Still Building ‘Priceless’ List As Stocks Wobble

Nvidia has become so important as a benchmark stock, like chemical giant ICI in earlier years, that it is hard to say if its shares are falling because the market is falling or the whole market is falling because Nvidia shares are weak.

Both the chart and the fundamentals remain amazing. What is most likely happening is a period of profit-taking/ consolidation. I am sure founder Jensen Huang still sees many opportunities ahead. After a big share split, 10:1 in the case of Nvidia, there is always the possibility of heavy profit-taking.

There are deeper worries about AI and whether it will change the world. I feel that the combination of massive computing power and vast quantities of data will be a game changer and we will always want more of both.

Flat-Lining Money Supply Growth Weighs On Shares

Meanwhile, I have become aware of what could be a significant development on the economic front. Back in the day, there were Keynesians and monetarists. Keynes grew up with the Great Depression and formulated strategies for governments to create and maintain full employment. Monetarists came along when the Keynesian solution led to inflation.

Led by Milton Friedman and the Chicago school of economists the monetarists said inflation was caused by too much money chasing too few goods. The solution was to control the money supply by putting central bankers rather than politicians in charge of interest rates – the price of money.

Implemented in the 1980s the initial effects were painful as unemployment soared but it worked and ushered in an era of great prosperity. In the light of fears of a recession, I had a look at what is happening to the money supply and was struck by what I found.

First of all some background.

From the founding of the Federal Reserve in 1913 until the end of World War II, the money supply tended to grow at a higher rate than the growth of nominal GNP. This increase in the ratio of money supply to GNP shows an increase in the amount of money as a fraction of their income that people wanted to hold. From 1946 to 1980, nominal GNP tended to grow at a higher rate than the growth of the money supply, an indication that the public reduced its money balances relative to income. Until 1986, money balances grew relative to income; since then they have declined relative to income. Economists explain these movements by changes in price expectations, as well as by changes in interest rates that make money holding more or less expensive. If prices are expected to fall, the inducement to hold money balances rises since money will buy more if the expectations are realized; similarly, if interest rates fall, the cost of holding money balances rather than spending or investing them declines. If prices are expected to rise or interest rates rise, holding money rather than spending or investing it becomes more costly.

Since 1914 a sustained decline of the money supply has occurred during only three business cycle contractions, each of which was severe as judged by the decline in output and rise in unemployment: 1920–1921, 1929–1933, and 1937–1938. The severity of the economic decline in each of these cyclical downturns, it is widely accepted, was a consequence of the reduction in the quantity of money, particularly so for the downturn that began in 1929, when the quantity of money fell by an unprecedented one-third. There have been no sustained declines in the quantity of money in the past six decades.

The United States has experienced three major price inflations since 1914, and each has been preceded and accompanied by a corresponding increase in the rate of growth of the money supply: 1914–1920, 1939–1948, and 1967–1980. An acceleration of money growth in excess of real output growth has invariably produced inflation—in these episodes and in many earlier examples in the United States and elsewhere in the world.

Until the Federal Reserve adopted an implicit inflation target in the 1990s, the money supply tended to rise more rapidly during business cycle expansions than during business cycle contractions. The rate of rise tended to fall before the peak in business and to increase before the trough. Prices rose during expansions and fell during contractions. This pattern is currently not observed. Growth rates of money aggregates tend to be moderate and stable, although the Federal Reserve, like most central banks, now ignores money aggregates in its framework and practice. A possibly unintended result of its success in controlling inflation is that money aggregates have no predictive power with respect to prices.

The lesson that the history of money supply teaches is that to ignore the magnitude of money supply changes is to court monetary disorder. Time will tell whether the current monetary nirvana is enduring and a challenge to that lesson.

Money Supply, Anna J Schwartz, economist at the National Bureau of Economic Research in New York

A simple inference from the above is that a rising money supply, especially when unaccompanied by inflation, is good for stocks and a falling money supply is bad. It can be hard to disentangle cause and effect; which is the chicken and which is the egg. I found this chart of what is happening to the US money supply.

I also found a quote relating to the trend.

The value of M2 money supply in the U.S. amounted to 20.86 trillion U.S. dollars in 2023, which was a slight decrease compared to the previous year. While between 2000 and 2019, the M2 money supply increased at a relatively slow pace, there was an exceptionally sharp increase in 2020, which was the result of the Federal Reserve’s quantitative easing in response to the COVID-19 pandemic.

Statista, 1 August 2024

As we know share prices exploded between 2020 and 2021.

