Mad Hedge Technology Letter
October 23, 2024
Fiat Lux
Featured Trade:
(ANOTHER GEM IN THE CHIP INDUSTRY)
(TSM), (NVDA)
Posts
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.
Mad Hedge Technology Letter
March 27, 2024
Fiat Lux
Featured Trade:
(TAIWAN IS ON THE MAP)
(AAPL), (TSM)
I know it’s not the sexiest choice but there is a chip company in Taiwan that readers need to look at.
This company has investments all over the world and is the leader in what they do.
They are also involved in AI which lately has been the ticket to riches.
Taiwan Semiconductor Manufacturing Company (TSM) may not seem like a glamorous AI stock, but it's as critical to the AI future.
To understand TSMC's role in AI, you need to understand how we get to end consumer-facing products like ChatGPT, Bard, and other generative AI applications.
For AI to be effective, it must be trained using lots of data -- quantities that must be stored in specialized data centers.
Data centers rely on graphic processing units (GPUs), which are essentially the brains of AI computing systems.
TSMC and the semiconductors it manufactures for its client companies are crucial in this process. These GPUs rely heavily on TSMC's best-in-class manufacturing processes.
This AI knock-on effect hasn't impacted TSMC's financials yet, but management said they expect sales of its AI-related semiconductors to grow at a compound annual rate of 50% for at least the next few years.
By 2027, AI-related semiconductors are expected to be responsible for a large part of the company's revenue.
TSMC will absolutely be additive to the AI ecosystem.
Let’s talk about their products.
TSMC's 3nm fabrication process accounted for 15% of the company's revenue in 2023.
Only one of TSMC's customers used it at the time:
Apple (AAPL).
The three-nanometer product is where it’s at.
Wasn’t it just a year or 2 ago we were at 7 nanometers?
As more customers adopt the manufacturing process, 3nm process nodes will account for a considerably larger share of TSMC's revenue.
This year TSMC's N3-series nodes — including N3B and N3E — will account for over 20% of the foundry's revenue in 2024.
Apple currently exclusively uses TSMC's N3B to make its A17 Pro system-on-chip (SoC) for smartphones, as well as the M3-series processors for iMac desktops and MacBook laptops.
AMD is preparing to launch its new Zen 5-based processors made on 3nm- and 4nm-class process technologies later this year.
Apple's new iPhone 16 series will be equipped with the A18-series processor, and the upcoming M4-series processors for Mac PCs will also be produced using TSMC's 3nm technology.
This marks the first time Intel has entrusted TSMC with the full range of chips for its mainstream consumer platform, the report notes.
This collaboration highlights TSMC's expanding role in serving Intel, which also happens to be the company's rival in the foundry market.
With three major customers using TSMC's 3nm family of process technologies, this company needs to be on readers’ radar.
More companies are expected to adopt TSMC's N3 nodes in 2025, including performance-enhanced N3P, and the report suggests 3nm will account for over 30% of TSMC earnings in 2025.
It’s easy to see with the mushrooming of business for TSMC, how they are a highly sought-after stock.
It also explains why the stock has been on a tear.
It was only just last May they were trading at $82 per share and fast forward to today at the stock sits at $136 per share.
Holding this stock long term has borne fruit and every big should be bought.
They will continue to be the best at what they do.
Global Market Comments
February 9, 2024
Fiat Lux
Featured Trade:
(FEBRUARY 7 BIWEEKLY STRATEGY WEBINAR Q&A),
(LLY), (FXI), (TSM), (BABA), (PLTR), (MSBHF), (SMCI), (JPM), (INDY), (INDA), (TSLA), (BYDDF), (NFLX), (META), (UNG)
Below please find subscribers’ Q&A for the February 7 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: Have you ever flown an ME-262?
A: There's only nine of the original German jet fighters left from WWII in museums. One hangs from the ceiling in the Deutsches Museum in Munich (click here for the link), I have been there and seen it and it is truly a thing of beauty. You would have to be out of your mind to fly that plane, because the engines only had a 10 hour life. That's because during WWII, the Germans couldn't get titanium to make jet engine blades and used steel instead, and those fell apart almost as soon as they took off. So, of the 1,443 ME-262’s made there’s only nine left. The Allies were so terrified of this plane, which could outfly our own Mustangs by 100 miles per hour, that they burned every one they found. That’s also why there are no Japanese Zeros.
Q: Thoughts on Palantir (PLTR) long term?
A: I love it, it’s a great data and security play. Right now, markets are revaluing all data plays, whatever they are. But it is also overvalued having almost doubled in a week.
