Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
7investing CEO Simon Erickson chats with Chip Stock Investor founder Nick Rossolillo about his favorite picks in the semiconductor industry.
October 13, 2022 – By Simon Erickson
The semiconductor industry has been abuzz this past year. We’ve seen the market get pumped up about how custom chips will be needed to power AI, and that boosted chip stock valuations during early 2021. Yet we’ve also seen that optimism fade in recent months, as many chipmakers are cutting their forecasts and reporting weaker customer demand.
We already know the semiconductor industry is cyclical, but it’s also a $600 billion global market. Is the recent selloff providing opportunities that long-term investors should capitalize on?
To answer that question, 7investing CEO Simon Erickson recently interviewed Chip Stock Investor founder and host Nick Rossolillo about three of his favorite companies in the semiconductor space. The two discuss why Qualcomm (Nasdaq: QCOM) could be an overlooked and undervalued opportunity, why NVIDIA (Nasdaq: NVDA) has plenty of future growth opportunities, and why ARM Holding’s upcoming IPO could be worthy of your investing attention.
Publicly-traded companies mentioned in this podcast include Qualcomm, NVIDIA, AMD, and Taiwan Semiconductor. 7investing’s advisors and/or its guests may have positions in the companies that are mentioned.
Have you seen our announcement about our 7investing Strong Buy Portfolio? We’ve recently identified our 20 highest-conviction ideas and have compiled them into a single portfolio. To see 3 of our actual stock positions, please click here to join our free 7investing email list!
Edited transcript coming soon!
Simon Erickson 00:02
Hello everyone and welcome to today’s edition of the seven investing podcast where we’re here to empower you to invest in your future. Seven investing founder and CEO Simon Erickson I have been a fan of talking about the semiconductor industry lately. It’s one that’s fascinating on a whole bunch of different levels. And that’s why I’m excited to welcome my guest today. Nick Ross Lillo. Nick is the head and the host of chip stock investor. You can follow him here and subscribe to his channel there on YouTube. He’s also a business analyst that’s covered several different industries over the past decade or so Nick, I know that you’re a fan of the chip industry, though. It’s really a nice pleasure to have you on the seventh investing podcast today.
Nick Rossolillo 00:39
It’s nice to be here. Thanks, Simon. Thanks for the invite.
Simon Erickson 00:44
Nick, before we get started, I could not help but notice it looks like you are in an airport right now doing some exciting global travel. What’s the story? What’s going on out there?
Nick Rossolillo 00:54
Yeah, Pardon? Pardon the noise any background noise that’s coming through. But yes, at the airport at Athens International, have been in Greece for a couple of weeks, headed to Tirana, Albania to check that out. We’ll see. We’ll see where it takes us. But that’s, that’s where I’m at.
Simon Erickson 01:11
Global travel, I love it. And kind of the perfect segue to another global industry, which is sort of amorphous, right? We talked about this a lot. The world is dependent on chips. And there’s more and more of a focus of this kind of going regionally, as opposed to everything being produced in a certain area. We’ll talk about that a little bit. But kind of what’s your take at the 10,000 foot level? I know that you followed the semiconductor industry for several years, what what should we at the broadest sense be paying attention to as investors?
Nick Rossolillo 01:36
Right, yeah, it’s something that I pay a lot of attention to. That’s the name, Chip stock investor. I think the thing that really we need to pay attention to is, you know, chips are like the building blocks of all technology, when you start to boil it down, it doesn’t matter if it’s some trendy new piece of software, or the cloud. Or if we’re talking about electric vehicles, battery technology, it kind of all starts with the chip technology. That’s kind of the driving force here. And I think we’ve entered a decade, where, if you think about the 2010s, one of the key themes was the cloud software, changes in software, I think the next decade, hardware has a lot of catching up to do, there needs to be a lot of capital investment and actual hard assets. And I think semiconductor, that the chip development itself, but but also manufacturing of these chips, has a lot of catching up to do. And if you hear a lot of CEOs in the industry talk about it. They think that we’re going to go from roughly 600 billion and ship sales this year 600 to 650, it kind of we’ll see where that lands, but we’re headed towards 1 trillion per year, globally, just for chips just for the little building blocks of technology. That’s a huge increase. And frankly, we’re not anywhere close to being able to meet that, that that that demand for production. Thus, the chips act and a lot of kind of buzz, buzz worthy news items are going on right now surrounding that. So I think that’s what we need to focus on. When we talk about the semiconductor industry.
