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Fountainhead Investing

  • Objective Analysis: Research On High Quality Companies With Sustainable Moats
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5 Star Tech Analyst Focused On Excellent Companies With Sustainable Moats

Tag: AI

Categories
AI Stocks Technology

UiPath: The Path Forward Is Getting Smoother

  • UiPath’s competitive edge lies in its AI integration, SAP partnership and industry-agnostic automation solutions, making it a strong contender in RPA despite generative AI threats.
  • Recent struggles were due to sales execution issues, and competition, but the company shows signs of recovery with strategic changes and a focus on large clients and collaborations.
  • Founder Daniel Dines’ return as CEO, workforce reductions, and strategic partnerships, especially with SAP, are pivotal in steering UiPath back on track.
  • Despite current challenges, UiPath’s strong cash position, cost-saving measures, and promising AI Agentic capabilities make it a worthwhile investment with limited downside risk.

UiPath’s (PATH) updated financial forecast and current valuation do make a great case for investment as a GARP, now that it’s likely to grow only in the mid-teens, valued at just 5X sales, and 25x adjusted earnings. Besides, cash flow is almost double the adjusted operating income, so that too is a plus. I own some and plan to accumulate on declines.

Here’s the complete article on Seeking Alpha.

Categories
AI Semiconductors Stocks

Taiwan Semiconductor  Manufacturing (TSM)  Hits It Out Of The Park

What a great start to the earnings season! 

TSM is up 5% premarket after a massive beat and terrific guidance for AI demand.

TSM, the indispensable chip producer and source for some of the world’s largest tech companies, including Apple (AAPL), Nvidia (NVDA), AMD (AMD), and other chipmakers produced outstanding results this morning.

Q4 Metrics

Sales up 37% YoY to $26.88B

Earnings per American Depositary Receipt $2.24, up 69% YoY compared to $1.44 

Both top and bottom line numbers surpassed analysts’ expectations.

“Our business in the fourth quarter was supported by strong demand for our industry-leading 3nm and 5nm technologies,” said Wendell Huang, senior VP and CFO of TSM in the earnings press release.

Strong AI momentum

TSMC’s brilliant Q4 results beat management’s guidance, and confirmed the strong AI momentum for 2025, disproving any notions about reduced or waning demand. With $300Bn in planned Capex by just the hyperscalers, I believe investors’ concerns are misplaced.

Management highlighted TSM’s growing collaborations with the memory industry during the earnings call, reinforcing confidence in strong and accelerated HBM demand, which bodes well for HBM makers like Micron (MU).

Closer interaction with HBM makers also suggests a strong foundation for the potential ramp of TSM’s 3nm node and upcoming 2nm node, which would be essential for AI development.

TSM has de-risked geo-political issues with its overseas factories in Arizona and Kumamoto. It also noted that it could manage further export controls from the US government to China, besides only 11% of their sales were to China.

“Let me assure you that we have a very frank and open communication with the current government and with the future one also,” said Wei when asked about the current and next U.S. administrations.

Any de-risking is a tailwind for increasing multiples and valuation for the stock. I had recommended TSM earlier stating that the geo-political concerns shouldn’t devalue the crown jewel of the semiconductor industry.

Q4 Revenue by Technology

TSM said 3nm process technology contributed 26% of total wafer revenue in the fourth quarter, versus 15% in the year-ago period, and 20% in the third quarter of 2024.

The 5nm process technology accounted for 34% of total wafer revenue, compared to 35% in the same period a year ago, and 32% in the third quarter of 2024. Meanwhile, 7nm accounted for 14% of total wafer revenue in the fourth quarter versus 17% a year earlier, and in the third quarter of 2024.

Total 3nm+5nm = 26+34 = 60% – that’s a fantastic high-margin business.

Advanced technologies (7nm and below) accounted for 74% of wafer revenue.

Q4 Revenue by Platform

High Performance Computing represented 53% of net revenue, up from 43% in the fourth quarter of 2023. – Nvidia, AMD, Broadcom.

The company’s smartphone segment represented 35% of net revenue, versus 43% in the year-ago period. – Apple

Q4 Revenue by Geography

Revenue from China — Taiwan Semi’s second-biggest market by revenue — accounted for 9% of the total net revenue in the period, down from 11% in the year-ago period and in the third quarter of 2024.

