Trade Alert on QCOM, Plus Inflation/Retail Pain, INTC’s “Good” Test Results, And Much More

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Secondly, we are selling the rest of our QCOM as the stock has rallied strong after crashing following disappointing quarterly results. QCOM has been a big winner for after we started buying it in the $50s. The company makes a great product but there isn’t much secular growth left in this stock and there are better, more revolutionary names in the portfolio that we want to invest in right now. We would probably buy back in if the stock gets crushed significantly from these levels.

On to the markets, which are up today after a fairly sizeable pullback in semis and a lot of other stocks yesterday. But even after yesterday’s action, we are still largely cautious into this market.  Underneath the surface, there are a lot of signs that the economy is starting to weaken. Most consumer-facing companies, including retailers and consumer brands, have noted that inflation is persistent and consumers are much more cost-conscious in their purchasing. The S&P Retail ETF put in fresh lows yesterday:

One important anecdote we noticed was in the Walmart earnings call, its executives explained that inflation in food has slowed down but in the “dry grocery and consumables categories like paper goods, [Walmart] continue[s] to see high single-digit to low double-digit cost inflation.” The fact that consumers are shifting towards staples and away from discretionaries is effecting other retail stocks, like Victoria’s Secret which reported dismal results yesterday and the stock put in a new all-time low:

And those aren’t the only struggling retailers. Check out Macy’s:

Even discount stores like Dollar General (DG), which is down almost 20% today:

With retail sales starting to slip and a more cost-conscious consumer, we want to remain cautious as the markets and many stocks are still up big off their lows last year. There is still not much fear amongst the bulls, especially those in tech and AI. Speaking of which, C3.ai reported yesterday and actually lowered their full-year guidance and the stock is getting demolished this morning. Point is that while generative AI, large language models (LLMs), and neural networks are revolutionary and are already changing the world in some ways, that doesn’t mean every company that is now an “AI Company” will be successful or is actually creating any value from AI. The AI hype is way ahead of the AI fundamentals.

With that out of the way, let’s jump into some analysis of a few of our longs:

Intel (INTC): For those that missed it, Intel popped yesterday after NVDA CEO Jensen Huang said that the test results from INTL’s fab were “good.” Additionally, INTC’s CFO indicated that this quarter’s revenue would likely reach $12 billion to $12.5 billion, at the high-end of the previous guidance of $11.5 billion to $12.5 billion. In our minds, the NVDA comment is clearly the more important news. Our bull case for INTC has long been that INTC will gain share and potentially take over as the leading contract manufacturer of semiconductors, thereby replacing the current behemoth that is TSMC. Right now, all of NVDA’s most-advanced GPUs are manufactured by TSMC at its facilities in Taiwan. Because of the ever-present China risk to Taiwan, it makes sense that most chip designers, and even TSMC itself, would want to diversify their manufacturing base away from the country. After the WSJ reported that TSLA and QCOM had passed on using INTC to fabricate their chips because of quality issues, receiving the NVDA stamp of virtual approval is huge for the success of the fab business. We expect INTC to continue to gain traction as new customers sign up for the fab business and that would be massively accelerated if the almighty NVDA is one of the first customers to sign up. Throw in the possibility that INTC’s own chips start to retake market share and the possibility that the demand for INTC’s CPUs benefit from the demand for AI inference capabilities and the stock probably has room to run.

Rocket Lab (RKLB): It seems like demand for RKLB launches is starting to really pick up in response to the increasing need for responsive launch capabilities. Specifically, just this month RKLB conducted two separate launches for NASA as part of the TROPICS mission which put four cubesats into space to watch the weather in anticipation of hurricane season. The reason RKLB was awarded the TROPICS contract was because Astra’s rocket blew-up when they were supposed launch the mission originally. Additionally, while the launches were originally supposed to take place at the new Virginia facility, because of poor weather RKLB pivoted (with NASA’s blessing) and launched both rockets from the New Zealand site. All of this just goes to show that RKLB truly has the capability to rapidly place satellites in space. Unlike even SpaceX (who’s launches are booked up for ~2 years), RKLB is uniquely positioned to provide rapid response launches for the U.S. Government and others that need to place small satellites in space immediately. Because all of the other small-launch companies (VRBO, Astra, etc.) are either out of business or unable to launch, RKLB is virtually the only option for governments, companies, and other organizations that need to place satellites in space on short notice. The fact that RKLB is so well positioned to capture this market and that management continues to execute on their strategy makes us bullish. We bought more below $4 and are sitting tight for now.