Simon Erickson 03:19
Yeah, that’s a great point, you know, that you brought up the cloud industry, you know, which I think that maybe it might be under appreciated by many, just how much computing horsepower is going into that behind the scenes and those cloud data centers. You know, the Amazons and the Googles of the world, they’re really just kind of had to do all the computing for all these workloads that are being done by every business out there right now. Super capital intensive super opportunity for the invidious for the AMD is of the world for all the chip designers to get into that. And and like you say, that’s just kind of one sliver of what could be upcoming to when you’re talking about electric vehicles and Internet of Things, and everything else depends on chips out there. So let’s talk about three companies on today’s show. Nick, you know, I know that there’s a couple that you know, we’ve been following kind of a whole bunch of them, but the first one you wanted to talk about was Qualcomm. What is this is this is an established name. This is a large you know, huge company, but what is it that is attractive about Qualcomm if you’re an investor?
Nick Rossolillo 04:18
Yeah, so Qualcomm if you asked me about a couple of years ago, but probably it probably would have been my response is smartphones are tapped out for the most part, you know, everyone on the planet has a smartphone, basically. There’s been this big 5g upgrade cycle the last couple of years. And that’s been huge for Qualcomm as it has been for anyone involved with the smartphone market. Whenever you have a big upgrade cycle, like this, the more advanced the technology, the more content when a company like Qualcomm can get. But I think what’s interesting is management has changed from a couple of years ago, they have a new seat Yo, Christiane Oman, their CFO, I’ve had the pleasure of talking with him a few times now Akash pulka Wallah, he’s actually an engineer that goes way up into the CFO, I think it’s an interesting new management team. That is that is coming at this from a different a different approach than Qualcomm has in the past. They’re trying to take the same technology that worked for them in smartphones, and apply it across the technology ecosystem. So the be that IoT, like you just mentioned, Simon Internet of Things, basically, any device that we might interact with, on the job, or in our homes, getting a network connection in it to autos, the modern vehicle is going to be connected, it’s going to be hooked up to the cloud, it’s going to be taking in massive amounts of data from the road. Qualcomm, Qualcomm I think, is a really good mix of building really, really high end processors based on arm. We’ll talk about them here in a bit. But it’s also energy efficient. And I think that’s something else the world has kind of, kind of come to terms with here, like one of the big users of power is technology. And this isn’t just, you know, talking about, you know, renewables and, and climate change, but just from a user perspective, something that runs out of battery, or is not very energy efficient, like it’s a killer, right? Like you don’t, you don’t want to interact with a device like that. So I think Qualcomm is a good combination of computing power and power efficiency. And I think their chips are going to make a ton of headway in the coming years in these new departments.
Simon Erickson 06:47
Yeah, and I’m glad you mentioned the upgrade cycle, right? I mean, Qualcomm was kind of the enabler of so much of that cellular spectrum, we went from 3g to 4g to 5g will be at 20. 5g At some point in the future. It’s leveraging right the IP, you know, they they kind of built on a lot of the necessary infrastructure for cell phones. But it sounds like from the investing pieces here might be is it’s not just all about the newest Apple iPhone, that’s in our pocket. There are devices that need energy efficiency that still want to connect to that spectrum. There are vehicles I know Qualcomm has been very focused on chips for cars, it sounds like they might be able to leverage that fixed cost infrastructure they put in place and get a bang for their buck out of it elsewhere.
Nick Rossolillo 07:26
Absolutely. I think that’s essentially in a nutshell, that’s the investment thesis in this company, the infrastructure is there already, because of the massive smartphone ecosystem that’s already in existence around the globe? Why not extend it to other industries as well?
Simon Erickson 07:42
Is this a lower risk investment in equity? Consider this a mid or high or low risk investment? It seems like Qualcomm’s established got some opportunities on tape. But what do you put this on the risk continuum?
