Tech Letter Archives

Is Nvidia Worth a Long-Term Investment?

Tech Letter

A can’t-miss stock in technology investing has to be Nvidia (NVDA).

We got confirmation from the latest earnings report that they are still too hot to handle.

Sure, the bulk of revenue still mostly comes from gaming, but gaming is still a secular growth driver.

They had another strong quarter overall, with revenue of $6.5 billion and year-on-year growth of 68%.

They set new records for total revenue as well as for Gaming, Data Center, and Professional Visualization.

The pandemic minted a fresh wave of new gamers which has been a generous gift to an already robust company.

The audience for global eSports will soon approach 0.5 billion people, while the number of those who live stream games is expected to reach over 700 million.

Meanwhile, the number of PC gamers helps set the stage for a new audience that will help drive Nvidia’s future products.

Gaming, with revenue of $3.1 billion, was up 11% sequentially and up 85% from a year earlier.

Demand remained exceptionally strong, outpacing supply.

Nvidia has two powerful new GPUs for gamers and creators, the GeForce RTX 3080 Ti and RTX 3070 Ti, delivering 50% faster performance than their prior generation with acclaimed features such as real-time ray tracing, and AI Rendering.

Laptop demand was another blistering division that was again helped by the importance of quality devices in a locked-down world.

From the top-of-the-line gaming laptops to those through mainstream price points as low as $799 that brings the power of GeForce CPUs to gamers, the entire range of products was in high demand.

Highlighting Nvidia’s stranglehold at the cutting edge of technology and the future is its developments in the self-driving sphere.

In autonomous trucking, DRIVE ecosystem partner, Plus, signed a deal with Amazon (AMZN) to provide at least 1,000 self-driving systems to Amazon's fleet of delivery vehicles.

The systems are powered by NVIDIA DRIVE for high performance, energy-efficient and to take advantage of its centralized AI computer.

An autonomous trucking start-up, Embark, is building on NVIDIA DRIVE.

The system is being developed for trucks for four major auto manufacturers representing the vast majority of largest size trucks in the US.

The NVIDIA DRIVE platform is being rapidly adopted across the transportation industry from passenger-owned vehicles to rob taxis, to trucking and delivery vehicles.

The goal is to get Nvidia products in everything that autonomously moves one day, a big goal, but I have seen crazier things come to fruition.

Nvidia expanded AI software and subscription offerings make it easier for enterprises to adopt AI from the initial development stage through to deployment and operations.

The enterprise continues to be a core set of Nvidia’s operations.

In the Enterprise, the application that is driving AI is that every enterprise must move toward being a tech company, take advantage of connected clouds, connected devices, and artificial intelligence to achieve it.

Nvidia just helps facilitate the opportunity to deploy AI services out of the edge.

And in order to do so, there are several things that have to happen; first, they have to create a computing platform that allows them to do training in the IT environment that they understand, which is a virtualized, which is largely managed by VMware (VMW).

And Nvidia’s collaboration with VMware is creating a new type of system that could be integrated into the enterprise that has been quite a significant effort and it's in volume production today.

The second is a server that allows the enterprise customers to deploy their AI models out to the edge.

The AI engine through software suite that they’ve been developing over the last 10 years now has been integrated into this environment and allows the enterprises to basically run AI out of the box.

Putting all of the state-of-the-art AI solvers and engines and libraries that Nvidia has industrialized and refined over the years, are all available to anyone that signs up for an Enterprise license.

The largest eyebrow-raiser in the earnings rhetoric was news from the data center which is expected to have another strong quarter with sequential growth driven largely by “accelerating demand.”

This acceleration has boosted record revenues in both hyperscale cloud and industrial enterprise.

Now we are seeing accelerated growth for the short to midterm.

The acceleration in hyperscale and cloud comes from the transition of the catalyst providers in taking AI applications, which are now heavily deep learning-driven into production.

Ultimately, Nvidia’s gaming division is its cash cow operating at a tremendously high level and the accelerated growth in the data center will help sweeten margins for the foreseeable future.

