“If you don't understand the details of your business you are going to fail.” – Said Amazon Co-Founder Jeff Bezos
Mad Hedge Technology Letter
July 8, 2024
Fiat Lux
Featured Trade:
(ARM SHINES BRIGHT)
(ARM), (NVDA), (AMD)
With the US Central Bank’s policy being quite accommodative, this advantageous backdrop has really set the platform for certain strategic tech companies to shine on the public markets.
In particular, chip stocks have been the darlings of the AI revolution and will continue to be in the limelight.
Part of this is about investors not knowing in particular what software firms will benefit from AI.
It is really a crapshoot to know how the software will look like in the future, but investors do know that software will be powered by the backend infrastructure which is why AI chips are fetching a premium at market in today’s stock market.
Once the software part of it starts to reveal itself, then it is highly likely the software winners will start to experience the same sort of price appreciation in shares that AI chip companies are experiencing right now.
That trend reversal is still years off so it is better to spend our energy on chip stocks.
The no-brainers are the likes of Nvidia and AMD, but the lineup is dee.
Look at the 2nd and 3rd tier of chip stocks like British chip company ARM (ARM).
Arm is also right in the mix of the AI boom. The positive market sentiment toward AI advancements continues to propel Arm's stock upwards. Furthermore, the company's former focus on low-power embedded and mobile chips is changing before your eyes. These days, you'll find Arm-based chips all over modern data centers and PC systems.
The broader market dynamics also played a role in Arm's rise. A softer-than-expected jobs report in May fueled hopes for potential interest rate cuts by the Federal Reserve, which would benefit growth stocks. The semiconductor sector is full of growth stories, including Arm.
Industry news also contributed to Arm's strong performance. Reports that Taiwan Semiconductor Manufacturing was investing in extreme ultraviolet lithography suggested a robust demand for next-generation chip technologies. As TSMC is a leading manufacturer of Arm-based chips, this investment indicated a positive outlook for Arm's future growth.
Arm's strategic positioning in the AI ecosystem highlights its potential for sustained growth. The company's advanced v9 architecture and its power-efficient processor platforms are increasingly interesting to major industry players, strengthening Arm's competitive edge in the semiconductor market.
ARM and its ticker symbol were added to the Nasdaq-100 Index on June 24.
This move guarantees more capital flow into ARM as it becomes part of a bigger ETF meaning pension and institutional money will own a piece of ARM and help the stock rise.
Arm's rapid inclusion in the index after an initial public offering last September reminds investors of its growing importance in the global technology ecosystem. As CEO Rene Haas highlighted in that announcement, this achievement validates Arm's business strategy and its critical role in providing foundational compute solutions for AI workloads.
Don’t forget that ARM agreed to be purchased by Nvidia which speaks volumes of what Nvidia believes about ARM.
Unfortunately for both, the deal was shut down due to regulatory issues, and imagines the future trajectory of ARM if that deal went through.
In the past 365 days, the stock is up over 200% and just looking at a 2024 chart, readers can understand how investors have complete belief in the future of ARM.
ARM will continue to maintain an important position in the future of AI and they are a juicy takeover target.
I do believe that AI stocks like ARM will continue to grind up, but we are inching closer to a point where investors will take profits before the next leg up.
Mad Hedge Technology Letter
July 5, 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 and no doubt the interest rates cut next year might turbocharge commodity prices around the globe.
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 their houses and apartment 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 when there isn’t much meaningful follow-through to the underlying business models.
On top of that, generative AI is programmed to be ultra-left-leaning on the social spectrum which could cause conflict down the road.
In short, ride up the momentum until the wave crashes, but watch out for the canary in the coal mine which will bring attention to a deep dip in AI shares.
Mad Hedge Technology Letter
July 3, 2024
Fiat Lux
Featured Trade:
(SHOULD I INVEST IN AI CHIPS OR AI SERVERS?)
(SMCI), (NVDA), (DELL)
The AI server market is booming and so are the AI chip markets.
I’ll talk about 2 prestigious companies right in the mix of things.
For long-term portfolios, it’s essential to not miss out on these supercharge growth companies.
I just don’t think that average investors will be able to make up the performance if they miss the boat of these 2 companies. The law of large numbers will just put you too far behind.
All the hot new money is going into AI which adds to the momentum of the share price trajectories.
Even the old money, after not being convinced by Bitcoin, is starting to come around to AI partly because most of the companies involved in AI are publicly listed companies on the New York Stock Exchange.
It makes it a lot easier when the source of exponential growth isn’t on some alternative exchange in some alternate currency in some backwater jurisdiction.
With a few clicks and moving a few dollars here and there, investors can be part of the AI future whether it be in AI chips or AI servers like the companies I am about to talk about.
What up with Nvidia?
Nvidia (NVDA) dominates an impressive 94% of the AI chip market. It’s basically a monopoly or close to it.