North America accounted for 75% of total net revenue coming from it, compared to 72% a year earlier, and 71% in the third quarter of 2024.

Outlook

“Moving into the first quarter of 2025, we expect our business to be impacted by smartphone seasonality, partially offset by continued growth in AI-related demand,” said Huang.

TSM expects capital expenditure to be between $38B to $42B in 2025. The amount is up to 19% more than analysts’ expectations, according to a Bloomberg report.

In the first quarter of 2025, TSM expects revenue to be between $25B and $25.8B (midpoint at $25.4B), consensus of $24.75B. That’s a raise.

Categories
AI Stocks

CES Note On Nvidia (NVDA)

Nvidia Digits Linux Blackwell Desktop

Nvidia Announcements: Jensen Huang CEO delivered the CES (Consumer Electronic Show) keynote on January 6th, 2025. An immensely popular event, with about 140,000 attendees, the charismatic Jensen drew a packed crowd. Jensen did not disappoint.

New Gaming Cards: Nvidia’s new line of RTX 50 Series gaming graphics cards is based on the company’s Blackwell chip architecture. Considering the massive leap Blackwell has made over Hopper, its previous iteration in data center applications, getting it to work in gaming is a huge deal – a massive improvement with superior rendering and higher frame rates for gamers.

Digits – The Linux-based desktop computer with the GB 10 Grace Blackwell Superchip with a CPU and GPU. A first in its history at $3,000 “Placing an AI supercomputer on the desks of every data scientist, AI researcher, and student empowers them to engage and shape the age of AI,” Huang said.

It may seem like a niche product for high-end engineers/professors/scientists and researchers, but I think it’s a deliberate and excellent strategy to evangelize the product, through the folks who can develop use cases and apps that can further the market for cheaper at scale mass Digits in the future. 

This is straight from the Nvidia playbook from the last two decades – they have always involved the scientific and research community from the start. I can bet a large number of these are going to be distributed free to campuses.

I think Digits will turn out to be a very consequential product for Nvidia – with several billion in revenue in a few years. But forecasts aside, what’s key is that Digits uses a scaled-down version of Nvidia’s Grace AI server CPU technology. It’s packaged in a Mac Mini-sized form factor with the help of Taiwan-based MediaTek, which Huang commended for its expertise in building low-power chips. 

Quoting Tae Kim from Barron’s who authored an excellent book on Nvidia.

“Over time, the logical move for Nvidia would be to scale down this CPU further for consumer Windows laptops. By integrating its graphics expertise, MediaTek’s power-saving capabilities, and the efficiency of Arm-based CPU technology, Nvidia could create a processor that offers leading graphics for gaming and high performance for productivity, along with long battery life. While prior Arm-based Windows PCs have struggled with software compatibility, Nvidia’s top-notch software engineering could make it work.”

Huang strongly hinted it was likely to happen. “We architected a high-performance CPU with [MediaTek],” he said on Tuesday at a question-and-answer session with financial analysts at CES. “It was a great win-win.”

When pressed by an analyst if Digits was an iterative step toward moving into the PC market, “I’m going to have to wait to tell you that,” Huang said. “Obviously, we have plans.”

There are questions about why Nvidia chose Linux over Windows – and we should hear more about that at their GTC conference in March.

It could shake up the moribund PC market, which has been suffering from a lack of growth rates after COVID-19. Desktop PCs and laptop computers still generate large revenues for Intel and Advanced Micro Devices, the primary makers of x86-based processors – a legacy that could give way to ARM-based processors, which Apple uses. Analysts expect Intel to generate $30 billion in revenue from its client computing business in 2024, according to FactSet, while AMD has $6.7 billion in revenue in its client segment.

Billions of potential new revenue are at stake for Nvidia, which is forecasted to make $180Bn in sales in the 12 months ending January 2026. While data center takes up the largest share of revenue at about $150Bn of that pie and gaming, auto, and professional visualization (Omniverse) take the rest, a new source would help a great deal when data center revenue growth slows down.

