February 2025

MARKET LOGIC.EXE HAS CRASHED

(AVGO), (GOOG), (META), (AMZN), (NVDA), (TSM)

Last weekend, while cleaning up my home office, I came across an old Intel 486 processor I'd kept as a memento from my first custom-built PC.

Funny how things change - that chip had about 1.2 million transistors. Today's AI accelerator chips? We're talking billions.

This old relic got me thinking about Broadcom (AVGO) and the recent market hysteria over AI chip competition.

Speaking of hysteria, let me tell you about the market's latest panic attack. When news broke about DeepSeek's supposedly cheaper-to-train Chinese language model, investors acted like someone had just announced the death of AI.

Over $1 trillion in market cap vanished faster than a plate of cookies at a board meeting.

And here's the kicker: DeepSeek reportedly spent just $5.6M on training compared to Google (GOOG) DeepMind's Gemini at $191M and OpenAI's GPT-4 at $78M.

Broadcom took a nasty hit in this selloff, dropping 17.3% at its worst.

That's quite a haircut for a company that just reported AI-related revenues of $12.2B - a whopping 41% of their semiconductor business in FY2024. For more context, that's up 21 percentage points year-over-year.

But here's where it gets curious. While having lunch with a semiconductor industry veteran the other day, he couldn't stop talking about Broadcom's custom ASIC business.

These aren't your garden-variety chips - they're custom-designed AI accelerators for the likes of Google, Meta (META), and Amazon (AMZN). And guess what? All these companies are ramping up their AI spending, not cutting back.

The numbers tell an intriguing story. Taiwan Semiconductor Manufacturing Company (TSM), the world's leading chip manufacturer, reports that their advanced 3nm and 5nm chips now represent 60% of revenue, up 8 points quarter-over-quarter and 10 points year-over-year.

That's not the trajectory of a dying industry - that's a growth story with legs.

Want to talk about margins? NVIDIA (NVDA) has been enjoying gross margins of 75% in their latest quarter, up from 61.2% in FY2019, though down a bit from their peak of 78.4%.

When you're making margins like that, you're practically printing money. No wonder hyperscalers are looking at custom ASICs as an alternative - and that's where Broadcom shines.

Looking ahead, analysts expect Broadcom to grow revenue and earnings at a CAGR of 16.3% and 23.1% through FY2027.

That's not just impressive - it's an acceleration from their already robust historical growth of 17.9% and 18% between FY2019 and FY2024.

The stock isn't exactly cheap at 34.85x forward earnings, up from its 5-year mean of 20.11x.

But in the context of the sector, with a forward PEG ratio of 1.69x compared to the sector median of 1.82x, it's still digestible.

NVIDIA, by comparison, trades at 40.66x forward earnings with a PEG ratio of 1.07x.

Yes, the dividend yield has dropped to 1.07% from its 5-year average of 2.76%, but that's what happens when your stock becomes a market darling.

Short sellers seem to agree - they've reduced their bets against Broadcom by 7.9% compared to last year.

Here's my bottom line: The market's reaction to DeepSeek looks like a classic case of throwing the baby out with the bathwater.

Broadcom isn't just riding the AI wave - they're helping build the surfboard. Their custom ASIC business is perfectly positioned as tech giants look to optimize their AI infrastructure costs.

That old 486 processor sitting on my desk reminds me of an important lesson: in tech, it's not about where we've been, but where we're going.

And Broadcom? They're headed toward the next generation of AI chips, with volume shipments of 3nm ASICs scheduled for the second half of fiscal 2025.

For now, I'm calling this one a Buy on any pullbacks. Sometimes the market hands you a gift wrapped in panic - this might be one of those times.

February 5, 2025

Tech Letter

Mad Hedge Technology Letter
February 5, 2025
Fiat Lux

Featured Trade:

(AMAZON DOESN’T NEED WORKERS)
(AMZN), (AAPL)

Amazon Doesn't Need Workers

Tech Letter

Flatten the curve!

No, I am not talking about that 2020 thing, I am talking about the CEO of Amazon Andy Jassy’s vendetta to remove the middle manager tier out of the company he runs.

Flatten the curve so there is no more middle manager and everyone is on the same level with higher-ups rejoicing with the entry levels.

Everything sounds ideal, right?

So why buy this company’s stock?

