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Strategies for a Bull Market Just Taking Off!

February 6, 2024

This chart of the US S&P 500 index going back to the 1930s is one of the world’s wonders. This chart more or less spans my lifetime and fills me with shame that unlike Warren Buffett I am not one of the world’s richest men. The opportunity was handed to me on a plate and I didn’t take it but better late than never because US shares look more exciting than ever.

The time to buy US shares like no tomorrow is when the indices are breaking up from consolidation; just what is happening right now. If it isn’t fill your boots, what are we waiting for; Moses to come down from the mountain with flaming tablets saying BUY SHARES!

It is important not to buy any old shares. On QV we focus on 3G (great growth, great story, great chart) and we also look for magic, innovation and ‘something new’. In an age when the world is being transformed by an accelerating technology revolution, there is a lot of ‘something new’ about.

I was just reading an interesting article by Ian Cowie in the Sunday Times in which he compared AI in the 21st century to the discovery of the Bessemer steel process in the 19th century. His article is headed ‘AI today is what steel was in 1856 – get ready for the future.

Bessemer Steel Changed Everything

Simply put, the Bessemer process was a game-changer for both the steel industry and the world economy. By making steel production faster, cheaper, and more consistent, it enabled a wide range of new applications and industries to emerge, such as skyscrapers, bridges, ships, railways, and weapons.

The legacy of the Bessemer process is profound and enduring. It not only transformed the steel industry, but also had a ripple effect on many other industries and sectors. For example, the availability of cheap and abundant steel enabled the construction of large-scale infrastructure projects, as well as large-scale production of steel consumer goods, which became affordable and accessible to the masses. Moreover, the Bessemer process paved the way for other technological innovations, such as the development of new alloys, coatings, and composites, which have further expanded the range of applications and properties of steel.

Rotabroach

When I think about the Industrial Revolution I think about steam but the real game changer was steel, this fantastic material that didn’t rust, was super strong and easy to work. If AI is going to have that sort of impact, WOW!

Monolithic Power Systems (MPWR) is another sexy semiconductor share with a spectacular chart. It is currently breaking out from a new area of consolidation and looks poised to move strongly higher.

As we can see MPWR has enjoyed great success as a business in the new millennium with a noticeable acceleration in growth since 2019. The earnings reports get bogged down in numbers to my way of thinking but I found this conclusion to a piece on Seeking Alpha which gives a good picture of where both business and shares are likely to head in the medium/ longer term.

MPWR Sales to Rebound in 2024

We maintain our buy rating on MPWR. We think MPWR will experience a sequential decline in all its end markets but see A.I. and auto-related sales rebounding QoQ [quarter on quarter] into 2024. We expect this to drive financial outperformance. Management noted on the call, “While we expect visibility to remain limited in the short term, which was the same as last quarter, we continue to execute on our long-term strategy.” We see an attractive risk-reward profile for the stock into 2024 and recommend investors explore entry points at current levels as the stock hovers closer to its 52-week lows.

Seeking Alpha, 2 November 2023

2023 into 2024 has been a difficult period for the business with many headwinds but the group has proved adaptable in the past and I see that happening in the future with AI increasingly becoming a tailwind for the business.

The clue to prospects is what the company does.

Monolithic Power Systems, Inc. is a global company that provides high-performance, semiconductor-based power electronics solutions. The company’s mission is to reduce energy and material consumption to improve all aspects of quality of life. Formed in 1997 by CEO Michael Hsing, the company has three core strengths: deep system-level knowledge, strong semiconductor design expertise, and innovative proprietary semiconductor process and system integration technologies. These combined advantages enable MPS to provide customers with reliable, compact, monolithic solutions that offer highly energy efficient, cost-effective products, as well as provide a consistent return on investment to our shareholders.

MPWR, investor relations

Still More on Super Micro Computer (SMCI)

Subscribers will know that I am very excited about prospects for SMCI.

I have just found an interesting Seeking Alpha piece on the company.

As AI continues to hold its status as a moneymaker in the market, there is no better time than now to invest in Super Micro Computer, Inc. More commonly known as Super Micro, this San Jose-based tech company is a global leader in the design and production of server solutions. The company offers high-performance and high-efficiency server technology that caters to a wide range of markets. These include data centres, cloud computing, high performance computing, IT, and big data. SMCI’s main goals relate to performance maximization and energy efficiency which is evident through their servers, motherboards, and other accessories. The company’s commitment to technological excellence and advancement has propelled it to the top of the server and data centre industry, working closely with tech giants like Nvidia and Samsung. With a drive to innovate and over 50pc of its revenue coming from AI-related servers, SMCI is in a great position to handle the demands of modern AI applications now and far into the future.

