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Holy Trinity of AI Roars Onwards & Upwards

February 22, 2024

QQQ3 sets the tone for an amazing US stock market as AI explodes faster than anything in the history of humanity. This share looks headed miles higher as all the trading since 2021 forms a springboard for a sustained advance.

Next on the list is the Philadelphia PHLX Semiconductor index (SOX) which had a massive breakout in 2013 and has another smaller one now. Again, this index and the associated ETFs (SOXX and the leveraged version, SOXL) look headed miles higher.

So now to the king of semiconductors and increasingly the whole technology revolution – NVIDIA! What a stock, what an amazing, amazing stock and business. Comparisons to the Cisco of the 1990s, incredible as Cisco was with its domination of computer networking, do not do justice to the phenomenon that is Nvidia and the force of nature that is Jensen Huang.

The World Has Reached the Tipping Point of a New Computer Era

Q4 was another record quarter. Revenue of $22.1bn was up 22pc sequentially and up to 265pc year-on-year and well above our outlook of $20bn. For fiscal 2024, revenue was $60.9bn and up 126pc from the prior year.

Starting with data centre. Data centre revenue for the fiscal 2024 year was $47.5bn, more than tripling from the prior year. The world has reached the tipping point of a new computing era. The $1 trillion installed base of data centre infrastructure is rapidly transitioning from general purpose to accelerated computing.

As Moore’s Law slows while computing demand continues to skyrocket, companies may accelerate every workload possible to drive future improvement in performance, TCO and energy efficiency. At the same time, companies have started to build the next generation of modern data centres, what we refer to as AI factories, purpose built to refine raw data and produce valuable intelligence in the era of generative AI.

In the fourth quarter, data centre revenue of $18.4bn was a record, up 27pc sequentially and up 409pc year-over-year, driven by the NVIDIA Hopper GPU computing platform along with InfiniBand end-to-end networking. Compute revenue grew more than 5x and networking revenue tripled from last year. We are delighted that supply of Hopper architecture products is improving. Demand for Hopper remains very strong. We expect our next-generation products to be supply constrained as demand far exceeds supply.

Colette Kress, CFO, Nvidia, Q4 2024, 21 February 2024

Nvidia Says Demand Far Exceeds Supply

There is a ton of stuff in the report to demonstrate what an unbelievably exciting business Nvidia is, which makes it almost as hard to value as Bitcoin. In 60 years of close familiarity with stock markets, I don’t think I have ever encountered a company as amazing as Nvidia. God alone knows where these shares are going but much higher, that’s for sure!

Talk about volatility though. The shares briefly fell to $646 after the figures before rocketing higher as their true significance sank in. Needless to say, the chart looks great, so strong that on the 12m candlestick chart there is not even a new buy signal in 2023 as has happened with so many other shares because the long-term moving averages never turned lower.

Super Micro (SMCI) May be the Only Share that Can Keep Up

Just to remind you how excited these guys are about what is happening.

The exciting news is that, finally, we are entering an accelerating demand phase now from many more customer wins. To support faster growth, we have increased our working capital recently by raising about $600m with an equity offering. Moreover, we have other programs to increase our cashflow without additional equity dilution to support short and long-term sustainable growth. Overall, I feel very confident that this AI boom will continue for another many quarters, if not many years. And together with the related inferencing and other computing ecosystem requirements, demand can last for even many decades to come, we may call this an AI revolution.

Charles Liang, CEO, Super Micro Computer, Q2 2024, 29 January 2024

These shares have been through an even wilder period of volatility than Nvidia, falling from a peak of $1077 to $692 in just two days before rallying strongly. Meanwhile, oblivious to what the shares are doing, SMCI is walking the talk with blistering growth and massive capacity expansion plans.

SMCI revenue heading for $25bn

The rapid growth of our business is driving the need for additional R&D, solution optimisation, manufacturing and service capacity. Today, our production utilisation rate is about 65pc across our USA, Netherlands and Taiwan facilities, and they are quickly filling. To address this immediate capacity challenge, we are adding two new production facilities and warehouses near our Silicon Valley headquarter, which will be operating in a few months. The new Malaysia facility will focus on expanding our building blocks with lower costs and increased volume, while other new facilities will support our annual revenue capacity above $25bn.

Charles Liang, CEO, Super Micro Computer, Q2 2024, 29 January 2024

The chart looks terrific with a massive consolidation followed by an explosive chart breakout. You could not ask for more. Like Nvidia, these shares are headed miles higher.

ARM Races Ahead with Exciting New Technology

Arm Holdings ARM, on Wednesday released a new set of blueprints for making chips that it says could cut the time required to develop data centre processors to less than a year.

Arm, whose underlying technology is widely used in the semiconductor industry and powers virtually every smartphone in the world, has been working to take market share away from Intel INTC and Advanced Micro Devices AMD in the market for data central processors, or CPUs.

Arm, which is majority owned by Japan’s SoftBank Group 9984, argues that its CPUs will become the preferred pairing with Nvidia’s NVDA chips in many artificial intelligence data centres, which has helped drive Arm’s shares up more than 60pc this year.

Arm’s technology for creating data centre processors is already in use by Amazon.com AMZN, Microsoft MSFT and Ampere Computing, which supplies chips to Oracle ORCL. Arm on Wednesday announced a new generation of designs for the computing “cores” – the most central part of a data centre chip.

But the larger announcement was that the cores will be offered as part of what Arm calls a “compute subsystem.” That offering ties together the cores with other offerings from Arm into something closer to a complete chip design. Arm argues that customers can use it to go from an initial idea to a test chip in less than a year.

That’s about half the time of a traditional two-year chip development cycle. Arm said that Microsoft already used the subsystem technology to design its “Cobalt” chip announced last year.

“That’s a huge deal,” Ryan Shrout of chip research firm Shrout Research said of cutting down development time.

Shrout said that one of the biggest challenges for traditional chip firms like Intel and AMD was keeping a steady design cadence. Now, Arm is offering to do that work for anyone willing to pay for its blueprints, even if they aren’t a traditional chip company.

“It’s one of the reasons why you’re seeing Amazon, Meta and Microsoft start to build their own platforms and not just build them once, but iterate on them. They’re coming out with new generations relatively quickly,” Shrout said.

Reuters, 21 February

The chart above is based on daily candlesticks, very short-term by my usual practice, but that is because ARM has such a short history as a quoted company. They show an explosive gap breakout, a pullback and my best guess is much higher levels ahead. Like Nvidia ARM is so focused on research and development it is like a quoted university. The shares are 90pc owned by Japan’s Softbank which makes them very scarce and very volatile.

What is happening in the world of AI and the whole world of technology represents a fantastic opportunity for these companies and they look determined to make the most of it. I am sure there will be others but these three are my favourites for now.

Strategy – Buy Shares in Nvidia, Super Micro Computer and ARM

These three shares are arguably the most obvious shares to buy in the world right now but fortunately doing the obvious thing is TOO obvious for most investors who are obsessed with hidden treasure, not the treasure that is right in front of their eyes.

Do what is obvious; it is amazing how often it is the right thing to do.

Share Recommendations

Nvidia. NVDA. Buy @ $768

Super Micro Computer. SMCI. Buy @ $839

ARM Holdings. ARM. Buy @ $135

Note that I have used pre-market prices for the share recommendations. I don’t usually bother to do this but they are so dramatically different to the prices at which these shares closed last night that anything else would be absurd.

On the ETF front, the obvious ones to buy if you can buy them are SOXX and the leveraged version SOXL.

SOXX. Buy @ $638

SOXL. Buy @ $40.40

And the other one I always love.

QQQ3. Buy @ $177.46

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