Gaming demand is continuing to exceed supply and the company expects channel inventories to remain below target levels.

The one controversy that most analysts were waiting for was an update on its acquisition of British chip company Arm Ltd.

Upper management, more or less, offered some vague one-liners expressing “concern” and noting that the deal is “taking longer than initially thought.”

Getting Arm Ltd. onboard to add another monkey branch in its neural network would be a major feather in Nvidia’s cap, but the global regulatory climate has been harsh as of late.

This could be a headwind for future cash flow expectations, yet, ultimately, if there is any weakness in the stock, I would dollar cost average this one out on any 3-5% dip.

Nvidia is highly volatile, and this is not the stock to day trade. Considering we are at new all-time highs of $200, I wouldn’t chase this one higher but wait for the next small dip.

Fortunately, time and time again, Nvidia proves they are at the forefront of tech innovation, powered by a brilliant CEO, and instead of market timing the stock, it should simply be a cornerstone of a long-term buy and hold portfolio.

I am bullish on Nvidia long term with high conviction.

Quote of the Day - August 20, 2021

Tech Letter

“The AI technology will keep you out of harm's way. That is why we believe in an AI car that drives for you.” – Said CEO of Nvidia Jensen Huang

August 18, 2021

Tech Letter

Mad Hedge Technology Letter
August 18, 2021
Fiat Lux

Featured Trade:

(WILL THE ARK INNOVATION FUND CRASH?)
(ARKK), (TSLA)

Will the Ark Innovation Fund Crash?

Tech Letter

Michael Burry, the audacious hedge-fund icon who is famous for being represented in the movie “The Big Short,” is aggressively taking the other side of Cathy Woods, a name synonymous with tech growth.

Such prominent names at loggerheads with each other signals a divergence in interest rate expectations and the fallout, or lack of it, for tech growth stocks.

That is fundamentally the crux of the issue, with the stock market levered so heavily that even a quarter rate rise would undermine it.

Woods seems to minimize any ill-effects that broader volatile behavior will have on her niche area of the tech market.

Statistically speaking, growth tech outperforms the broader market when already low-interest rates are expected to trend lower.

The inverse holds true when interest rates are expected to rise, then tech growth stocks will underperform the broader market and even non-growth tech.

This is precisely why in 2020, elevated growth names rode the wave of the pandemic and shelter-at-home trade as the Fed lowered rates to fuel the stock appreciation.

The party is somewhat over now; or at least the low-hanging fruit has been plucked.

Burry disclosed that his firm, Scion Asset Management, held bearish put options against 235,500 shares of Woods’ actively managed ARK Innovation exchange-traded fund (ARKK) at the end of the second quarter.

The new position was valued at almost $31 million, according to the quarterly filing, which is required for hedge funds above a certain size.

Burry also has a growing put position worth $731 million in Tesla (TSLA), which remains Wood's highest conviction stock.

Woods responded saying, “I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.”

Woods doesn’t understand that this isn’t a call based on a long-term forecast of growth tech outperforming the broader market but more of a short-term call that even slightly rising interest rates will penalize high beta names more than the rest.

No doubt that Burry has a clearly defined entry and exit point while Woods seems to be in the business of blanket statements disregarding idiosyncratic particulars which is a dangerous game.

There is the premise out there that a slightly rising interest rate will rotate money back into FANG names who can, by and large, stomach the ensuing bond rise opposed to loss-making growth stocks that depend on cheap money to fuel unproven business models.

Last year was sensational for ARK Invest, there is no point to play this down, it raked in billions of new assets from spectacular performances by Wood’s active ETFs focused on high-growth innovation-driven stocks. Several were among 2020’s best-performing funds, with returns of more than 100%.

But the funds have struggled to maintain that momentum this year. Many of their stock holdings are trading at frothy valuations that are betting on outperforming expected growth in the future.

As inflation flares up and interest rates rise, the current value of the growth companies’ future cash flow diminishes.

The ARK Innovation ETF is now 6% down for the year, with $500 million asset outflows in the past month.

