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ARM v Softbank – 2 Ways to Play the AI Game

March 8, 2024

According to other sources, Softbank’s market value is more like US$88bn, which compares with a value of US$123bn for its 90pc stake in ARM. Softbank also holds other investments but trying to make sense of its NAV is not easy. Just the chart and the value of the ARM stake suggest that the shares are good value and an alternative to investing directly in ARM.

ARM has a powerful chart and the shares look as though they could be at the beginning of a multi-year uptrend. The problem many observers have is with the valuation. This is what one commentator said.

Anytime a stock undergoes a hyperbolic run upwards and trades at 40x sales, the odds of a bubble increase. But ARM appears poised to have an “Nvidia moment,” which in conjunction with the company’s superior business model appears to lend substantial support to the current valuation. 

Julian Lin, 25 February 2024

Lin also had this to say about ARM’s fundamentals.

For starters, consensus estimates look too conservative. ARM is expected to generate just 23pc revenue growth this upcoming fiscal year. But with RPOs [remaining performance obligations] growing at a 40+pc pace, I wouldn’t be surprised if ARM delivers large beats to consensus estimates. Consensus estimates call for ARM to see revenue growth decelerate to the mid-teens thereafter, but I suspect that the company can sustain around 40pc growth for some years, especially given that NVDA has seen such a surge in demand.

It’s not just the fact that ARM benefits as more and more chips are used for generative AI adoption. ARM also may benefit from future pricing power as it may be able to increase its royalty rates over time (similar with how the v9 carries double the rate of the v8 products). Majority owner Masayoshi Son has famously attempted to renegotiate its pricing terms with Apple (AAPL) to no avail, and the two companies recently inked an extension of their partnership running through 2040. However, with ARM having dominant market share, I expect the company to sustain pricing power over the long term.

Julian Lin, 25 February 2024

He also pointed out that, like Nvidia, ARM is in a powerful virtuous circle.

The more hardware that exists on Arm, the more software that’s written for Arm, the more software that’s written for Arm, the more popular the hardware.

Julian Lin, 25 February 2024

Strategy – Buy ARM, Consider Softbank

I always prefer the direct approach which in this case means buying ARM. I deal with valuation by not paying attention. If ARM is to play a growing role in the AI revolution and that is certainly their intention then a market value of around $140bn could soon seem like small beer. I always think it is more about the direction of travel and the size of the opportunity.

AI seems to be essentially a semiconductor revolution which is why shares in world-class semiconductor businesses are performing so strongly.

This is a chart of a semiconductor ETF. It looks extremely strong and should be bought. Unfortunately, the KID rules mean UK investors can not buy shares in this and many other ETFs.

My solution, maybe not ideal but maybe also with advantages, is to create your own ETF by buying the top holdings in the fund individually. Better still, buy the BEST of the top holdings individually. My choices would be – AMD, NVDA, AVGO, QCOM, LRCX (the chart looks amazing), ASML (another amazing chart), MU and AMAT (another great chart).

I could go further down the list but these shares should perform at least as well, probably better than the ETF. They can be bought in share, CFD or Spread Betting accounts. The shares I suggest buying (see above) were listed with prices in a recent alert.

Share Recommendations

SOXX. Buy @ $239 (after 3:1 share split)

Softbank. 9434. Buy @ Yen1,989 ($13)

ARM Holdings. ARM. Buy @ $141

More on Nvidia and its Golden GPUs

Boom/Bust: Nvidia’s “quarter/guidance for the ages” delivered this week should not unduly worry investors, according to analyst Daniel Ives. For those doubters, the analyst has a definitive response. “Our answer is firm and confident: this is a 1995 Moment as now the AI Revolution and $1 trillion of incremental spending over the next decade is hitting the software ecosystem and the rest of tech sector,” he said.

“Nvidia and the golden GPUs are the start of the spending wave…not the end.”

The AI revolution will only intensify further, as a myriad of use cases are built out across the enterprise and consumer ecosystem, Ives said, adding that this is a “transformational tech trend” not seen since the start of the Internet in the mid 1990s.

“For every $1 of spend with Nvidia on GPUs, the multiplier around the enterprise and consumer space could be $10+ over the next few years as this all plays out over the coming years,” the analyst said.

Jensen [Huang] and Nvidia have essentially cracked the code and sparked a generational tech transformation that investors are trying to get their arms around,” he said.

The current AI frenzy is nowhere near the 1999/2000 period, Ives said. Back then during the 1999 Dotcom bubble burst, sky-high valuations, lack of monetisation/ infrastructure, weak balance sheets, frothy business models, and macro backdrop characterized the tech world, he said.

