Best Semiconductor Gem!

Semiconductor stocks had a superb run in the last fwe years driven by shortage of chips and then the current A.I. craze. The following chart from finchat.io showed that investing in the SOXX ETF would have delivered over 200% return or CAGR of 25%.

Today, we are going to discuss a related idea with potentially more upside given that the stock has corrected more than 45% but the big tailwind story hasn't really changed. But first let's look at the financials:

Simple Financials (Mar 25 estimate)

• Sales: 2.3trn and EBITDA: 700bn
• OP: 600bn and NI: 500bn
• Market Cap: 10trn
• FCF: 450bn and Net Cash: 500bn 

Financial Ratios

• PBR 5.3x and ROE: 26%
• EV/EBITDA: 11.3x
• PER:16.7x
• FCF yield: 5%, Dividend Yield: 1.8% 

Isn't it amazing to be able to buy such a high-octane semiconductor play at such valuations? Hence the tagline that this could be the best semiconductor gem! As an experiment, we shall not reveal the name today. Interested readers could try to guess and go onto substack to find out. But for convenience, let's call this company T. 

1. Fundamentals

The following is the investment thesis for T:

T is the one of the top players in the semiconductor industry with high market share in certain core products. It stands to benefit from the continuous growth of the semiconductor market and is especially geared to capex growth in its home country. At current valuation, investors can enjoy 5% FCF yield and almost 2% dividend with 80% technical upside if market sentiments improve quickly.

The chart below shows that the market is estimated to double from USD500bn to USD1trn by 2030. As one of the top companies in the value chain, T will grow in tandem with the market and current share price correction provides the opportunity to buy cheap and gain good exposure today!

The manufacturing of semiconductors is also highly complex and in various parts of the value chain only the best of the best survived. The number of players have shrunk to just 1-3 in most segments. In actual high end cutting edge production, there is only Intel, Samsung and TSMC and in the field of lithography, there is only one player left - ASML.

Positives

High and growing market share: the production of semiconductors requires many types of equipment which are manufactured by T. It would take up too much space to describe all of them. The following paragraph describes the opportunity well:

T commands a share of more than 80% of the coater/developer market and more than 60% of the thermal processing system market*, but has less than a 30% share of the etch system market and less than 20% of the cleaning system market. Etch systems and cleaning systems are both used in key semiconductor production processes and therefore their markets offer strong growth prospects going forward. 

Increasing dominance in servicing: as the largest player in the field, T also has a huge installed base of past equipment globally and only T can service its own equipment. This has led to the growth of its servicing business (currently 20-30% of revenue) and at the same time strengthen its business moat as customers are unable to switch to competitors while new entrants are also not able to gain market share.

Risks

However, the thesis is not without risk. T has significant exposure to China and stands to lose this portion of its business should the trade and technology war between US and China exacerbate. The mitigating factor is that there is no other provider and China will find a way to still buy from T via different routes not unlike how arms dealer can find ways to sell weapons around embargoes.

The rest of the post can be found on substack.

Gamestop War: Trolls vs Wall Street

Gamestop is a game retailer in secular decline which was made worse by the pandemic. Well, it's in decline simply because we buy consoles from Amazon and games itself are now downloaded online so there is no reason to visit Gamestop ever again. But in recent days, Gamestop found itself becoming the epicentre of an epic war. Its stock price rose 1700% as the internet generation wanted to make a statement to Wall Street. 

Gamestop's meteoric rise from $20 to over $300 in days

The statement was made on Reddit. War rallies on social media to save Gamestop from evil Wall Street hedge funds shorting the stock to bankruptcy. Gondor calls for aid. And Rohan will answer. Yes, they were answered. Millions of gamers and internet trolls bought Gamestop and drove the share price up so that short sellers will get hurt. They won the first battle, some hedge funds sold and a few even went bankrupt.

Gamestop on a rollercoaster

Two days ago, on 28 January 2021, Wall Street fought back. Various trading accounts, using share price manipulation as the reason, restricted trading on the name, driving the share price down from $469 to $132, an over 70% drop. The saga did not end, millions of Robinhood account holders complained and the restrictions were lifted. The stock proceeded to rise over 100%! So the fight continues. This is yet another manifestation that we are in this pandemic induced bubble. Irrationality overwhelms and share price volatility explodes.

Meme on reddit

We know this is not going to end well. Gamestop will not be saved (for the simple reason that Gamestop doesn't have an intrinsic value of USD22 billion) and many people will lose their shirts. 

