A New Direction - Fundamental Stock Analysis

Trying out something new

Hey Guys,

First off, all episodic pivot positions have hit their stops. And I haven’t initiated any new positions lately…

I’m going to do something a little different here now. I feel like everyone and their mother is posting charts and talking technical analysis techniques. I may still do that, but I’m going to switch to talking about fundamentals of companies. And tracking those more closely.

For investors, by that I mean those with a holding period greater than 9 months, fundamentals matter more than technical. Sure, you can probably increase your returns by only buying stocks above their 200-day and 50-day moving averages. But the truly large moves come from companies that are fundamentally improving.

I personally traded in and out of Nvidia this past year, but really I would have been better holding. It was clear their business had fundamentally changed. AI is driving an insatiable demand for their graphics processing units (GPUs).

These GPUs are the workhorses of AI training and inferencing. And the world can’t make enough of them.

I also believe that AI is a fundamental shift in how the world will operate. I believe right now we are in the equivalent of 1995 in the internet boom. The one main difference is that the companies benefiting from AI are profitable.

If we can catch just a few of the big winners in the coming years, we’ll meet the criteria of a barbell portfolio. And that’s to invest a small portion of our portfolio in companies with the potential to surge.

I’ll mostly be covering the large cap companies. That’s because they are the ones enabling the change in the world. And following these trends, we’ll know if a smaller company is set to gain adoption… And we’ll strategically talk about these companies.

Let me know in the comments if you like this change or if you’d rather I got back to posting episodic pivots. I wouldn’t blame you if that was the case, we earned an average of a 40% annualized return on our positions. That’s a great return.

But with that said, here’s updates on some of the most important companies in the world right now.

Corning (GLW) is finally getting the respect it deserves. The company rose 9% as it prereleased its second quarter earnings. Now companies only prerelease earnings in one of two situations, the quarter was really good or really bad. In this case, it was really good.

Preliminary core sales came in at $3.6 billion compared to the estimate of $3.4 billion. And core EPS came in at the high end of its guidance range.

Why the beat? We must remember that Corning is a specialty glass maker. They are perhaps most well known for their shatter resistant Gorilla Glass which is used on Apple iPhones and other high-end mobile devices. But the company also makes glass for monitors, TVs, windshields, etc...

But the reason now for the beat is their fiberoptic lines. The outperformance is driven by the adoption of optical connectivity products by datacenters to run generative AI applications.

This is great news for Corning. And management believes that this growth will continue. But it's also great news for AI hardware companies. Hyperscalers like Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) don't just buy connectivity devices to use by themselves. As we can tell by the name, these connect devices.

Fiberoptics are used to connect GPUs to where the data is stored, to connect different racks to each other to equally distribute the computing requirements, and for interconnect between different data centers.

An increase in fiberoptics tells us the speed of data center construction and build outs continues to accelerate. This is great news for those hyperscalers. But also, for Nvidia (NVDA) and AMD (AMD) which are the main providers of GPUs – the workhorses of AI computer. And for companies like Super Micro Computers (SMCI), Dell (DELL), and HP Enterprises (HPE) which produces AI server racks.

Taiwan Semiconductors (TSM) also confirmed this. Earlier today, they released their monthly sales figures for June. And they surprised the market again. Sales grew 40% from June 2023.

TSM’s sales growth is truly astounding. They are now a trillion-dollar company with $80 billion in annual revenue. To get that kind of growth shows the enormity of the AI build outs.

This company is now one of the most important companies in the world. They are the sole provider of advanced chips for Nvidia and Apple, among others. These companies need to order through TSM before they can mark their revenue. By following TSM, we can get an early read on how the semiconductor industry is doing. And right now, it’s doing great.

Analysts believe this strong demand will give TSM the ability to raise prices next year. Which I agree with. So the company should see strong revenue growth in coming years. And the price increases will help them continue holding massive profit margins. Their current EBITDA margin is 67%. That’s one the largest margins in the world.

While TSM doesn’t give a breakdown in its revenue for the monthly numbers, we can safely assume the revenue beat was from increased demand from AI servers. That’s the general consensus on Wall Street right now too.

We will learn more about the sales breakdown when they release their quarterly earnings report. Which is likely to be sometime next week.

Advanced Micro Devices (AMD) is the other GPU company. While Nvidia took the early lead, AMD is quickly trying to catch up with their AI offerings. The MI300X is a good start – as it’s currently the most powerful GPU on the market.

But many AI companies that trained their models on Nvidia chips aren’t likely to switch. That’s because they used the CUDA software to make sure the code worked efficiently with the hardware. And changing the hardware would require a rework of the code.

So in a way Nvidia has lock-in with their GPUs and training. But where AMD can make inroads is in inferencing. That’s the ability of the AI to generate answers after it’s been trained. Inference is very important and where AMD can make a lot of inroads.

They need to scale up their AI offerings though. In an effort to do this they purchased European-based AI Lab called Silo. They paid $665 million in cash for the company.

Silo specializes in creating custom AI models for their clients. These clients include European behemoths like Allianz SE, BMW, and Unilever.

This is a great move for AMD is this team will help them create offerings to make it easier to use AMD GPU-based systems. This is one of the biggest things we need to listen for regarding AMD – the ease of using their GPUs in AI applications.

And that’s all for today. I’ll have more in depth reports for companies to refer to in the future. Once again, let me know if you like the new direction below.