MP Materials (MP): MP has been nothing but painful this year as the price for its main product, Neodymium-Praseodymium (NdPr) concentrate, has continued its path lower. That said, MP’s last quarter came in surprisingly well as the company actually slightly beat expectations despite a roughly 36% decline in the price of NdPr year to date. MP’s management has thus far executed really well in terms of production from the Mountain Pass mine and is moving rapidly toward producing NdPr Oxide which it can then sell directly to magnet producers. Additionally, the company is working on its magnet factory in Fort Worth where it will produce permanent magnets for GM. Until MP gets its Stage II and Stage III businesses up and running, the stock is likely going to be highly correlated to the price of the underlying commodity, like many other mining stocks. But this is a long-term play for us in the only domestic company positioned to capture the continued growth and development of EVs, renewables, chips, smartphones, etc. that use rare earth minerals. We are buyers below $20.

Wolfspeed (WOLF): Wolfspeed got smacked after the company announced that it won’t be able to ramp its Mohawk Valley fab until 2024, after promising that the ramp would occur this year. Frankly, we were disappointed in the management’s failure to get this new fab up and running this year as the production ramp has been delayed twice before. That said, WOLF is the only pure-play on the development of Silicon Carbide (SiC) semiconductors which are without revolutionary as they are far more efficient and powerful than traditional silicon-based semiconductors. We are holding WOLF for now and would potentially buy more below $40.

Upwork (UPWK): We bought UPWK after both it and its competitor FVRR had been beaten up because the market thought AI would ultimately replace the need for most freelancers (writers, content creators, programmers, etc.). But the more we play with ChatGPT and Bard, the more frustrated we have gotten. It has thus far been unable to successfully write code for the programs we want, so we have UPWK to hire freelancers to help us with AI programming. We should also mention that both ChatGPT and Bard have repeatedly given us straight-up false information and made-up facts. With that in mind, we think ChatGPT and Bard may actually increase the demand for freelance programmers and the like to help people like us actually utilize AI in our business. We like UPWK because it has reached critical mass of both clients and freelancers, and has a fairly attractive valuation. We were buyers below $8 and are holding tight for now.

NuScale Energy (SMR): We have been nibbling on SMR around $7 as we continue to build up a full-sized position in this small cap. Interest in NuScale’s small modular reactors is on the rise and the company announced a major new deal with Romania last week. The Biden Administration is committing $275 million to the project and the U.S Export-Import Bank (EXIM) and the U.S. International Development Finance Corporation (DFC) issued Letters of Interest for potential support of up to $3 billion and $1 billion, respectively, for project deployment. As you all know, it will still be several years before NuScale’s plants are operational but the company will start generating meaningful revenue from these projects even this year as part of the engineering, design, and approval of the plants. We think the Romania deal is a good sign of things to come as other countries in Europe and around the world that don’t have access to natural resources will likely build nuclear into their overall energy portfolios. Additionally, NuScale’s SMRs have huge industrial applications and will likely power data centers, reverse osmosis plants, steel mills, helium plants, etc. once the modules are actually in production.

Lastly, here is a link to a fascinating article from Wolfram discussing how ChatGPT actually works that I would encourage you all to read as we look for better ways to invest in the AI Revolution.

Be sure to join us for this week’s chat today at 3:00 EDT in the TWC Chat Room or just email us your question to support@tradingwithcody.com.