The latest figures look more encouraging but the growth rate is well below a historical average of around 6.6pc.

The M2 money supply in the United States rose by $29.3bn from the previous month to $21.054 trillion in July 2024, the highest in 17 months. Money Supply M2 in the United States averaged $5.326 trillion from 1959 until 2024, reaching an all time high of $21.722.30 trillion in April of 2022 and a record low of 286.60 USD Billion in January of 1959.

Trading Economics, source Federal Reserve

Trying to get too precise about all this is the way to a migraine but it seems clear that expanding money supply is bullish and flat or contracting money supply has historically been bearish. Money supply growth looks flat currently, which might explain why inflation is coming down and shares are finding it hard to get lift-off.

What may lie ahead, based on monetary theory is lower inflation (already happening), lower interest rates (mostly still to come) and ultimately a pick up in money supply growth and higher share prices.

I am watching the chart of US 10-year bond yields, which should be poised to fall. It looks promising.

More Shares For My Priceless List (Just One, It Turns Out)

I have decided to feature only one stock in this issue: Zeta Global, an AI-focused business that has just raised its revenue and EBITDA projections and launched an equity fundraising issue.

First, what they do.

Founded in 2007 by David A. Steinberg and John Sculley (Former Apple CEO and Pepsi President), today our vision remains the same: help CMOs make the complexities of modern marketing easier. Zeta empowers enterprises to make smarter business decisions by combining proprietary AI, data, and multiple point solutions together into a single platform, resulting in better results for a lower cost of total ownership.

Zeta website

I found an excellent piece on Seeking Alpha analysing the business which concluded as follows:

In conclusion, I believe Zeta is an intriguing investment opportunity in the fast-growing MarTech [marketing technology] space. The company’s platform is proving to be sticky with its customers thanks to its unified platform approach and specialisation in customer acquisition, which aligns well with the needs of most businesses. It is for this reason that the company’s scaled and super scaled customers have been growing rapidly, which is a promising sign for its future revenue growth.

At the same time, the company’s unified approach and specialisation in customer acquisition provides it with an edge over its competitors by having better understanding of consumer behaviors. In my opinion, this is a major attraction point for Zeta’s platform, since its better understanding of consumer behavior allows its customers to execute more efficient marketing campaigns.

Based on these advantages, I believe Zeta is well positioned to take advantage of the forecasted growth in the MarTech industry and maintain its high revenue growth rates. In light of this, I’m rating Zeta as a buy with a price target of $158 by 2030, representing 653pc upside from its current valuation.

Seeking Alpha, 31 July 2024 (Ahmed Abdelazim)

This is what the CEO had to say with the latest quarterly results.

Three years ago, we went public with the promise of bringing data and AI together to modernise marketing technology. Over the course of these three years, we have delivered on this promise and consistently produced, beat, and raise results.

This quarter was no different. In the second quarter of 2024, we generated revenue of $228m, up 33pc year over year with adjusted EBITDA of $38.5m, up 44pc year over year. Our adjusted EBITDA margin of 16.9pc expanded 130 basis points year over year. This accelerated revenue growth, combined with strong margin performance, means we have achieved the rule of 50 for the first time as a public company [The Rule of 50 is a score that represents a company’s growth rate multiplied by two, plus its free cash flow margins. A score of 50 can indicate a variety of business models, including high growth with losses, medium growth with profitability, or low growth with high profitability].

And once again, we are raising our full-year 2024 outlook by another $25m to $925m at the midpoint. This translates into 27pc year-over-year revenue growth. This is driven by the AI revolution, which is accelerating the replacement cycle of marketing technology. Artificial intelligence is disrupting legacy marketing clouds, which in some cases are even shutting down parts of their business, creating a large opportunity for more innovative, agile, and AI-powered marketing technology companies like Zeta.

As I have stated before, AI has moved from science fiction to a boardroom conversation. Boards are asking CEOs what is their AI strategy. In turn, CEOs are asking their CTOs, CMOs, and CIOs for their plans. And they are turning to us because we turn AI into real-world results for marketers.

Enterprises are looking to Zeta to improve productivity, deliver personalisation at scale, and develop marketing programs with a measurable and superior return on investment. This is core to our value proposition. We have been focused on AI for many years, not many months with AI, natural language processing and data at the core of our platform. As the use of GenAI tools has grown, there has been greater acknowledgment that marketing is among the first functions to be transformed by AI.

