The BuyChart of the day: The cool kids of AI
Artificial Intelligence (AI), as a theme, is one of our biggest portfolio bets – even after we’ve got rid of some overpriced holdings recently. Many AI stocks rallied in the last few weeks. They’re the cool kids again. We weren’t surprised about that. We're usually more surprised about the doomsday analyses that float around during the so-called “corrections”. To us, AI dominators are as sure shot as they come in the game of investing: Companies with distinct competitive advantages, operating in an industry that’s growing exponentially (if measured by processing power needed) AND has very high barriers to entry! So, if you want to compete with Nvidia in AI GPUs, we wish you the best of luck; you’ll need it.
But not all AI stocks are rational investments today. We ran some of these cool kids through The Buycaster. Here’s how their Buycaster Investability Ratings looked, as of today:
Well, we feel pretty good about our Portfolio for now. But we will be looking into Tokyo Electron as a potential investment. That’s our next deep-dive investment thesis. Right off the bat, we like that it’s a Japanese company and, therefore, somewhat immune to the emotional price rollercoasters that the US-China trade-barbs frequently set in motion.
Note: The Buycaster Rating is a score of out 10, which signifies how rational it is to expect the stock to deliver our required return (ours is 80% cumulative within 5 years). The higher the score, the more rational it is, and the more likely we are to buy the stock. The ratings are a combination of Sanity & Safety. Sanity refers to “what needs to happen in the business for us to – rationally – expect the stock to generate our required return”. Safety refers to the potential capital loss if revenue growth is anemic over the next 5 years. Generally, we like stocks with overall Buycaster Ratings above 9, which implies high Sanity and Safety. You can unpack these Buycaster Ratings in granular detail in The Buycaster.
The BuyTheme of the day: Artificial Intelligence
If we zoom out a bit and think thematically, the biggest risk in any AI stock is the US-China situation. The fault line lies in the incongruency of Intellectual Property laws between the two countries. China’s IP laws are lax. The US government has a problem with that.
American firms absolutely dominate the global Semiconductor arena – especially the fancy Logic variety that powers AI in computers and servers across the world. Companies such as Intel, AMD, and Nvidia have no non-US competition. China has a problem with that. In its decades-long quest for restoring its former glory, China wants its slice of the AI pie in the 21st century. That restored glory will be subdued and hollow if it depends entirely on those American pieces of silicon. They want to make their own chips – and they don’t see what the big deal in just reverse-engineering a fancy Nvidia AI chip.
This is tricky for the Americans. Those global dominators sell a lot of chips to China. Intel, for example, sells nearly 25% of its chips in China. Last time we checked, about 58% of Nvidia’s sales came from China & Taiwan (in the year 2021). So, long-term, Nvidia would want to balance the 2 conflicting interests: Jeopardizing Sales to China vs. Jeopardizing its IP. This is what the Brits call a “sticky wicket”. Hey ChatGPT, how do we get out of this sticky wicket?
Macro Dose: Rate Hawks
It seems that the cabal of the most powerful people in the world – Spectre – met in Portugal this week. We’re kidding – Spectre met in Italy as per the last Bond movie. No, we’re talking about the elite group of Central Bankers like Jerome Powell and his counterpoints in other central banks of the world. The overall tone was “we’ll do whatever it takes to bring inflation down to 2%”. In Wall Street parlance, they were “hawkish”.
Generally, hawkishness spooks equity investors. But over the long-term, such vigilance is good. Inflation is like a leak at the bottom of a bucket. It eats up investment returns. Your money will be worth a lot less in real terms if inflation remains at 4% vs. the long-term target of 2%. This article in the latest Economist quantifies the effect of inflation pretty well. We thought this chart was good to keep in mind next time we hear a pundit groan about Fed hawkishness - the same pattern applies to your equity returns.
Note: We’re not Macro investors. However, we like to keep an eye on possible overreactions in the equity market due to macro factors, so we can be greedy when others are fearful and vice versa.
We wish you many Happy Returns!