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Chart Breakout Revisited – Part 1

December 15, 2023

A License to Print Money

Above is a chart of my much-loved QQ3, the Nasdaq 100 on steroids and perhaps the ultimate one decision stock. Buy some of these and hang in there and you should do well. Keep buying into weakness, at regular intervals or whatever and you should do very well.

The blue moving average line has already turned higher and we are a whisker away from a golden cross with both moving averages trending higher. On long term charts like this one, each candlestick equals six months, these buy signals don’t happen very often. They don’t come with a guarantee like everything in investment but historically buying into these buy signals has been a rewarding thing to do.

We never know what the future holds but one distinct possibility is that a period of incredible AI-fuelled prosperity lies ahead which ultimately could be good for a wide range of shares, not just cutting edge technology, and that in turn would be great news for QQQ3.

Frankly, it looks like a license to print money to me.

Chart Breakout was the name of one of my monthly print publications and carried some 20 charts per issue. This alert is going to be more like that not least because there are a growing number of exciting charts around.

These two stocks are uber-favourites of mine, the deadly duo of chip design, heavily involved in the world of AI and with share prices racing higher in a classic ‘season in the sun’ period. You can see on both charts that something happened in 2019. They have been doing well since 2008 but the last five years have been explosive with no sign this incredible run is over.

Both shares are up roughly seven-fold in the last five years so it does not seem to matter which one you buy or both. I went back to the Q1 2019 analysts’ meeting for Synapsys to see if there were any clues to the great period of growth that was coming. I think there were.

One notable driver, of course, is artificial intelligence. The development and proliferation of AI-dedicated chips brings great potential for us, as the number of customers and designs is growing quickly. Competition among AI-specific companies is fierce, and indeed for anyone incorporating AI into their chips, with an intense race to market and a broad set of competing architectures.

In addition, we’re seeing an escalation of the security challenges in highly interconnected systems loaded with software. This is in part driven by the proliferation of data-intensive IoT devices, and the emerging 5G connectivity standard, among other applications. The power of AI and the risks of security breaches require attention for all the products we use every day. From cars to mobile phones to smart homes to medical devices.

Synopsys provides key technology in the midst of this evolving picture. Our results and outlook are not in spite of these challenges, but rather because of them. Our innovation and technologies become even more valuable to our customers when the stakes are so high. This is evident throughout our business: Our penetration in new and growing AI chip companies has been excellent, and this growth has been visible across our product groups.

Art Geus, CEO, Synapsys, Q1 2019, 20 February 2019

Those forces that were instrumental in driving growth in 2019 have only become stronger since and augur well for the prospects for both these wonderful businesses.

Another Wonderful Semiconductor Stock

Now let us look at another wonderful stock in the semiconductor sector.

Chartists talk about a configuration known as a step pattern. Broadcom is a perfect example. Strong rise, period of sideways trading, strong rise, sideways, strong rise, which is what is happening right now. Broadcom is a growth-by-acquisition business specialising in the semiconductor sector. A string of deals has created a giant.

The quote below highlights the quality of the business that Broadcom has built and is building.

And since 2020, even though we have not made an acquisition, we have shown a robust trajectory of growth, driven by semiconductor growing at an 18pc CAGR [compound annual growth rate] over the past three years. In fiscal 2023, operating profit grew by 9pc year on year, and our free cash flow grew 8pc year on year to $17.6bn, or 49pc of revenue. We returned $13.5bn in cash to our shareholders through dividends and stock buybacks. We closed the acquisition of VMware on November 22nd, just about four weeks into Broadcom’s fiscal 2024.

We are now refocusing VMware on its core business of creating private and hybrid cloud environments among large enterprises globally and divesting noncore assets. Reflecting the consolidation of a restructured VMware into our 2024 outlook, we forecast our fiscal year ’24 consolidated revenue to be $50bn. We expect the integration to take about a year and will require close to $1bn in transition spending, which will largely be done as we exit fiscal ’24. Regardless, we expect our fiscal year 2024 adjusted EBITDA to be approximately 60pc of revenue.

Hock Tan, CEO, Broadcom, Q4 2023, 7 December 2023

The company is very much in the forefront of what is happening in technology.