Caveat Emptor!

Charts #36: Tesla

Another day, another enigma.

Tesla, a company that hasn't made profits cumulatively over the last 10 years, makes a mere 300,000 cars, is bigger than Toyota, Volkswagen, BMW, General Motors, Ford, Fiat Chrysler and Honda combined!

The automakers listed above make more than 30 million cars annually. 100x more than Tesla. 

It also dwarf the recent inclusions into the famed S&P500 by a mile!

Well, maybe bcos it did finally generate USD1bn of FCF after burning USD10bn since its inception. Remember the market only looks forward, not backwards.

Or, we can attribute it to the Power of QE Infinity. 

To Infinity and Beyond!

Thoughts #22: The Curious Impact on COVID Sectors

COVID-19 has impacted various sectors in dramatic ways and yet benefitting totally different sectors altogether. This post tries to connect the dots and to crystallize some of these thoughts. Hope this helps!

1. Business and long distance travel. This will be impacted for a long time. Some say air traffic will not return to 2019 level even in 2024. As such, airlines are in a lot of trouble. Related to that, inflight meals (SATS), aircraft servicing (ST Engineering and SIA Engineering), hotels, tourism goods, luxury products, demand for gasoline, the whole aerospace industry, in short, the better half of Singapore's listed companies and even business travel solutions - SAP is down 20% in one day!

2. Social distancing. This has impacted restaurants, cinemas, live events, spectator sports, small businesses like massage parlors, pubs and related to that on-premise beer demand, liquor sales, soft drinks and the likes. Auto sales as well bcos you cannot buy a car without touching, feeling, test driving and sitting and talking with the dealer. That said though, Tesla is flying!

3. COVID winners. Conversely, the TMT^ sectors benefited big time. ZOOM, SAAS and remote work solutions took off. Amazon and Netflix benefited from shopping at home and more binge watching. Online learning boomed, together with ZOOM (decimating Pearson, the world's largest textbook seller along the way). Gaming is another big beneficiary and needless to say, vaccine related plays are also commanding sky high valuations.

So what to bet now? I will tend to focus on the beaten down ones to find the gems. Maybe JCNC can be an interesting recovery play when things settle down. People will need to buy their cars, bikes and finance such purchases for their livelihoods post COVID-19. There will be a lot of pent up demand for sure!

Looking back in history many years from now, this would be one of the most unique crisis that people will analyze for years. Let's try can still make some money despite some indices back to all time high! Might have room for STI to chiong. Huat Ah!

^ TMT stands for telco, media and tech. This was a buzz acronym in 2000 during the tech bubble.

2017 First Half Review - Part 1

This year started with a lot of renewed hope after the disastrous 2016 where we saw markets whipsawing investors. Brexit was supposed to crash the market, but it didn't and Trump wasn't supposed to become President and he did! The markets then reacted by going up 15%, when everyone thought it should go down if Trump ever won. In retrospect, the Trump rally continued into 2017 and we saw the S&P500 hitting all time highs and most markets, following US footsteps, are up for the year.

We have passed the first half of 2017 and hence it might be timely to do a quick review for the half year. Looking at various indicators, it could be said that a large part of the positive moves in the stock markets are done. Most markets had seen positive return for consecutive 6 months which happened very rarely in the past 20 years. Our own STI index (chart below) rallied from 2900 to 3200 in the last 6 months with only 3 down counters out of the 30 components. 

STI 1 year price chart

What had caused the general euphoria in the markets?

For one, the US market is very resilient. It's almost a decade since the Lehman crisis in 2008-09 and the system had been pretty much cleaned up. Multiple rounds of quantitative easing (QE) had created enough liquidity (as well as side effects which we shall discuss) to stabilize the economy. Unemployment rate is now quite low, productivity is getting higher with tech innovation and things are looking so good that the Fed is thinking about finally stopping QE. Then they changed their mind and thought maybe the party should go on. So markets rallied even more!

Meanwhile in Europe, things are also bottoming after the Grexit scare two years ago and China seemed to be okay with the big meeting coming up in October and everyone is trying their best to keep the Goldilocks economy going. Things should be not too cold nor too hot, just right for President Xi to announce his dream team during October's plenum session. Hence, other parts of the world are following this Goldilock's story where everything will be just right until they go wrong.

