Mad Hedge Technology Letter
May 31, 2024
Fiat Lux
Featured Trade:
(ANOTHER AI SERVER STOCK)
(DELL), (SMCI), (NVDA), (ORCL)
Nvidia CEO Jensen Huang complimented Dell by saying it’s a “great partnership” at its GTC conference and said that “nobody is better at building end-to-end systems of very large scale for the enterprise than Dell.”
Words like this go a long way in this industry let alone partnering with the best tech firm in the industry.
To have the best CEO in tech flatter your products means staying power but in the short-term, the stock has come too far too fast.
That’s what this deep selloff is about as Dell shares.
The stock is down 19% today but that doesn’t diminish the 207% gain in the past 365 days.
Dell has reinvented itself as an AI stock and specifically a company specializing in servers that serve AI chips.
The company has done so well lately that they are gearing themselves up for inclusion into the S&P index.
That would honestly be a game-changer for the stock.
Super Micro Computer (SMCI), another play on AI servers, was added in March, despite having a market cap below $50 billion.
Confirmation of improving growth prospects could continue to support a stock that’s at a record high while trading at a discount to other tech favorites.
Dell recently generated excitement by unveiling a line of PCs optimized for AI, adding to hopes that such features could prompt a long-awaited upgrade cycle from customers and businesses. HP even reported the first increase in PC sales in two years.
The firm has become a critical cog in the AI ecosystem.
Both the PC and the server businesses will drive growth in coming years, and that’s supportive of both the stock price and the multiple.
I believe we can now say the company has turned itself into both a growth and a value play since the growth story is still under-appreciated and the multiple is very low relative to other AI plays.
The S&P 500 is rebalanced quarterly, with the next scheduled to occur in June. Becoming a component would open Dell up to a fresh avalanche of investors who use the S&P 500 as their benchmark, as well as flows into passive funds that track the index.
All things considered, I believe this is one of the best tech stocks to play server momentum, sky-rocketing storage demand, and an improving PC market.
Dell is becoming an increasingly strategic vendor in AI, but there’s a lot more appreciation for this than there was a few months ago.
Demand for AI systems remains healthy, but other parts of the business remain cyclical, and if we see a macro downturn, even a growth story as powerful as AI could slow down.
I like that investors are looking through the bad PC numbers and only focusing on Dell's AI server story.
This means that readers should be dissuaded from reach for this tech play even though they have a saturated computer business.
The most important and hardest endeavor in the tech industry is to reinvent when business is slowing down.
Only so many firms can pull it off and now that the pivot is into AI, companies are scrambling like Google and Apple in order to stay relevant.
Dell is a stock that should be bought on dips now and I feel funny saying that because that wasn’t the case not too long ago.
Another stock that has reinvented itself with the AI craze has been Oracle (ORCL).
Mad Hedge Technology Letter
May 29, 2024
Fiat Lux
Featured Trade:
(THE GRIND HIGHER)
(FED FUNDS RATE), ($COMPQ)
Rates will stay higher for longer and the higher income bracket will carry the US economy through any conflict with short-term inflation.
What does that mean for tech stocks?
It will trend higher for longer.
Sure, US rates will stay elevated, but tech stocks have proven they are tough to keep down with elevated inflation.
Most who buy tech stocks have done very well financially in the past 18 months.
There is a high likelihood that higher rates won’t affect their purchasing power to buy more tech stocks.
I do admit a big chunk of Americans are missing out on buying tech stocks at these current prices – I don’t diminish that.
The big spenders have utilized their 3% fixed mortgage to hunker down and continue to spend on devices, software, EVs, and other tech.
This clearly means that 5% isn’t the real neutral rate that the Fed is looking for and I view this rate as a relatively loose fiscal policy that is allowing high-income Americans to splurge on more tech products.
Don’t forget that these are the same stockholders that are reaping increasing tech dividends, higher-tech stocks, and generous shareholder returns.
Further evidence is that the $2 trillion in quantitative tightening along with a 5% Fed Funds rate has resulted in the S&P index rising 37%.