In the past two years, Nvidia has monopolizedized the AI data center market with the best-designed, highest-performing chips. Nvidia would likely make a significant dent in the PC market as well as the new paradigm in edge computing with all the computing power and constant innovation and upgrade at its disposal.

The third announcement was for COSMOS – a significant improvement over their Omniverse and the biggest catalyst/enabler of “Physical AI”,  I’ll write a separate note on that.

Nvidia wants it all. That’s likely to be good news for consumers and trouble for the PC status quo.

Categories
AI Hardware Semiconductors Stocks

AI Takes Center Stage At 2025 CES

AI at the edge

The mood at the CES (Consumer Electronics Show) is pretty upbeat. This is a hardware show and after years of taking a backseat to software, the massive computing power from GPUs for AI applications has propelled hardware to the forefront. And it’s not just servers, racks, data center peripherals, or networking, the range of hardware was impressive. From auto, robots, home appliances, entertainment, healthcare devices, industrial equipment, and smart glasses, to security.

Vendors, engineers, consulting firms, and VCs are noticeably excited for the future. 

Heavily focused on AI, the number of exhibitors with AI proof of concept and use cases was also quite large. Sure, there’s always hype, but a lot of them were genuine, with orders, use cases, and deployment.

Trends

Smarter hardware

Robotics – big push from computing power for robotic uses in supply chain, warehousing, and retail. Strong use of AI in industrial design, and industrial production.

Examples:  

  • Siemens’ collaboration with Nvidia and several others using Nvidia’s Cosmos (a big improvement on Omniverse) for pre-production simulation and assembly lines for quality control, and error reduction) 
  • Eaton with Intel for power systems. (Time reduction on compliance, process streamlining)
  • Accenture’s several clients, in fields like oil drilling, and IoT applications.

Vendors can do a lot more now and are seeing demand for better AI products.

Inference

Both edge AI in PCs and IoT endpoints are going to be huge. A SaaS cyber security firm (among others) complained about the crazy fees she pays AWS (somebody’s got to pay for that $100Bn of Capex for Nvidia’s GPUs!). The need to increase inference and solutions at the endpoint will be a major trend, and the increase in the number of AI PCs coming to market confirms the shift to the edge.

Agentic AI or Agents

I had lengthy discussions with  Nvidia and AMD engineers on Agentic AI, which has become a bit of a buzzword with some hype about it really being a chatbot with a fancier name, but in several cases that I saw, was a major improvement over a chatbot.

Agentic has to mean enhanced or better solutions than a chatbot –  a chatbot or a ChatGPT query gives you a simple answer to a query from a data set. An Agent must be able to give you significantly more feedback from analyzing a wider set of data, or more than one data set. It is more interactive and provides feedback and looks for feedback – a loop that ends up with a better solution.

A comment from the VP of Accenture was very interesting. She said, that if agents have to be better than chatbots or the latest version of Alexa/Siri – if I ask for the next charging station for my EV, it should be able to know my history, deduce, which direction I’m going in, and also tell if there is a vegetarian eatery on the way (in the same direction)  – not just throw up 5 charging stations 2 in the wrong direction, as it currently does.

In my opinion, this is just the beginning, there will be secular growth for a while. I would strongly focus on AI with the usual caveat of being careful of stock valuations running ahead of growth and getting overpriced – we’ll need to be patient with getting the right price.

For AI to continue growing the industry has to get more democratized – more developers, a wider ecosystem, more use cases and I saw that in spades, which gives me a lot of confidence in its future – Nvidia, AMD, Qualcomm, Amazon, Google, and Intel had multiple partners all over the conference. 

The Agent could be your interface on your iPhone – this is an interesting idea brought up by a VP from Qualcomm.

Categories
Semiconductors Stocks

The Knee Jerk Reaction To Micron’s Q1-25 Is A Gift

Micron Technology’s fiscal Q1-2025 earnings report offered two stories: a dramatic surge in data center revenue and a troubling outlook for its consumer-facing NAND business. Despite the strong performance in high-growth areas like AI and data centers, the company’s stock took a sharp dip after hours due to concerns about consumer weakness, especially in the NAND segment.

I’ve owned and recommended Micron for a while now, and even took some profits in June 2024 at $157, when it rose far above what I felt was its intrinsic value. Since it’s a cyclical stock in a commodity cyclical memory semiconductor business, getting a good price is unusually important, and it is crucial to take profits when the stock gets ahead of itself.