The other big trend that had really taken off in 2017 was the Second Coming of Tech. 17 years ago, we had the dotcom boom and bust when the internet promised the new future but then everything failed to deliver. Back then, we were not ready but we thought we were. There wasn't enough optics fiber to deliver what the internet promised, there wasn't enough profits generated. But today, things have really changed. 

Nasdaq 17 year price chart

Now, we have more than enough optics fiber in the ground and under the sea, we have the top tech companies generate more profits than the GDP of some big countries and we have lots of money created by QE1, 2, 3 and QE Infinity. In a amazing turn of event, the Nasdaq price today exceeded the peak reached during the dotcom bubble of 2000 (chart above). Statistics show that people spend 4-6 hours online everyday, on their phones, using PCs, shopping, playing games, watching videos. We are not doing work, not watching TV, not sleeping, not going out to eat (since we have Deliveroo) and just living our lives online. 

As such, the combined profits of the global tech companies: Apple, Amazon, Facebook, Google, Netflix, Alibaba, Tencent, Baidu and the rest generated c.$40 trillion in revenue and c.$3 trillion in profits. In terms of profits, tech would rank as the 4th largest economy in the world, behind Japan. With such profits in tech, it had generated positive cash overflow into the real economy, creating more high value added jobs, startups and hence reducing unemployment (somewhat). Hence it could be said that there is this symbiosis between QE and tech. QE flooded the world with money which flowed into tech unicorns (tech startups with more than one billion dollars in market cap) and into the other parts of the tech supply chain.

One huge positive side effect was semiconductors. After the bubble burst, the semiconductor industry and its relatives all died as the huge oversupply created in the aftermath caused prices to fall year after year. NAND prices, DRAM prices, chip prices always went down, until now. The tech revival, driven by big data and A.I. today, required more powerful computing and more storage. Much more than most could imagine. All the big tech are investing in server farms and computing prowess to outdo their competitors and this caused a short squeeze in semiconductor chips. Hence these players benefitted big time as well. Samsung, TSMC, Nvidia are at or near all time high!

The other huge market was the advent of tech gaming.

This industry started in Japan when Nintendo created the first console box called Nintendo 64 back in the 1980s. It spawned a huge market that had grown to become a $100 billion industry today. Gaming including mobile gaming, computer games, Playstation and Xbox is bigger than Hollywood and music combined. Then in 2017, we have a game changer: Overwatch.

Overwatch poster

Overwatch was created by a company called Activision Blizzard which also gave us a few of the best games ever created. Most people would have heard of them even if they are not gamers. Games like Call of Duty, Warcraft, Diablo, Starcraft and now, Overwatch. For the uninitiated, Overwatch is a team-based player vs player (PvP) game where gamers band together as different characters to defeat the other teams. It was made possible in today's era again because optic fiber now have ample capacity and chip computing power can handle multiple player gameplay without lags. This was not possible just a few years ago which was why games were always single or double player only.

Overwatch redefined PvP with a few ingenious concepts such as having a "replay" moment (like soccer) where the game automatically replays the significant moments during the match and also introduce a very huge variety of different characters (currently 25) having different strengths and weaknesses so as to keep interest high amongst players as they have to study these strengths and weaknesses well to win. Since Overwatch, this concept had been used in many other gaming platforms including Minecraft (Bedwars) as well as Honour of Kings (Tencent's huge hit in China right now) and Clash Royale (which also belongs to Tencent since they own Supercell).

But what's more significant about Overwatch is the creation of Overwatch League. I believe this marks the turning point of e-sports, a new genre in sports where people go to stadiums to see professionals play computer games. Overwatch will have teams from different countries (or states in the US) fighting one another much like World Cup or Premium League. Teams train together (online) professionally to win and most believe this would be as big as soccer someday where players earn multi-millions with worldwide fan base as well as lucrative sponsorships. So, it may not be bad thing to play games and not study today! Well if your kids are so good at it.

Since the creation of Overwatch League, we have seen e-sports taking off with talks of e-sports being included in 2022 Asian Games or a creation of an Olympic style gaming franchise with the past top games from all genres: Tetris, Street Fighter, Halo, Mario Kart and needless to say Overwatch. E-sports will also spawn other industries such as goods, merchandise and gaming peripherals (mouse/mice, headsets, keyboards) where Singapore's own company is the global leader - Razer!

Okay, so much about tech, in short, QE helped the tech industry to revive and the markets are seeing new trends which got investors excited, but there's are risks that the party might just end soon. Next post we talk more about the outlook for the later half of 2017 and 2018.

Overwatch this space!