Revenue from generative AI in fiscal ’23 reached 15pc of semiconductor revenue, in line with our expectation. And moving on to fiscal ’24, we forecast semiconductor solutions revenue to be up mid to high single-digit percent year on year. We expect revenue from generative AI to represent more than 25pc of the semiconductor revenue, consistent with prior guidance, which more than offset the lack of growth from non-AI semiconductor revenue. With the consolidation of VMware bringing our infrastructure software segment revenue to $20bn and the semiconductor segment holding a high single-digit growth year on year, we are therefore guiding our fiscal ’24 revenue to be $50bn, which represents 40pc year-on-year growth from fiscal ’23.

Hock Tan, CEO, Broadcom, Q4 2023, 7 December 2023

The World’s First $3 trillion Company

Apple has a very promising looking chart as the market value crosses $3 trillion, in a world where $1m increasingly seems like small change.

What we have in the chart above is a golden cross buy signal and a breakout from two years of consolidation. This looks like an excellent moment to buy shares in Apple.

My impression is that not owning an Apple device is increasingly an odd thing to do and this has been confirmed by some recent statistics about the company’s success with younger generations.

First, it’s a fact that Apple has a firm grip on Gen Z, with 87pc saying that they own an iPhone. This isn’t just true for the United States, it’s a trend that is spreading worldwide.

In South Korea, where the most common device is Samsung, only 23pc of its population uses an iPhone. However, 52pc of people 18-29 own an iPhone. This grew from 44pc in just two years. Meanwhile, Samsung’s overall market share has shrunk from 44pc to 45pc. Globalisation will attract more youth to Apple. 

InvestorPlace 7, December 2023

Cloud Titans Drive Growth at Arista Networks

One of the things I like about Arista Networks is its amazing CEO, a lady called Jayshree Ullal, who has transformed the performance of the business since she became CEO in 2008. Arista Networks is yet another in the seemingly endless stream of transformational technology companies that have their origins in North America.

As we have said before, gross margins have consistently improved every quarter this year and will stabilize next year in 2024. International contribution registered at 21.5pc, with the Americas at 78.5pc. As predicted, Arista’s supply chain and lead times are improving steadily in 2023, and we expect it to normalize in 2024. We are now projecting 33pc annual growth versus our prior analyst day forecast of 25pc growth for the 2023 calendar year.

During the past year, our cloud titan customers have been planning a different mix of AI networking and classic cloud networking for their compute and storage clusters. Our historic classification of our cloud titan customers has been based on industry definition of customers with or likely to attain greater than 1 million installed compute servers. Looking ahead, we will combine cloud and AI customer spend into one category called cloud and AI titan sector. And as a result of this combination, Oracle OCI becomes a new member of the sector, while Apple shifts to cloud specialty providers.

This new cloud and AI titan sector is projected to represent greater than 40pc of our total revenue mix due to the favorable AI investments expected in the future. In terms of enterprise momentum, Arista continues to focus on multi-domain modern software with architectural superiority based on our single EOS, Extensible Operating System, and CloudVision stack. This is truly a unique foundation and differentiator. We have demonstrated our strong execution and uncompromised quality with predictable release cadence that our customers have come to enjoy and appreciate.

Jayshree Ullal, CEO, Arista Networks, Q3 2023, 30 October 2023

Like so many great American companies the business is bursting with confidence.

Our team has always projected at least double-digit growth for next year and years beyond.

Jayshree Ullal, CEO, Arista Networks, Q3 2023, 30 October 2023

AI Opportunity for Adobe

I tend not to draw all these lines in because it makes the chart so busy and we are all geniuses with hindsight. My feeling is that if a chart has a message it should be clear without any annotations at all but some annotations are fun like my smiley buy signals.

On this chart Adobe has just given a powerful buy signal and the obvious inference from the whole chart pattern since 1986 is that this a very special business. If you are not familiar with Adobe is some guise or other you probably don’t use computers.

Adobe is a sensational company, playing a growing role in the unfolding global technology revolution.

Q4 was the culmination of another record year for Adobe, achieving $19.41bn in revenue, which represents 13pc annual growth.

GAAP earnings per share in fiscal 2023 was $11.82 and non-GAAP earnings per share was $16.07, both representing 17pc year-over-year growth. We exited the year with $17.22bn in RPO [remaining performance obligations]. Our strong performance reflects the mission-critical role our products play in a digital-first world, incredible product innovation and exceptional execution. Adobe Creative Cloud, Document Cloud, and Experience Cloud have become the foundation of digital experiences, starting with the moment of inspiration to the creation and development of content and media to the personalised delivery and activation across every channel.