Micron’s (MU) stock slumped from $108 on weak guidance for the next quarter, and now at $89, it looks very attractive at this price. I’ve started buying again.

Record-breaking data center performance

Micron reported impressive growth in its Compute and Networking Business Unit (CNBU), which saw a 46% quarter-over-quarter (QoQ) and 153% year-over-year (YoY) revenue jump, reaching a record $4.4Bn. This success was largely driven by cloud server DRAM demand and a surge in high-bandwidth memory (HBM) revenue. In fact, data center revenue accounted for over 50% of Micron’s Q1-FY2025 total revenue of $8.7Bn, a milestone for the company.

HBM Revenue was a standout, with analysts estimating that the company generated $800 to $900Mn in revenue from this segment during the quarter. Micron’s HBM3E memory, which is used in products like Nvidia’s B200 and GB200 GPUs, has been a significant contributor to the company’s data center growth. Micron’s management also raised their total addressable market (TAM) forecast for HBM in 2025, increasing it from $25 billion to $30 billion—a strong indicator of the company’s growing confidence in its AI and server business.

Looking ahead, Micron remains optimistic about the long-term prospects of HBM4, with the expectation of substantial growth in the coming years. The company anticipates that HBM4 will be ready for volume production by 2026, offering 50% more performance than its predecessor, HBM3E, and potentially reaching a $100 billion TAM by 2030.

Consumer weakness and NAND woes

While Micron’s data center performance was strong, the company’s consumer-facing NAND business painted a less rosy picture. Micron forecasted a near 10% sequential decline in Q2 revenue, to $7.9Bn far below the consensus estimate of $8.97 billion, setting a negative tone for the future. This decline was primarily attributed to inventory reductions in the consumer market, a seasonal slowdown, and a delay in the expected PC refresh cycle – a segment that has also derailed other semis such as Advanced Micro Devices (AMD), and Lam Research (LRCX) among others. While NAND bit shipments grew by 83% YoY, a weak demand environment for consumer electronics—especially in the PC and smartphone markets—weighed heavily on performance.

Micron’s CEO, Sanjay Mehrotra, emphasized that the consumer market weakness was temporary and that the company expected to see improvements by early 2025. The company also noted the challenges posed by excess NAND inventory at customers, especially in the smartphone and consumer electronics markets. In particular, Micron’s NAND SSD sales to the data center sector moderated, leading to further concerns about demand sustainability. The slowdown in the consumer space and the underloading of NAND production is expected to continue into Q3, with Micron’s management projecting lower margins for the foreseeable future due to these supply-demand imbalances.

Micron reported Q1 revenue of $8.71 billion, up 84.3% YoY, and in line with consensus estimates. However, the company’s Q2 guidance of $7.9Bn (a 9.3% sequential decline) was notably weaker than the $8.97Bn analysts had expected. The guidance miss sent Micron’s stock down significantly in after-hours trading.

Financial highlights: Strong margins and profitability, but challenges ahead

Improving Margins: Micron’s gross margin for Q1 came in at 38.4%, an improvement of 3.1 percentage points QoQ, largely driven by the strength of HBM and data center DRAM. However, the outlook for Q2 is less optimistic, with gross margins expected to decline by about 1 percentage point due to continued weakness in NAND, along with seasonal factors and underloading impacts.

Micron’s operating margin for the quarter was 25.0%, ahead of guidance, reflecting the company’s tight cost control and strong performance in high-margin segments like HBM. However, for Q2, Micron expects operating margins to contract, with GAAP operating margin expected to drop to 21.8%.

Profitability also improved significantly with GAAP net income rising 111% QoQ to $1.87Bn, resulting in a GAAP EPS of $1.67, compared to a loss of $1.10 in the year-ago quarter. However, Micron guided for a significant drop in EPS for Q2, forecasting GAAP EPS of $1.26, well below the $1.96 expected by analysts.