Q: What do you make of all these layoffs in Silicon Valley? What does this mean for tech stocks?
A: It means tech stocks go up. The tech stocks for a long time have practiced over-employment. They were growing so fast, they always kept a reserve of about 10% of extra staff so they could be put them to work immediately when the demand came. Now they are switching to a new business model: fire everybody unless you absolutely have to have them right now, and make everybody you have work twice as hard. That greatly increases the profitability of these companies, as we saw with META (META), which had its profits triple—and that seems to be the new Silicon Valley business model. If you're one of the few 100,000 that have been laid off in Silicon Valley, eventually the economy will grow back to where they can absorb you. That's how it's going to play out. In the meantime, go take a vacation somewhere, because you're not going to get any vacations once you get a new job.
Q: I have had shares of Alibaba (BABA) since 2020 and the stock has been in free fall since. Should I take the 80% loss or hold?
A: Well, number one, you need to learn about risk control. Number two, you need to learn about stop losses. I stop out when things go 10% against me; that's a good level. At 80%, you might as well keep the stock. You've already taken the loss and who knows, China may recover someday. It's not recovering now because no foreigners want to invest in China with all the political risk and invasion risk of Taiwan. After all, look at what happened to Russia when they invaded Ukraine—that didn't work out so well for them.
Q: On the Chinese economy (FXI), is the poorer performance due to the decision to move to a war economy? The move in the economic front was described in Xi's speech to the CCP in January of 2023.
A: The real reason, which no one is talking about except me, is the one child policy, which China practiced for 40 years. What it has meant is you now have 40 years of missing consumers that were never born. And there is no solution to that, at least no short-term solution. They're trying to get Chinese people to have more kids now, and you're seeing three and four child families for the first time in 40 years in China. But there is no short-term fix. When you mess with demographics, you mess with economic growth. We warned the Chinese this would happen at the time, and they ignored us. They said if they hadn't done the one child policy, the population of China today would be 1.8 billion instead of 1.2 billion. Well, they’re kind of damned no matter what they do so there was no good solution for them. Of course, threatening to invade your neighbors is never good for attracting foreign investment for sure. Nobody here wants to touch China with a 10-foot pole until there’s a new leader who is more pacifist.
Q: What do you think of Eli Lilly (LLY)?
A: I absolutely love it. If there's a never-ending bull market in fat Americans, which is will go on forever, they're one of two companies that have the cure at $1,000 a month. On the other hand, the stock has tripled in the last 18 months, so it’s kind of late in the game to get in.
Q: Are there any stocks that become an attractive short in the event of a Taiwan invasion, such as Taiwan Semiconductor (TSM)?
A: All stocks become attractive shorts in the event of another war in China. You don't want to be anywhere near stocks and the semis will have the greatest downside beta as they always do. You don't want to be anywhere near bonds either, because the Chinese still own about a trillion dollars’ worth of our bonds. Cash and T-bills suddenly looks great in the event of a third war on top of the two that we already have in Gaza and Ukraine.
Q: What do you think about the prospects of the Japanese stock market now?
A: I think the big move is done; it finally hit a new high after a 34-year wait. The next big move in Japan is when the Yen gets stronger, and that is bad for Japanese stocks, so I would be a little cautious here unless you have some great single name plays like Warren Buffett does with Mitsubishi Corp. (MSBHF). So that's my view on Japan—I'm not chasing it after being out for 34 years. Why return? The companies in the US are better anyway.
Q: What is the deal with Supermicro Computer (SMCI)? It went up 23 times in a year to $669 after not clear $30 for a decade.
A: The answer is artificial intelligence. It is basically creating immense demand for the entire chip ecosystem, including high end servers, which Supermicro makes. It also has the benefit of being a small company with a small float, hence the ballistic move. It was too small to show up on my radar. I’ll catch the next one. There are literally thousands of companies like (SMCI) in Silicon Valley.
Q: Will JP Morgan (JPM) bank shares keep rising, or will they fall when the Fed cuts rates?
A: (JPM) will keep rising because recovering economies create more loan demand, allow wider margins, and cause default rates to go down. It becomes a sort of best case scenario for banks, and JP Morgan is the best of the breed in the banking sector. It also benefits the most from the concentration of the US banking sector, which is on its way from 4,000 banks to 6 with help from the US government.
Q: Is India a good long-term play? Which of the two ETFs I recommend are the better ones?
A: Yes, India is a good long-term play. You buy both iShares India 50 (INDY) and the iShares MSCI India (INDA), which I helped create yonks ago. India is the new China, and the old China is going nowhere. So, yes, India definitely is a play, especially if the dollar starts to weaken.