Why do it?

Easy answer – the stock price goes higher.

Jassy’s campaign to gut the bloat out including the higher earners of Amazon is ringing alarm bells within the employee ecosystem at Amazon.

Amazon is probably the worst FANG company to search for a job at this point. I would never recommend it to a friend.

The thing about Jeff Bezos, he paid his employees well and promised promotions and lots of other perks.

Jassy is promising the inverse and employee morale has fallen off a cliff then mixed into the fact that workers now go back to the office 5 days per week when the standard at other tech companies is a hybrid 3 days per week in-office requirement.

Tried and Tested Amazon's career paths are drying up faster than the Salt Lake in Utah.

Managers fear replacement by lower-paid people with less experience and half a brain.

Jassy has even coined a new term “horizontal development” which he wants workers to understand as a fake promotion.

Jassy even codified his philosophy into a published 1,400-word manifesto for change on Amazon’s corporate blog — where investors could read it — and appears to have targeted an entire layer of middle managers.

Jassy is pressuring HR to hire from a pool of recent college graduates to fill positions while finding reasons to remove more senior workers.

Jassy’s cost-cutting has helped increase profits in each of the past six quarters, and the shares have surged 42% in the last 12 months.

Targeting middle managers rather than front-line workers has become more common recently in corporate America because these people tend to have higher salaries and usually don’t contribute directly to a project by coding or negotiating deals.

Like 2024, I do believe Amazon has a great chance at defying the tech malaise by pushing the financials over the line.

The stock will be rewarded by a higher share price.

Let’s be straight, Amazon isn’t reinventing the wheel.

There is no big new shiny thing to hang their hat on.

But much like Tim Cook came in for Steven Jobs, Jassy has come in for Jeff Bezos to operate the hell out of Amazon and search for nickels in the corner of every couch.

Sadly, that is what has come of Silicon Valley and the “most innovative” place in the world.

The truth is that Silicon Valley isn’t innovating like it used to aside from a few people like the guy who figured out how to re-use rockets.

However, Amazon and Silicon Valley don’t need to offer something new when there is little competition besides the Chinese (which are taking over the iPhone and EV business).

Unluckily for China, it’s harder for the Chinese to replace a foreign e-commerce and logistics company while easier to rip off a smartphone.

Buy the dip in Amazon in 2025.

February 5, 2025 - Quote of the Day

Tech Letter

“I'd rather be optimistic and wrong than pessimistic and right.” – Said CEO of Twitter Elon Musk

Trade Alert - (GOOGL) February 5, 2025 - BUY

Tech Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

February 5, 2025

Jacque's Post

(WHERE DOES AUSTRALIA STAND IN RELATION TO THE U.S. AND TRUMP 2.0)

February 5, 2025

Hello everyone

The United States makes more from Australia than Australia makes from the United States in terms of trade and investment. The United States is Australia’s largest economic partner.

TRADE

In 2023, Australia exported $12.59 billion to the United States.

The United States has a trade surplus with Australia, with the surplus in goods and services favouring the United States.

The United States is Australia’s third largest trading partner for goods.

The United States is the third most popular tourist destination for Australian residents.

INVESTMENT

The United States is Australia’s largest foreign investment destination.

At the end of 2023, the United States had invested $1.17 trillion in Australia.

Below is a list of the top twenty exports to the United States.

This is by no means everything on the list.

The prospect of an international trade war with the U.S. now must be factored into the realm regarding inflation and interest rates in Australia. The likely downward trajectory of inflation and interest rates has been complicated by Trump’s “bull at a gate” mentality over tariffs on goods from many countries.

Vowing to stick to his election promise, Trump wants the U.S. to return to a “golden age” of U.S. manufacturing. China has been loud and clear that countermeasures are coming. And Canada has already responded by slapping a 25% tariff on a range of U.S. imports. Certain provinces have indicated that they will no longer buy American goods, so public influence will spin the tables against Trump’s actions.

Mexico, too, has indicated that it will also levy retaliatory duties on American goods.

It was initially understood that Trump’s rationale for threatening tariffs on Canada and Mexico was to force these countries to stem the flow of fentanyl and illegal immigrants across the border into the U.S. But it seems they have become more than a bargaining chip and look certain to be locked into place to protect America and make it great again, even though it may be a painful journey.