Nick Rossolillo 07:54
This is something more in the low risk bucket for me personally, I think that’s probably different from investor to investor. But if you look at ISO earnings, like what are they 1011, right now, price to free, cash flow is higher, it’s closer to 20. Those two will kind of converge over time, though. That’s maybe a topic for a different different time why there would be such a big gap between the two, or maybe you’ve already got a podcast, and maybe you’ve talked about it already. But low valuation. I think basically, the market is factoring for a recession. They’re factoring for a really big decline in smartphone sales, perhaps through the first quarter or two of 2023. Without paying attention to the fact that they’re going to continue to get the the tailwind from the upgrade cycle and 5g for their smartphones, plus, IoT and automotive are really, really, really high growth segment for them. So I would put this low risk. From a business standpoint, that’s not to say that the stock won’t be incredibly volatile, but I think the business execution the bar set really low for Qualcomm at this point.
Simon Erickson 09:07
Great point company, like I said, mega cap company you know 10 or 11 times PE for an established business, lots of IP, those are expensive components that are going to be smartphones even you know outside of the the camera I believe that the radios for the 5g connectivity would be one of the most expensive parts of smartphones and you can certainly translate that elsewhere. Right Okay. Qualcomm no lower risk stable company been around for a long time might be worthy of your attention at 10 times earnings right now. Let’s chat about another one. Nick. That’s also quite popular over the past few years, less popular over the past few months. Video right and video has been a market darling for a long time, but volatility here recently. Yeah, I
Nick Rossolillo 09:52
I’ve referred to Nvidia as everyone’s favorite semiconductor stock chart. Up until like you said this year And then everyone hates it because you know who likes 60% declines plus from all time highs. But yeah, in Vidya, the company, in Vidya, I think is building something, it was already a unique business because of the GPU that they helped pioneer. But I think they’re building something truly new that doesn’t exist yet in the semiconductor world. And I think that’s really not being fully appreciated yet, by the market at this point.
Simon Erickson 10:35
Can you elaborate on that, Nick, what are they building that is that is completely unique in the semiconductor world. We know the GPU, we know that they use it in data centers. Seems like they have a lot more ambitions than just what they’ve been in the past, though.
Nick Rossolillo 10:46
Yeah, they’re starting to peel back some of the, you know, the, the veil that they’ve had on the software business that they’re building. So Nvidia has always and really, maybe not just a video, all chip companies. You know, you design the chip, you have it manufactured, and then you package it with firmware. That’s like the basic instructions that the chip uses to operate. You know, the firmware tells the chip how to operate and interact with the rest of the computing system, but invidious taking it one step further. CEO, Jensen long said if they’re GTC event last week, he talked a lot about Nvidia becoming a full stack developer. So they’re not just designing the GPU, they’re not bundling the firmware with it. They’re also now building software applications on top of that now, and some of them, I think they have two or three now you can actually purchase as a software as a service on a Software as a Service license. So they’re also becoming a cloud computing company, a SASS company, if you will, on top of the semiconductor business that doesn’t exist yet.
Simon Erickson 12:00
It’s really neat. You know, when you think about what Jensen built with Nvidia, he really he saw the opportunity to use GPUs outside of just rendering for graphics outside of just video games, which is kind of the initial start for it. But he said, you know, if we develop the software ecosystem, called a CUDA, you know, you could code things for your application, and C and Python, whatever language you wanted to, and then really, really optimize the way that those operations were being computed by his GPUs. And it’s amazing to see how he’s built upon that. I agree with you that he’s building something unique. He’s always thinking, like three steps ahead, it feels like where he wants to go. And he’s certainly been a key part of Nvidia, just having your founder, you know, kind of the leader of this company for so many years.
Nick Rossolillo 12:45
Yeah, and he absolute visionary, it’ll be really intriguing to see where they take the software business, it’s obviously not the only thing they’re betting on, because it’s still a semiconductor business. Engineering, new hardware is always going to be part of the game. But what’s one of the reasons we like software as a business model, it’s like the most scalable business on the planet, right? Like you write the code once. And then your only limit after that is like how many users you can distribute it to. It’s incredibly profitable. So they already have the building blocks in place, because they’re a leading semiconductor engineer. And now to build the software on top of it. I think that’s one of the reasons why people like Beth Kindig, who I think you’ve, if I’m not mistaken, you know, Simon, I’ve had discussions with in the past says things like Nvidia could be much bigger than Apple someday. We’ll see. We’ll see if that if that happens. But you can you can see why such statements aren’t completely far fetched. If a company like Nvidia already has that base, established, and now they’re going to put the most scalable business model on the planet ever invented on top of it. You can see it happening.