Seeing Forest Through Woods: Nvidia’s earnings were a game-changing moment for the tech bulls, putting jet fuel in the tech bull market thesis as the second, third and fourth derivatives of AI play out over the coming 12–18 months, Ives said.

He noted that big tech stalwarts Microsoft Corp. MSFT, Alphabet, Inc. GOOGL GOOGMeta Platforms, Inc. METAAmazon, Inc. AMZN and others cited accelerating CapEx for AI build outs on their earnings calls over the last few weeks.

Microsoft’s Copilot activity was well ahead of Street expectations and the company’s comments point to customers lining up to sign up for Copilot and AI deployments, Ives noted.

“The AI Revolution starts with Nvidia and in our view the AI party and popcorn is just getting started with this 1995 Moment,” the analyst said.

He also cautioned investors against missing out on the upside. “Investors that have missed the biggest transformational tech stocks [of] the last decade including Amazon, Netflix, Inc. NFLX, Meta, Apple, Alphabet among many others have dogmatically stuck with the forward PE valuation approach on these unique tech stories,” he said.

“For the elite, transformational tech stories such as Nvidia and the AI Revolution, investors must see the forest through the trees.”

Ives said he expects 60pc-70pc of enterprises to ultimately head down the AI use case path.

Benzinga, 23 February 2024

P.S. Several subscribers have contacted me in recent weeks wondering what to do with the dud performers (lossmakers) in their portfolios. I have a simple rule – sell them! Instead of buy and forget try sell and forget.

Broadcom (AVGO) Looks Like a Must-Own Investment

Last but not least I am increasingly viewing Broadcom (AVGO) as an AI superstock. Read this from the CEO about the growing importance of AI to the company.

I know we told you in December, our revenue from AI would be 25pc of our full-year semiconductor revenue. We now expect revenue from AI to be much stronger, representing some 35pc of semiconductor revenue at over $10bn. And this more than offset weaker-than-expected demand in broadband and service storage. So, for fiscal 2024, in summary, we reiterate our guidance for consolidated revenue to be $50bn, which represents 40pc year-on-year growth. And we reiterate our full-year adjusted EBITDA guidance of 60pc.

Hock Tan, CEO, Q1 2024, Broadcom, 7 March 2024

On a market value of $648bn, Broadcom is a strong candidate to join the trillion-dollar market value club at some point.

Broadcom is a fast-changing company.

Broadcom, which went from being a hardware company to a semiconductor company and is now transitioning to being half software and half semiconductor/hardware, has a large portfolio of many small electronic parts that we use every day without even realizing it. Just the fact that 99.9pc of all Internet traffic passes through at least one Broadcom chip is crazy when you think about it. That sounds like a big moat to me.

Broadcom has built a strong ecosystem and deep industry expertise. The combination of storage, Ethernet, PCIe, and Fiber Channel means that many customers are dependent on Broadcom. Broadcom is the market leader in Wi-Fi, with nearly 80pc of the infrastructure relying on Broadcom, 1 billion Broadcom DSL connections installed worldwide, and Broadcom server storage is used by a very large portion of enterprise server customers.

And thanks to high reliability, which is very important for mission-critical tasks, low latency, and high power efficiency in the desired areas, Broadcom is very popular with its customers. And the focus on software and especially data centers should pay off in the coming years.

Seeking Alpha, 3 January 2024

As a result of the VMware acquisition Broadcom has high levels of debt but that should not be a problem.

The most significant change is the increase in net debt from $25bn to $70bn to $80bn as a result of the VMware deal. But as we can see in the picture above, this is part of Broadcom’s strategy. They buy strong companies with debt, then improve their margins, and then deleverage the balance sheet. And historically they have been very successful with this strategy.

And for me personally, the current level of debt is higher than I would like. I usually prefer companies that have no more than 4 times net income as net debt. However, since Broadcast’s net income was only $14bn in its last report, this is not the case. But we have to adjust the net income for the income that VMware will generate in 2024, and if we add that in, the net income could be over $20bn, which would make the debt situation more comfortable.

In addition, Broadcom has plans to divest Carbon Black and EVC, and depending on how that goes, that could generate revenue. And FCF [free cash flow] is also very strong at $17bn. And if we adjust that for SBC [don’t know], which is $2.7bn, we get an SBC-adjusted FCF of about $15.3bn. That should be enough to satisfy shareholders, buy growth, and ease the balance sheet.

Seeking Alpha, 3 January 2024

Broadcom Chart is a Thing of Wonder

The chart is a thing of wonder. Broadcom is a classic climb-aboard stock.

More Share Recommendations

Broadcom AVGO Buy @ $1400

Nvidia NVDA. Buy @ $952

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