Q: Do you expect to pull back in your market timing index?
A: Yes, probably this month. Have I ever seen it go sideways at the top for an extended period? No, I haven't. On the other hand, we’ve never had a new thing like artificial intelligence hit the market, nor have we seen five stocks dominate the entire market like we're seeing now. So, there are a lot of unprecedented factors in the market now which no one has ever seen before, therefore they don't know what to do. That is the difficulty.
Q: Does India have an in-country built EV, and what is their favorite EV in India?
A: No, but Tesla (TSLA) is talking about building a factory there. And I would have to say BYD Motors (BYDDF) because they have the world’s cheapest EV’s. There is essentially no car regulation in India except on imports. Car regulation and safety requirements is what keeps the BYDs out of the United States, and it's kept them out for the last 15 years. So that is the issue there.
Q: What do you think about META as a dividend play?
A: I think META will go higher, but like the rest of the AI 5, it is desperately in need of a pull back and a refresh to allow new traders to come in.
Q: Why does Netflix (NFLX) keep going up? I thought streaming was saturated—what gives?
A: Netflix won the streaming wars. They have the best content and the best business strategy; and they banned sharing of passwords, which hit my family big time since it seemed like the whole world was using my Netflix password. And no, I'm not going tell you what my password is. I’ve already paid for Griselda enough times. Seems there is a lot of demand for strong women in my family. Netflix they seem to be enjoying a near monopoly now on profits.
Q: Has the NASDAQ come too far too fast, and does it have more to run?
A: Well it does have more to run, but needs a pull back first. I'm thinking we'll get one this month, but I'm definitely not shorting it in the meantime.
Q: Have you ordered your Tesla (TSLA) Cybertruck?
A: I actually ordered it two years ago and it may be another two year wait; with my luck the order will come through when I'm in Europe and I'll miss it. Some of my friends have already gotten deliveries because they ordered on day one. They love it.
Q: What happened to United States Natural Gas (UNG)?
A: A super cold spell hit the Midwest, froze all the pipes, and nobody could deliver natural gas just when the power companies were screaming for more gas. That created the double in the price which you should have sold into! Usually, people don't need to be told to take a profit when something doubles in 2 weeks, but apparently there are some out there as I've been here getting emails from them. Further confusing matters further is that (UNG) did a 4:1 reverse split right at this time. They have to do this every few years or the 35% a year contango takes the price below $1.00 and shares can’t trade below $1.00 on the New York Stock Exchange.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
September 13, 2023
Fiat Lux
(A GREAT CHIP STOCK TO BUY AND HOLD)
(QCOM), (APPL), (SOC), (SAMSUNG), (TSM)
If there is a company I would tell my grandkids to work for then it would be semiconductor company Qualcomm (QCOM).
Why?
Even Apple (APPL) can’t replace them so easily and that counts for a lot in this day and age.
We learned just as much as Qualcomm said that it will supply Apple with 5G modems for smartphones through 2026.
Qualcomm expected to lose the Apple smartphone business, because they expected Apple to use an internally developed 5G modem starting in 2024.
They couldn’t develop the product fast enough so it is back snapping up modems with QCOM.
QCOM is the best of breed for smartphone chips and they can be found in every flagship Android device.
I am specifically referring to QCOM’s Snapdragon products which are a suite of system on a chip (SoC) semiconductor products for mobile devices.
The Snapdragon's central processing unit (CPU) uses the ARM architecture.
This line of chips is incredibly competitive and one of the foundational reasons to hold the stock.
Samsung’s SoC competitor named the Exynos is still a far cry from the Snapdragon no matter how hard they try and it seems like each iteration of the Exynos flagship SoC is always a generation behind the Snapdragon.
Apple do use their own SoC with the newest one named the Apple A17 Bionic, but QCOM will still monopolize the Android market with their own Snapdragon that is actually slightly better than the A17 Bionic chip.
The Snapdragon 8 Gen 3 beats the CPU clock speed of the A17 Bionic.
This doesn’t always translate to better real-world performance, but it’s still an impressive feat.
People believe the new Taiwan Semiconductor Manufacturing Company (TSM) 3 nanometer (nm) processing can lose to the advanced 4nm node on the 8 Gen 3.
However, Apple will probably maintain a CPU lead, thanks to better software tuning and more transistors in the same area thanks to a smaller 3-nanometer node.
Basically, Snapdragon is a little faster but Apple has higher performance because of its superior software.