Simon Erickson 14:07
The other side of the coin I think we should address to hear Nick because the bears out there are quick to point out that NVIDIA is having some struggles right now. Notably, the sales and its gaming segment are down via Aetherium. That merge requires much less computing for mining of cryptocurrencies like Ethereum out there right now. And then China is kind of pushing back and then kind of making it where they can’t sell some of their highest end chips into neural networks in Chinese data centers, which was a key kind of kind of growth driver for them. Do you? What is your take on the recent developments for Nvidia is it warranted that the stock has sold off so significantly? And do you think that these are short term headwinds? Or are these long term lingering issues?
Nick Rossolillo 14:56
I would say both I would say yes to both of us. Question Simon? Yes, I think it’s warranted that there was a sell off. Like I said earlier, I think video was everyone’s favorite semiconductor stock chart in 2020 and 2021, without knowing anything about the business, and deserve to skyrocket, yes, absolutely deserve to go up, you know, several 100% in a very short period of time, the optimism was probably a little bit misplaced. So some of that optimism is coming back in line with what present reality is right now. But as far as the the bear case right now, some of these issues are short term, and I think they’re going to work themselves out because there are a ton of parallels with what happened in 2018 2017 and 2018. During the last semiconductor, cyclical downturn, sales restrictions to China. Yep, that’s when the US China trade war happened in 2018. This is not new territory. We had a crypto winter in 2018. So the theory emerge hadn’t happened. Obviously, mining made a huge comeback. When the pandemic started, that’s not going to happen again, at least for Aetherium. Which is significant. But Aetherium is not the only company or the only crypto excuse me the only cryptocurrency that uses that uses GPUs for mining. We’ll see how that pans out. So I think there’s parallels to the previous bear market for Nvidia, it got clobbered in 2018. And through the first half of 2019, as well, it was also down 60%. So this is not uncharted territory. I think many of these issues will resolve themselves. I think if Jensen and the rest of the company were really worried about just their demand, completely evaporating, I don’t think they’d be Holding, holding some of the big developer events that like they just did a couple of weeks ago, I think they have massive potential ahead of them, and they know it, they just need to get the word out there to the developer community.
Simon Erickson 17:17
That’s a good point to company, like in videos is pretty asset life, right? They are doing the designing of chips that are manufactured in house elsewhere, they’re not fabricating themselves, they aren’t doing the manufacturing. So when you have kind of cyclical downturns like this, even as invidious stock prices selling off, it doesn’t leave them in as perhaps awkward of a situation as a company like Intel is right now, who’s trying to play both sides of the design side and the manufacturing side, even during a downturn like this. And I think that that plays to invidious advantage. Another one of the designers I’ve followed Nick has been AMD, who is continuing to redesign the architecture for the chips that they’re selling into the datacenter but for CPUs, but I don’t think that those are really as competitive with invidious GPUs. I think that that’s more of the expensive of Intel than Nvidia, like that asset light model allows you to pivot in times of downturns like these seems to be like the the long term thesis for Nvidia would still be attacked. Yeah, I agree. I agree. Let’s take a really quick break here. And we’re going to talk about our third company which is arm which is going to be very interesting because they are preparing perhaps for an IPO here in the next few months. But a very, very quick word from our sponsor. Our sponsor for today’s episode is Zacks investment research. Let’s take a moment to consider the times that we’re in right now. The current economic climate has people wondering will this ever end? We’re at record high gas prices. There’s volatility in the market, there’s inflation and there’s ongoing disruptions in the supply chain. Fortunately, investors like you have Zacks investment research which provides in depth financial data and expert analysis to help you make more strategic investment decisions. The Fed is doing all that it can to cool down inflation and stocks have already started to respond. And when the market is gripped in pessimism. Zacks provides the invaluable resources, investors need to capitalize on volatility volatility and buy stocks when they’re low. They’ll also help you spot losers so you know which stocks to avoid or eliminate from your portfolio. experts know market volatility is the time to unearth great opportunities and current conditions have done just that. So to provide value to our listeners, Zach is providing the opportunity to download their reports five stocks set to double for absolutely free zero cost and with no obligation. Their experts are revealing the top five stocks with the best chance of giving 100% or more in the next 12 months I have looked at the list personally, I’m a fan of several of these companies so I can attest that I really enjoy the list they put together here. Imagine how that could affect your portfolio your retirement savings, fight inflation and down Load your free report at zacks.com/seven Investing podcast that’s www.zacks.com/seven the number seven investing podcast. Nick, let’s bring it back to chips. Let’s talk semiconductors once more and round this out with our third company. This is a company that NVIDIA tried to get its hands on. Recently it was unsuccessful, but might now actually be spun off for an initial public offering. And that’s ARM Holdings. Working tell us about arm this is one it’s been around for a long time the chip industry as well. It has