Adobe’s mission of changing the world through personalised digital experiences and our delivery of foundational technology platforms, set us up for the next decade of growth. We take pride in being one of the most inventive, diversified, and profitable software companies in the world. We believe that every massive technology shift offers generational opportunities to deliver new products and solutions to an ever-expanding set of customers.

AI and generative AI is one such opportunity and we’ve articulated, how we intend to invest and differentiate across, data, models, and interfaces. We have delivered against this strategy and I’m pleased that a number of our groundbreaking innovations, including our Firefly models and integrations across Creative Cloud, Liquid Mode and integrations across Document Cloud and AI services in our real-time Customer Data Platform and integrations in Experience Cloud, are now seeing tremendous usage by customers.

Shantanu Narayen, CEO, Adobe, Q4 2023, 13 December 2023

Adobe plays a huge and growing role in content creation.

Global demand for content is accelerating and continues to be a tailwind for the business.

Creative Cloud remains the creativity platform of choice for creators across imaging photography, design, video, web, animation, and 3D. Our rapid pace of product and AI model innovation is empowering a wide and growing base of individuals, students, creative professionals, small-business owners, and enterprises to create and monetize amazing content more quickly and easily than ever before.

David Wadhwani, president of digital media, Adobe, Q4 2023, 13 December 2023

Digital experiences are indispensable for every business in every category, enabling companies of all sizes to engage and transact with customers around the world

Our efforts are focused in three areas: one, augmenting our applications with an AI Assistant that significantly enhances productivity for current users, and provides an intuitive conversational interface to enable many more knowledge workers to use our products; two, reimagining existing Experience Cloud applications, like we did with Adobe Experience Manager; and three, developing entirely new solutions built for the age of generative AI, like Adobe GenStudio.

In Q4, we continue to drive strong growth in the Experience Cloud business across our enterprise and mid-market customers achieving $1.27bn in revenue. Subscription revenue was $1.12bn, representing 12pc year-over-year growth. Business highlights include, strong momentum with Adobe Experience Platform and native applications inclusive of Real-Time CDP, Adobe Journey Optimiser, and Customer Journey Analytics.

Anil Chakravarthy, president of digital experience, Adobe, Q4 2023, 13 December 2023

Adobe is a company at the top of its game, bursting with confidence and set to keep blazing ahead.

Digital remains a massive tailwind as content demand and consumption continues to grow and businesses of all sizes are focused on transforming their customer experiences. Adobe is incredibly well-positioned to lead and capitalize on this opportunity. Thanks to our innovative roadmap expanding global customer base, strong brand, and the best employees in the world. Our fiscal ’24 financial targets reflect our confidence in continuing to drive strong topline growth and world-class profitability. I am more certain than ever that Adobe’s best days are ahead of us.

Shantanu Narayen, CEO, Adobe, Q4 2023, 13 December 2023

Strategy – Recession, What Recession

There is a famous joke about US stock markets that the stock market has predicted five of the last two recessions. The terrible year US shares had in 2022 might seem to have presaged tough times ahead but if so there is little sign in the results being delivered by many of the greatest US technology companies.

This raises the exciting possibility that as and when conditions become more favourable, stronger growth, lower inflation and falling interest rates and growth could accelerate from already very healthy levels.

There is much debate about the wall of cash supposedly waiting to pour into shares when interest rates fall. I am not going to attempt to pass judgement but I can’t help feeling that all this cash must be bullish .

Higher rates this year have created a high bar for cash coming off the sidelines. Assets in money market funds have climbed to nearly $5.6 trillion, a record-high and a notable 18pc increase year to date.

LPL Research, 25 August 2023

The chart above shows a buy signal for the iShares Semiconductor ETF, which is good news for holders of the ETF and for constituent shares, i.e., shares in the semiconductor sector.

Share Recommendations

Wisdomtree Nasdaq 100 3x. QQQ3. Buy @ $148.21

Cadence Design Systems. CDNS. Buy @$271.5

Synapsys. SNPS. Buy @ $549.50

Apple AAPL. Buy @ $197.50

Broadcom AVGO. Buy @ $1127

Arista Networks. ANET. Buy @ $233.50

Adobe. ADBE. Buy @ $587

iShares Semiconductor SOXX. Buy @ $569

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