Hi Stocknovice, Congratulations on the great results!
I was wondering about your views on SMCI. This is a highly cyclical business with no moat; and the valuation is rather high at this point (TTM PE of 45 and FWD PE of 22). There is a lot of investors that I have high respect for, that seem to be interested in SMCI, but I am struggling a bit to see the long term thesis.
Good question. Totally agree on the highly cyclical comment. The question is what to do about it. Unless using a strict buy-and-hold philosophy, when to exit almost has to be part of the strategy with many of these chip plays.
In a general sense, new technology adoption usually goes: picks/shovels -> hardware -> software. Our portfolio benefitted immensely from catching the cloud software phase. Now the market has moved on to AI. Names like NVDA and SMCI have really benefitted as companies have built out data centers. NVDA is clearly picks/shovels. As many others have pointed out, NVDA is working hard to make itself a software play as well. I see that as a genius move as it could totally lengthen NVDA's current run. A possible counter to that idea is NVDA iterates so fast it actually outpaces its customers' refresh cycle where those using say V1.0 decide to pass on a V2.0 upgrade and simply wait for V3.0. No matter how hard NVDA tries, there will always be a capital expenditure cycle tied to its core purchase.
SMCI in my opinion fills the bridge between picks/shovels and hardware. We have no idea yet who the software winners will be (which IMO is at least partially why those waiting for workloads to rebound for usage-based names like DDOG and SNOW have been disappointed thus far). SMCI has been crazy volatile during this climb, especially as the market tries to figure out just how much capacity it has. It crushed Q2 but came in closer to the mid-point of its Q3 guide due to supply constraints. At the same time, it raised the FY significantly with the implication anything constrained in Q3 should be delivered in Q4. We'll see.
The other thing is SMCI will need to issue its FY25 guide next quarter. Right now estimates are very high and all over the place. How will management approach this? I have no idea, which is why I haven't taken a regular position. I could easily see a +/- 20% move on earnings at basically coin flip odds. I have no problem sitting that out.
In the meantime, I have done some small trading with SMCI in a different account using June2025 calls. I did this earlier this year when the shares kept bouncing between $200-$300. I sat out the run from $300 to $1200 after the last calls sold off, but restarted when the shares dipped back to $700 or so. I'm currently using limit orders to nibble when the shares are ~$800 and sell when the shares bounce back above $900. I've skimmed profits worth ~2% of our portfolio YTD doing this. That's clearly off topic for Saul's and not part of what I post here, but that's how I've approached SMCI without making it a permanent position. After the calls sold off to a 0% position last week, they refilled to a ~2% position on the drop last this week. With the shares at $820 or so, that position will sit until limit orders start peeling them off if/when it goes back up.
Regardless, I'll likely have this position be tiny or even zero when SMCI next reports in August due to the uncertainty I described above. The saving grace is anything I do carry into earnings will basically be a free roll due to the prior options profits.
Thank you for your comprehensive reply – it’s super helpful for me.
I own NVDA and I feel comfortable holding it. I fully expect the cycle to end at some point – but I think there is time before this happens given their rate of innovation and, as you pointed out, movement to SW. I get your point about NVDA iterating so fast that it actually outpaces its customers' refresh cycle – however a counter to that is (maybe) if customers do not refresh to the latest NVDA tech then they risk falling behind a competitor that is refreshing to the latest tech. I took the decision to add a very tiny bit more to my NVDA position when it dropped under 120 the other day.
Thank you for clarifying your stance on SMCI – it makes sense to me that SMCI is not currently a permanent position in your portfolio due to the uncertainty, and I can also understand that it maybe was/is a good stock to trade due to its volatility. I do not own SMCI and, by the way things are looking right now, it’s unlikely that I ever will; my main concern is the lack of protection with that they do v’s competitors. I don’t see a path to the company building a business advantage. Competitors like Dell and HPE have longevity and distribution power. Hardware assembly is a hard gig.
Just to touch again on your point about NVDA iterating so fast: If I compare NVDA to SMCI, taking into consideration the lack of moat and innovation from SMCI (v’s the rate of innovation of NVDA), I would expect the end of the cycle for SMCI to be more abrupt than the end of the cycle NVDA. Once a company buys a rack from SMCI, they are unlikely to have to change it to accommodate the next V2.0 upgrade from NVDA.
There was some recent TTD news. They signed a deal with Fox.
Increased access to premium inventory: TTD will gain more direct access to Fox's premium advertising inventory across its entire portfolio, including Fox Sports, Fox Entertainment, Fox News Media, and Tubi.
This deal demonstrates TTD's growing influence in the advertising technology space and its ability to form strategic partnerships with major media companies.
I hadn't seen that since Fox issued the release rather than TTD. However, it did eventually make The Trade Desk's blog. I simply missed it. The original Fox release is here for anyone wishing to take a look.
Hi Stocknovice, Congratulations on the great results!
