Mad Hedge Technology Alerts!
Chip stocks have been the talk of the town in the tech world.
It’s hard not to notice as stock valuations skyrocket.
These aren’t normal times anymore.
A secular trend that could be the biggest we have seen for a generation is taking hold.
That trend today is AI, and this 800-pound gorilla in the room is causing institutional money to pour into the chips that will help AI and the top firm is clearly Nvidia (NVDA).
After NVDA, there is a solid group of others like AMD, but even after that, there is still more ammo left in the shotgun.
Investors could look at an intriguing name - something like Western Digital (WDC).
WDC has a $19 billion valuation and in the long term future could be considered a bargain looking back.
Its earnings weren’t great with another quarter of decelerating revenue.
Western Digital (WDC) reported a narrower-than-expected loss for its December quarter, with revenue just squeaking past expectations.
The business model has been affected due to the impact of structural changes the company implemented in its flash and HDD businesses.
Last quarter, the company said it would spin off its flash memory business, which has been grappling with a supply glut after talks of merging the unit with Japan's Kioxia stalled, by the second half of 2024.
The company said its second-quarter loss included $156 million underutilization-related charges in Flash and HDD.
Western Digital has struggled as demand for memory chips cooled in the past couple of years, but underlying shares have rallied in recent months.
WDC stock had gained nearly 40% since the end of October.
Cloud represented 35% of total revenue, with the quarterly growth attributed to higher “nearline” or onsite data storage shipments to data center customers and better nearline pricing. The increase in client revenue was driven by an increase in the average selling price of flash memory and customer revenue was driven by a seasonal surge in flash bit shipments.
Revenue came in at $3.023 billion, down 2.5% year-over-year but up 10% quarter-over-quarter.
In addition to the recovery in both Flash and HDD markets, I believe storage is entering a multi-year growth period.
Generative AI has quickly emerged as yet another growth driver and transformative technology that is reshaping all industries, all companies, and our daily lives.
Importantly, industry analysts estimate that the edge now represents approximately 80% of total NAND bit shipments, an increase from approximately 75% in 2022, which is another indication that cloud demand was significantly pulled in during the pandemic.
In addition, I believe the second wave of generative AI-driven storage deployments will spark a client and consumer device refresh cycle and reaccelerate content growth in PC, smartphone, gaming, and consumer in the coming years.
WDC has done some nice business specifically in the cloud division with some serious growth.
WDC is also at the center of the generative AI trend and they could be the recipient of “the tide lifts all boats.”
However, I don’t like how revenue as a whole isn’t growing causing major uproar in the investor community.
Splitting up the company should do the trick of weeding out the bad revenue from the good.
I do believe that WDC represents good value for buy-and-hold investors in the mid-$50 range.
This isn’t an ideal stock to trade in and out and even on an earnings beat, the stock sold off which isn’t what investors like to see in terms of price action.
There isn’t enough investor confidence in the stock yet, but that could change in the future.
Mad Hedge Technology Letter
January 24, 2024
Fiat Lux
Featured Trade:
(THE EV REALITY CHECK)
(TSLA), (RIVN), (TOYOTA)
Sometimes tech trends start and stop and then start again.
It certainly felt that way for the EV industry when the Chairman of Toyota Akio Toyoda threw a damp towel on the progress of EVs taking over the world.
The Japanese Chairman told the world that he thought EVs will never account for more than a third of the market and that consumers should not be forced to buy them.
These ideas definitely go against the grain of the liberal democratic order.
Listen to the bureaucrats in Brussels and the left-wing establishment in Washington and it almost seems as if they want to ban oil and gas products.
Of course, the ban is certainly hyperbole, but the green movement towards lithium battery-powered cars has become quite political and partisan.
Akio Toyoda, chairman of the world’s biggest carmaker by sales, said that electric vehicles (EVs) should not be developed to the exclusion of other technologies such as the hybrid and hydrogen-powered cars that his company has focused on.
He said he believed battery EVs will only secure a maximum of 30% of the market – less than double their current share in the UK – with the remaining 70% taken by fuel cell EVs, hybrids, and hydrogen cars.
Mr. Toyoda argued that electric cars’ appeal is limited because one billion people in the world still live without electricity, while they are also expensive and need charging infrastructure to operate.
The chairman also pointed to Toyota’s recent announcement that it was working on a new combustion engine, saying it was important to give engine factory workers a role in the green transition.
In recent weeks, that strategy has been partially vindicated after Toyota revealed it had produced a record 9.2 million vehicles in 2023 with one month of the year still to go. The annual total is expected to exceed 10m.
At the same time, sales for January to November increased 7% to 10.2 million vehicles.
Koji Sato, the car maker’s chief executive, last year promised Toyota would sell 1.5 million battery EVs a year by 2026, and 3.5 million by 2030.
Tesla, the world’s biggest EV producer on an annual basis, reported 1.8 million deliveries last year.
Mr. Toyoda’s two cents come after electric car sales have slowed in the western world towards the end of 2023.
I am of the notion that in the short term, all the low-hanging fruit has been plucked by the EV buyers.
To find the next incremental buyer, it won’t be impossible, but that same type of excitement won’t exist.
The truth is that many consumers are still tied to the combustible engine.
On a recent trip to Japan, almost no local drove an EV and I witnessed almost no charging points.
If one of the biggest economies in the world isn’t convinced, then there is still a lot of work to do and I don’t believe that the Japanese will give up gas-powered engines so quickly.
In the short term, the demand weakness in EVs bodes ill for EV stocks like Tesla or Rivian.
Throw in the fact that EVs aren’t cheap and the cost of living crisis is forcing consumers to migrate to necessities which unfortunately doesn’t include a brand new Tesla.
Stay away from EV stocks in the short term and pile into the AI narrative.
