🎙️ Former karaoke company obliterates trucking market cap

Trucking industry stocks were shellacked on Thursday, with shares of freight companies like CH Robinson (down 15%) and Expeditors International (down 13%) getting smoked. The news? An interesting technology development out of a company better known for karaoke products. 

• A white paper published by Algorhythm Holdings — a company that previously produced consumer karaoke products and also owns 80% of AI logistics company SemiCab — said that its SemiCab AI platform lets customers scale freight volumes by 300% to 400%. 

• Fears that AI will disrupt the freight forwarding and brokerage industry appear to be driving the sell-off, while Algorhythm’s stock shot up 30% on the news.

• Other victims of the sell-off included JB Hunt (down 5%) and Old Dominion Freight (down 4%).

• The market reaction mirrors last week’s AI-led sell-off in software stocks prompted by some impressive performance out of Claude Cowork, and the similar recent sell-off seen in gaming companies following Google’s launch of its Project Genie AI tool.

The ongoing storyline in markets for the first few weeks of the year has been companies that are niche or private release compelling real-world implementation cases for AI, while existing businesses that have grown to dominate in those day-to-day sectors get smoked on the news. 

The Takeaway

Are you a public company with a valuable, earnings-generating business? Congratulations, every day is now a nightmare!

Your CEO wakes up every morning expecting that some R&D lab in San Jose or an outfit that used to be called The Singing Machine Company out of Fort Lauderdale is going to cause a billion dollars of market cap to evaporate in the course of an hour. Every morning, the NYSE opening bell is some upstart’s dinner bell, and you are on the menu. 

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The vibes should have been good. Meta’s fourth-quarter numbers had just trounced expectations. Revenue hit an all-time high. The stock price was ripping after-hours.

But as longtime tech analyst Laura Martin listened to CEO Mark Zuckerberg’s post-earnings conference call late last month, she heard what she later described as “a veiled threat.” 

• Giant tech companies at the heart of the AI boom have never been more profitable, powerful, or highly valued. But for anything non-AI, Wall Street expects increasingly tight budgets at hyperscalers like Meta, Microsoft, Alphabet, and Oracle.  

• Morgan Stanley estimates that group could recognize a whopping $680 billion of depreciation costs over the next four years.

• As those depreciation costs rise in coming years, hyperscalers’ profitability will hinge in part on how effectively they control non-AI operational expenses — in other words, “trading opex for capex,” as another analyst put it.

• And we’re already seeing it: hyperscaler hiring has flattened out. A little over two weeks ago, Amazon announced 16,000 new layoffs, on top of the 14,000 job cuts it had already announced.

Before the AI boom, tech companies considered their lack of large-scale capital investment a key attribute of their “asset-light” business models. The low-cost structure consisted largely of employees, intellectual property, and computing power, resulting in big profit margins and growing piles of cash that companies could use to buy back stock and boost returns. But all that’s changed in the last 18 months. 

The Takeaway

To be sure, tech companies have gone through periods of belt-tightening before. But their current focus on boosting efficiency is a part of a somewhat ironic situation tech workers face that’s different from manias of eras past.

Is it possible that jumps in productivity can offset costs of this scale?

Morgan Stanley’s Todd Castagno is skeptical. “In our view, it’s kind of starting to price in a free lunch,” he said. “And generally, free lunches don’t exist.”

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Sherwood News’ Jon Keegan spoke with George Hershman, CEO of SOLV Energy, literally minutes after his company went public on Wednesday. Hershman discussed the unprecedented demand for energy, his thoughts on Elon Musk’s plans for the moon, and his company’s clever ticker symbol.

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• ⚾️ MLB: By today, every MLB team will have had its pitchers and catchers report to either Arizona or Florida for their first workouts of spring training. Currently the LA Dodgers are incredibly strong favorites to win the World Series, given a 25% chance by prediction markets,* with the Seattle Mariners in a distant second at 9% and the New York Yankees at 8%. 

• 🏅 Olympics: The home-field advantage — or home-ice advantage — sure seems pretty real for Winter Olympics host country Italy, which, with 14 medals so far, is beating expectations by about 7.9 medals. The Italians are still a long shot to win the most golds, but are having a great year. (For more coverage of the Olympics and other sports like this, subscribe to our other newsletter, Scoreboard!) 

*Event contracts are offered through Robinhood Derivatives, LLC — probabilities referenced or sourced from KalshiEx LLC or ForecastEx LLC.

• January CPI

• Earnings expected from Moderna, Enbridge, Advance Auto Parts, and Wendy’s