Seeking Alpha, 28 January 2024

The guy who wrote this piece, Max Feldman, has just 134 followers, very similar to me.

Also, like me, he feels that SMCI is an amazing company.

Super Micro management, spearheaded by CEO Charles Liang, are showing extreme confidence in the upward mobility of their company as they’ve revised fiscal 2024 outlook to $10B-$11B in revenue. Some might call this wishful thinking but their balance sheet reinforces an aura of financial health and stability. Their debt level is a manageable $146m as of September 30, 2023 and they hold $543m in cash and cash equivalents. SMCI’s efficient operational management is also highlighted in their healthy cash flow from operations, which was $271m.

This upward revision in sales, earnings, and revenue is fascinating and appealing to investors, myself included. But I also feel this story of unprecedented growth paints a bigger picture with regards to the market’s expectations of the emerging AI sector. Robust growth and increased demand are the simple answers to Super Micro’s success but for investors looking into the future they see the unbounded potential of AI, and recognize the need to enter this space. Super Micro is the safe entry point.

Seeking Alpha, 28 January 2024

SMCI is increasingly about AI.

SMCI brings in more than fifty percent of its revenue through AI optimised platforms. It’s this deep connection to AI, a rapidly expanding sector, that has lifted up Super Micro over the past year and all indications point to this trend continuing. The need for servers where hardware and software work together seamlessly is the highest it’s ever been due to AI’s proliferation, and Super Micro does this better than essentially any other company.

Seeking Alpha, 28 January 2024

I could have written this guy’s conclusion.

In conclusion, for investors who want to get into the AI sector, I wholeheartedly recommend Super Micro as a starting point. The company’s market positioning and undervaluation in spite of positive financial performance indicate that it is a strong buy. Some might call this a no-brainer after several extremely successful months for the company, but I cannot stress enough that Super Micro’s surge has only just begun. It is still marginally undervalued, possibly at risk by market volatility and partnership dependency, yet SMCI is ultimately defined by its resilience and growth potential. The company’s financial health and plans to expand are signs of stability and valuation metrics indicate that this is an undervalued stock. The sky’s the limit for the AI sector and Super Micro is poised to grow with it.

Seeking Alpha, 28 January 2024

As usual, the bit that baffles me is what exactly SMCI does but here is a flavour of it.

Construct tailored AI solutions with Supermicro NVIDIA MGX™ Systems, featuring the latest NVIDIA GH200 Grace Hopper™ Superchip and NVIDIA Grace™ CPU Superchip. The new modular architecture is designed to standardise AI infrastructure and accelerated computing in compact 1U and 2U form factors while providing ultimate flexibility and expansion ability for the present and future GPUs [graphics processing units], DPUs [data processing units], and CPUs [central processing units].

Supermicro’s advanced liquid-cooling technology enables power-efficient hyper-dense configurations, such as a 1U 2-node system with 2 NVIDIA GH200 Grace Hopper Superchips, each comprising of a single NVIDIA H100 Tensor Core GPU and an NVIDIA Grace CPU, integrated with a high-speed interconnect. Supermicro delivers thousands of rack-scale AI clusters per month from facilities around the world, ensuring plug and play compatibility.

SMCI, investor relations

It’s all gobbledygook to me but may mean something to you and at least shows that they have a business, with prospects which make them very excited. The thing about SMCI that I like is that it ticks all my boxes and arguably puts two ticks in each box. The stock and the business are performing so explosively it makes me think we are close to the start of something big.

Strategy – Buy MPWR and Buy More SMCI

Physically SMCI’s business could hardly be growing faster.

The last word comes from CEO and founder, Charles Liang.

Our growth can be very strong in the next few years.

Charles Liang, CEO, Super Micro Computers, CNBC, 26 September 2023

In the same interview where he said this about SMCI’s growth outlook Liang also compared the AI revolution to the Industrial Revolution which began in earnest some two centuries ago.

I was going to talk more about general strategy but that will have to wait for another alert. Meanwhile, SMCI has one of the most explosive charts I have ever seen. The chart can be interpreted as a dramatic breakout from an upward-sloping 16-year consolidation.

Share Recommendations

Monolithic Power Systems MPWR. Buy @ $646

Super Micro Computer. SMCI. Buy @ $663

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