Mad Hedge Technology Letter
August 21, 2018
(THE CHIP MINI RECESSION IS ON),
Mad Hedge Technology Letter
August 21, 2018
(THE CHIP MINI RECESSION IS ON),
Now is not a good time to put new money to work in the semiconductor space.
American chip companies are some of the major exporters of domestic technology in a world that has been taken over by a contentious global trade war.
The administration shows no signs of backing down digging into the trenches and not giving up an inch.
Damocles’ sword is hanging over chip revenues waiting for the final verdict giving investors a great short-term reason to avoid semiconductor companies.
It’s not the time to be cute in the market, but there is still one must-buy name in the chip space that is best in show and that is Nvidia (NVDA).
“Turing is NVIDIA’s most important innovation in computer graphics in more than a decade,” said Nvidia CEO and founder Jensen Huang.
Huang made this announcement of the eighth-generation Turing graphics architecture at a conference in Vancouver last week.
There have been recent leaks in the press that Nvidia will roll out two new GPU products shortly, the RTX 2080 and RTX 2080 Ti adding to its already stellar lineup of gaming hardware.
The quality shines through with the real-time ray-tracing offering gamers newly enhanced lighting effects.
Nvidia’s new GeForce RTX 2080 series of graphics cards is derived from the company’s Turing architecture.
To check out a demo that shows off production-quality rendering and cinematic frame rates then click here.
Innovation has been a hallmark of Nvidia’s approach for quite some time and the high quality of products has always attracted a diverse set of customers.
Enhancing its GPU products is a boon because a myriad of gamers, professional and casual, will end up upgrading to these chips that vie to stay ahead of the fierce gaming competition.
Gaming is Nvidia’s core revenue stream comprising more than 58% of sales.
Global exports revenue projects to surge 30% higher in 2018, eclipsing $906 million and could swell to $1.65 billion by 2021.
The new Turing GPU is poised to elevate margins because of its $2,500-$10,000 price point.
The Turing architecture incorporates enhanced Tensor Cores offering six times the performance of the previous generation architecture.
The steep price will entice content creators and developers to drop a wad of cash on state-of-the-art GPUs improving their own products.
The step up in price reflects the addition of modern AI and ray-tracing acceleration into the design that previous generations lacked.
Ray tracing is the act of simulating how light bounces in the physical world smoothly transferring it to a virtual image.
The new Turing architecture will produce 25 times the performance of the previous generation.
Content creators are drooling over these new possibilities.
Profit margins will increase starting from the fourth quarter when shipping commences.
Nvidia has chimed in before describing that the GPU addressable market will rake in 50 million potential customers and will be a $250 billion industry.
Innovation is Nvidia’s bread and butter and instead of resting on its laurels, it has gone out and pushed the limits further with these new GPU technologies.
Advanced Micro Devices (AMD) will have a hard time replicating Nvidia’s success after Nvidia’s second generation of products with integrated AI acceleration is lapping up praises by industry specialists.
Nvidia has adopted the playbook that so many tech companies have found useful. It has a mix of businesses that complement its core business.
The gaming division is by far its main driver. However, the rest of the 42% of revenue is made up of a collection of mainly the data center comprising 23.8% of sales, and its automotive segment bringing up the rear with 5.2% of revenue.
The total addressable market for artificial intelligence will be in the ballpark of $50 billion by 2023 offering a huge pipeline of potential deals in its data center and autonomous driving divisions.
Nvidia rings in just 5.2% of revenue from autonomous driving segment and the mass rollout of robot-taxis will ignite this segment into a meaningful part of its portfolio.
The first hurdle is the mass adoption of Waymo vehicles because they are first in line to make this futuristic industry into modern day reality.
Either way, Nvidia is advancing its technology to be in pole position to capitalize on the shift to automotive driving by developing a driverless car supercomputer named Drive PX Pegasus aimed at helping automakers create Level 5 self-driving vehicles.
Even though this industry is still in its incubation stage, a projected 33 million autonomous vehicles will be cruising around streets by 2040 ballooning from the 51,000 cars forecasted by 2021.
Nvidia’s have struggled as of late.
The post-earnings sell-off happened even though it beat the current quarter’s projections, but the all-important guidance was light.
Guidance fell short because of bitcoin’s fall from grace cratering from $20,000 to $6,000.
Low cryptocurrency prices suck the air out of the demand for GPUs required to mine cryptocurrency.
The softness in demand was reflected in last quarter’s crypto-based revenue coming in at a paltry $18 million.
