Mad Hedge Technology Letter
October 23, 2024
Fiat Lux
Featured Trade:
(ANOTHER GEM IN THE CHIP INDUSTRY)
(TSM), (NVDA)
The hottest part of the tech industry is the build-out of the AI infrastructure.
Millions of data centers are needed equipped with high-speed chips to facilitate the miracle that is artificial intelligence.
One of the leading companies right in the heat of the battle is Taiwan Semiconductor Manufacturing (TSM).
Why is TSM so important?
Nvidia (NVDA) outsources the manufacturing of its chip designs; TSM is the one doing the building, and that will mean a highly strategic position in AI moving forward.
TSM's other customers include several tech heavyweights like Advanced Micro Devices and Apple.
TSM has carved out a solid advantage in producing leading-edge logic chips used in advanced computing technologies such as AI and 5G mobile networks.
TSM is the world leader in manufacturing these specialized semiconductor chips, with an estimated 90% share of this market.
A key factor in TSM's market dominance is customer demand for chips using its three-nanometer (nm) semiconductor manufacturing process. Referred to as 3nm, this technology creates chips with greater microprocessor speed, lower energy consumption, and exceptional computational power without increasing chip size.
This 3nm tech looks like a game-changer for TSM. The process produces better chips than its older 7nm technology, which was once responsible for over a third of the company's revenue a mere three years ago. Just last year, TSM's 3nm-related revenue was a tiny 6% of third-quarter sales. But the rapid rise of AI drove 3nm income to reach 20% of quarter three revenue this year.
As 3nm-manufactured chips become more widely adopted, TSM's market share in this sector is expected to grow. This is because TSM's 3nm process generates higher yields and power efficiencies compared to those made by such competitors as Samsung.
TSM's 3nm strengths position the firm for revenue growth in the coming years. The market for the technology is forecast to skyrocket from $1.4 billion in 2023 to $26.5 billion by 2032.
With its 3nm process taking off, TSM experienced strong sales in the third quarter as revenue rose 36% year over year to $23.5 billion.
TSM's long-term sales potential looks to get a boost from the expansion of its chip fabrication facilities. Because leading-edge logic chips are needed for advanced computing, the U.S. government is incentivizing TSM to build semiconductor factories in the United States.
The underlying stock has delivered a 92% performance in the first 10 months of the year.
They certainly didn’t get left behind by the success of Nvidia, and I believe as we move forward, their strategic importance to the industry will grow and fortify.
I don’t believe that there is any slowdown in the pipeline coming any time soon.
The rhetoric from the AI chip management has been bragging about the over-demand and undersupply of chips.
This has created a massive surge in the profits for AI chip firms.
In the short term, the only negative that comes to mind would be that chip firms could be the victim of their own success reflected in overheated stock price trends.
We are due for a pullback, and that would certainly constitute as a buy-the-dip moment.
We have not seen the best of TSM yet, the best is yet to come.
“Price is what you pay, value is what you get.” – Said Warren Buffett
Mad Hedge Technology Letter
October 21, 2024
Fiat Lux
Featured Trade:
(BITCOIN PRICE ACTION IS GOOD FOR TECH STOCKS)
($COMPQ), (BTCUSD)
When I see Bitcoin coming back from the doldrums, it highly suggests to me that there is a great deal of liquidity sloshing around in the markets.
Bitcoin doesn’t pay your mortgage or buy food at the grocery.
Fiat currencies do.
Therefore, users still need to convert their crypto holdings into whatever it may be, whether it is Turkish Lira or Euro, to transact with most retailers.
So when we have a roaring economy of 3% GDP powered by $3 trillion in annual deficit spending, it seems that many investors are focused on the large deficit spending, which infuses a heavy dose of asset appreciation into the economy and other asset classes like crypto and tech stocks. That is why tech stocks, houses, Bitcoin, and groceries are all expensive and rarely go down in price.
Bitcoin approaching $70,000 per coin is a highly bullish sign to the rest of the tech stocks that this rally will power on until year-end.
Tech stocks are denominated in US dollars, which makes them a huge beneficiary of increasing global liquidity, which is on the rise again, with central banks across the world injecting cheap capital into their economies.
When global liquidity has exceeded its moving average in the past, it has often coincided with significant upward movements in the price of Bitcoin and tech stocks.
Compounding the positive fortunes of Bitcoin and tech stocks are the presidential candidates saying they are very pro-crypto.
Republican candidate Donald Trump is avowedly pro-crypto, so much so that Bitcoin is viewed as a so-called Trump trade. Democratic rival Vice President Kamala Harris has vowed to support a regulatory framework for the industry.
I do believe that this synchronized trade of higher-tech stocks, higher bitcoin, a weaker yen, and stronger gold continues until there is a paradigm shift.
The one outsized risk that is a “known known” is the Aha moment when investors realize the federal debt is a now problem.
We have kicked the can down the road for decades, but even Elon Musk has repeated a warning that the U.S. is hurtling toward the brink of "bankruptcy."
U.S. national debt has skyrocketed in recent years, crossing the $34 trillion mark at the beginning of 2024, largely due to lockdown stimulus measures that sent inflation spiraling out of control and forced the Federal Reserve to hike interest rates at a historical clip.
Earlier this year, Bank of America warned the U.S. debt load is about to ramp up to add $1 trillion every 100 days, headed towards $36 trillion by the end of 2024. This will also trigger a surge in Bitcoin prices.
I do believe if the federal government limits its debt spending to $3 trillion per year, tech stocks and bitcoin will continue to increase in price in tandem.
However, if we ever do get a recession, yes, the one that was supposed to happen since 2019, then it could trigger a $15 trillion federal debt response to limit the contagion, destroying more purchasing power.
