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What’s Driving Stocks This Morning

Stocks broadly retreated yesterday after industry site The Information reported internal documents at Oracle (ORCL) indicated a division at the tech giant that provides specialized servers to OpenAI and other businesses was generating just 14% gross margins. It brought to the fore once again growing concerns about the returns on investment from the massive spending on AI.

That hasn't kept Nvidia (NVDA) from pouring massive amounts of money into the space. The AI chipmaker is reportedly investing as much as $2 billion into Elon Musk's xAI in yet another circular round of purchases. xAI, which has raised more than expected in a financing round, will use Nvidia's cash to buy its AI accelerators for use in the Colossus 2 project.

While these deals have generated excitement on Wall Street, they are increasingly being critiqued as a questionable form of vendor financing that is essentially paying customers to boost sales.

It wasn't enough to stop NVDA stock from pulling back, as the ORCL report weighed heavily on the tech sector. ORCL itself initially plunged 7% on the AI profit news, though it ended up just 2.5% lower for the day. 

It had the effect, however, of dragging down other tech stocks with it. Microsoft, Alphabet, and Meta Platforms also eased back yesterday, helping to drop the S&P 500, which had just set its 32nd record the day before, as well as the Nasdaq, which also previously closed at a record high.

Investors instead continued to rally around safe haven assets, sending gold above $4,000 an ounce for the first time ever, though Bitcoin (BTC) retreated from its high.

The Big Picture: Questions continue to mount about the ROI of AI investments after Oracle is reportedly generating scant profits despite pouring billions into the sector. Its stock is up 70% year-to-date after securing huge new AI contracts. Companies, though, may begin to face closer analyst and investor scrutiny from the AI spending.
 

Stocks on the Move (Pre-Market)

• Equifax (EFX) $244.15 +2.6% - The credit reporting bureau will cut prices on mortgage scores after Fair Isaac (FICO) will cut credit bureaus out of the loop and sell directly to lenders.
• Micron Technology (MU) $188.15% +1.3  The chipmaker is still benefiting from numerous analyst upgrades following its earnings report that initially saw shares tumble.
• Newmont (NEM) $88.99 +2.3% - The gold miner is moving higher on no company-specific news, but likely rose due to gold breaching the $4,000 threshold.
• Advanced Micro Devices (AMD) $214.43 +1.4% - The chipmaker continues its run higher after signing massive deal with OpenAI
• Fair Isaac (FICO) $1,836.00 -2.3% - The credit bureau's decision to cut the three reporting agencies out of the loop and sell its scores directly to lenders isn't sitting well with investors.
• FedEx (FDX) $236.51 - 2.4% - The logistics giant is falling after JPMorgan analysts downgrade the stock to Neutral and cutting their price target, citing freight segment challenges and earnings guidance concerns.
   

Upgrades & Downgrades

Upgrades:

• Advanced Micro Devices (AMD) upgraded to Buy at Jefferies, tgt $300
• Brinker (EAT) upgraded to Overweight at JPMorgan, tgt $175
• Netflix (NFLX) upgraded to Buy at Seaport Research Partners, tgt $1,385
• EMCOR Group (EME) upgraded to Neutral at Goldman Sachs, tgt $676
• Fifth Third (FITB) upgraded to Overweight at Morgan Stanley, $60

Downgrades:

• Carmax (KMX) downgraded to Equal Weight at Stephens, tgt $42
• D.R. Horton (DHI) downgraded to In-Line at Evercore ISI, tgt $196
• Dollar Tree (DLTR) downgraded to Underperform at Jefferies, tgt $70
• AST SpaceMobile (ASTS) downgraded to Sector Underperform at Scotiabank
• GE HealthCare (GEHC) downgraded to Neutral at Citigroup, tgt $83
   

Today’s Bottom Line:

One tech stock that bucked yesterday's downward trend was Advanced Micro Devices (AMD), which continued to rise following its own deal with OpenAI that will see it supply the AI shop with up to 6 gigawatts of its Instinct GPUs while giving OpenAI a warrant to buy up to 160 million shares of AMD stock – about 10% of the company. Shares rose 3.8% after surging 24% the day before.

Tesla (TSLA) wasn't so fortunate. Despite NVDA investing in xAI and unveiling two new low-priced EVs, TSLA stock fell 4.5%.

The EV maker unveiled new, stripped down Model Y and Model 3 vehicles priced below $40,000. The Model Y Standard is available for order on Tesla's website starting at $39,990 for delivery in November to December while the Model 3 Standard is even cheaper at $36,990 for delivery in December to January.

The models are only about $5,000 less than previous versions, which underwhelmed investors and sent the stock lower.

The Standard models remove front and rear light bars, and don't offer Full Self-Driving. They only feature automatic cruise control. The Model Y also only comes in three exterior colors while the interior is available in any color so long as it's black.

Tesla is trying to navigate a post-EV tax credit world to attract buyers that are no longer as enamored of EVs as they once were. Musk has said he expects Tesla will face a couple of challenging quarters as sales have fallen in recent periods. It experienced better-than-forecast sales in Q3 as buyers rushed to buy ahead of the EV tax credit expiration at the end of December.
 

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