Realizing the full potential of GenAI requires proprietary data. Over the last 15 years, we have invested and innovated to assemble one of the largest proprietary opted in data clouds. Our flexible and scalable data platform enhances and extends investments that enterprises have made in modern data warehouses, such as Snowflake and Databricks, and has a robust identity resolution capability built right in. Taken together, these modules make it easier for marketers to target the right customers at the right time while keeping the security of their data and the privacy of their consumers within the enterprise ecosystem.

There is no data exhaust from Zeta’s LLMS [large language models] like there are with others. While our AI-powered intelligence delivers value from day one, we are not standing still. We are seeking new ways to expand our AI advantage. We recently announced an advancement in GenAI functionality by partnering with Amazon’s Bedrock platform.

This collaboration enhances and extends our long-standing partnership with AWS [Amazon Web Services] and gives Zeta greater access to AWS customers with tools to create intelligent AI assistants with personalised workflows that can handle all of their marketing tasks. An emerging example of the power of Zeta’s intelligence is the launch of the Zeta Economic Index or ZEI, which we announced earlier this month. The ZEI is a next generation barometer of the U.S. economy, leveraging Zeta’s proprietary data Cloud, which captures the behavior of 240m Americans.

It predicts the trajectory of the macro economy and highlights microeconomic levers. Zeta’s ability to produce a sophisticated tool like this underscores our commitment to providing unique, actionable business intelligence to enterprises. And with strong initial media coverage by CNBC, Bloomberg, Forbes CNN, and others, the ZEI is also an incremental source of brand awareness. Our ability to provide AI-driven intelligence to the world’s leading enterprises enables them to understand the drivers of consumer behavior and intent.

David Steinberg, co-founder and CEO, Zeta Global, Q2 2024, 31 July 2024

Intriguingly, Steinberg’s co-founder was John Sculley best known as the guy who fired Steve Jobs from Apple. As usual with American CEOs, Steinberg is all set for world conquest.

Our increasing brand exposure is giving us a broader vantage point of where the market is going. This strengthens our ability to improve our competitive position through internal development while remaining opportunistic for accretive transactions that can enhance our platform, accelerate our speed to market, and deliver outside value to our customers.

In closing, I am extremely excited about our growing market awareness and the competitive position of our platform. We remain hyper focused on executing on the huge opportunity in front of us. While we have come a long way as a public company over the last three years, we truly believe we are just getting started.

David Steinberg, co-founder and CEO, Zeta Global, Q2 2024, 31 July 2024

Zeta looks like a seriously wow business!

Zeta is one of the only platforms merging the data ecosystem of existing customers and prospects. For a CTO [chief technology officer], it allows for the elimination of multiple data vendors and first-generation CDPs [consumer data platforms] while creating faster paths to integrate data because of Zeta’s partnerships with companies like Snowflake and AWS. And finally, CMOs [chief marketing officers] want to practically understand what generative AI can do for them and their teams. Otherwise generative AI can be a distraction for buyers if you’re not able to demonstrate its real world utility and ease of use.

Zeta is solving for this. We’ve transformed our internal learning and development team into external-facing customer trainers so we could flatten the AI learning curve for our customers and prove its ease of use. The utility of our AI can be viewed through the lens of conversations our customers are having with our intelligent agents. We now have over 400 agents created to date.

And while it’s still very early, we saw conversations increase 300pc month over month in June alone. Agent conversations drive a more efficient and effective marketing campaign for our customers. It’s these factors, in combination with a well-diversified large enterprise and agency customer set, that we can execute through the choppiness others are having challenges navigating, which is a good lead in to my final topic, how we’re flowing through our upside and 2Q and the details of our increased 2024 guidance. We’re raising revenue and adjusted EBITDA guidance for the third quarter and full year, along with increasing the midpoint of 2024’s free cash flow guidance.

Chris Greiner, CFO, Zeta Global, Q2 2024, 31 July 2024

In answer to an analyst’s question, Steinberg had this to say.

We had said over the last couple of quarters that we had gone from 1 to 3 to 5 [agencies]. So the answer is that in those five we’re seeing the new agencies, the ones we’ve added over the last six months scale very, very rapidly.

One of the things I found so interesting about the quarter was if you look at it, the ARPU [average revenue per user] growth of 22pc from existing customers is emblematic of how well our AI, our data, and our software are working because we’re seeing clients that are using it growing at an accelerated pace. When you look at going from an average of 12 brands per agency to an average of 19 brands per agency, which Chris talked about in the prepared remarks, that’s really just scratching the surface because if you look at it, these five agency holdcos that we work with today each have hundreds of clients. So we’re very happy about the progress there.