Cash flow and capital investments

Micron’s cash flow generation remained robust, with operating cash flow (OCF) increasing by 130% YoY to $3.24 billion, but free cash flow (FCF) was more limited due to significant capital expenditures (CapEx) of $3.1 billion. The company also outlined its intention to spend around $14 billion in CapEx in FY25, primarily to support the growth of HBM and other high-margin data center products. In my opinion, this is a necessity to stay close to SK Hynix and Samsung, its biggest rivals in HBM, who also have a large chunk of the market and can easily match Micron in product improvements necessary to supply to the likes of Nvidia (NVDA). High Capex also increases its ability to scale and improve margins down the road, leading to greater cash generation.

Going home: Micron also announced a $6.1 billion award from the U.S. Department of Commerce under the CHIPS and Science Act to support advanced DRAM manufacturing in Idaho and New York. This partnership aligns with Micron’s long-term growth strategy in the data center and AI segments.

Micron is a bargain

I’m buying the stock with the risk that it could stay range-bound for a few months.

The company’s earnings call reflected a clear divergence in the outlook for its two key segments: data center and consumer electronics. Management sounded confident about data center growth, driven by strong demand for AI-driven applications while providing a more cautious forecast for the consumer NAND business, where inventory corrections and weakened demand are expected to persist through Q2 2024.

I’m very confident about Micron’s continued strength in the data center market, driven by AI and cloud computing, and believe that the prolonged weakness in consumer-facing NAND and PC markets in the short term is an opportunity to buy the stock at a bargain price. The market’s reaction suggests that investors were caught off guard by the unexpected weakness in the consumer business, but this has been persisting as I mentioned earlier with AMD, and Lam Research, and even before

earnings at $109, Micron was a lot below its 52-week high of $158. The further knee-jerk reaction is a boon for the bargain hunter.

For now, I’m not worried if the stock remains range bound – at $89, the downside is seriously limited and its future success will remain squarely on HBM data center demand. Its largest customer Nvidia is forecast to generate $200Bn worth of data center revenue from its Blackwell line and Micron will reap a good chunk of that.

Micron is priced at 13x FY Aug – 2025, with consensus analyst earnings of $6.93, which is forecast to grow to $11.53 in FY2026, a whopping jump of 66%, bringing the P/E multiple down to just 8. Even for a cyclical that’s a low. Besides, Micron is also growing revenues at 28% next year on the back of a 40% increase in FY 2025, which took it soaring past its previous cyclical high of $31Bn in FY2022. With data center revenue contributing more than 50% of the total, Micron does deserve a better valuation.

Categories
Cloud Service Providers Enterprise Software Stocks

Oracle Deserves A Seat At The AI Table

Oracle

Oracle (ORCL) $166 is a solid investment opportunity for 3-5 years, with a decent shot at growing data center cloud revenues faster than its other businesses, with a push from AI requirements from clients like Meta. Hyperscalers and cloud service providers are expected to spend a capex of $300Bn in 2025, boosting cloud infrastructure providers such as Oracle.

Oracle’s earnings should grow between 16-18% in the next 3-5 years- and it’s very reasonably priced at 24x forward earnings of $7.05. 

Its 31% GAAP operating margins are another sign of strength, especially for a legacy/mature $52Bn+ tech company. 

Revenues should grow at 12-14% annually in the next 3-4 years, which is impressive for a company of that size. Oracle’s P/S multiple is not expensive at 7X sales.

Oracle Cloud Infrastructure’s robust growth is a big catalyst for the company and the stock, and while the near-term Oracle’s FQ2 double miss disappointed investors, the price drop from $191 has created an opportunity for investors. Besides Oracle could gain market share over time.

Oracle’s modular approach and scalable infrastructure offer cost competitiveness, attracting customers. The company’s ability to scale AI clusters, demonstrated by the deployment of a 65,000 NVIDIA H200 supercomputer and a 336% surge in GPU consumption last quarter, further highlights its appeal.

Furthermore, Oracle’s strengthened partnership with Meta for AI training underscores its attractiveness to both large enterprises and smaller businesses. This reinforces the effectiveness of Oracle’s modular strategy, which aims to provide customers with an improved total cost of ownership (TCO) compared to leading hyperscaler competitors.

Their overall cloud segment is about 55% of revenues and growing at 25%, but the licensing segment has been stagnant for the past two years. Over time this will tilt more decisively towards the cloud, allowing them to either increase or maintain their multiples/valuation.

