This chart of the US S&P 500 index helps explain why Warren Buffett is so rich. He started investing, with leverage, after the Second World War and is famous for his buy and hold approach to investing. His mother could not have given birth to the wizard investor at a better time, ahead of a bull market in US stocks that just runs and runs – and, almost certainly, isn’t finished yet.
We can look at a shorter term chart and what we see is a new buy signal. This is telling us that this long running bull market is off on another leg. Charts are good at cutting through all the feverish analysis and expert opinions with which investors are buffeted from every direction. There are always a million opinions out there but only one chart and that chart says buy.
You can choose to disbelieve, pour over the weighty ruminations in your favourite financial newspaper but if you just believe in my chart indicators and act accordingly it makes life very much easier.
The index looks like this because many stocks look like this. One option is to buy every 3G stock with a chart broadly on these lines – a strong uptrend and a recent buy signal. But I am focusing more on the story. I want a great story but I also want a stock that is walking the talk.
In the late 1990s when there was a crazy bubble around the Internet part of the madness was that many stocks had a story but they were not performing. It was all smoke and mirrors and the bubble duly burst. One of the few stocks from that era which really delivered was Amazon. All the other members of the Magnificent 7 began their march to global ascendancy later in the next millennium (more like a second wind for Microsoft).
There is talk of bubbles now but I think that is nonsense. What we are seeing is a cohort of incredible businesses driving the greatest period of advance in the history of Homo Sapiens. I don’t know what the stock market implications are but there is clearly a strong possibility that they will be equally incredible.
Table of Contents
In the past, perhaps thinking too much like a journalist, I have felt that there must be plenty of novelty in my stories, new names, new ideas but I don’t think that any more. If we can find really great ideas new names are good and there will be some exciting ones as this bull market unfolds but for the moment it is all about making money and we don’t need new ideas for that when the old ideas work so well.
As is immediately apparent from the chart Broadcom is a phenomenally successful business, which has been a rewarding investment for years. It is in a sector, semiconductors, which is red-hot. I think that paradoxically this may have something to do with the ending, or at least fading, of Moore’s Law.
The observation is named after Gordon Moore, the co-founder of Fairchild Semiconductor and Intel (and former CEO of the latter), who in 1965 posited a doubling every year in the number of components per integrated circuit,[a] and projected this rate of growth would continue for at least another decade. In 1975, looking forward to the next decade, he revised the forecast to doubling every two years, a compound annual growth rate (CAGR) of 41pc. While Moore did not use empirical evidence in forecasting that the historical trend would continue, his prediction held since 1975 and has since become known as a “law”.
It doesn’t work any more according to no less an authority that Jensen Huang, CEO of Nvidia, who said in September 2022 that Moore’s Law was dead.
Before Huang said this we had learned about Moore’s second law.
As the cost of computer power to the consumer falls, the cost for producers to fulfill Moore’s law follows an opposite trend: R&D, manufacturing, and test costs have increased steadily with each new generation of chips. Rising manufacturing costs are an important consideration for the sustaining of Moore’s law.[44] This led to the formulation of Moore’s second law, also called Rock’s law (named after Arthur Rock), which is that the capital cost of a semiconductor fabrication plant also increases exponentially over time.[4
Wikipedia July 2023
Taiwan Semiconductor Manufacturing (TSM) is expanding and upgrading a factory in Arizona at a cost of $40bn. Serious money indeed!
Its factory expansion in the northern outskirts of Phoenix is meant to bring advanced microchip production closer to the United States and away from any potential standoff with China. Yet the effort has stoked internal apprehension, with high costs and managerial challenges showing how difficult it is to transplant one of the most complicated manufacturing processes known to man halfway across the world.
The New York Times, 22 February 2023
There is a debate about whether Moore’s Law is dead or not. Some say it is still delivering exponential advances but it is getting much more complicated than just cramming loads more transistors on a chip.
This may be making semiconductor companies much more sophisticated businesses, heavily involved in software as well as hardware and this in turn may be making them much more attractive investments. They stand at the heart of a technology revolution which is both huge and advancing at an accelerating rate.
Nvidia may not be the only semiconductor company to reach a valuation over $1 trillion. Broadcom is an obvious candidate, not only because it is already a third of the way there but also because it is highly acquisitive and has a rapidly growing exposure to AI.
Now, as I start this call, I know you all want to hear about how we are benefiting from this strong deployment of generative AI by our customers. Put this in perspective, our revenue today from this opportunity represents about 15pc of our semiconductor business. Having said this, it was only 10pc in fiscal ’22. And we believe it could be over 25pc of semiconductor revenue in fiscal ’24.
In fact, over the course of fiscal ’23 we are seeing a trajectory where our quarterly revenue entering the year will have doubled by the time we exit ’23. And in fiscal third quarter ’23, we expect this revenue to exceed $1bn in the quarter.