The previous quarter was a different story with crypto-based revenue boosting top-line revenue substantially with quarterly revenue registering $289 million, which was 9% of total quarterly revenue.
Huang has confided that crypto-based revenue is not the main driver for Nvidia going forward. And latching itself to an unstable digital currency with governments out to drown out the fad is not sustainable.
The guidance, even though less than expected, is still healthy representing 23% YOY growth.
The sell-off offers a prime entry point in a stock that is the best publicly traded chip company in America right now.
No doubt the enhanced GPU chips will kick-start another round of increasing revenue. The lighter-than-expected revenue guidance sets the stage for Nvidia to resoundingly beat next quarter’s earnings estimate.
Crypto-based revenue was never an assumed part of Nvidia’s revenue engine and was at best a one-off boost to the bottom line.
Nvidia is still a great company producing hardware with duopoly playmate AMD, which has seen a double in its share price in the past four months.
As Nvidia retraces from its all-time high, $225 is the next level of support that would provide a timely entry point into a company that leads its industry.
These types of companies do not grow on trees and if you choose to buy into any chip stock, Nvidia would be the favorite because of its dominant position grabbing 66% of market share in the GPU market leaving runner-up AMD with the scraps.
Quote of the Day
“It’s OK to have your eggs in one basket as long as you control what happens to that basket,” – said Tesla founder and CEO Elon Musk.
It was one of those normally mundane seasonal events.
But what I heard blew my mind and will substantially shape my trading and investment strategy for 2018.
By now you already know that I used some of my stock market winnings this year to buy a vintage Steinway concert grand piano (click here for “The Great Inflation Hedge You’ve Never Heard Of.”
Well, you can’t own a Steinway without a recital, and ours was held last weekend.
After listening to an assortment of children display their skills with Pachelbel, Ode to Joy, and The Entertainer, we adjourned for a celebratory buffet dinner.
Making small talk with the other parents, I asked one particularly articulate gentleman what he did for a living. He, too, had enjoyed an excellent year, and also used his profits to buy a Steinway, although his was a cheaper upright model.
It turned out that he was the chief technology officer at LAM Research (LRCX).
Had I heard of it?
Not only did I know the company intimately, I had recommended it to my clients and caught the better part of the nearly 400% move since the beginning of 2016. Furthermore, I was expecting another double in the share price in the years ahead.
Was I right to be so bullish?
The man then launched into a detailed review of the company’s prospects for the next three years.
The blockbuster development that no one outside the industry sees coming is China’s massive expansion of its semiconductor production.
More than a dozen gigantic fabrication plants are planned, the scale of which is unprecedented in history. Some of these fabs are 10 times larger than those built previously.
This is creating exponential growth opportunities for the tiny handful of companies that produce the highly specialized machines essential to the manufacture of cutting-edge semiconductors, including Applied Materials (AMAT), ASML (ASML), Tokyo Electron (TOELY), KLA-Tencor, and LAM Research (LRCX).
Everyone in the industry has boggled minds over the demand they are seeing for their products.
The reality is the artificial intelligence is rapidly working its way into all consumer and industrial products far faster than anyone realizes, creating astronomical demand for the chips needed to implement it.
Bitcoin mining is also creating enormous new demand for chips that no one remotely imagined possible even two years ago.
As a result, the industry has been caught flat-footed with severe capacity shortages. They are all racing to add capacity as fast as they can. Profit margins are exploding.
On October 17, (LRCX) announced Q3 revenues of $2.48 billion, a staggering increase of 51.84% over the previous year, and a gross margin of 46.4%. The operating margin was 28%, generating net income of $591 million.
That gives the shares a very reasonable price earnings multiple of 16.95X, a 10% discount to the 18X multiple for the S&P 500. That is an incredible deal for one of the fastest growing companies in America.
Samsung of South Korea was far and away its largest customer, accounting for 38% of total sales.
On November 14, the company announced an eye-popping $2 billion share repurchase program that is certain to drive the price higher.
If there is one dark cloud on the horizon, it is the loss of the research and development tax credit embedded deep in the proposed Republican tax bill.
This will have a noticeable and negative impact on (LRCX)’s bottom line. Still, my friend thought that the company could offset this loss with faster sales growth and margin expansion.
However, many other technology companies in Silicon Valley won’t be able to bridge that gap. It is a hugely anti-technology move for the government to take.
My fellow Steinway owner thought that LAM Research could easily see sales double in three years as long as there is no recession, which I believe is at least two years off. As for the share price, he couldn’t comment, but remained hopeful, as he was a large owner himself.
