Monday, 27 May 2024

By Ryan Dinse Editor, Crypto Capital and Alpha Tech Trader

[4 min read]

Dear Reader,

In a sea of red last Thursday, one stock stood out from the crowd.

Check it out:

As you can see, Nvidia Corp. [NASDAQ:NVDA] shot up 9.4%, while most other major stocks were negative.

That’s a gargantuan move for Nvidia, adding a whopping US$217.7 billion to its valuation in just one day.

That’s like adding almost the value of McDonald’s and Ford combined.

As I type, Nvidia is worth an astounding US$2.55 trillion dollars.

It’s the third most valuable listed company, just behind Apple and the world’s most valuable company, Microsoft.

But get this…

Nvidia is now worth more than the value of every single stock on the Australian stock market combined!

But the really amazing thing about Nvidia is not just the magnitude of its valuation but the speed of its rise too.

At the start of 2020, this was a company worth just US$144 billion. A 17 times gain in less than four years for a stock this big is almost unheard of.

Check it out:

Naturally enough, many commentators are now calling it a ‘bubble’.

And an early backer — the legendary George Soros protégé Stanley Druckemiller — recently offloaded some of his Nvidia holdings.

He said on his decision:

‘We did cut that and a lot of other positions in late March. I just need a break. We’ve had a hell of a run. A lot of what we recognized has become recognized by the marketplace now.’

Interestingly, Druckenmiller has rolled part of his profits into the iShares Russel 2000 ETF.

This is an index fund that invests in US small-cap stocks.

Small-cap stocks have lagged the general market all year, and Druckenmiller thinks it’s time for them to play catch up.

Look, if I was in Druckenmiller’s shoes, I can see why he’d play it like this.

He’s made a motza on being early to the AI theme, and as he says himself, ‘he’s not Warren Buffett’.  

It’s not his style to stay invested for years.

He picks his moment, places his bets (usually using leverage), cashes in, then moves onto the next idea.

So, personally, I don’t see it as a judgement of the value of the overall AI trend.

When you look at why Nvidia bucked the market trend last Thursday, you can still see strong signs of life in the AI theme.

Let me explain…

Do you want chips with that?

Nvidia’s Q1 results ‘blew the doors off expectations across just about every possible metric’according to Bespoke Investment Group.

The AI giant reported first-quarter revenue of US$26.04 billion, more than triple its revenue one year ago.

Sales in their AI-focused data centre division surged to new records, quintupling year-over-year.

These are all tangible signs that demand for AI computing power isn’t slowing down…yet, at least.

Nvidia CEO Jensen Huang said on the results:

‘The next industrial revolution has begun—companies and countries are partnering with NVIDIA to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center—AI factories—to produce a new commodity: artificial intelligence.’

In Jensen's view, AI, and consequently Nvidia's microchips, will be the driving force behind everything.Self-driving cars, robotics, drones, TVs, smartphones, computers, factories, trucks — you name it…

What does the total addressable market for ‘everything’ look like!?

That’s basically the reasoning behind Nvidia’s surge.

So, should you be buying Nvidia now?

To be honest, I don’t know.

As Druckenmiller noted, is there anything about Nvidia that’s not priced in right now?

That’s hard to say, and at the very least, you could say it’s priced for perfection right now.

It’s not a stock we hold in the Alpha Tech Trader CORE portfolio.

However, we do hold a number of other stocks that are aligned strongly with the AI theme in general.

The way we see it is Nvidia is best used as a bit of a bellwether stock for AI — a signal rather than an investment.

Right now, it has a quasi-monopolistic hold on one area of the semiconductor market — GPUs.

But this monopoly position may dilute over time.

Interestingly, when you dive deeper into the semiconductor industry, you find that there are a number of monopolistic plays in certain key niches.

Companies are creating crucial products that are even more important —and harder to replicate — than Nvidia’s much-vaunted GPU processing chips.

To give you a few ideas today…

Alternate ways to play the AI theme

Check out this chart of the overall eco-system:

There are a number of subsectors, including design, manufacturing, testing, IP, equipment, and more.

Nvidia itself is a ‘fabless’ chip firm.

The word ‘fabless’ means they don’t actually produce their own chips (though they may design them to certain specifications).

That ‘fabrication’ role is almost exclusively held by two companies.

Taiwan’s TSMC and South Korea’s Samsung account for 71% of the entire foundry market.

They’re the only two companies that make the most advanced microchips.

China is trying hard to develop its capabilities in this sector, but it’s notoriously difficult to get right.

US company Intel is also a potential wild card entrant into the foundry space, with strong financial support from the US government behind it.

Microchip production capacity is a major strategic issue for the world's superpowers.

Another interesting area of the semiconductor supply chain is lithography.

These are the companies that make the machines that are sold to the foundries that make the chips.

An obscure Dutch company called AMSL is one of the few true monopolies on the planet in this field.

As tech investor Eric Flaningham noted recently:

‘Few people in the world fully understand this technology. The top-end lithography machines have over 100,000 parts. It takes four 747s to ship one to a customer. ASML only makes ~55 of them a year. There’s a reason why these machines cost $200m-$300m a piece.’

Then there are companies like Tokyo Electron, Applied Materials, and Lam Research Corporation, which all create specialist tools essential to the semiconductor supply chain.

Again, all companies you’ve probably never heard of.

I’ve barely touched upon the many moving parts at play here.

My point is that the AI story is a lot bigger than just Nvidia.

With some research, I still think it’s possible to uncover the hidden gems that will ride this multi-year tailwind.