Trump has also drawn attention to his intention to impose tariffs as early as mid-February on imports from all countries of computer chips, pharmaceuticals, steel, aluminum, copper, oil, and gas into the U.S.

The implications for Australia’s open and export-oriented economy, which greatly benefits from free trade, are two-fold.

Australia risks importing higher inflation. And, secondly, Australian exports to the U.S. risk getting caught up in the trade war. For instance, blood plasma made by biotech giant, CSL, is among the $1.7 billion a year pharmaceutical exports that are at risk of being hit by Trump’s tariffs if they are imposed on Australia.

The potential hit to costs and sales for Australian companies that do business in the U.S. is significant. The Albanese government will need to act swiftly to negotiate an agreement with the U.S. to minimize the potential damage from Trump’s trade war.

There are many other effects too. Disruptions to international trade that slow the world economy would drag on Australia’s 0.3 annual rate of GDP. Effects could include the acceleration of the economic slowdown in China, which is Australia’s main trading partner.

The looming trade war has consequences not only for inflation and interest rates but also for economic growth.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Trump’s latest expansionist tendency includes wanting to take over the Gaza Strip. He wants to transform it into the “Riviera of the Middle East.” This is on top of wanting Greenland, and the Panama Canal.

Instability on the geopolitical front could go from amber to red.

Cheers

Jacquie

February 5, 2025

Diary, Newsletter, Summary

Global Market Comments
February 5, 2025
Fiat Lux

Featured Trade:

(THEY’RE NOT MAKING AMERICANS ANYMORE)

They’re Not Making Americans Anymore

Diary, Homepage Posts, Newsletter

You can count on a bear market hitting some time in 2038, one falling by at least 25%.

Worse, there is almost a guarantee that a financial crisis, severe bear market, and possibly another Great Depression will take place no later than 2058 and would take the major indexes down by 50% or more.

No, I have not taken to using a Ouija board, reading tea leaves, nor examine animal entrails in order to predict the future. It’s much easier than that.

I simply read the data that was just released from the National Center for Health Statistics, a subsidiary of the federal Centers for Disease Control and Prevention (click here for the link).

The government agency reported that the US birth rate fell to a new all-time low for the second year in a row, to 60.2 births per 1,000 women of childbearing age. A birth rate of 125 per 1,000 is necessary for a population to break even. The absolute number of births is the lowest since 1987. In 2017, women had 500,000 fewer babies than in 2007.

These are the lowest number since WWII, when 17 million men were away in the military, a crucial part of the equation.

Babies grow up, at least most of them. In 20 years, they become consumers, earning wages, buying things, paying taxes, and generally contributing to economic growth.

In 45 years, they do so quite substantially, becoming the major drivers of the economy. When these numbers fall, recessions and bear markets occur with absolute certainty.

You have long heard me talk about the coming “Golden Age” of the 2020’s. That’s when a two-decade-long demographic tailwind ensues because the number of “peak spenders’ in the economy starts to balloon to generational highs. The last time this happened was during the 1980’s and 19990’s stocks rose 20-fold.

Right now, we are just coming out of two decades of demographic headwind, when the number of big spenders in the economy reached a low ebb. This was the cause of the Great Recession, the stock market crash, and the anemic 2% annual growth since then.

The reasons for the maternity ward slowdown are many. The Great Recession certainly blew a hole in the family plans of many Millennials. Falling incomes always lead to lower birth rates, with many Millennial couples delaying children by five years or more. Millennial mothers are now having children later than at any time in history.

Burgeoning student debt, which just topped $1.5 trillion is another. Many prospective mothers would rather get out from under substantial debt before they add to the population.

The rising education of women is another drag on childbearing and is a global trend. When spouses become serious wage earners, families inevitably shrink. Husbands would rather take the money and improve their lifestyles than have more kids to feed.

Women are also delaying having children to postpone the “pay gaps” that always kick in after they take maternity leave. Many are pegging income targets before they entertain starting families.

As a result of these trends, one in five children last year were born to women over the age of 35, a new high.

This is how Latin Americans moved from eight to two-child families in only one generation. The same is about to take place in Africa, where standards of living are rising rapidly, thanks to the eradication of several serious diseases.

The sharpest falls in the US have been with minorities. Since 2017 the birth rates for Hispanics have dropped by 27% from a very high level, African Americans 11%, whites 5%, and Asians 4%.