Of course, the trick is how to buy a stock that has just risen by 400% in two years. So, you could start scaling in here, and build a larger position over time.
You only get opportunities like this a couple of times a decade, and it’s better to be too aggressive than too cautious.
To learn more about LAM Research, please click here to visit the company website.
A Steinway Model D
Quote of the Day
“The market always gets it right,” said Jim O’Neill, the chairman of Goldman Sachs International, who coined the term “BRIC.”
Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Update, which I will be conducting in New Orleans, LA, on Tuesday, June 12, 2018. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there, too. Tickets are available for $268.
I’ll be arriving at 11:30 AM, and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at an exclusive downtown restaurant. The precise location will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for the luncheon, click on our online store.
What a late Christmas gift!
It’s three months late, but I am sure Mark (Zuckerberg) will take it.
The cost of data just spiked thanks to UK-based Cambridge Analytica, and the FANGs are popping bottles of Champagne.
The embedded regulatory premium increased one full magnitude on the news of the data leak, and regulation will certainly be brought forward.
This is fabulous news for the FANGs because they are the ones that benefit from new data regulation because it builds a bigger moat around their businesses.
Sensational claims over third-party data extraction is just the tip of the iceberg. We haven’t wrapped our heads around the full extent of Pandora’s Box either because the hijacking of data has gone on unabated for years.
Remember, Facebook (FB) is just a “distribution platform.”
Years of grabbing market share and dominating business was well worth it because tech regulation will kill off future competition as the lubrication of free-flowing data will be scrutinized adding to costs.
Mark Zuckerberg will pay lip service, noting he didn’t know perpetrators would use data in an unscrupulous way, and the world will move on. He might even have to testify in front of various governments and put in some face time. Case closed.
Meanwhile the market doesn’t blink an eye, but whispers of tech regulation tears the market to shreds.
The ugly truth is Facebook does not care what users post on its distribution data platform as long as users post, gifting free data on themselves. Herd-like advertisers have no choice but to comply and pony up for potential clicks driving business.
The real news is in the ramifications to the FANGs, Big Data and data regulation.
Tech companies and corporate America make executive decisions based on data, and without it operations are run less efficiently and with less precision.
Big data cuts across every single big trend in tech. The unearthing of bad actors only highlights the desire for big data and the widespread monetizing opportunities of data extraction.
The volume of data is integral to the accuracy of the applications. Minimal degree of error yields higher quality A.I. technology, translating into better performance.
The data economy produces zettabytes of data now, up from exabytes, and before that, up from gigabytes.
The technological development expected by 2020 is mind-numbing. Autonomous cars will generate 4 terabytes of data per day per car. There will be 50 billion connected smart devices in operation.
Smartphones will consume more than 1 exabyte of data each day. Oh, did I mention the 43 million robots in the workplace and all the data they will produce?
The White House has missed the boat on regulation, hence the wrist slapping.
Which FANGs are most susceptible to regulation?
The FANGs that are closely aligned with the proliferation of data – Facebook and Google (GOOGL).
These two FANGs are in the firing line and disastrous headlines exacerbate an already tense situation in the short term. They will be fine long term.
Facebook and Google don’t charge their customers to circumvent the antitrust dilemma. The result is charging through a back-door method of building up user data for the means of hyper-targeting advertisements.
In general, the aftermath may lead to payment of user data – but not yet, not even close.
Until harvesting data is illegal, FANGs should be bought on the dip after the brouhaha settles down and the stock finds solid support levels.
This is hands down the best entry point into Facebook in 2018.
Big data for implementing business decisions will never go away, but the rules on how to responsibly handle it will. This is where the government is likely to step in and put its stamp on the situation. How these rules are fleshed out is a moot point because either way, Facebook will avoid any direct hits.
Any data costs related to building hyper-targeted user profiles easily will be passed on to advertisers boosting earnings. The beauty of a duopoly is that Facebook can charge more, and advertisers have no choice but to stump up the extra ad cash. Facebook would even be able to pass off the higher ad prices as a function of improved ad tech, which it is the absolute best of breed in the world.
Facebook should want more regulation.
Regulation also is necessary to steward the user-ship of 2.2 billion users. The plan for Facebook is raising revenue per user after digesting the low-hanging fruit. Facebook is perfectly placed to execute, and advertisers will grumble about additional price hikes.
The reality is that American big tech is coddled because of the American fight for technological supremacy against China. It supersedes any data harvesting blip.
