry! In meetings, Plank discusses BlackBerry's cautionary tale to describe how an industry leader can become obsolete in a short period of time. But that’s the path the apparel company is on: Shares of Under Armour are down about 23% over the past 12 months and down 87% since 2015, a loss of $18 billion in market value. 

• Sales began declining rapidly in its North American market, and Under Armour underwent three rounds of restructuring. 

A podium brand? This week, Under Armour warned of more annual losses amid high restructuring costs, including closing a distribution facility. 

• Under Armour was founded in 1996 by Plank, a Maryland football player who wanted better workout clothing that was cool, dry, and lightweight. For nearly 20 years, it was on a steady growth trajectory, and some analysts deemed it a real threat to titans like Nike and Adidas. (Plank refers to his firm as a “podium brand” among the top four global athletic brands.)
  

• But he’s not just competing with Nike and Adidas; now, there’s Skechers, New Balance, Lululemon, Puma, and Vuori, all fighting for a slice of the pie. Each one posted higher sales in 2023; Under Armour did not.

Why it matters:

UA’s rise and fall is already a case study in poor operational management and shifting consumer preferences. A company can go from euphoria to chaos in what feels like the blink of an eye. 

UA’s struggles are also another reminder of just how challenging retail can be. In surveys, many males say they no longer wear Under Armour. Wrote investment bank Piper Sandler in a report: “We continue to believe that Under Armour has lost relevance with its target demographic.”

• Less-than-ideal products haven’t helped, such as a new shoe called the “SlipSpeed.” Thanks to poor demand, retail prices for it have been halved.
  

• Plank already has said he will cut out pricey consultants, which his predecessor put in place. That should cut some costs. He also says his firm will focus on performance products and attempt to launch better-quality products that align with what a premium brand would sell. 

Final thoughts: Some say Under Armour is a lost cause. Clothing is a brutal industry full of competition and high costs, and Under Armour has lacked a true identity. 

Others say Plank needs to realize what made him a billionaire: He was a football player who didn’t like sweaty, wet T-shirts, so he and his team created a sweat-absorbing, dry-feeling material. Apparel, not footwear, has always been its strength. Maybe it’s worth going back to its roots. 

Read more

More Headlines

☕ Starbucks’ new CEO wants to make Starbucks a coffee shop again

🏠 The U.S. states with the most million-dollar homes

🏦 JPMorgan Chase shares drop after bank tempers guidance on interest income and expenses

💪 Nvidia CEO Jensen Huang: 'Everybody is counting on us'

🤖 How the AI craze is distorting VC market

💡 Bill Gates on the No. 1 thing that keeps him up at night

💭 Piecing together Berkshire Hathaway's 1988 annual shareholders meeting

🤖 Breaking Down the AI Spending Spree

Generative artificial intelligence has driven soaring valuations and investor optimism. Companies invest billions of dollars in the technology, hoping it will one day lead to enormous profits. But when?

Big tech companies are shoveling huge cash piles into AI to increase productivity, lower costs, and ultimately boost the bottom line. Most are spending record amounts on capital spending, mostly to build hardware for running AI models. 

“The risk of underinvesting is dramatically greater than the risk of overinvesting,” Sundar Pichai, CEO of Google parent Alphabet, said on an earnings call in July.

Betting big: Venture capitalists predict that a handful of promising AI startups could someday be worth trillions of dollars, but it’s nearly impossible to tell which ones will succeed over decades. Still, they’re placing their bets on AI startups to the tune of $64.1 billion this year, which could match the record year in 2021. 

• The Wall Street Journal reports that this year's total share of VC investments in AI is the highest on record.
  

• Look around the U.S., where new data centers have opened up with specialized chips to run generative AI applications.
  

• From 2020 through now, Microsoft has more than doubled its number of data centers. Google’s total is up 80% over the same period, and Oracle plans to build 100 new data centers. 

Training runs: As WSJ reports, “AI data centers are more power hungry than those built in the past because AI chips require a constant and reliable source of energy to operate. Even brief dips in power could damage the ‘training runs’ in which AI models improve by analyzing reams of data. For large models, each training run costs tens or hundreds of millions of dollars… Since 2015, the amount of power that data centers in the U.S. and Canada have ordered from energy companies has increased nearly ninefold.”

• Most of the chips to train and run AI come from Nvidia, whose graphics processing units (GPUs) were originally designed just for video games. Now, they’re used for virtually everything AI-related at big tech companies like Amazon and OpenAI. Their top chips cost tens of thousands of dollars apiece.

Meta CEO Mark Zuckerberg says his company plans to have 600,000 GPUs by the end of 2024. Tesla’s Elon Musk, who is building his own AI startup, xAi, hopes to have 300,000 GPUs by next summer.

Why it matters:

To meet all these lofty goals, tech is hiring, but not for traditional “tech” jobs.

Instead, they’re after AI-related jobs after widespread layoffs in other departments. Tech firms are investing millions in hiring research scientists and other roles with rich compensation packages, including sizable company stock programs. Nearly all of these AI gigs have salaries well into the six figures, and new listings for AI-related positions in July were up nearly 50% compared with last year, while postings for tech jobs overall were down slightly.

This means that, at some point, all of this investment will need to generate a return. Investors are growing a bit more impatient with Silicon Valley’s AI spending. They penalized the stock of companies like Meta and Microsoft that have increased AI spending without fast-enough revenue growth.

Here’s WSJ: “Worries about whether AI backers have gotten ahead of their skis hark back to the dot-com era a quarter-century ago when companies poured cash into fiber-optic networks to support bullish estimates of internet use that took longer to develop than expected.”

Time curve: Executives, meanwhile, are asking for more time and patience. Zuckerberg says it will be years before Meta sees the big payoff, and Google’s Pichai said “there is a time curve in terms of taking the underlying technology and turning it into meaningful solutions.” Investors will just have to wait.

Read more

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Quick Poll

On Monday, we asked: Do you own any Indian stocks? Why or why not?

— Nearly half of respondents said they won’t invest in Indian stocks, either because they don’t know how, don’t want to do the research, or say they’re satisfied with U.S. stocks’ performance.

One investor said, “I already have exposure to India through Coca-Cola, Apple, Proctor & Gamble, etc. I traveled to India and learned more about their markets and economy earlier this year. It's not a regulatory regime I feel comfortable investing in.”

— On the other end, one said: “I own the Franklin India ETF.”

See you next time!

That's it for today on We Study Markets!

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