That’s not supposed to happen if rates are high above the neutral rate.
What the Fed gets wrong is that the neutral rate has moved significantly higher when we consider the trillions that were printed for the pandemic programs and stimulus checks.
The additional amount of fiat paper floating around chasing a limited amount of goods results in the neutral rate being somewhere closer to 8-10% and that development gets missed by the Fed.
Therefore, 5% Fed Funds rates are “high” and a lot higher than 0%, but the wealthy have now used this rate as a tailwind to progress their financial goals.
Wealthy households right now can earn upwards of 4.5% in a high-yield savings account, see their tech portfolios go up 20% in a year, and are watching the value of their real estate holdings surge higher.
Given the amount of wealth concentrated among a handful of US households and the skew on the income distribution in the US, just about any change in monetary policy will be regressive, advantaging those with more at the expense of those with less.
Tuesday's consumer confidence reading — while registering a three-month high — was far from a clear-cut judgment from Americans that things are looking up, economically speaking.
If the Fed holds at 5% and fails to erect rates closer to 8%, tech stocks will grind higher.
Rates would need to be at a nominal number that would give pain to higher-income buyers.
My personal view is that the Fed will stand pat at 5% interest rates and the Nasdaq should perform well in this scenario.
If we get talk of 6 or 7%, tech stocks will produce a minor pullback delivering another fabulous opportunity to buy.
The other piece here is Nvidia delivering stellar earnings and that should keep the shine on high-quality tech stocks when the market sets up to make the next move.
My bet is any dip will be bought ferociously and any “dip” could turn out to be more of a sideways time correction before we rip higher.
This is also why Nvidia is close to 81% above its 200-day moving average and boasts a current $2.7T valuation.
Mad Hedge Technology Letter
May 24, 2024
Fiat Lux
Featured Trade:
(CBDC BANNED BY THE HOUSE)
(CBDC), ($COMPQ)
The US House of Representatives passed a bill effectively banning the Federal Reserve from creating a digital version of the dollar.
Even though this action doesn’t specifically target the tech sector, the tech sector ($COMPQ) has a lot at stake in this bill.
First, the irony here is how polarized the US Central Bank has become in Washington to the point the Federal government wants to ban something from them.
It’s like taking away a dangerous toy from a baby.
It signals there has been a massive failure at the Fed with its blown “transitory inflation” call that has lasted over 4 years.
The Fed could equally screw up the onboarding of the digital dollar, if it ever happens, the U.S. financial system might never recover.
The vote passed but it still would need approval from the Senate and then signed by the President for it to become US law.
Still, as one of the chief opponents of the Bill, Rep. Maxine Waters, put it, "In fact, if this bill becomes law, we would be the only country in the world to ban a CBDC." Prohibiting "innovation" on the central bank digital currency front seems like a policy miss at first sight.
Waters has this backward.
The U.S. adopting a digital dollar would stifle tech innovation.
Money earmarked for innovation would likely go into capital that isn’t tightly controlled and tracked.
Innovation usually happens when big risk-takers deliver big ideas and the implementation of CBDCs would mean that tracking technology could shut down any “big idea” from the top.
China has tried the e-Yuan which has been a massive disaster with little uptake in the project.
Innovation thrives in an environment that offers freedom for the big picture thinkers, and a 3rd party tracking and monitoring apparatus isn’t good enough.
In fact, if CBDC were implemented, it would be the end of US-led tech innovation in modern history.
Few would take risks because it wouldn’t be worth innovating in this type of currency when there are others that would step over the line of privacy.
Scamming would be off the charts as well in this scenario.
Inserting unparalleled surveillance and individualized control would choke off free business and ideas become sterilized.
Anything new laid out would face a gauntlet of obstacles before getting anywhere near a consumer.
Think about all the middlemen on the way nickel and diming you the death as well. We already have that with the blown transitory inflation call by the Fed.
I am a believer that the less government, the better for tech business.