The White House needs the FANGs to be powerful enough to counter the emerging threat on the other side of the Pacific. The Chinese BATs (Baidu, Alibaba and Tencent) are right on the heels of the FANGs in a full-out arms race.
Disabling the FANGs would sway the power pendulum overwhelmingly in favor of the Middle Kingdom. Washington cannot destroy the FANGs because it would give Chairman Xi the green light to dominate future technology and, in turn, the future of mankind. Trump would never let that happen, and he likes his social media too much.
Buy Facebook after the smoke clears and the dust settles.
Quote of the Day
“I’ve expressed how upset I am that the Russians tried to use our tools to sow distrust. What they did is wrong and we are not going to stand for it.” – Facebook CEO Mark Zuckerberg
Mad Hedge Technology Letter
February 13, 2018
Mad Hedge Technology Letter
February 1, 2018
(ALL THAT GLITTERS IS SILICON),
(MU), (WDC), (GOOGL), (AMZN), (FB),
(SAMSUNG), (SK HYNIX), (BITCOIN), (CRYPTO CURRENCY)
*Your first emailed newsletter will be sent at 1:10am EST Friday, February 2, 2018!
As soon as possible, be sure to add the email address firstname.lastname@example.org to your white list or the list of trusted email addresses. And tomorrow, if you do not see your email, check your spam and junk folder to make sure it was not marked as junk mail.
– – – – – – –
How about if I told you there was one stock that captured ever major trend in technology today?
That would include the cloud, the computing power therein, cloud storage, virtual reality, and the exponentially increasing speed of broadband networks.
Now, how about if I told you that such a stock traded not only at a discount to the market, but is a bargain compared to other peers in its sector. It is even cheaper than average multiples in mundane industries like industrials and beverages.
I might even entice you further by pointing out that the shares have gone nowhere for two months, enduring a sideways “time” correction when the entire rest of the tech area has been on fire.
How about a company that is getting a massive tailwind from the cheap US dollar and the Bitcoin cryptocurrency boom.
You would think that such a company would be impossible to find in the ninth year of a bull market, especially one that has been focused on technology.
But you would be wrong.
Look no further than Boise, Idaho based Micron Technology (MU). (MU) manufactures DRAM chips (dynamic random access memory) in competition with South Korea’s Samsung Electronics and SK Hynix.
It also builds NAND flash memory head to head against Japan’s Toshiba and America’s Western Digital (WDC). Intel (INTC) is a peripheral player in the field through a joint venture with (MU).
The key to understanding Micron is that this is not your father’s (MU). After the Dotcom bust, the company under invested in R&D and fell behind the pack. It has since addressed that management error. The stock market noticed two years ago, causing the share price to explode.
The DRAM industry itself has undergone a major transformation. When I covered the industry during the 1980’s DRAM’s became commoditized, giving undue advantage to companies with the lowest cost of capital, which turned out to be Japanese.
That’s when Intel made its strategic withdrawal out of DRAM’s to focus purely on microprocessors. The industry was later taken over by lower cost South Korea, which continue to dominate today.
Some 20 years ago, DRAM was a PC driven industry, making it slave to the consumer spending cycle. Thanks to the “siliconization” of American industry DRAMS are not found everywhere.
Servers are 30% of the market, and cell phones another 20%. The rest can be found in a plethora of electronic goods and cars. These days, you can’t swing a dead cat without hitting a raft of DRAMS. The market has grown enormously.
Here is the real sweet spot for investors. While demand for chips has growth by leaps and bounds, the number of manufacturers has remained the same for over a decade. The rest have disappeared thanks to a relentless round of mergers and takeovers.
Hugely increasing demand in the face of shrinking supply. It sounds like a winner to me.
The really great thing about this set up is that new customers will pay anything to get more chips. When Alphabet (GOOGL), Amazon (AMZN), or Facebook (FB) need a new server farm they don’t exactly quibble over the price of DRAM’s because their downstream profits are so enormous.
DRAMS and NAND are notoriously cyclical industries. They are great to own in healthy economies, but awful to be near during recessions.
If you don’t believe me, check out the long-term chart below, which had the share price flirting with pennies at the 2009 bottom. They had chapter 11 written all over them.
So nine years into this economic recovery, there is more than a little hesitation about the sector.
Except that this time its different.
From what I am hearing across the technology space, this cycle will run much longer than anyone expects.
For a start, the next downside won’t be so bad either. The next recession certainly won’t be as bad as the Great Recession.
