Mad Hedge Technology Letter
October 18, 2024
Fiat Lux
Featured Trade:
(AMD GAINING MARKET SHARE)
(AMD), (NVDA)
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.
Global Market Comments
September 26, 2024
Fiat Lux
Featured Trade:
(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (META)
Last weekend, I had dinner with one of the oldest and best-performing technology managers in Silicon Valley. We met at a small out-of-the-way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables.
The service was poor and the food indifferent, as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.
I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.
To get this information, I had to promise the utmost confidentiality. If I mentioned his name, you would say “Oh my gosh!”
Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.
By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on these lowest-of-margin businesses.
It’s everything else that’s so interesting. While its profitability is quite low compared to the other Magnificent Seven stocks, Amazon has the best growth outlook. For a start, third-party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.
Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer, who once in, buys more services.
Apple (AAPL) is his second holding. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 34X over the last several years. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.
The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third-party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from up-front sales to a lifetime subscription model will also give it a he boost.
Half of these are more than four years old and positively geriatric in the tech world. More than half of these are outside the US. 5G will add a turbocharger.
Netflix (NFLX) is another favorite. The world is moving to “over the top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 21 Emmys this year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.
Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world. Tech growth will accelerate in 2021 and 2022.
5G will enable better Internet coverage for everyone and will increase the competitiveness of the telecom companies. Factory automation will be another big area for 5G, as it is reliable and secure, and can be integrated with artificial intelligence.
Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.
My friend is not as worried about government-threatened breakups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies if its own, views big American tech companies simply as a source of revenues through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.
Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).
Both Google and Meta (META) control 70% of the advertising market between them, which is inherently a slow-growing market, expanding at 5% a year at best. (META)’s growth has slowed dramatically, while it has reversed at (GOOG).
He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.
He has raised value tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings it is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.
He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.
Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract service revenues from their cars, like Apple has. Tesla will grow revenues by 30%-50% a year for the next two or three years. They should sell several million of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.
EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.
Tech valuations are high, there is no doubt about it. But interest rates are much lower by comparison. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.
When rates rise in a year or so tech stocks may have to come down. They have a lot more things going for them than against them. The customers keep coming back for more.
Needless to say, the above stocks should make up your shortlist for LEAPS to buy at the coming market bottom.
Global Market Comments
August 29, 2024
Fiat Lux
Featured Trade:
(SEVEN TECH STOCKS TO BUY AT THE ENXT MARKET BOTTOM),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (META)
Last weekend, I had dinner with one of the oldest and best-performing technology managers in Silicon Valley. We met at a small out-of-the-way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables.
The service was poor and the food indifferent, as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.
I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.
To get this information I had to promise the utmost in confidentiality. If I mentioned his name you would say “Oh my gosh!”
Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.
By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on these lowest-of-margin businesses.
It’s everything else that’s so interesting. While its profitability is quite low compared to the other FANG stocks, Amazon has the best growth outlook. For a start, third-party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.
Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer, who once in, buys more services.
Apple (AAPL) is his second holding, the next AI stock. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 25X over the last several years. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.
The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third-party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from up-front sales to a lifetime subscription model will also give it a boost.
Half of these are more than four years old and positively geriatric in the tech world. More than half of these are outside the US. 5G will add a turbocharger.
Netflix (NFLX) is another favorite. The world is moving to “over-the-top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 21 Emmys this year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.
Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world. Tech growth will accelerate in 2021 and 2022.
5G will enable better Internet coverage for everyone and will increase the competitiveness of telecom companies. Factory automation will be another big area for 5G, as it is reliable and secure, and can be integrated with artificial intelligence.
Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.
My friend is not as worried about government-threatened breakups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies of its own, views big American tech companies simply as a source of revenue through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.
Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).
Both Google and Meta (META) control 70% of the advertising market, which is inherently a slow-growing market, expanding at 5% a year at best. (META)’s growth has slowed dramatically, while it has reversed at (GOOG).
He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.
He has raised the value of tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings it is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.
He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.
Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract service revenues from their cars, like Apple has. Tesla will grow revenues by 30%-50% a year for the next two or three years. They should sell several million of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.
EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.
Tech valuations are high, there is no doubt about it. However, interest rates are much lower. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.
When rates rise in a year or so tech stocks may have to come down. They have a lot more things going for them than against them. The customers keep coming back for more.
Needless to say, the above stocks should make up your shortlist for LEAPS to buy at the coming market bottom.
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
April 5, 2024
Fiat Lux
Featured Trade:
(DELL IS NOT A DINOSAUR ANYMORE)
(DELL), (AMD), (NVDA)
Investors are looking through any bad part of Dell’s business because they have faith in the AI narrative.
Dell is one of those legacy companies that produce a great deal of enterprise products.
The stock went nowhere for a long time but now it is different.
Mixed into their earnings story was a torrent of negative numbers like the company's net revenue was down 14% year over year in 2024 and down 11% in Q4.
A weak PC market isn't helping its numbers. And the drop in revenue led to a 10% drop in full-year operating income.
Dell stock nevertheless has crushed in the short term to churn out all-time highs.
Investors are solely focused on Dell’s potential with artificial intelligence (AI).
Peeling back the numbers, Dell suddenly has a massive backlog of orders for its AI-optimized servers.
They are finally relevant after so many years out to pasture.
Dell is driven in particular by strong demand for AI servers powered by Nvidia H100 chips.
The company said at the time that its backlog of orders for AI servers at quarter end had reached $2.9 billion, up from $1.6 billion in the previous quarter and $800 million two quarters earlier.
Dell also said that it has a pipeline of interest in AI servers that is “multiples” of its current backlog.
And the company said at the time that there is additional demand for servers powered by AMD’s (AMD) pending MI300 GPU and for the next generation of Nvidia (NVDA) chips.
One still on the horizon is the emergence of AI PCs, which should start shipping later this year from Dell and other PC makers.
Management revealed that by the end of January 2025, one of every five PCs Dell sells will be capable of running AI workloads. They also estimate that the total could double by the end of 2026.
Another business that could see an AI-driven improvement is enterprise storage, which accounted for about 20% of overall revenue in the latest quarter. That business was down 10% in the most recent quarter from the year-earlier period.
Dell's management said that it had $800 million in shipments for AI-optimized servers in Q4 alone which is greater than the $500 million they did last quarter.
There will be many winners and losers in this Game of Thrones tech sub-industry of AI.
Tech firms will go from boom to bust with some even going boom based on pure potential.
That’s how much money is flowing into this segment of tech right now.
Many companies are counting on cloud computing platforms to provide AI expertise and power, but Dell's business is betting on AI-equipped on-premise servers.
These servers make sense for big entities that need on-site installation.
I am not talking about the single guy working from home in his little studio apartment.
I do believe there is a use case for multiple types of set-ups and Dell spearheading the enterprise-style large on-premise servers will be suitable for large corporations that need high amounts of storage capacity.
AI on-site data servers aren’t for everyone, but it has the stock raring to go for the rest of 2024.
Buy the Dell story on big dips until the AI bubble pops.
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