Europe is the poster boy for government-led innovation stifling.
There are no competitive tech companies in Europe that can compete with Silicon Valley because a tech innovator would be crazy to start and grow a company in Europe.
Europe is hostile to free business and tech innovation. They know how to tax and do it highly.
I could easily see how an integration of digital currency could end up in a dystopian situation if carried out by the wrong government.
Of course, the banning of CBDCs at the House level is a good sign that America is open for business, but it will need to become enshrined in law to have some bite.
If CBDCs are implemented by the Fed in the future, 90% of the Nasdaq market would fail leaving just 7 tech stocks.
It would in fact amplify the lack of competition that we are facing these days in the US tech sector.
I am bullish on the tech sector if integration of CBDCs by the Fed and Congress are banned.
“Someone's sitting in the shade today because someone planted a tree a long time ago.” – Said Legendary American Investor Warren Buffett
Mad Hedge Technology Letter
May 22, 2024
Fiat Lux
Featured Trade:
(THE AI DATA CENTER COOLING STOCK)
(VRT), (NVDA), (AI)
Not every winner from the artificial intelligence revolution will be in Nvidia (NVDA).
Let me be clear about that.
Others will wriggle their way into the group that can admire their success over time.
Here is one for you.
Readers need to look at a company that is literally collaborating with Nvidia to position themselves closest to Nvidia’s business model.
Aligning themselves with the hottest stock in the best sub-sector in the industry that grows the fastest isn’t a bad idea.
That’s why readers should take a peek at Vertiv (VRT) shares which have gone absolutely ballistic over the past year.
VRT is a provider of coolant distribution infrastructure for data centers.
IT cooling challenges continue escalating as new server-accelerated compute technologies, machine learning, artificial intelligence, and high-performance computing drive higher heat densities in the data center environment. Liquid cooling is rapidly emerging as the technology for efficiently handling power-dense hot spots.
These massive data centers require significantly more electricity to operate.
That offers an upside to industrials, utilities, and commodities, according to the firm.
GPUs need 2-2.5x more power than CPUs, and expected power usage for US data centers under construction is equivalent to more than 50% of the power currently used by US data centers.
Here is how Vertiv aids the technological revolution:
High-Density Power and Cooling Solutions: The ever-growing processing power of AI requires robust power and cooling infrastructure.
Vertiv's data center solutions are designed to handle the intense heat generated by AI workloads, ensuring optimal performance and preventing overheating.
Technical Partnerships: Vertiv actively collaborates with leading AI chipmakers like Nvidia. These partnerships ensure their solutions are specifically tailored to meet the unique power and cooling demands of cutting-edge AI hardware.
End-to-End Expertise: Vertiv doesn't just provide individual components. They offer comprehensive solutions that manage power delivery and heat rejection from the power grid all the way to the individual chip. This holistic approach streamlines AI infrastructure deployment and optimizes performance.
Their scalable solutions can adapt to the ever-increasing power and cooling needs of AI applications.
Organic orders increased by 60% compared to the same period last year and net sales reached $6.82 billion.
Operating profit for the quarter was $203 million, while adjusted operating profit stood at $249 million, reflecting a significant year-over-year growth of 42%.
The company also began returning cash to shareholders, repurchasing approximately 9.1 million shares at an average price of $66 per share.
Its strong performance is due to robust demand, particularly in AI-driven deployments and liquid cooling technologies, positioning VRT for continued growth and operational improvement in the evolving digital infrastructure landscape.
The necessity of power usage also makes these GPUs considerably hotter, putting pressure on firms such as VRT to improve cooling systems in data centers.
VRT shares have essentially gone up in a straight line in the past 1.5 years from $12 per share to $100.
That type of return has been entirely justified.
Moving forward, I believe the stock will behave in a similar fashion as the demand for its products grows strongly.
Under no scenario do I find a way that its cooling technology will go by the wayside.
In fact, they could have such a great product that it might fuel speculation of getting acquired which would fuel an even higher share price.
I am bullish VRT.