Burry hasn’t been always right such as pulling out of GameStop (GME) in 2020 before the frenzied buying, which left a 2,000% surge on the table.

Wood also told us that Burry may not understand the current growth environment, as inflationary pressures are likely to be short-term in nature.

"Most bears seem to believe that inflation will continue to accelerate, shortening investment time horizons and destroying valuations," Wood explained. But Wood thinks supply-chain-related issues will be resolved, helping relieve inflationary pressures.

Wood pointed to a sharp drop in certain commodity prices in recent weeks (including lumber, copper, and oil) in regards to explaining why inflation may not linger for as long as some think. Used-car prices are also beginning to fall after an extraordinary rise, and a strengthening US dollar has also put pressure on commodity prices, according to Wood.

Nevertheless, Woods fails to chime in on China closing one of its biggest ports or Southeast Asian manufacturing hubs like Vietnam, Thailand effectively being shutdown from the delta virus.

Ultimately, Woods offers an overly blasé attitude towards an extremely niche problem. It is almost as if she would say the same thing no matter what condition the broader market is in.

And while cheerleading the stocks you are invested in is not a criminal act, to completely miss that Burry most likely has a different timeline than Woods shows that she has tunnel vision in terms of the phase of the economic cycle we are in.

I would say with conviction that it’s normal for Tesla to retrace after a 600% move up in 2020. There is nothing wrong with it and I see it as healthy market behavior.

Burry is essentially betting on a revision to the mean, which is high risk, ostensibly, Tesla most likely won’t rise another 600% in 2021 as well which is where Burry comes in.

I won’t sit here and advocate to market time mean revisions of tech growth stocks as we are not in that business, but this little skirmish screams to jump back into best-of-breed tech stocks to protect ourselves at frothy levels.

Quote of the Day - August 18, 2021

Tech Letter

“A founder is not a job, it's a role, an attitude.” – Said CEO of Twitter Jack Dorsey

August 16, 2021

Tech Letter

Mad Hedge Technology Letter
August 16, 2021
Fiat Lux

Featured Trade:

(HOW TO BE A TECH ANGEL INVESTOR)
(FB), (PINS), (LYFT), (TWTR), (BTC)

How To Be A Tech Angel Investor

Tech Letter

It’s not easy to be the genius who doled out early seed money to Facebook (FB), Foursquare, GitHub, Pinterest (PINS), Lyft (LYFT) and Twitter (TWTR), among others.

These investments turned out to be highly successful. If someone even miraculously hit on one of these, your grandchildren would know about it.

This person even acquired a majority stake in Skype for $2.75 billion which was considered highly risky at the time and offloaded it to Microsoft in 2011 for $8.5 billion.

Not everyone can do this like Silicon Valley tech investment maestro Marc Andreessen.

Behind the public markets is angel investing and the data says that these investments fail over 50% of the time for the best of breed like Andreesen.

There are simply too many variables that can derail these profit models which nobody can predict.

To lose over half the time and claim to be an outsized winner means relying on those 10 or 100-baggers or might I even say 1,000-baggers to drag up the portfolio performance.

These are the guys who were buying bitcoin (BTC) at 10 cents on the dollar.

Truthfully, investing in startup companies is not for everyone considering there is over a 50% chance a company will end at a 0 or pennies on the dollar.

However, it can be highly gratifying if and when the investments do pay off and investors get a front seat to the forefront of the tech innovation cycle, which you simply don’t get by trading Facebook and Google from your Fidelity account on your computer screen.

These investors can also get direct access to the chatter while creating a rich network of tech know-how; and I do believe that’s half the value in it too, since it can propel angel investors to the next super app or guy behind the next super app.

I mean who could have ever predicted a global health crisis that’s going into its 3rd year soon? And who will be able to nail the knock-on effects of climate change.

That is why risking losing one’s shirt is a real possibility if they bet the ranch on an unknown entity.

Everybody wants the next Tom Brady to quarterback their team, but who knows who the next Tom Brady is at 18 years old?

