Mad Hedge Technology Letter
October 25, 2024
Fiat Lux
Featured Trade:
(EXPENSIVE ENERGY A BIG WORRY FOR THE FUTURE OF AI)
(AI)
One of the forgotten risks of AI is the energy capacity situation in the United States.
Many people forget that AI will require immense energy with a hoard of energy-guzzling data centers to facilitate the next tech revolution.
Many consumers have come to realize how the cost of energy has skyrocketed lately with no breaks in sight.
There is an increasingly real chance that Silicon Valley might not be able to afford AI simply because the costs of energy will deem the AI concept unworthy.
Green energy hasn’t developed as fast as many experts once thought, and the United States is still very much dependent on fossil fuels to facilitate tech and business in general.
A pressing question that is popping up is whether the United States can deliver the energy capacity that AI chips demand.
The question is hard to dissect because the situation is always changing.
Numbers need to make sense, just like how builders build when they think they can sell houses and apartments for a profit to the end buyer.
The military conflict in Eastern Europe has forced German manufacturing to deindustrialize because producing without that cheap Russian energy is loss-worthy. AI could follow a similar pattern.
The data grid will become strained, but by how much is the next most important matter?
A ChatGPT query, on average, requires almost 10 times as much electricity to process as a Google search does.
The rise of generative AI coincides with a heightening of other factors increasing energy demand, from the electrification of transportation and infrastructure to the on-shoring of US manufacturing. Adding yet another acute demand: AI systems need power all the time.
Critics of AI fanaticism point to potential wastefulness, and this could end up morphing into a government regulatory quagmire like so many industries that are overburdened by government agency overreach.
If, in the case, the energy demands spiral out of control with everyone going the AI route with every country building AI data centers, the exploding costs will mean that tech won’t be able to profit from AI as quick as it wants.
Many analysts are already raising the flag as to whether all these billions poured into AI investments will really pan out or not. AI isn’t free to produce, but shares of it are priced as such.
Much of this hot money is migrating into companies that haven’t proven anything or never even turned a profit. Look at OpenAI, it started out as a non-profit.
The issue I have is that generative AI is priced to have zero pushback of its revenue trajectory, and I do believe that is wrong.
When there is a pullback, it will be deep and sharp, even if not long.
I believe that would be a healthy event for AI because the stock shares of AI have gone parabolic.
In short, ride up the momentum until the wave crashes, but watch out for the canary in the coal mine, which will foreshadow a deep dip in AI shares.
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