I was wondering about your views on SMCI. This is a highly cyclical business with no moat; and the valuation is rather high at this point (TTM PE of 45 and FWD PE of 22). There is a lot of investors that I have high respect for, that seem to be interested in SMCI, but I am struggling a bit to see the long term thesis.
Thank you and best regards,
Hi Ronan -
Good question. Totally agree on the highly cyclical comment. The question is what to do about it. Unless using a strict buy-and-hold philosophy, when to exit almost has to be part of the strategy with many of these chip plays.
In a general sense, new technology adoption usually goes: picks/shovels -> hardware -> software. Our portfolio benefitted immensely from catching the cloud software phase. Now the market has moved on to AI. Names like NVDA and SMCI have really benefitted as companies have built out data centers. NVDA is clearly picks/shovels. As many others have pointed out, NVDA is working hard to make itself a software play as well. I see that as a genius move as it could totally lengthen NVDA's current run. A possible counter to that idea is NVDA iterates so fast it actually outpaces its customers' refresh cycle where those using say V1.0 decide to pass on a V2.0 upgrade and simply wait for V3.0. No matter how hard NVDA tries, there will always be a capital expenditure cycle tied to its core purchase.
SMCI in my opinion fills the bridge between picks/shovels and hardware. We have no idea yet who the software winners will be (which IMO is at least partially why those waiting for workloads to rebound for usage-based names like DDOG and SNOW have been disappointed thus far). SMCI has been crazy volatile during this climb, especially as the market tries to figure out just how much capacity it has. It crushed Q2 but came in closer to the mid-point of its Q3 guide due to supply constraints. At the same time, it raised the FY significantly with the implication anything constrained in Q3 should be delivered in Q4. We'll see.
The other thing is SMCI will need to issue its FY25 guide next quarter. Right now estimates are very high and all over the place. How will management approach this? I have no idea, which is why I haven't taken a regular position. I could easily see a +/- 20% move on earnings at basically coin flip odds. I have no problem sitting that out.
In the meantime, I have done some small trading with SMCI in a different account using June2025 calls. I did this earlier this year when the shares kept bouncing between $200-$300. I sat out the run from $300 to $1200 after the last calls sold off, but restarted when the shares dipped back to $700 or so. I'm currently using limit orders to nibble when the shares are ~$800 and sell when the shares bounce back above $900. I've skimmed profits worth ~2% of our portfolio YTD doing this. That's clearly off topic for Saul's and not part of what I post here, but that's how I've approached SMCI without making it a permanent position. After the calls sold off to a 0% position last week, they refilled to a ~2% position on the drop last this week. With the shares at $820 or so, that position will sit until limit orders start peeling them off if/when it goes back up.
Regardless, I'll likely have this position be tiny or even zero when SMCI next reports in August due to the uncertainty I described above. The saving grace is anything I do carry into earnings will basically be a free roll due to the prior options profits.
Hope that helps.
Hi Stocknovice,
Thank you for your comprehensive reply – it’s super helpful for me.
I own NVDA and I feel comfortable holding it. I fully expect the cycle to end at some point – but I think there is time before this happens given their rate of innovation and, as you pointed out, movement to SW. I get your point about NVDA iterating so fast that it actually outpaces its customers' refresh cycle – however a counter to that is (maybe) if customers do not refresh to the latest NVDA tech then they risk falling behind a competitor that is refreshing to the latest tech. I took the decision to add a very tiny bit more to my NVDA position when it dropped under 120 the other day.
Thank you for clarifying your stance on SMCI – it makes sense to me that SMCI is not currently a permanent position in your portfolio due to the uncertainty, and I can also understand that it maybe was/is a good stock to trade due to its volatility. I do not own SMCI and, by the way things are looking right now, it’s unlikely that I ever will; my main concern is the lack of protection with that they do v’s competitors. I don’t see a path to the company building a business advantage. Competitors like Dell and HPE have longevity and distribution power. Hardware assembly is a hard gig.
Just to touch again on your point about NVDA iterating so fast: If I compare NVDA to SMCI, taking into consideration the lack of moat and innovation from SMCI (v’s the rate of innovation of NVDA), I would expect the end of the cycle for SMCI to be more abrupt than the end of the cycle NVDA. Once a company buys a rack from SMCI, they are unlikely to have to change it to accommodate the next V2.0 upgrade from NVDA.
Thanks again for your valuable input.
Best regards
There was some recent TTD news. They signed a deal with Fox.
Increased access to premium inventory: TTD will gain more direct access to Fox's premium advertising inventory across its entire portfolio, including Fox Sports, Fox Entertainment, Fox News Media, and Tubi.
This deal demonstrates TTD's growing influence in the advertising technology space and its ability to form strategic partnerships with major media companies.
Thank, Larry. That's a great find!
I hadn't seen that since Fox issued the release rather than TTD. However, it did eventually make The Trade Desk's blog. I simply missed it. The original Fox release is here for anyone wishing to take a look.
https://www.foxcorporation.com/news/corp-press-releases/2024/fox-and-the-trade-desk-announce-extensive-advertising-integrations-across-fox-portfolio/
Nice market beating performance. Yeah!