Hock Tan, CEO, Broadcom, Q2 2023, 1 June 2023
In a nutshell, revenue coming from the deployment of generative AI by customers is exploding. The company is also busy on the acquisition trail.
The combination of Broadcom and VMware is about enabling enterprises to accelerate innovation and expand choice by addressing their most complex technology challenges in this multi-cloud era. And we are confident that regulators will see this when they conclude their review.
Hock Tan, CEO, Broadcom, Q2 2023, 1 June 2023
Strategy – More on Kamikaze Investing
Share tippers in America often talk about millionaire making stocks. They can because there are so many in the States, 10-baggers are ten a penny, to coin a phrase.
So let us apply this thinking to our Kamikaze strategy. I have already heard from one subscriber who is strapped up in his plane and ready to go. Bully for him.
I am thinking we should do this with the specific target of making a million. Five thousand to a million is doable but feels like a bit of a stretch, so I suggest starting with £10,000 and buying £50,000 of a single stock, one that really excites you and has a fabulous chart.
Sounds scary, well, maybe you should be a bit scared; do it as though you mean it.
If any of my subscribers cannot guess which stock I am playing Kamikaze with go and stand in the corner for a period of reflection.
I have decided to pick a stock at random to illustrate how this might work. You will be astounded to hear that the stock I have chosen is Nvidia. Where did that one come from? Below is the basic case for the stock.
In May, Nvidia Corporation (NASDAQ:NVDA) provided one of the most outstanding earnings announcements ever. Nvidia delivered approximately $7.2bn in revenues vs. the expected $6.52bn. Moreover, Nvidia’s EPS increased to $1.09 vs. the consensus estimate of 92 cents. Nvidia smashed the Q1 earnings out of the park. However, genuinely stunning was Nvidia’s forward guidance. Nvidia guided to a staggering $11bn (plus/minus 2pc) in revenues for Q2, much higher (53pc) than the consensus estimate of only $7.18bn.
This remarkable guidance illustrates several crucial elements:
First, the analyst community was and may continue to be significantly behind the curve on Nvidia and the AI revolution.
Second, to post such results and future expectations, Nvidia is positioned incredibly well to capitalize on AI-driven markets in the future.
Also, by posting such stellar numbers, Nvidia suggests it will likely beat its estimates. Otherwise, what would be the point in providing such excellent guidance if there is a likelihood of missing the mark?
While Nvidia’s valuation remains relatively high, the company could continue beating consensus estimates, and its stock should continue appreciating in the long term. The AI industry has tremendous untapped potential, and Nvidia’s unique industry-leading position should enable it to excel in future years. We are still in the initial innings of the AI revolution, and Nvidia’s comprehensive AI solutions should play a leading role in this game. Therefore, we should continue seeing Nvidia’s stock trade at a premium multiple, and its stock price should continue appreciating in the coming years.
Victor Dergunov, The Financial Prophet, 26 July 2023
The interesting thing about this guy is that he has put some numbers on where Nvidia might be going.
Despite Nvidia’s lofty 58 times forward EPS estimates (consensus), its revenues should expand considerably in the next few years. Moreover, Nvidia’s growth runway remains vast, and it could sustain substantial 25-30pc or higher revenue growth through fiscal 2028 (potentially longer).
Remarkable Revenue Growth Ahead
Revenue estimates (SeekingAlpha.com)
Consensus estimates suggest Nvidia will achieve approximately $115bn in revenues in fiscal 2028 (2027). Moreover, higher-end estimates imply Nvidia could reach around $140bn or higher by then. Also, consensus estimates could still be relatively low, and Nvidia likely has a high probability of achieving higher-end forecasts in the coming years. As Nvidia’s revenues increase more than expected, its profitability could skyrocket in the years ahead.
Victor Dergunov, The Financial Prophet, 26 July 2023
Sorry about the tiny numbers in the table but that is how they came out.
EPS Estimates – Still Too Low
EPS estimates (SeekingAlpha.com )
While Nvidia’s EPS should surge by around 138pc or more this year, consensus forward EPS estimates could be too low for future years. Next year’s EPS estimate range is vast, ranging from a low estimate of around $6 up to $19. The mid-range or the consensus estimate is around $11, but Nvidia EPS could increase more than that. As Nvidia’s revenues surge in future years, its profitability/EPS growth could increase more than the consensus estimates suggest.
For instance, if Nvidia earns around $15 next year (fiscal 2025), its forward P/E ratio is only about 30 now. Even using depressed consensus figures puts Nvidia’s forward P/E ratio at about 40 here. Due to its unique market-leading position in GPU technology, the data centre sector, AI, and other lucrative segments, Nvidia deserves its premium multiple of 30-40 times forward EPS. Therefore, as Nvidia’s revenues and profitability continue increasing, its stock price should appreciate considerably in future years.
Victor Dergunov, The Financial Prophet, 26 July 2023
Now we get to the punch line.
