When a Plan Comes Together
A new No. 1 in our Stansberry Research Hall of Fame... All about Dave Lashmet's Nvidia pick... What we love in a business... The risks are now too high... When a plan comes together... The link between graphics cards and cryptos... Insight on the Terra 'implosion'...
Our Stansberry Research Hall of Fame has a new top dog...
Detail-oriented and eagle-eyed Digest readers likely noticed a change at the bottom of our daily e-mails earlier this week...
Congratulations are in order for our colleague Dave Lashmet – and his Stansberry Venture Technology subscribers as well. In short, on May 10, Dave closed out a partial position in computer-graphics maker Nvidia (NVDA) for a 1,466% gain.
Dave first recommended buying Nvidia nearly six years ago, when it was much less known than it is today...
But as he detailed in the May 2016 issue of Venture Technology, at the time, Nvidia was already the leader in designing and making graphics cards for video games. The company was valued at around $24 billion.
Dave noted that savvy tech investors likely knew about the company. But as he saw it, Nvidia had a much longer and wider runway for growth than Mr. Market believed. As Dave wrote...
Gaming might seem like kid stuff. But conservatively it's a more than $100 billion hardware and software business every year...
This is a massive market – far bigger than just one company. And yet, one company makes the lion's share of profits in graphics cards: Nvidia.
Dave detailed the ins and outs of Nvidia's graphics-card business – likening it to a mature tech company like Alphabet (GOOGL), which uses the money made from its search business to invest in side projects with big upside.
For Nvidia, the side interests at the time were things like "machine learning" and "supercomputers." And Dave explained that the company was well-positioned for market share because it was doubling the speed of its cards' graphics capabilities nearly every year – faster than Moore's law.
That created huge demand for Nvidia's products as computers and TV screens became optimized for higher-resolution images. In a phrase, Nvidia makes "better graphics."
It's the type of thing we love to see in a business...
All in all, Dave said owning shares was a "low-risk, high-growth" opportunity in a company with expanding margins and the type of measures our team has long looked for in high-quality businesses. As he wrote in that Venture Technology issue...
These are the kind of numbers we want to see in growth companies – not just growing sales... but growing margins. Take a look at the following chart, showing the company is improving both sales and margins...
And its growing sales filter down to free cash flow ("FCF"). This is the number we love most. It's what's left after the company pays all operating expenses and capital outlays. Last year the company generated more than $1 billion in FCF off $5 billion in sales – roughly 25%. Those are outstanding returns.
The company just kept growing from there...
In the fourth quarter of 2021 alone (the most recent data available, as the company reports earnings next week), Nvidia made more than $7 billion in revenue. And it reported roughly $27 billion in revenue over the previous 12 months.
Of course, Dave's subscribers profited along the way. Dave recommended selling half the original position in November 2016 for more than 100% when shares of Nvidia initially doubled. Then, in July 2020, he said to sell half of the remaining stake for a 777% gain.
Finally, on May 10, Dave sent out another sell alert... He said to close the rest of the position for a gain of more than 1,400%. And he noted that the combined total gain in the position would be roughly 600%.
Now, you might be thinking, "Why sell now?"
Nvidia is staring at a few big risks...
We'll cover them briefly here, but if you're a Venture Technology subscriber, please read Dave's sell alert if you haven't already. It includes all the details, starting with No. 1 – falling cryptocurrency prices...
Perhaps you're wondering what cryptos have to do with a graphics-card maker...
Well, it turns out a side interest for Nvidia became cryptos – or more accurately, the crypto world became interested in Nvidia over the past several years because of the value of its graphics cards.
In the simplest explanation possible, the same powerful graphics-card technology from Nvidia that makes video-game characters look like they're real people has also been widely used in recent years by cryptocurrency "miners."
In fact, Nvidia's cards have been used for crypto mining more widely than the company let on, according to the U.S. Securities and Exchange Commission ("SEC"). Earlier this month, the SEC fined Nvidia $5.5 million for failing to disclose its sales to crypto miners back in 2018.
For Dave, this development tied into a trend he had been tracking anyway...
In the short term, Nvidia shares have become linked to Ethereum...
Ethereum is the world's second-largest cryptocurrency by market cap. And as regular readers know, it's tied to many of the burgeoning parts of the digital world – like non-fungible tokens or decentralized-finance platforms.
We're talking about Ethereum and not bitcoin. That's because of an interesting distinction between how the two cryptos are "mined." You see, you can use an off-the-shelf graphics card – like the kind Nvidia sells – to create Ethereum, but you can't do that with bitcoin.
Baked into bitcoin's code is a requirement for miners to use a specific type of chip.
You can dive deeper into the details in Dave's update. But in general, with Ethereum – and other cryptos – selling off over the past several months, so have the "spot" market prices for the Nvidia graphics cards that miners use in their "rigs." As Dave wrote...
Spot prices for graphics cards have lost most of their premium. Current prices are only 7% higher than the manufacturer's suggested retail price. This is also likely tied to falling cryptocurrency prices.
If you can't use these cards to "print money," they become like any consumer electronic device: subject to the normal trends in tech.