And Nvidia’s recent results prove that…

Regards,

Ryan Dinse,
Editor, Crypto Capital and Alpha Tech Trader

Ryan is a former financial advisor who over seven years helped more than 600 clients and had more than $150 million under management. This experience taught him that the mainstream investment industry has no interest in helping clients strive for greatness. He was told to make ‘safe’ investment plays and settle for average returns. It wasn’t good enough for Ryan.

In 2016, he embarked on a renewed mission: to help ordinary people lock onto extraordinary trends before they go mainstream. He’s an experienced small-cap trader and an expert in cryptocurrencies. He first bought Bitcoin [BTC] in 2013, when it was around US$600. Today, it’s around US$30,000.

His crypto advisory is a must for anyone looking to make digital assets a part of their long-term portfolio. Check it out here.

His tech advisory Alpha Tech Trader aims to identify and latch onto strong emerging opportunities in the tech sector, wherever they are in the world. Get more info here.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Dear Reader,

It’s coming... a new world order. 

Politics doesn’t interest us. But mega-politics does. Its deep currents — mostly unseen — carry history along with them. And they guide and drive the Primary Trends in markets, too. 

And this week, something very important happened. We saw the future taking shape. Vladimir Putin went to Beijing. There, he surely received one of the warmest welcomes he has ever gotten. But this was more than just conviviality... it was the signal of a big shift in the power relationships — ‘les rapports de force’ — between the governments of planet earth.  

Ray McGovern, a CIA analyst for 27 years, reports: 

‘It amounts to a tectonic shift in the world balance of power. The Russia-China entente also sounds the death knell for attempts by U.S. foreign policy neophytes to drive a wedge between the two countries. The triangular relationship has become two-against-one, with serious implications, particularly for the war in Ukraine. If U.S. President Joe Biden’s foreign policy geniuses remain in denial, escalation is almost certain.’ 

Since the end of WWII, US security experts and geopolitical strategists have taken comfort in what they thought was an eternal animosity between Russia and China. The two titans share a long border and a long history of mutual distrust.  

But now, something has changed. The two old adversaries have embraced.  Now, “it’s two against one,” says McGovern. 

Arnaud Bertrand: 

‘Wow, China and Russia issued an extraordinary joint statement yesterday, with almost 8,000 words when translated into English, and in many ways more important than the famous "no limits" partnership statement in February 2022.’  

Bertrand identifies three important features in the joint Russian/Chinese announcement. First, they openly proclaim a New World Order in which the US is no longer the boss: 

‘[T]he status and strength of emerging major countries and regions in the “Global South” [are] continuously increasing” which will lead to greater “multipolarity.”’  

The second point is that the statement clearly takes aim at the US, telling it to stop “interfering in the internal affairs of other countries”... and creating “small yards with high fences” among the world’s sovereign powers. 

The third point must send chills of delight and foreboding, both up and down our warmongers’ spines. It calls for much broader, deeper cooperation militarily, as well as commercially: 

‘... [both sides] will further deepen military mutual trust and cooperation, expand the scale of joint training activities, regularly organize joint maritime and air patrols, strengthen coordination and cooperation within bilateral and multilateral frameworks, and continuously improve the ability and level of jointly responding to risks and challenges.’ 

Is this just diplomatic blah, blah? It doesn’t sound like it. It sounds more like an alliance between the world’s largest country geographically — Russia — and the world’s most dynamic economy — China. Russia is experienced and capable militarily; it has shown itself able to resist the weapons and tactics of the advanced “West.” But the Russian economy is tiny. The US firepower lobby made full use of ‘bear baiting’ to get more money from Congress. But Russia lacks the commercial strength to pose much of a danger.  

China was a convenient bugaboo, too. It has manufacturing and high-tech capacity up the wazoo. What it lacks is much experience in modern warfare. Since Chiang Kai-shek fled to Taiwan in 1949, China has minded its own business, lately more eager to make money than to make war. And now, with the full cooperation of Russia, it will be able to shore up its defenses and bring its military up to world standards. 

Alfred Thayer Mahan concocted a grand theory in which there were two types of geopolitical force — landpower versus seapower — described in his famous book, The Influence of Seapower on History. The book became required reading, not only at the US Naval War College, but in Japan and Germany too. The Japanese built up their fleet in the 1920s and ‘30s expecting a ‘decisive battle’ with the US. In fact, they got their decisive battle — Midway — and they lost. 

Napoleon Bonaparte seemed to anticipate Mahan by nearly a century. He believed he would beat the Duke of Wellington at Waterloo, because “the English don’t know how to fight on land.” 

He lost too. 

But never before was there a landpower so great, potentially, as the China/Russia partnership.  

For various reasons — mostly venal, partly just stupid — US policymakers made enemies of both Russia and China. The firepower industry needed enemies to justify huge military budgets. Spurred by the neocons, the US rolled out sanctions, tariffs, massive support for the Ukraine, more military spending, threats and sophisticated new weapons.  

In these pages, we’ve focused on how these policies add to US debt and make it impossible to forestall a debt crisis. 

But that may turn out to be the least of the problem. Driving the Chinese and the Russians into each other’s arms might turn out to be the biggest strategic miscalculation of all time. 

Yes, the dreaded Huns, the Han, Tartars, Mongols, Cossacks — all the fierce warriors of the steppes and the Middle Kingdom — are coming together.  Not since Genghis Khan has the Eurasian Heartland been so united.    

And so long, small fry -- Vietnam, Grenada, Guatemala, Nicaragua, Iraq, Afghanistan.  Now, the empire of ‘the West’ may have created a worthy opponent.  

Regards,

Bill Bonner,
For Fat Tail Daily