We love our agency clients. They’ve been incredible partners to us. Our goal is to help them be the heroes of their stories with their brands, right? So we’re there to service the agencies. And as a subset, they’re bringing more brands to work with us as a part of that.

So I expect that trend to continue. I expect us to continue to grow brands within those agencies. And by the way, there’s a whole host of incredible midsize agencies, some of which we’re working with very, very closely. And our goal is to grow with them as well.

David Steinberg, co-founder and CEO, Zeta Global, Q2 2024, 31 July 2024

Big plans!

Our goal is to continue to grow Zeta from what used to be Zeta who to now what is why Zeta. My long term goal is to get the must-have Zeta, and we continue to work on that. So the more RFPs [requests for proposals] we get, the more language around AI that’s in there, the higher the percentage of them we are winning.

David Steinberg, co-founder and CEO, Zeta Global, Q2 2024, 31 July 2024

This company has massive plans.

Let me start by saying that the biggest pain points in marketing really haven’t changed over the last, pick a number, 100 years, right. How do you eliminate the percentage of your marketing that does not show a high-quality return on investment? And if you look at the industries that are ripe for disruption utilising artificial intelligence, marketing should be right at the top of that. And what we’re seeing is the ability to take our data, which is native to the application layer and our artificial intelligence, which is native to the application layer, and get down to the people with the highest level of intent and the ability to buy and the inclination to buy our clients products. As a result we’re able to show an even higher return on investment by using GenAI and data then even we could a year ago.

And we were already doing pretty well a year ago. So we’re seeing that return on investment for our clients go up exponentially, which is why I think you see our existing clients who are using it. They’re seeing the advancement. They’re buying the products at a substantially higher pace.

And as we’re onboarding clients, we’re able to get them in and then up to speed. As you also asked, how do you get to that literally targeted individual, we’re already doing 1:1 marketing at massive scale. And I don’t really know another organisation that’s able to do that. So we’re able to look at as many as 5,000 to 7,000 individual data signals to target an individual as it relates to our clients, products, and services.

So we’re not fully where I’d like to be, right? Because long term, I would like to only run marketing to clients who are in the market and will be approved for our clients and continue to evolve the return on that investment. And that’s how we continue to grow our ARPU and continue to onboard existing customers, and I think we’re well on our way to getting there.

David Steinberg, co-founder and CEO, Zeta Global, Q2 2024, 31 July 2024

There is ‘something new’ happening at Zeta.

This rolling out our learning and development to our clients has been really game changing with their ability to scale with us, and we think that’s a trend that will continue.

It seems like there was a great awakening with the launch of ChatGPT that has really benefited us from a tailwind perspective as clients have begun to adopt it, and the market has begun to understand the power of our artificial intelligence and our data.

David Steinberg, co-founder and CEO, Zeta Global, Q2 2024, 31 July 2024

I don’t know who is more upbeat, the CEO or the CFO. First the CEO.

We are super excited about the momentum that we have.

Chris Greiner, CFO, Zeta Global, Q2 2024, 31 July 2024

Now for the CEO.

We made the decision seven years ago to completely rearchitect our platform and put data and artificial intelligence as native to the application layer. This allows us to put intelligence at the heart of the platform. Our competitors have to do a step-out of their platform to an AI algorithm, which then has to do a data dip into a third party database, go back to the algorithm, come up with the level of an answer, and go back to the marketing cloud. In our world, where a millisecond matters, we’re able to create substantially better return on investment by making intelligence faster and real time.

So we believe that our competitive advantage over the competitive landscape is getting bigger as we continue to invest and continue to focus on our AI and our data assets. And while they’re trying to catch up to where we are, we’re moving to the next generation. We are incredibly excited about where we are as an organisation and where we’re going technologically,

David Steinberg, co-founder and CEO, Zeta Global, Q2 2024, 31 July 2024

An interesting thing about Zeta Global is that, though it is a small company by US standards, with a market value of around $6bn, it is already followed by 12 analysts. If they do well there will be big institutional buying coming in here and obviously, John Sculley is a well-connected individual.

Share Recommendations (5 September 2024)

Zeta Global ZETA

Strategy – Buy Zeta

I know this alert is far too long. Still, I think the relationship between money supply and the share market is interesting and explains why the stock market is flat-lining currently and could do much better in future when money supply growth accelerates to more normal levels.

I also think Zeta Global looks like a super-exciting investment.