There is no denying that Apple has fantastic software.
On the revenue side, this is great news for the staying power of Snapdragon products and continued sales to Apple will boost Qualcomm’s handsets business, which reported $5.26 billion in sales in the past quarter and could soften the blow of potentially losing a critical customer.
About 21% of Qualcomm’s fiscal 2022 revenue of $44.2 billion came from Apple.
APPL purchased Intel’s smartphone modem division in 2019 to build its own modem. However, evidence suggests that it will be challenging for Apple to move away from Qualcomm’s chips because of their complexity.
Qualcomm also makes money from Apple through cellular licensing fees, which were about $1.9 billion in 2022.
Qualcomm continues to collect royalties from Apple under a six-year agreement. That agreement was struck at the end of a legal battle between Apple and Qualcomm over royalties that was settled in 2019.
Qualcomm says that it expects to only supply 20% of the modems needed for Apple’s 2026 smartphone launch, signaling that it likely still expects the Apple business to eventually decline.
Apple’s new iPhone called iPhone 15 uses QCOM modems as do many other high-end smartphones.
It’s hard to believe that QCOM’s market capitalization is only $125 billion. The eye test alone makes me think this is a half a trillion-dollar company.
Revenue is accelerating and they offer a 2.9% dividend yield.
I can’t talk more about the high quality of products made by QCOM.
This company will have staying power and even if Apple decides to move on, there are a slew of companies ready to gobble up QCOM chips.
Readers shouldn’t trade this stock, but they should buy and hold for the long haul.
Mad Hedge Technology Letter
September 28, 2022
Fiat Lux
Featured Trade:
(CHICKENS COME HOME TO ROOST)
(APPL), (HNHPF), (TSM), (ASML)
I hit the nail on the head – I’ll take another victory lap and you’re welcome.
I’ve been telling all my subscribers.
Apple backing off production of the new iPhone 14s signals that the US consumer is tapped out.
Throw in the towel!
What does that mean?
At the low-end, US consumers don’t have the extra funds to pay for all the streaming services or the extra hardware, gizmos, and gadgets they are used to.
That means the iPhone 14 Pro is next to get squeezed from the budget after an eye-watering $1,500 pretax price tag. At least at that price point, it includes 1 TB of data storage, but no charger.
Personally, I acknowledge that Apple makes a pretty darn good smartphone, but it’s way too overpriced in 2022 and there aren’t enough improvements to justify the lofty prices.
But the killing of new iPhone production goes well beyond just the issue of global sales of smartphones, this is a harbinger of things to come as global economic growth goes from bad to worse.
This is also legit confirmation that inflation is not only transitory, but it’s terrorizing US consumers’ budgets.
Interestingly enough, the most expensive models did still see high demand, confirming what I already have been saying is that high income US consumers are navigating elevated inflation more than superb even if conditions aren’t ideal.
Because they are in good shape – great personal financial balance sheets – hope it stays that way.
Thus, Apple supplier is shifting production capacity from lower-priced iPhones to premium models.
High income households are passing on their costs to the end consumers in the companies they run, and they are jacking up rents in the condos they let out.
They are even hitting up Walmart more than usual and abstaining from pricier options like Whole Foods or Whole paycheck.
Fantastically, high income Americans are ready to spend, spend, spend and that’s great news for employers and employees, but bad news for the bond market.
Apple is cutting the iPhone 14 product family by as many as 6 million units in the second half of this year.
Instead, the company will aim to produce 90 million handsets for the period, roughly the same level as the prior year and in line with Apple’s original forecast this summer.
In Taipei, key chipmaker Taiwan Semiconductor Manufacturing Co. (TSM) fell 2.2% and Apple’s biggest iPhone assembler Hon Hai Precision Industry Co. (HNHPF) was down 2.9%, amid a wide selloff of electronics suppliers.
ASML Holding NV (ASML), maker of advanced chipmaking gear, dropped as much as 3.2% in Amsterdam.
Purchases of the iPhone 14 series over its first three days of availability in China were 11% down on its predecessor the previous year.
Readers must be aware of Apple being the biggest component of the S&P. When Apple goes, so does the market.
Then there is the issue of, maybe the phones just suck now, since each iteration is the trigger for higher expectations which aren’t really met anymore.
Either way, CEO Tim Cook needs to roll up his sleeves, and this report ostensibly means that Apple won’t return to 2022 highs anytime soon.
It also vindicates and confirms that we are still in a sell the rallies mode or buy the dip after deep selloffs mode. This is a short-term traders' world right now and the data backs me up.
Happy trading!