Where Nvidia’s Stock Price Could Be in Future Years
Year (fiscal)
2024
2025
2026
2027
2028
2029
Revenue Bs
$46
$65
$88
$110
$135
$162
Revenue growth
70%
41%
35%
25%
23%
20%
EPS
$8.50
$15
$20
$26
$33
$40
EPS growth
155%
53%
33%
30%
28%
22%
Forward P/E
30
33
35
34
33
32
Stock price
$450
$660
$910
$1122
$1320
$1500
The Financial Prophet
Victor Dergunov, The Financial Prophet, 26 July 2023
So this guy, crunching the numbers, thinks that Nvidia shares could be $1500 in five or six years time. But it never happens like that because investor get excited and they bring stuff forward. So I think there is an excellent chance that Nvidia shares could reach $1500 in three years, especially if this AI revolution goes as bananas as I think it might.
Note: if you are puzzled by the calculations the forward PE uses the 2024 share price divided by the 2025 eps, i.e., $450/$15 = 30 and so on.
If you are playing Kamikaze with a share going from $460 to $1500 incredible things can happen. Just as a reminder there are two key elements to Kamikaze. Element one is that you use a rising share price to leverage to the max, again and again. This is foot to the floor investing. I know, some censorious people, like my wife, call it gambling but it is such fun.
The second and the scary element is that when the shares fall, which they will from time to time, and your equity (and profits) start to evaporate you hang on in there and do whatever it takes to make sure that IG’s 50pc liquidation rule is not triggered.
If you do this and your stock selection was right. Put it another way, if Nvidia is, as I believe, one of the greatest businesses ever seen on planet earth, then you will make an incredible, life changing amount of money.
This is what I mean by Formula One investing. One thing is for sure. You will not get bored. On the contrary, you will spend the rest of your life either thrilled or terrified.
I am not going to grind through the figures, maybe I will one day but not now, but if you start with £10,000, stick to your guns and Nvidia is what I think it is, you will be an equity millionaire at the end of the process. And, in order to be an equity millionaire you may need a £5m holding although I will understand if you have shifted to a less Kamikaze approach before that stage is reached otherwise you may need a defillibrator on permanent standby.
I don’t want to frighten you by being too insane about it all. Once your equity reaches £1m or $1m you could sell down to the point where you have £1m of shares and no leverage. Remember that in a spread betting account there is no capital gains tax. You could even do that when your equity is £200,000 and your gross is £1m. Obviously you can do it whenever you like but in the spirit of Kamikaze we are looking for a serious result.
There is an interesting point about now as the starting point. A big threat to a company like Nvidia where so much of the present value lies in expected future sales and profits is a rise in the discount rate, otherwise known as interest rates. Now, they may go higher, they are still climbing after all, but much of that damage has already been done. And they are already high enough that at some future date they could fall.
Let me also remind you that the world’s greatest investor, Warren Buffett, has made his gigantic fortune, by placing huge bets on individual shares. Berkshire Hathaway’s stake in Apple cost $31bn and is worth $176bn. Who says elephants can’t jump.
When I was editor of the IC Stockmarket Letter, way back in prehistory, I noticed that all the most successful investors made their fortune from a single share.
Doesn’t mean you can’t have a portfolio as well or balance your single share gamble with holdings in selected ETFs or my old favourite, QQQ3. In fact I am brooding on a share account version of my Kamikaze strategy for QQQ3, which is such a wonderful investment. One of the beauties of my single share Kamikaze strategy (the leveraged version) is that you don’t need much money to make it work but you do need balls and that goes for the ladies as well as the gentlemen.
Semiconductor sector looks strong
As well as a new double whammy buy signal (moving averages plus Coppock) this is a fabulous longer term chart with an incredible rise from the 2008 low point. It is up some 25 times! Who needs leverage although the performance of the leveraged version (SOXL) is unbelievable. Thanks to UK/ EU regulations we British, cursed with sub-human intelligence so unable to take decisions, can’t buy SOXL – patronising b******s. Probably a decision taken by the same far-seeing geniuses responsible for 20mph speed limits.
We are going full circle. When petrol powered cars first appeared the law said that a man needed to walk in front of the car carrying a lamp. The difference is that people soon realised that was absurd.
You can of course buy this ETF (SOXX) with leverage in a CFD or better still a spread betting account and it is an excellent candidate for my Kamikaze strategy (buy to the max, defend to the death by adding funds if the margin threatens to fall below 50pc).
Note that I only advocate defending to the death against the background of a bullish long-term chart and ideally a recent buy signal. The exception to this rule would be if you are already a billionaire and even then I prefer to back the chart. In general, I do not advocate holding shares with bearish charts, however good the fundamentals unless you are £-cost averaging when it should work – very well, most likely.
I was reading about some guy who bought Nvidia all the way down to $115 and he is a very happy bunny.
But it is an advantage of spread betting that you can step aside when the chart looks bearish and go back in when it looks bullish without worrying about the tax implications.
The fact that the sector is performing so strongly is good news for sector constituents like AVGO, NVDA and plenty of others.