Nick Rossolillo 20:38
been decades. And very few know anything about this company. But it’s a big deal. So we already talked about Qualcomm, I think, correct me if you know I’m wrong. But I think Qualcomm might be like the biggest developer utilizing arm arms architecture, it’s a completely different business model than say, Intel or AMD, like you mentioned, Simon, you buy a new computer or a new device and you have a sticker on it that’s like Intel or AMD is inside the computer or even Nvidia for that matter. There’s a sticker that says, hey, this is the chip inside your device. arm doesn’t operate like that. It’s it’s what’s known as a system on a chip. So rather than, you know, a device manufacturer getting a license for the chip, and then building the computer around that arm basically licenses the architecture and then a company like Apple arm is the company that powers Apple’s new M one and m two chips for for their their MacBooks and whatnot, you’re not gonna see aren’t an arm sticker anywhere because Apple bought the license, they integrated deeply into their system. And then Apple gets to say something really snazzy like Apple silicone. Or when really it’s like, you know, it’s arms technology that made it really possible in the first place. But you know, that’s the beauty of a company like arm, you’re never gonna see it. But it’s huge. It’s everywhere. We’re benefiting from arm right now, at this moment, Simon, company is a big deal, there’s a there’s a good reason why Nvidia wanted their hands on it.
Simon Erickson 22:24
We think about it as the building blocks, you know, if you want to design your chip, and you don’t want to just start completely from scratch, you can work with arm license, it’s architectures for the designs of the chip, right? If you want to build a house, you don’t need to make the bricks out of out of mud, you know, in Adobe yourself, you don’t need to make all of the you know, the foundation of the house or the walls, you know, out of scratch. You can build pre pre made materials, prefabricated materials, same idea with designing a chip, leverage what’s already out there and kind of start from Step Five rather than step zero. Arm enables that certainly has been useful for all of these tech companies that make it seems like like you mentioned Apple, not just apple, but Tesla Mehta platforms. You know, there’s a zillion tech, Amazon has all been wanting to make their own custom chips lately, because they have applications that are large enough to support the cost to do that kind of feels like arm is in the perfect position to capitalize and
Nick Rossolillo 23:20
I think so. And so I think your question basically boils down to, you know, should we be interested in the RMI IPO? I think the answer is absolutely yes. What, see if it happens, Softbank is, who knows what they’re doing. But supposedly they’re planning this, this, this IPO, but I think we definitely want to be interested. And I think oftentimes, you know, a company like Apple that wants to design its own chips, it might be easy for us to say, well, Apple just wants to save money and design it in house. But I think there’s actually a much more important reason why there’s this big shift to ARM based devices. And it’s because x86 That’s the architecture that Intel developed all the way back in the 70s. That’s still the architecture that Intel and AMD are using for things like laptops and PCs, if you’re using, you know, an actual, you know, tower based computer at home or at the office. It’s not energy efficient. And part of it is the architecture itself. The instructions that are used to run software on x86, it’s not efficient. There’s a lot of redundant processes. It was not at all designed with today’s mobility and app based, mobile based application in mind because it was the 70s and the 80s. It’s kind of outdated. It’s on its way out. Even AMD made an acquisition of a an ARM based developer called pensando. Earlier this year for a couple billion dollars pretty significant because they Want to they want to develop ARM based processors for the cloud instead of the old x86 type. So even companies like AMD, I think are recognizing that, you know, there’s this is a significant shift. It’s not just mobile devices, but arm is also going to get applied to things like the cloud, internet infrastructure. Obviously, it’s it’s used in practically every smartphone and tablet in existence today. So why not use his arm for things like autos, automobiles, virtual reality headsets, augmented reality headsets, like Qualcomm and started making? Nvidia wanted to acquire it, we’ll probably never know what exactly they have planned for that, but it’s very significant. I think we’re witnessing behind the scenes quietly, a very massive tidal wave sized shift from what Intel helped develop over the last three or four decades to this arm based ecosystem. And a significant it’s going to help continue to advance computing power, but in an inflationary period, where if you’re a company worried about inflation and energy prices, absolutely what’s what’s good are tech ecosystem, utilizing things that are more energy efficient to help keep costs down, arm can help do that, for these businesses. So it’s, it’s very significant.