Categories
AI Semiconductors Stocks

Broadcom Is A Strong AI Contender

ASICs

12/12/2024

Broadcom (AVGO) reported good results and exceeded guidance for Q1-FY2025

Revenue $14.05Bn for Q4-FY2024, up 51% YoY (It acquired VMWare) in line with expectations. Without the VMWare acquisition, organic revenue growth was 11%.

GAAP net income of $4.3Bn; Non-GAAP net income of $ 6.9Bn, slightly higher than estimated.

Adjusted EBITDA of $9.1Bn or 65 percent of revenue – Adjusted margins are high because of the non-cash adjustment of charges for the merger with VMWare.

GAAP diluted EPS of $0.90 for the fourth quarter; Non-GAAP diluted EPS of $1.42 for the fourth quarter – Slightly higher than estimates.

Solid Cash Generation: Cash from operations of $5.6Bn for the fourth quarter, less capital expenditures of $122Mn, resulted in $5.5Bn of free cash flow, or 39 percent of revenue.

First quarter fiscal year 2025 revenue guidance of approximately $14.6Bn, an increase of 22 percent from the prior year period – Slightly higher than estimates of $14.5Bn.

First quarter fiscal year 2025 Adjusted EBITDA guidance of approximately 66 percent of projected revenue.

Surging AI revenues: It exceeded its earlier projection of $11.5Bn AI revenues with $ 12.2Bn, mainly with sales of ASICs to Google, besides selling ethernet solutions to other AI data center clients.

“Broadcom’s fiscal year 2024 revenue grew 44% year-over-year to a record $51.6 billion, as infrastructure software revenue grew to $21.5 billion, on the successful integration of VMware,” said Hock Tan, President and CEO of Broadcom Inc. (AVGO) “Semiconductor revenue was a record $30.1 billion driven by AI revenue of $12.2 billion. AI revenue which grew 220 percent year-on-year was driven by our leading AI XPUs and Ethernet networking portfolio.“

Should the proposed development of semis for Apple go through as planned, they’d be an even stronger contender in AI data center infrastructure.

I own Broadcom and continue to accumulate and plan to hold for at least 3-5 years. The VMWare integration is also going according to plan and will be a source of sustainable and recurring revenue.

Categories
AI Cloud Service Providers Semiconductors Stocks

Nvidia Is An Excellent Long Term Investment

source:nvdia

Hyperscaler Capex Shows Strong Demand For Nvidia’s (NVDA) GPUs.

I know there is excitement in the markets as Nvidia reports Q3-FY2025 earnings after the market on Wednesday 11/20. Nvidia earnings watch parties have become part of the Zeitgeist, and its quarterly earnings are one of the most closely watched events each quarter.

I, however, don’t believe in quarterly gyrations and have been a long-term investor in Nvidia since 2017, having recommended it more than two years ago and then in March 2023 and again in May 2023 as part of an industry article on auto-tech.

I believe the Blackwell ramp is going strong, and reports regarding rack heating issues are just noise in a program of this size.

Capex from hyperscalers will continue to fuel demand for Nvidia’s GPUs in the next year and beyond and even though it’s expensive it remains a great long-term investment.

Capex from hyperscalers – Nvidia’s biggest customers.

AI spending from the hyperscalers is expected to increase to $225Bn in 2024. Cumulatively in the first 9 months of the year, the key hyperscalers who are Nvidia’s biggest clients, have already spent $170Bn, on Capex — 56% higher than the previous year. Here are the estimates for the full year 2024, 

  1. Amazon (AMZN) $75Bn 
  2. Alphabet (GOOG) $50Bn
  3. Meta (META) $38Bn to $40Bn
  4. Microsoft (MSFT) $60Bn

On their earnings call, hyperscalers’ management committed to continued Capex spending in 2025, but not at the same pace of over 50% seen in 2024.

When quizzed by analysts, hyperscalers also talked about AI revenues, which though are still relatively small compared to the amount of Capex spent, it is growing and growing within their products. Amazon mentioned that its AI business through AWS is at a multibillion-dollar revenue run rate growing in triple-digits year, while Microsoft’s CEO stated that its AI business is on track to surpass $10 billion in annual revenue run rate in Q2-FY2025. 

