NOTW #3: The Best Thing About Semis Is Not Needing To Be Precisely Right
Articles of the week, market commentary, and more
Hi reader and welcome to yet another edition of the News of the Week!
Let me briefly explain what this article is all about for newcomers. In the NOTW I will share the articles of the week and a brief market commentary (typically commenting on any given topic that comes to mind) completely for free, and then subscribers will be able to read about portfolio changes and company-specific news. If you want to receive these emails directly in your inbox every Saturday and you have not signed up yet, don’t forget to do subscribe 👇🏻
The indices were only slightly up this week despite many companies doing great. This is probably related to the concentration we’ve seen in the indices over the past couple of years. This is the topic for this week’s NOTW, where I will also share some thoughts about investing in semis.
Without further ado, let’s get on with it.
Articles of the week
I uploaded two articles this week, both exclusively for paid subscribers. The first one was an earnings analysis on Adobe’s Q2. The company reported excellent earnings and stands to benefit from AI despite all the premature skepticism (there’s no denying this conclusion is also slightly premature!)
The second article of the week was the second part of the three part series on the company I added most recently to the portfolio. I go over key topics for any company such as…
The competition
The moat
The risks
Management & Incentives
Capital Allocation
Valuation
Next week I will probably upload several articles, most notably the entire deep dive of one of the companies in my portfolio. This 80+ page deep dive, like most others, will be reserved for paid subscribers. Feel free to sign up if you want to have access to it and all the paid content:
Market overview
The markets were slightly up this week despite giving a good deal of the gains towards weeks-end. Both indices were up around 0.3%:
The “surprise” this week was that Nvidia started to correct somewhat. Of course, I don’t know if this will be a prolonged correction or just a “false” correction before it marches to all-time highs again, but it’s interesting to see how correlated its performance is to that of the indices. The indices pretty much started to correct when Nvidia began to fall:
There’s no denying it has been pretty hard to outperform the indices this year if one did not own Nvidia. I’ve seen several charts about how Nvidia has been responsible for a pretty substantial portion of the indices’ year-to-date gain, something that’s normal when a multi-trillion company is up triple digits in a short period, but something that also portrays that the indices’ performance might not be the best indicator of the health of the broad market. Many continue to claim that with indices at all-time highs, it’s very tough to find undervalued stocks, but I’d have to disagree with that strongly.
Now, this should not be used as a justification for underperformance for several reasons. First, Nvidia was freely available for anyone to purchase, even the largest funds. Second, if one believes this is unsustainable, one should expect to outperform strongly once Nvidia starts to fall (considering they don’t own it, of course). Very few (if any) managers outperform over all periods, and that’s perfectly fine. What matters is outperforming over long periods. It makes no sense to try to outperform while holding something that one doesn’t feel comfortable with; this surely is the perfect recipe to underperform.
As for Nvidia, I don’t have a strong opinion. What I do think is that things have gotten a bit stretched. I am not saying this because of its valuation multiples or growth opportunities but because I am increasingly seeing Nvidia quoted in the news in Spain, and many friends and family are asking me about the company. When “outsiders” start to ask you about a given company, it might ring some alarm bells.
Interestingly, some people claim that the “AI bubble” was completely unforeseeable; therefore, investing in Nvidia and enjoying the gains was pure “luck.” While I agree that the “AI bubble” was unpredictable, I think people claiming it was completely unforeseeable miss the whole point of investing in semis. It’s not about predicting the cloud, AI, or whatever application might come in the future; it’s about understanding that the future will probably be one with more semiconductor content, regardless of the application that requires chips. Peter Wennink (ASML’s CEO) has said exactly this several times:
Why didn't we see this massive and big demand for our products coming?
Because we simply did not connect all the dots. And it's still a challenge today to keep connecting all the dots. But it's the value of Moore's Law, which is basically reducing the cost per function that will drive our business, and we'll create these building blocks for growth and solving some of humanity's biggest challenges. And we are a strong believer in this. And Moore's Law is alive.
This has been the case for a long time already. Who would’ve predicted smartphones two decades ago? Who would’ve predicted cars with $2000 in semiconductor content 10 years ago? Who would’ve predicted AI? The answer to these questions is that very few people would’ve, but the good news is that it wasn’t necessary so long as one understood that semis would be key in the world's future. I honestly think this has not changed, regardless of whether the markets have gotten a little bit too excited about the implications of AI. Let’s not forget that semis are cyclical but secular. It’s very easy to get tangled in the ups and downs and lose sight of the long-term trend.
The industry map clearly portrays how the indices might have become overweight around some companies. Pretty much everything was green except Nvidia and Apple, and this weighed quite significantly in the performance of the indices:
The fear and greed index improved slightly but remained in fear territory:
Until here the market commentary, thanks a lot for reading!