Intel’s Foundry Losses, RKLB v. RDW, And The Town With The Best Mexican Food In The World!

Here’s the transcript from this week’s Live Q&A Chat hosted by Bryce:

Q: If you take “revolutionary” out of the equation, what number or combination of numbers make you say “wow, this stock is a strong buy”? P/E, gross margins, etc.?

A: Good question, and there is no simple answer. A hard lesson I’ve learned investing over the years is that a low P/E alone is never a good reason to own a stock. Especially in bull markets, stocks that are cheap on a P/E basis are usually cheap for a good reason. That’s different than in bear markets when great companies like Apple (AAPL) and Google (GOOG) get sold off for no reason at all and those companies get “cheap” and become great buying opportunities. So to answer your question, we like to model out what the operating profits look like in 3, 5, and 10 years. You’ve probably seen us reference what we call the p/p (price/profits) ratio. We model the revenue growth, gross margins, and operating expense growth for a company, and then see what kind of profits the company could earn in the future. In general, we’d like to see single-digit p/p ratios five years out on companies that are growing revenue at least 15-20% per year. If we like the business and think those growth rates are sustainable, then we consider buying the stock.

Q: Are you guys averaging down on Tesla (TSLA) and LEAP calls here?

A: We added more TSLA last week when it got down in the $160s. I think anywhere around $165-$175 is probably not a bad place to buy TSLA if you want to own more of it. Other than Elon’s Robotaxi tweet last week, and the developments we are seeing in FSD, it’s basically all bad news every day for TSLA. I think the market has gotten very pessimistic on the stock and if there is any kind of surprise to the upside on FSD adoption, or if auto sales don’t decline, or if the solar business takes off again, this stock could probably get going again.

Q: I was driving my wife’s Tesla (TSLA) Model X in Los Angeles and you are right that it is at 95% or maybe less. I live/drive in very congested traffic. It was good until I exited the freeway and the car was to make a right with 3 lanes at the exit. It kept going way too fast and then slammed the brakes in between two lanes. It’s not ready for the big city.

A: I agree, the FSD still isn’t perfect and there are literally an infinite amount of different driving scenarios that it has to learn to handle perfectly before true autonomy is here. But the cool part about FSD and the new approach using a neural network is that FSD literally teaches itself how to drive better in that situation you described, without any humans having to tell it how to fix itself. The advancements in Tesla’s AI are what is going to take FSD to the next level, and AI is advancing faster than any technology ever has in all of history (per Elon).

Q: Are we getting pretty aggressive on Intel (INTC) here under $39?

A: We’ve picked up some more INTC this week on the pullback. INTC was already one of our top five positions, so I cannot say that we have been “pretty aggressive” in buying it this week. That said, I do think this is probably a good time to add some INTC, and I think it is really trading at a cheap valuation compared to its peers. I tweeted earlier that INTC and AMD both have competitor chips to NVDA’s H100, and both guided first-quarter revenue down, yet AMD is trading at 12x sales and INTC is at 3x sales. Plus INTC has a potential $1tt+ foundry business that is just getting started. I think I’ll take INTC over AMD here.

Q: What are your thoughts on Intel reporting a $7B loss on its fab business? Are we buying more?

A: Yes, see above, we picked up some more INTC this week. It’s funny to me that INTC sold off after it restated its financials to break out the Foundry business into its own P&L. None of INTC’s numbers actually changed, this was just an accounting thing so that INTC could start preparing to spin off the foundry division at some point. Obviously, INTC’s foundry business is running at a loss, because it built all of the chips for INTC and only had about $1b in revenue from outside customers. INTC is building literally hundreds of billions of dollars worth of fabs and until it scales up that manufacturing capacity, the Foundry business is going to lose money. INTC is in the middle of a decade-long process to become a world-class systems foundry for customers like NVIDIA (NVDA), Microsoft (MSFT), Google (GOOG), Meta (META), Apple (AAPL), and others that don’t want to be entirely dependent on Taiwan for chips.

Q: A “Where I Would Buy More” list would be helpful on some of the names given the pullbacks. Also, typically when building a new position as in Adobe (ADBE) or Crowdstike (CRWD), what if any practical applications do you put into purchasing tranches?

A: Cody published a “Where I’d Buy More” list back in January (link here), and we’ll probably get that updated when he gets back from his trip. In general, when we start a new position, we are putting anywhere from 10-30% of the money to work that we want to end up having in the stock. You need to know roughly how much you want to end up having invested, then go backward from there, giving yourself room to buy more if the stock keeps falling. Trading is more art than science, and we like to stay flexible and be opportunistic.

Q: With the drawback Adobe (ADBE), do guys start considering calls here? Do you guys see the possibility for some earnings surprises/strength?