Dave noted that Nvidia makes its "variable revenue" based on the prices of cards sold individually... And with less incentive for crypto miners to mint coins at lower prices, there's less demand for new Nvidia cards to power mining operations.
The company has other customers, of course – like cloud providers Alphabet, Amazon (AMZN), and Apple (AAPL)... But revenue streams from those lines are more fixed.
And there's no denying the relationship between Nvidia and the price of Ethereum. As Dave showed...
As you can see in the chart below, the average price for Ethereum two quarters ago was $3,850 per coin. Last quarter, Ethereum was only $2,950 per coin. And the price is still falling...
Nvidia is scheduled to report its first-quarter results next Wednesday (May 25). And based on falling crypto prices, Dave believes the company will likely report lower sales numbers.
Over the past few weeks, Ethereum's price has dropped even further. Today, it traded near $2,000. (More on that – and what has been happening in cryptos in general – is coming below from Crypto Capital editor Eric Wade and his research team.)
Longer-term risks are also clouding Nvidia's future...
Starting next month, Nvidia will only use Taiwan Semiconductor Manufacturing (TSM) to make the chips used in its graphics cards. Previously, it sourced some of them from South Korea as well.
TSM is, of course, based in Taiwan. It's building a new chip factory in Arizona, but construction has been delayed and production won't start there until at least the first quarter of 2024.
As we've written in the Digest before, Taiwan figures to play a central role in some of the geopolitical tensions rocking the world today. Specifically, the Chinese government "wants" full control of Taiwan – the tiny yet influential island republic just off its coast – much like Russia's Vladimir Putin wants Ukraine.
Any conflict will likely disrupt the production of the silicon chips made in Taiwan – which along with those already made in mainland China – account for roughly half of the world's supply. And in short, as Dave put it...
Nvidia relying on Taiwan for 100% of its products is a risk we're not willing to take.
The third and final risk to the company is growing competition from Intel (INTC), which is working on a rival graphics card that should hit the market by September.
Add it all together and Dave says that when Nvidia reports its first-quarter financials next week, it's not likely to go very well.
So he told subscribers it was time to sell the last third of their position. And with that, it took the top spot in our Hall of Fame.
Kudos again to Dave for this big winner – and congratulations to subscribers who followed his advice over the past several years.
Don't you love it when a plan comes together?
But speaking of cryptos...
Last week marked one of the more volatile and panicky periods for cryptocurrencies in quite a while...
The implosion of the TerraUSD (UST) "stablecoin" – which was designed to be pegged one-to-one to the U.S. dollar – and the Terra (LUNA) blockchain hit the mainstream headlines.
Most notably, UST lost 98% of its value pretty much overnight (and left many people wondering what, if anything, backed the coin to begin with).
Sure, folks will make low-hanging-fruit or bad (and not entirely accurate) "so much for stablecoin" jokes.
I say "not entirely accurate" because not all stablecoins are like Terra's. There are many others – such as USD Coin (USDC), whose dollar-denominated reserves are attested each month by major accounting firm Grant Thornton.
In any case, Eric Wade covered the wild week in a video update last Friday, as well as the latest issue of Crypto Capital, sent to subscribers on Tuesday. As Eric explained...
While UST was designed to be pegged to the dollar, it's not backed by actual dollars. Recently, Terra formed the Luna Foundation Guard ("LFG") to accumulate assets to back the value of UST and help maintain its peg.
When UST broke below its peg on May 9, LFG liquidated assets to protect the peg, including bitcoin and possibly other cryptocurrencies. But this selling wasn't able to prop up UST... and it pushed down other crypto prices.
In the video update, analysts Andrew McGuirk and Stephen Wooldridge II joined Eric to talk about the implosion of the Terra "ecosystem" and what it might mean for the crypto space.
I urge existing Crypto Capital subscribers to check it out if they haven't already... It's a must-watch conversation for any serious crypto investor.
Dissecting the fallout of an 'implosion'...
Among other things, Eric, Andrew, and Stephen discussed the potential for more U.S. government regulation of stablecoins, which function as a kind of onramp from the "traditional" financial system into cryptocurrencies.
They also talked about what reminders this story brings to mind – like knowing what you own... and doing your due diligence, as always. To that point, Eric has kept subscribers updated on a pair of recommended positions with exposure to the Terra system.
As Eric explained in the latest issue of Crypto Capital on Tuesday...
We've spoken to both projects, and they want to move forward, but that may require moving to a different blockchain.
Eric, Andrew, and Stephen also talked about Coinbase's (COIN) public admission that the platform could take customers' funds in the event of a corporate bankruptcy. And they shared why you should take as much control of your crypto holdings as possible, as well as a few ways to do that.
Finally, they offered some interesting insights on the relationship between the U.S. dollar and bitcoin's recent price action. Again, existing Crypto Capital subscribers and Stansberry Alliance members can check out the video update right here.
Garrett Goggin: The Fed Will Change Its Tune
"The Fed is going to keep raising rates until the economy falls apart," Garrett Goggin, editor of Silver Stock Analyst, tells our editor-at-large Daniela Cambone. Plus, he detailed why it could happen in the second half of this year...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 5/18/22): None.
A rare quiet mailbag today. What's on your mind? As always, send your notes to feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
May 19, 2022