Even though Andreessen hits on less than 50% of his ideas, the industry median is around 17%, showing how superior his performance is.

He definitely has this thing figured out on relative terms.

Let’s define Angel Investor.

An angel investor is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.

The funds that angel investors offer could be one-off investments to help the business get off the ground or in drip injection form to support and carry the company through its difficult early stages, which means burning cash.

Most of these companies don’t make money for the first 10-years and that time is usually a referendum on the quality of the idea; very few stand the test of time.

The potential to make 100-baggers is out there with subsectors like fintech already worth half a trillion dollars in 2020 and with a predicted annual growth rate of 35%.

Angel investors typically require a 35-40% return on the money they invest in a company minus costs and inflation to call it a winner.

But Venture Capitalists may take even more, especially if the product is still in development. For example, an investor may want 50% of the business to compensate for the high risk it is taking by investing in a startup.

Angel investors do the jobs of banks.

Traditional banks would never lend to an entity based on a half-built product or even a genius idea.

Proof of income and debt to income ratios are realities at banks.

When net profits are negative, the balance sheet is too ugly for banks to even think about doing any business with these startups.

Therefore, there are limited pathways for entrepreneurs to find capital, and many turn to Angel investors to help startups take their first steps.

Who Can Be an Angel Investor?

Angel investors are normally individuals who have gained "accredited investor" status, but this isn’t a prerequisite. The Securities and Exchange Commission (SEC) defines an "accredited investor" as one with a net worth of $1M in assets.

Essentially these individuals both have the finances and chutzpah to provide funding for startups. This is welcomed by cash-hungry startups who find angel investors to be far more appealing than other, more predatory, forms of funding.

These private funds usually draw up opportunities for a defined exit strategy, acquisitions or initial public offerings (IPOs).

Liquidity events is what makes everyone happy at the end except for the investors who missed the boat.

It’s even possible that an angel investor only sees growth in the first 5 years and unloads the “idea” to another private investor for a profit.

Private market deals are common because of the excess of liquidity brought on by the U.S. Central Bank lowering interest rates for a prolonged amount of time.

What I do know is that America is the framework within which almost all unicorns prosper, and I do not envision any monumental shift to Europe or China, these other places simply have more problems than the U.S.

How does the normal Joe get it on the action?

Andreesen has said the only way he usually does business is with a “warm” introduction which can be hard to come by if one doesn’t rotate in the same social circles as these heavy hitters.

Scoring a warm introduction also means getting boots on the ground in California which is ebbing and flowing between its colossal wildfires and public health issues like many other places.

Honestly speaking, if might be difficult to get the best of the best angel opportunities even if the gunpowder is loaded.

It’s accurate to believe that probably guys like Andreesen get the best of the best ideas in front of them and if they pass on it, the likes of Sequoia, Benchmark, and Softbank have very smart people as well who get similar type of presentations and opportunities.

Like you correctly guessed, this private group of capital is quite incestuous and tight-knit. It’s a copycat league of the ages.

The one avenue that might be of interest is a platform that has democratized angel investing who on the last count had close to 1,000 companies looking for start-up capital.

This platform is called https://angel.co/angel-investing and some are even actively hiring on the same platform.

I won’t stand here saying this is the cream of the crop because it’s not, but I will say that sometimes companies are overlooked, or the industry consensus has shifted too far in one direction offering undiscovered dark horses a chance.

Lastly, this forum of angel companies on offer does give analysts insight into where money is funneled to and the current hot sub-sector of the tech industry.

This platform even offers an Angel index fund if a reader wants to take the aggregate performance of 150-200 companies with a $50,000 minimum.

If a reader wants access to facilitate angel investing by a deal-by-deal offer from the Angel list as a professional investor, then $500,000 is required.

Quote of the Day - August 16, 2021

Tech Letter

“In the startup world, you're either a genius or an idiot. You're never just an ordinary guy trying to get through the day.” – Said Venture Capitalist Marc Andreessen

August 13, 2021

Tech Letter

Mad Hedge Technology Letter
August 13, 2021
Fiat Lux

Featured Trade:

(ARE THE WHEELS FALLING OFF THE CHIP INDUSTRY?)
(MU), (SK HYNIX), (NVDA)

Are the Wheels Falling Off the Chip Industry?