Europe has long had the same problem with plunging growth rates but only much worse. Historically the US has made up for the shortfall with immigration, but that is now falling thanks to the current administration policies. Restricting immigration now is a guarantee of slowing economic growth in the future. It’s just a numbers game.

So watch that growth rate. When it starts to tick up again it’s time to buy….in about 20 years. I’ll be there to remind you with this newsletter.

As for me, I’ve been doing my part. I have five kids aged 15-34, and my life is only half over. Where did you say they keep the Pampers?

I’m Doing My Part

February 4, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
February 4, 2025
Fiat Lux

Featured Trade:

(TOO RICH TO FAIL, TOO EXPENSIVE TO SUCCEED)

(MRNA), (TSLA), (NVS), (SNY), (JNJ), (BNTX), (RHHBY), (REPL), (CRSP), (ORCL)

Too Rich To Fail, Too Expensive To Succeed

Biotech Letter

Last weekend, while organizing my home office, I stumbled across an old COVID vaccination card. Remember those? It got me thinking about Moderna (MRNA), the biotech darling that went from relatively unknown to household name faster than you can say "messenger RNA."

Now, in early 2025, this once up-and-coming company is already facing what my grandmother would call "champagne problems" - too much cash to be broke, but burning through it faster than a Tesla (TSLA) on Ludicrous mode.

First, let's talk about this biotech's cash burn. In just nine months of 2024, Moderna torched through over $4 billion - that's the same amount they burned in all of 2023, suggesting their cash cremation rate is actually accelerating.

This acceleration in spending wouldn't be as worrying if they had endless reserves, but their current position shows $7 billion in cash and $2 billion in non-current investments.

The math isn't complex: at this burn rate, their runway is shorter than many investors realize.

The recent Health and Human Services (HHS) grant of $176 million in July 2024 for bird flu research barely registers on their financial statements.

While we've seen about 70 bird flu cases in the U.S. with one fatality in an elderly patient with underlying conditions, this isn't going to be another COVID-style revenue stream.

I've analyzed enough pharmaceutical companies to know that betting on another pandemic windfall is like expecting lightning to strike twice in the same spot.

What really interests me is Moderna's position in the competitive landscape. I spent last week analyzing patent data and geographic reach metrics across the industry.

First, you've got the old-guard pharma giants like Novartis (NVS), Sanofi (SNY), and Johnson & Johnson (JNJ), who have been at this game since before mRNA was a gleam in a scientist's eye.

Then, there are companies like BioNTech (BNTX) and Roche (RHHBY) with significantly higher geographic reach, while Replimune Group (REPL) and CRISPR Therapeutics (CRSP) demonstrate superior application diversity.

In comparison, Moderna's position in this landscape shows relatively low scores on both metrics - not exactly what you want to see from a company burning cash at this rate.

Stéphane Bancel, Moderna's CEO, recently outlined their pipeline: 2 approved medicines, 7 Phase 3 trials, and 45 candidates in development. They're also targeting $1.1 billion in annual R&D cost reductions by 2027.

But here's what keeps bothering me: their SG&A expenses have ballooned to nearly 10 times their pre-COVID levels, yet management is focusing on R&D cuts instead of addressing this administrative bloat.

The insider trading patterns since early 2024 haven't exactly inspired confidence either.

When I see heavy selling from insiders while a company is promising future breakthroughs, I can't help but remember all the biotech stories I've covered where the promise didn't match the reality.

Speaking of promises, Oracle's (ORCL) Larry Ellison recently made headlines talking about 48-hour personalized cancer vaccines using AI and robots.

While the technology sounds promising, I'm more interested in the practical path to profitability. Moderna isn't alone in this race, and their well-capitalized competitors have the luxury of funding similar development programs while maintaining positive cash flow.

Given Moderna's cash burn trajectory, their next three quarters will be telling.

I'll be watching that $4 billion nine-month burn rate closely, along with their progress on cost reductions - particularly those inflated SG&A expenses that management seems reluctant to address.

I'm keeping my old vaccination card as a reminder of Moderna's impressive COVID-19 achievement, but I'm not ready to bet on lightning striking twice.

Sometimes the hardest part of investing is knowing when to appreciate history without banking on its repeat performance.