Meta and Alphabet had more indirect inferences about AI revenues. For example, Meta believes that its AI tools improve conversion rates for its advertisers, which creates more demand. On the consumer side, Meta believes that their AI has led to more time spent on Facebook and Instagram. Similarly, Alphabet also spoke about Gemini improving the user experience and its use of AI in search. Seven of the company’s major products—with more than two billion users—have incorporated Google’s AI Gemini model, While Capex from hyperscalers also goes towards infrastructure, and building, which take longer to show good returns, a fairly large chunk goes towards GPUs, which bodes well for Nvidia, which controls more than 80% of the AI-GPU market.

Besides Capex, I also believe in AI and there are several areas where AI has already shown promise.

Code Generation

The low-hanging fruit is being plucked: A quarter of new code at companies like Google is now initially generated by AI and then reviewed by staff. Similarly, GitLabs and GitHub, are providing Dev-Op teams similar offerings.

Parsing and synthesizing data for product usage:

Partha Ranganathan, a technical fellow at Google Cloud, says he’s seeing more customers using AI to synthesize and analyze a large amount of complex data using a conversational interface.

Other enterprise software companies see huge upsides in selecting a large-language model and fine-tuning the model with their own unique data applied to their own product needs.

I recommended Duolingo (DUOL) for the same reasons, their own AI strengths better their language app, creating a virtuous flywheel of data generation from their own users to create an even better product – data that exists within Duolingo, which is more powerful and useful than a generic ChatGPT product.

Using AI for medical breakthroughs

Pharmaceutical giants like Bristol Myers are using AI for drug discovery at a pace that was impossible before AI and LLMs became available. These are computational problems that need powerful GPUs to research, compute, and process for clinical trials.

Who is the indispensable, ubiquitous, and default option to turn their dreams into reality? – Nvidia and its revolutionary Blackwell GPUs – the GB200 NVL72 AI system, which incorporates 72 GPUs, linked together inside one server rack differentiating Nvidia from its lesser lights like AMD and Broadcom, which at a run rate of $5.5Bn and $11Bn, respectively are minnows compared to the $130Bn behemoth with 80% of that revenue from AI/Datacenter GPUs.

I believe we are in the first innings of AI and Nvidia will continue to lead the way. I continue to buy Nvidia on declines.

Categories
AI Semiconductors Stocks

Qualcomm, (QCOM) Solid Beat On Turbocharged Auto Sales

Post earnings the stock was up 9% to $188, yesterday, but has given up most of its gains, today. I’m continuing to accumulate.

I’ve owned Qualcomm for a while now, and recommended it in July 2024, and earlier in September 2023, when I wrote a lengthy article on the auto-tech industry. I believe in its long-term strengths and plan to keep the investment for the next three to five years.

Key Strengths include:

  • The Crown Jewel – Its licensing business with its treasure trove of patents generating 70% margins.
  • Strong growth from autos – one of the market leaders with Nvidia and Mobile Eye.
  • Its partnership with Microsoft (MSFT) for AI PCs

Sep Q-2024 Results

QCT sales rose 18% year-over-year to $8.678B.

Within QCT, Auto was the best performer – sales jumped 68% to $899M. This was the biggest surprise as Qualcomm’s auto sales growth cadence is in the mid-thirties. Auto sales tend to be lumpy so this was a really big positive.

Revenue from handsets rose 12% year-over-year to $6.096B. Handsets tend to struggle sometimes –  based on Apple’s fortunes and after drops in the previous year, this was a welcome return to growth.

Its IoT segment has been a slow grower – usually mid-single digits, but it grew 22% this quarter to $1.683Bn. 

Licensing revenue rose 21% year-over-year to $1.521B. Licensing is its most lucrative segment with gross margins over 70% – pretty much its crown jewel.

Q1FY2025 Guidance:

Revenue of $10.5B-$11.3B vs $10.61B consensus. At the midpoint, that’s an increase of 3% Non-GAAP diluted EPS of $2.85-$3.05 vs $2.87 consensus, which at the midpoint is also an increase of 3%. from handsets rose 12% year-over-year to $6.096B.