A massive fiscal event like that would careen the US economy into a dangerous path while disrupt the tech and bitcoin trade into the only bitcoin and gold trade.
We still have time to get the situation under control, but neither party has even talked about it during their campaign. Only Musk has said he wants to create a department of efficiencies to trim the fat and reduce government spending.
As it stands now, goldilocks continues, and readers should buy the dip in tech stocks.
Mad Hedge Technology Letter
October 18, 2024
Fiat Lux
Featured Trade:
(AMD GAINING MARKET SHARE)
(AMD), (NVDA)
If you thought that AI chips had reached the high water mark, then you are entirely wrong.
Nvidia has been one of the only games in town, and that is a strong sign of a first-mover advantage.
In fact, the ecosystem could benefit if several chip companies could rise to the occasion to infuse that extra bit of supply.
Nvidia is on record, saying they can’t meet demand.
Well, we have finally reached the next phase of the AI chip story, and that is the next company stepping up to the plate.
AMD (AMD) has been working furiously to get into the AI GPU game, and it appears as if their harvest is just around the corner.
For the past 18 months, Nvidia (NVDA) has dominated the GPU industry with a ball-busting market share of up to 98%.
Nvidia's H100 GPU set the benchmark for AI training and AI inference.
The H100 is still a sizzling product today, and Nvidia continues to struggle with supply constraints because demand is so high from leading AI companies like OpenAI, Amazon, Microsoft, and more.
Those supply challenges have opened the door for competitors like Advanced Micro Devices to swoop out of nowhere. The company announced its own data center GPU called the MI300X at the end of 2023, which was specifically designed to compete with the H100. So far, it has lured in some of Nvidia's top customers, including Microsoft, Oracle, and Meta Platforms.
AMD forecasts the MI300 series will propel its GPU revenue to a record $4.5 billion in 2024 - an estimate that has already been raised twice.
Nvidia still is the champion - it started shipping its new H200 GPU earlier this year, which is capable of performing AI inference at nearly twice the speed of the H100.
Nvidia is now focused on its latest Blackwell chip architecture, which paves the way for the biggest leap in performance so far. The new GB200 NVL72 system is capable of performing AI inference at a whopping 30x the pace of the equivalent H100 system.
AMD is preparing to ship another new GPU next year called the MI350X, offering a staggering leap in performance of 35x compared to CDNA 3 chips like the original MI300X.
Advanced Micro Devices has explicitly said the MI350X will compete directly with Nvidia's Blackwell chips.
Nvidia plans to ramp up shipments of Blackwell GPUs during its fiscal 2025 fourth quarter.
A 114% increase year over year in data center revenue is what it looks like on the balance sheet for AMD.
Developing artificial intelligence (AI) software wouldn't be possible without data centers and the powerful graphics processing chips (GPUs) inside them.
This is where we stand – at the beginning of an AI-induced supercycle in technology stocks.
AMD is clearly the 2nd horse in the race that will pick up market share on Nvidia.
This could easily turn into a duopoly of GPU chip companies, and readers would be ignorant to not apply this knowledge a trading regimen.
Wait for a substantial dip to buy into AMD shares.
You’ll regret it if you don’t, especially long-term.
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” – Said American Investor Warren Buffett
Mad Hedge Technology Letter
October 16, 2024
Fiat Lux
Featured Trade:
(THE CHIP TRADE IS STILL IN-TACT)
(ASML)
Computer chip equipment maker ASML said they will cut 2025 financial guidance, citing weakness in markets other than AI and delayed orders.
This triggered a steep sell-off in many chip names, and I view this as a healthy event.
We are bombarded with so much robust news from the chip sector that it is hard for investors to catch their breath before the next spike higher in underlying shares.
Once in a while, it is highly positive to recalibrate momentum and allow the stock to settle.
Chips are definitely boom-and-bust stocks, and we are right in the middle of the boom. and I wouldn’t be too worried for other chip companies as we head into earnings.
This is a great chance to buy the dip in many of the best of class.
Europe's most valuable technology company, ASML, as an essential supplier to chipmakers, is not in question. But doubts have emerged over short-term sales and, for the longer term, whether it can continue to outgrow the overall market.
ASML's dominance of the market for lithography tools needed to create circuitry triggered the stock to all-time highs before this recent weakness.
After the health crisis of the early 2020’s, customers stopped overbuying, which reduced demand.
Now, ASML said some customers had announced delays of new plants and upgrades, including makers of the logic chips used in smartphones, PCs, and other devices.
Manufacturers that make the memory chips that go into them also plan fewer expansions, meaning they can rely on existing equipment for longer.
That's especially the case for an upstream equipment supplier highly reliant on the spending plans of its manufacturing customers.
It’s highly likely that Taiwan Semiconductor was the company who decided to cut back on business with ASML.
TSMC has been spending rather low capex numbers so far this year, and they may do so again next year because their overall (plant) utilization is not as good as their sales numbers suggest.
Among ASML customers that make logic chips, Intel said in August it would cut capital spending by $10 billion in 2025, while Samsung has said it faces challenges at the factory it is building in Texas.
Roughly a quarter of chipmakers' spending on tools goes to ASML, though some analysts say changes in chip-making techniques could lead that to be lower.
Management also said that customer delays are also a negotiating tactic that may force pricing concessions from ASML, squeezing margins.
Ultimately, this is a temporary demand adjustment after years of outperformance, and I would allow the seasonality to work itself through the system.
I see no threat to the overall business model of ASML, and if bad news on ASML triggers hits to other great chip stocks, I would look at some short-term bull call spreads on strong chip stocks in the US.
At the very least, if you don’t buy the dip, don’t take the other side of the trade because, more often than not, this type of price action sets up a “rip your face off” rally to the upside.
