First of all, Happy Diwali - Festival of Lights to all my readers. Its' climax of series of Indian Festivals which start at end of summer and is considered biggest Indian festival. It's 5 day festival which also marks start of new Hindu calendar year! On eve of such festival which celebrates Lakshmi (Goddess of Wealth), S&P is within inches of reaching all time high. I am sure it will reach new highs next week on its way to 3100 as seasonal Santa Rally gets underway.
So what changed in supposed scary October month? As in Halloween, markets have been playing "tricks" on investors with scare of upcoming recession but at same time "treating" patient investors for just staying invested. 2019 is turning out to be one of best year of returns with S&P returning over 20%. It does not feel that way due to recent drubbing software/cloud stocks took. That brings me to today's topic of Chips & Clouds!
Chips:
You can read this blog eating Chips and Salsa but you know what I really mean by chips. Semiconductors are generally referred as "chips". In product development we also use term called "Chip to Ship" means how long it takes when we get key "chip (ASIC)" to when we can "ship" final product. The semi stocks took drubbing in early year with MU, NVDA, TXN, QCOM and even Intel falling off 20-50% on fears of inventory overhang, slowing cloud spending, delays in 5G/IOT/AR/VR and generally no major game changing device/application on horizon. While all of these played out as predicted during the year, semiconductor companies have been adjusting their capital spending and investments to address these (in past these companies used to go thru boom and bust cycles every few years). They were able to burn down the inventory, introduce incrementally improved offerings. At same time, cloud spending is slowly ramping up and iPhone11 seems to be doing well (no wonder Apple stock has gained 50% in 2019). As phones are becoming cameras (and very good ones), they would need faster CPU, more memory, more storage and better image processors. All of these are provided by "chip" companies. Semiconductor ETF SMH is all time high and will continue to do well in 2020! My favorites in this sector are MU, AMD, INTC, AMAT and beaten down NVDA. But I would recommend to just go with SMH.
Clouds:
Cloud companies span from cloud providers like Amazon, Microsoft to cloud software providers (SAAS) like Salesforce, Splunk, MongoDB, Zscaler or recent IPOs like MDLA, Pagerduty, HCAT and so on. There must be over 100 companies one can choose from. The line between enterprise software, cloud/SAAS providers or even security providers is vanishing since almost all software players are moving to delivering their software over Cloud. Salesforce pioneered this and Adobe showed the path of how traditional software players can transition to this model. Microsoft did same with Office365. In last 8-12 weeks, stocks of many of these companies took hit bringing their valuations down by 20-50% - almost exactly what happened to Chip companies in Spring. So is it time to consider investing in this sector? Let's look at secular trend. This week one most important news came out was "Pentagon awarding $10 Billion cloud deal to Microsoft". While Microsoft is direct winner of this, IMO all cloud companies (even Amazon who supposedly lost Pentagon deal) are winners. If one of the most secretive organization in world can trust cloud for its IT operations, why not banks, retailers and other government agencies? The trend is almost as powerful as Internet trend in late 90's. That means double digit growth of cloud companies would continue in next decade (at expense of traditional IT players). And it's still relatively early to jump on this trend and reach the state of Cloud9! My personal favorites in this sector are NTNX, MDLA, HCAT, SPLK, NOW, WDAY and of course MSFT! But best way to invest would be thru IGV (ETF)
Happy Halloween!
/Shyam
So what changed in supposed scary October month? As in Halloween, markets have been playing "tricks" on investors with scare of upcoming recession but at same time "treating" patient investors for just staying invested. 2019 is turning out to be one of best year of returns with S&P returning over 20%. It does not feel that way due to recent drubbing software/cloud stocks took. That brings me to today's topic of Chips & Clouds!
Chips:
You can read this blog eating Chips and Salsa but you know what I really mean by chips. Semiconductors are generally referred as "chips". In product development we also use term called "Chip to Ship" means how long it takes when we get key "chip (ASIC)" to when we can "ship" final product. The semi stocks took drubbing in early year with MU, NVDA, TXN, QCOM and even Intel falling off 20-50% on fears of inventory overhang, slowing cloud spending, delays in 5G/IOT/AR/VR and generally no major game changing device/application on horizon. While all of these played out as predicted during the year, semiconductor companies have been adjusting their capital spending and investments to address these (in past these companies used to go thru boom and bust cycles every few years). They were able to burn down the inventory, introduce incrementally improved offerings. At same time, cloud spending is slowly ramping up and iPhone11 seems to be doing well (no wonder Apple stock has gained 50% in 2019). As phones are becoming cameras (and very good ones), they would need faster CPU, more memory, more storage and better image processors. All of these are provided by "chip" companies. Semiconductor ETF SMH is all time high and will continue to do well in 2020! My favorites in this sector are MU, AMD, INTC, AMAT and beaten down NVDA. But I would recommend to just go with SMH.
Clouds:
Cloud companies span from cloud providers like Amazon, Microsoft to cloud software providers (SAAS) like Salesforce, Splunk, MongoDB, Zscaler or recent IPOs like MDLA, Pagerduty, HCAT and so on. There must be over 100 companies one can choose from. The line between enterprise software, cloud/SAAS providers or even security providers is vanishing since almost all software players are moving to delivering their software over Cloud. Salesforce pioneered this and Adobe showed the path of how traditional software players can transition to this model. Microsoft did same with Office365. In last 8-12 weeks, stocks of many of these companies took hit bringing their valuations down by 20-50% - almost exactly what happened to Chip companies in Spring. So is it time to consider investing in this sector? Let's look at secular trend. This week one most important news came out was "Pentagon awarding $10 Billion cloud deal to Microsoft". While Microsoft is direct winner of this, IMO all cloud companies (even Amazon who supposedly lost Pentagon deal) are winners. If one of the most secretive organization in world can trust cloud for its IT operations, why not banks, retailers and other government agencies? The trend is almost as powerful as Internet trend in late 90's. That means double digit growth of cloud companies would continue in next decade (at expense of traditional IT players). And it's still relatively early to jump on this trend and reach the state of Cloud9! My personal favorites in this sector are NTNX, MDLA, HCAT, SPLK, NOW, WDAY and of course MSFT! But best way to invest would be thru IGV (ETF)
Happy Halloween!
/Shyam
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