A: We have not bought any calls on ADBE. Adobe is a great company and it got hit hard after that last earnings print, which is why we bought it. That said, it is not growing terribly fast (about 9% per year), and the stock is still a little expensive if that growth rate doesn’t start to climb. However, ADBE has a unique software offering and a critical mass of users, and it should be able to implement AI into its business to help accelerate growth and increase profitability over the next couple of years. If ADBE were to pull back another 10% or so, we might get more aggressive and pick up some calls.

Q: Your current outlook on Robinhood Markets (HOOD)? Not sure when the monthly metrics number is supposed to be released but is HOOD with all of their promotions going on geared up to blow out May earnings numbers?

A: Robinhood has been adding assets to the platform like crazy and they continue to innovate at a breakneck pace. With all of the Crypto craziness and speculation in the stock market, I wouldn’t be surprised if HOOD delivers a surprise to the upside in Q2. That said, the stock is up a bunch this year and so some of that is probably priced in. Trying to game the quarter-by-quarter action in HOOD is tough but in the long run, we think HOOD is going to continue to disrupt the multi-trillion asset management/credit card/and banking industries and “steal” assets from those mega institutions that do nothing but nickel-and-dime their customers, unlike Robinhood.

Q: Redwire’s (RDW) stock price is slightly above Rocket Lab’s (RKLB). Is Redwire’s TAM anywhere near that of RKLB?

A: Good question. But to be clear, comparing the stock prices of the two companies doesn’t really tell us much. Redwire has a market cap of $250 million and Rocket Lab’s market cap is $1.8 billion. Redwire is a manufacturer of satellites and components, and that’s about it. Rocket Lab, on the other hand, is a vertically integrated space company that does everything from satellite manufacturing to launch to software. I’d say that Rocket Lab has a much bigger total addressable market (TAM) than say Redwire, and the market looks to be pricing that in as well, given the respective valuations of the two companies.

Q: Do you think investing in Destiny Tech100 (DXYZ) is a good way to get exposure to SpaceX?

A: Short answer, no. For those that are not familiar, DXYZ is a closed-end fund that started trading in the last week or so. About a third of the fund is invested in SpaceX stock, and it also owns other unicorn/private companies like OpenAI, Discord, etc. The problem is that DXYZ got hyped up and now it is trading at a MASSIVE premium to its net asset value (NAV). The value of the fund’s holdings was about $5/share as of the end of last year, and now the stock is trading $52, down from its recent high of $105. A closed-end fund should never be trading at 10x or 20x its NAV, and this just goes to show how inefficient the market is right now. There is so much greed that people are completely ignoring valuations, and that’s a problem. That said, if DXYZ were to get down below $10, it might be interesting again.

Q: Does anyone know if the Solaredge (SEDG) sell was just in the hedge fund or both personal and hedge fund?

A. We sold all of the SEDG out of the hedge fund, and I’m not sure about Cody’s PA

Q: I’d like to know what you think about MP Materials (MP) presently?

A. We used to own MP and sold it last year for a small gain after trimming most of it much higher. MP is the only US-based miner of rare earth elements (REE), which are used in EVs, wind turbines, laser-guided missiles, and other high-tech devices. The problem is that many of those former growth markets are in a slump, and most importantly, Tesla stated that its next-generation vehicles (aka the “Model 2/Robotaxi/Redwire”), will not use motors with rare earth magnets. Moreover, there is a lot of competition for REEs from China, and even with all of the government help, MP may never fully realize its vision of becoming an American alternative provider of REEs. At the end of the day, it’s a commodity business competing with state-subsidized Chinese low-cost producers.

Q: If I’m remembering correctly, some years ago Cody discussed/focused on/perhaps recommended MercadoLibre (MELI) as a strong play on the growth of e-commerce in Latin America. From what I’ve read, it seems to be gaining momentum again. Not quite “revolutionary,” but have you guys given this any new consideration recently? Or can you?

A: I don’t think MELI is a bad stock, but it’s based in Uruguay and it is rare for us to invest in non-US companies. There is just too much of a chance for fraud, scams, nationalization, etc. when you leave the old US ofA (and that’s not to say we don’t have our own problems! There is plenty of fraud in the Crypto world right now for instance). Also, MELI looks a little expensive to me, especially for a foreign company. The stock is trading at 44x 2024 earnings estimates with the topline growing 22% per year. Again, not a bad company or investment, but it’s not for us.

Q: What do you guys usually do for lunch? Do you brown bag it or are there some decent eats in small-town New Mexico?

A: Las Cruces, NM is where I live and we have the best Mexican food in the world! My office is downtown and there are plenty of good places within walking distance. In Cody’s town, there are not as many options, but the gas station restaurant makes an awesome green chili cheeseburger!

That’s it for now. I’ll leave you with a picture of a Cybertruck with a black wrap that I saw charging here in Las Cruces at one of Tesla’s Superchargers. The owner was from California and he was heading to Austin to watch the eclipse with his kids/grandkids.