Simon Erickson 26:26
It’s something where I think that Intel Miss missed the train on this one, right? Mobile, they totally missed it, you know, their chips were too bulky to, to to power consumptive, you know, and this was kind of the opportunity for Armand, for everybody else to custom design chips, like you just said, energy efficient chips that had the perfect fit for the use case of a smartphone. I certainly think that energy efficiency is going to be remaining one of the most demanded things for customers, especially as we start talking about the Internet of Things. And I think that arm, as you correctly mentioned, is that it is a good spot to capitalize on it. So what do we think, Nick? Are we’re gonna see an IPO for arm this year, you know, what is the Masayoshi Son? Thinking at a soft bank? Is this something that investors really need to be keeping an eye on and buy as soon as it goes public? I know it’s a tough call, right?
Nick Rossolillo 27:17
I think the IPO will happen. But, you know, Softbank is probably looking at the market right now and thinking, wow, we should have done this IPO last year. But you know, they thought they were selling to Nvidia at an attractive price. So you know, that’s, that’s the brakes. I think it will IPO next year. Personally, my my philosophy is to wait. I like to see at least a quarter or two financial performance before I buy a fresh IPO stock. I will say this, you may not necessarily have to go out and buy an arm stock after IPO to get exposure to it because some companies like Qualcomm, for example, have said that they are very interested in participating in the IPO. In the actual IPO, they would be buying at the actual IPO price before the stock hits the public market. So I think if you want like kind of a safe way to get in on ARM early, you can buy a stock like Qualcomm, if Cristiano Amman is serious. Qualcomm might make a sizable investment in ARM whenever that IPO does happen.
Simon Erickson 28:29
Well, I think that the running theme through all of the companies we described is that there is a great need for computing horsepower for all of the creativity that software is unlocking right now. And the design freedom of companies like Qualcomm of Nvidia that is enabled by a company like arm is certainly a trend that’s just going to go continue to continue to go up in the future here. Nick, really appreciate your insights. Any final thoughts on what investors should be watching in the semiconductor industry right now?
Nick Rossolillo 28:57
Yeah, it’s, it’s gonna be rough. I think for the next six months or so. It looks like we’re headed into a broader based cyclical downturn for chips, especially on the consumer electronics side. That being said, it’s possible the market has already discounted that event, and a lot of the stock prices have already been clobbered. Maybe this is the bottom or close to the bottom. I don’t know. But it should be a bumpy six months, though, while the market kind of figures that out. So I think that’s the most important thing to watch right now at this moment with chip stocks.
Simon Erickson 29:32
Absolutely. Safe travels. Thanks again for having me. Thanks for being a part of today’s seven investing podcast.
Nick Rossolillo 29:39
Simon Erickson 29:41
And thanks, everybody for tuning in. Again, Nick Rossolillo is the host of chip stock investor. You can check out his new channel on YouTube. He’s got some great insights. I’m a big fan of the work that he’s doing for semiconductors. That’s a wrap for today’s edition of the seven investing podcast. We are here to empower you to invest in your future. We are seven investing
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