DRAMS and NANDS have also evolved from a discretionary to a non-discretionary product. During the last recession, a weak economy caused consumers to delay purchases of new PC’s an TV’s.
How many will turn in their iPhones, scale back there broadband, or buy dumbed down chip free cars during the next one. Not many I think.
That makes DRAM and NAND manufacturers much more stable companies to invest in.
After Sanjay Mehrotra, the fresh faced CEO of Micron Technology, recently took over, the newly crowned CEO has had Micron running perfectly on all cylinders.
Delve into the numbers deeper and they are absolutely stunning. In fact, the biggest headwind at Micron is that DRAM PC sale volume had a slight quarterly decline due to higher value- added market sales in server DRAM’s.
This is not surprising since the bulk of DRAM chips are migrating towards the embedded business unit which recorded a 44% increase in revenue YOY, driven by insatiable demand across all segments. Particularly, automotive and IoT segments outperformed as big tech companies traverse into the development of autonomous car technology and creating a smart home for consumers.
If that doesn’t tickle your fancy, then what about the cloud portion of the business which is the strongest growth driver and has more than doubled in the past year?
Cloud is all the rave these days and it is not shocking that companies exposed to the cloud, like SalesForce (CRM) and Red Hat (RHT) are reaping all the benefits.
Investors attempting to absorb what fuels Micron will be chuffed to discover that DRAM chips represent around 65% of their total revenue and around 30% by NAND revenue creating a mix of high quality solutions for all types of customers.
Micron officials have consistently referred to the DRAM pricing environment as “firm”and this was corroborated by the Chinese authorities who set in motion an investigation the last week of December 2017 to investigate potential “price fixing” in the DRAM and NAND spot prices.
In truth, the molten hot increases in chip prices reflect the strong global demand for DRAM and NAND chips. Demand is growing a consensus 20-30% per year and a shortage of inventory is causing prices to gap up.
The investigation by the Chinese economic regulator coincided with another jump in DRAM prices at the end of 2017 boding well for Q1 2018 earnings.
Stripped to bare essentials, a strong correlation between DRAM spot prices and Micron’s share price persists. To add fuel to the bonfire, DRAM chip supply is controlled by only 3 companies; Micron, Samsung, and SK Hynix. All other smaller players have been flushed out.
Much can be attributed to the breakneck growth of smartphones, both the low and high end, as the huge amount of applications they perform now require substantially more DRAM chips than ever before.
This was extremely evident in 2017 where Apple cornered the NAND market for their iPhone X, purchasing 17% of the entire global NAND supply. The tightness in the chip markets resulted in hoarding by tech companies afraid that diminished supply would affect their production chain.
Companies requiring chips started purchasing more than they needed because delays could be weeks to their end product if they under bought. As AI capability integrates into high-end smartphones, the DRAM capacity required for smartphone will continue picking up to the 4-6 GB level.
Other products such as smart TV’s, set-top boxes, gaming consoles, crytpo mining, and voice AI devices will also see strong growth in 2018. The transformation into voice AI is evident with micron chips acting as the vodka for the after party.
The overwhelming bullishness manifests itself in total revenue up around 100% YOY.
The technology itself is experiencing a renaissance at the technical level. Micron built and operates a DRAM center of excellence in Taiwan and the NAND center of excellence in Singapore. These centers are integral to optimizing costs, accelerating speed, and increasing capacity in their NAND and DRAM chips.
The firepower is on display with shipments of the 12 gigabits per second GDDR5X, the industry’s fastest DRAM chip.
The results have been anything but disappointing. The all-important bit growth per wafer which influences memory capacity has surged upwards 40% YOY. This allows Micron to pack more heat into the chips they produce.
When you look a little deeper into their chip development, the DRAM center of excellence also achieved a 6% quarterly cost reduction per bit and the ASP (Average Selling Price) increased 14% in just one quarter and is even higher at the beginning of 2018.
If you extrapolate the cost reductions to a trailing 12-month period, the cost per bit has dropped by 30%. According to Lee Pei-ing, president of Nanya Technology, DRAM prices are expected to elevate further in Q1 and Q2 2018.
Scouring the charts, Micron is mind numbingly cheap trading at a 4.5 forward PE multiple. Micron also generated operating cash flow of $2.4 billion in fiscal Q3 compared to $389 million in Q3 2016.
This company has one of the cleanest balance sheets around and is flush with cash. The semiconductor space as a whole is inexpensive. Without anyone noticing, Micron has suddenly become integral to everyone’s daily lives.
To learn more about Micron Technology, please visit their website at https://www.micron.com
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