The CEO, Cristiano Anon, had this to say about the quarter

“We are pleased to conclude the fiscal year with strong results in the fourth quarter, delivering greater than 30% year-over-year growth in EPS,” “We are excited about our recent product announcements at Snapdragon Summit and Embedded World, as they continue to extend our technology leadership and position us well across Handsets, PC, Automotive and Industrial IoT. We look forward to providing an update on our growth and diversification initiatives at our Investor Day on November 19.”

Analysts from UBS and J.P. Morgan upped their price targets, while Barclays analyst Tom O’Malley (who kept his Overweight rating and $200 price target) pointed out that there is now a “bifurcation in Android between the high and low end” and Qualcomm is benefiting both in units and average selling price.

At $180, Qualcomm is very reasonably priced at 16x next year’s estimated earnings and 4x next year’s forecasted sales.

Given its market leadership in auto-tech, AI PCs, and sustainable, and recurring high-margin licensing business, Qualcomm should be priced between 20-22x earnings. It spends a good 25% of its revenues on R&D, which will enable it to continue innovating and growing. Even after that, it still returned $1.6Bn to shareholders with $0.7Bn in share buybacks and $0.9Bn in dividends.

Super Micro Computer- SMCI $26 – Avoid Till We Get Restated Financials

Super Micro Server Racks

I think Super Micro Computer, (SMCI) should be avoided for the following reasons:

Restatements could alter the financials significantly: The odds are high that the company will end up restating past financials. The Auditor’s resignation, its CEO’s pay package, and its past settlement with the SEC in 2018 all suggest that SMCI will have to restate its financial statements.

No 10K: SMCI has delayed its annual 10-K filing and without an audited 10K, we have precious little faith in the numbers. 

SMCI has priors: This was not their first time. In 2018, the company settled charges with the SEC for improper accounting. As stated in the article from the SEC website….

“According to the SEC’s orders, Super Micro executives, including CFO, Hideshima, pushed employees to maximize end-of-quarter revenue, yet failed to devise and maintain sufficient internal accounting controls to accurately record revenue. As a result, the orders find Super Micro improperly and prematurely recognized revenue, including recognizing revenue on goods sent to warehouses but not yet delivered to customers, shipping goods to customers prior to customer authorization, and shipping misassembled goods to customers. The orders also find that Super Micro misused its cooperative marketing program, which entitles customers to reimbursement for a portion of cooperative marketing costs. According to the orders, Super Micro improperly reduced the liabilities accrued for the program in order to avoid recognizing a variety of expenses unrelated to marketing, including for Christmas gifts and to store goods.”

Tainted: To me the alleged malfeasance creates significant doubts for investors that will not go away for a while, and it’s very likely that Wall Street will not touch it, fearing liability for not doing enough due diligence. Also, I can’t imagine SMCI getting a decent multiple in the future for the same reasons until faith is restored in management and its books.

Possible Loan Default:  There is a significant risk of Super Micro defaulting on the company’s Term Loan Agreement with Bank of America. 

Compensation tied to aggressive revenue targets: The CEO’s unusual compensation package, with virtually no base salary and bonuses tied to very aggressive revenue and share price targets, is a dangerous and potentially abusive practice.

Possible delisting from the Nasdaq, and getting thrown out of the S&P 500: The chances of both are high as a new auditor needs to be found, and a substantial amount of restatement work needs to be done.

A great business: Sure, SMCI has a great server liquid cooling business, which has tremendous potential and demand for server racks for AI GPUs, right now and for the foreseeable future. However, as we saw Nvidia has already started shifting this business.

Ignore the low valuation: I’m going to ignore the current low valuation of 8x earnings and 0.5x sales, which are much lower than competitors such as Dell (DELL) and Oracle (ORCL), simply because I have no idea what the restated financials will look like, and the valuation could be a lot different

The only way I would invest is the possibility of a merger/acquisition/White Knight, that will keep the stock afloat. The CEO owns close to 10% of the company so I doubt if he would let this go without a fight.

The other problem I foresee is the difficulty of getting good and timely information. For the most part, we rely on analysts who expect a proper set of books. Instead of focusing on the fundamentals, we’ll be spending far too much time, and worse without success trying to figure out what is genuine or not, It would make better sense to invest in other GPU/semiconductor businesses.