Tech Letter

Is the chip industry about to freeze over?

Signs are creeping in of a cyclical downturn in memory chips starting in the first quarter of 2022.

This is all brought about by cycle indicators signaling that we are shifting out of 'midcycle' to 'late-cycle' for the first time since 2019 and this phase change has historically meant a challenging backdrop for forward returns.

The investments have been pouring in from chip companies to build more foundries and to improve chip performance.

Incrementally, new supply will eventually come online to address the giant chip shortage that many industries are grappling with.

However, I will say that whispers of an imminent collapse in the chip dynamics are exaggerated at best.

I don’t believe that the next cyclical downturn begins from Q1 2022 exacerbated by inventory builds.

We are still far from that happening even if the chip environment has tensed up more so now.

Micron (MU) has said that the order-filling time for chipmakers now exceeds 20 weeks.

The order-filling time represents the period from ordering a semiconductor to receiving it. That metric added on more than eight days in July, putting the total at 20.2 weeks.

Businesses from automakers to consumer-electronics companies are suffering from the chip shortage. Carmakers are expected to miss out on $100 billion in sales due to the lack of critical components.

Another industry-wide headwind is the UK's possible blocking of Nvidia’s (NVDA) planned $40 billion acquisition of Arm Holdings over national security issues.

A possible downturn in the chip cycle would also mean heavyweight South Korean memory-chip maker SK Hynix will severely underperform as well.

There are forecasts of contract prices for memory chips used in personal computers that decline by as much as 5% in the December quarter from the September quarter.

The PC market is only 20% of the DRAM market. Smartphone DRAM accounts for 40% of the market and server DRAM is 30% of the market. Miscellaneous device markets make up the remaining 10%.

Therefore, it is safe to say that not all the eggs are in one basket.

However, an analyst downgrade has set the tone for all makers of dynamic random access memory chips and puts the onus on the entrenched to prove the supposed downturn is not the case.

A world in which all relevant companies have hoarded chips because of the fear of not be able to source the right chips would be a transitory issue.

I don’t see demand falling off a cliff.

Many of these DRAM companies have moats around their business models and the case of businesses snapping up a high volume of chips and their inventories peaking out is a problem many companies would love to have.

As we progress into 2022, companies will start to plan their next iterations of devices and gadgets, and no doubt the next generation will need at least 50% more high-performing chips compared to the last version.

The pricing pressure is almost analogous to what happened with lumber prices and builders started buying at whatever prices during the short squeeze earlier this year.

This doesn’t mean the housing industry is doomed, but I understand it more as moderating prices will be a tailwind for the overall health of the industry.

Chips are famous for that boom and bust dynamic.

The price gains in chips cannot be absorbed in the same rate and as prices moderate, companies will start to look at acquiring the next batch of chips even if inventory is high.

In the short term, chip stocks are on course for a short correction that could take around a quarter to digest, but I highly doubt this will last into next year.

The 30,000-foot view shows us that many chip firms are enjoying record demand for their best chips driven by cloud customers’ capital expenditures, and even upside from the popularity of cryptocurrency-related chip products.

Demand is everywhere to be found.

The leading-edge manufacturers will take this dip in stride and adjust for the new environment in 2022.

Lower pricing expectations is something that nobody wants to hear as a chip CEO and absorbing a more challenging pricing environment into 4Q does not beat price spikes.

It gets lost that DRAM prices increased 35% over the past two quarters, with expectations for a “further modest increase” through the end of this year.

The industry can afford a little reversion to the mean pricing and shareholders will mostly stay in these stocks long term.

I understand that this dip in chip shares like Micron caused by moderation of pricing power translates into a great entry point into the stock for new buyers.

Quite quickly will investors start to shrug off this negative element to the industry and pile back into premium names or just stick with Nvidia who doesn’t sell DRAM chips.