Revenue is rising a stunning 262% year over year.
Even more interesting, emerging growth avenues in the nascent AI market indicate that Nvidia could end up doing even better than that.
For instance, governments are also betting the ranch on AI and this stable source of revenue will highly likely grow substantially for the foreseeable future.
Nvidia's customer base is diversifying beyond the major cloud infrastructure providers that have been deploying its chips in large numbers to train and deploy AI models.
Spending on AI chips is expected to grow more than 10-fold over the next decade, generating $341 billion in revenue in 2033 compared to $23 billion last year.
Nvidia should remain the Tom Brady of AI stocks as the race to develop AI applications by companies and governments alike has created a secular growth opportunity.
What about Super Micro Computer?
Supermicro's future prospects are attached to some extent with that of Nvidia’s.
Data center operators require server rack solutions of the type that Supermicro sells to mount the processors sold by Nvidia and other chipmakers.
Revenue jumped 200% year over year and Supermicro isn't all that far behind Nvidia when it comes to how AI has supercharged its fortunes.
I expect its top line to nearly double over the next couple of years.
Demand for AI servers is expected to expand at a compound annual rate of 25% through 2029.
Supermicro is growing at a faster pace than the AI server market right now. As it turns out, its growth is faster than that of more established companies such as Dell.
How to invest?
Supermicro is cheaper than Nvidia and Nvidia’s run-up to a more than $3 trillion market valuation has got to scare some people with sticker shock.
People with a time advantage of more than a few years should invest in Super Micro, whereas investors looking for that quick sugar high should buy the dips in Nvidia.
In short, anyone under the age of 40 and many years in front of them should invest long-term in Super Micro at a market cap of $50 billion. With Nvidia, I could easily see its market cap climbing to $4 trillion soon, but a wicked pullback would mean its market cap going from $4 to $3 trillion.
Either way, these are two tech firms with great prospects in the current and future.
“Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same.” – Said Former US President Ronald Reagan
Mad Hedge Technology Letter
July 1, 2024
Fiat Lux
Featured Trade:
(SOFTBANK BETS THE RANCH ON AI)
(SFTBY), (NVDA)
SoftBank Group raised about $1.86 billion via dollar and euro bond sales in one of the biggest foreign-currency deals by a Japanese company this year.
This is big news.
Softbank is one of the most prominent venture capitalist funds in the world and they plan on deploying the capital solely into generative artificial intelligence.
Many of these heavyweights from Asia, and the Middle East, and other billionaires around the finance world are chomping at the bit to get a piece of American AI firms.
This trend is in the early innings and won’t slow down.
It’s interesting that Softbank raised the currency in dollars and euros which is another bet on the Japanese yen strengthening and the Fed cutting rates.
The Yen has been one of the worst-performing currencies in the past few years and there is a chance this move could blow up in Softbank’s face.
The dollar is strong and has been increasingly strong lately as the Fed stays higher for longer.
However, if the dollar does get stronger, it will mean that Softbank will need to pay higher costs. Even that said, they will still dive head-first into AI.
My belief is that their CEO Masayoshi Son, who I know very well, will bet the ranch on AI considering he sold out of his Nvidia shares in 2022 and calls it the “fish that got away.”
He rues leaving hundreds of billions of dollars in profits on the table and I don’t believe he is willing to allow that to happen again.
So he will approach these new investments as an “all or nothing” all guns blazing type of strategy.
In its first non-yen debt offering since 2021, billionaire Masayoshi Son’s company priced two dollar tranches totaling $900 million and two euro tranches raising €900 million ($964 million).
It’s not only Softbank, it’s also other Japanese companies looking for ample liquidity.
SoftBank joins a bond bonanza by issuers from Asia and elsewhere including even bigger deals from fellow Japanese borrowers such as Takeda Pharmaceutical and Rakuten.
The Japanese firm this year directly invested $200 million into Tempus AI, a startup that analyzes medical data for doctors and patients to come up with better treatments. More recently, it backed Perplexity AI at a $3 billion valuation, betting on a firm that aims to use AI to compete with Alphabet’s Google search.
Longer term, SoftBank is working on a plan to deploy some $100 billion into AI-related chips in a project dubbed Izanagi, Bloomberg News reported in February.
My belief here is that Softbank and other Japanese companies are on the verge of deploying over $1 trillion of new money into generative artificial companies in America.
There is a reason why leading AI companies like Nvidia (NVDA) have surged to the skies and a lot of it is foreign money coming chasing the new hot trend.
I don’t believe this trend will stop will money from all corners of the globe from flooding the US markets chasing the few quality AI companies.
The ultimate takeaway is that the best companies connected the generative artificial intelligence are at the beginning of a huge run in share price that will extend years into the future.
Don’t fight the trend – especially the biggest ones in the world.
