🤖📈 Why Buffett was Wrong to Sell TSMC

TSMC reported strong Q1 results, with operating margins nearing 50% and half of its business focused on advanced chip production, despite a decrease in semiconductor demand. Revenues fell 4.8% YoY due to lower demand and high inventory levels, but TSMC maintains a competitive edge over Intel. The company plans to invest $32 to $36 billion in capex this year and aims to achieve a 40% operating margin in Q2'23.

TSMC faces supply shortages for modern N3 chips due to high demand in AI, 5G, and other technology sectors, with clients like Nvidia, Apple, and Qualcomm seeking more advanced chips. Despite Warren Buffett selling his TSMC stake due to political risks, the author remains ultra-bullish on the company's prospects in 2H'23.

TSMC is building new fabs in the U.S., Japan, and potentially the EU to reduce the risk of focusing solely on Taiwan. The company believes that political uncertainty should allow them to sell chips produced outside Taiwan at a premium valuation. TSMC trades at a 50% discount to Apple, despite having similar geopolitical risks and higher projected growth rates in the coming years. The market should not assign a risk premium to TSMC when Apple faces comparable risks of production disruptions in Taiwan and China. The author suggests that Buffett should have increased his TSMC holdings and sold Apple due to the premium valuation multiple and similar geopolitical risks.

The author anticipates Baidu's stock will rebound to $150-160 per share due to the Ernie bot's positive reception and a strengthening advertising business. With an expected increase in digital advertising demand in China following COVID reopening, Baidu's prior AI research efforts have put the company in a leading position to bring large language models like Ernie bot to market. Ernie bot has garnered interest from various sectors, such as finance, automotive, and media, and Baidu's AI ambitions are likely to receive government support, enabling the company to manage potential regulatory hurdles.

Management is optimistic about Q1 2023 and beyond, given the recovery in online marketing revenue and the expected boost from pent-up consumption in China. Recent Chinese macroeconomic data supports Baidu's confidence, showing strong retail sales growth, exports growth, and GDP expansion. The primary investment risk for Baidu is regulatory pressure on China's technology and internet industry. Nevertheless, the author views Baidu as a key enabler of AI adoption across industries in China and expects the company's fundamentals to improve significantly in the next 5, 10, and possibly 15 years.

The steel sector is expected to benefit from the Infrastructure and Chips bills during a recession. United States Steel Corporation (X) is financially sound with a sufficient margin of safety, and its earnings depend on steel prices and shipment volume across its three business segments. Valuing cyclical companies like X requires normalizing performance over the cycle, and the Earnings Power Value model is recommended for valuation. X is financially strong, with a debt-equity ratio of 0.4 and $3.5 billion in cash, and is well-positioned to withstand a prolonged downtrend in steel prices.

The author developed a financial model that accounts for shipment volume and steel prices to provide a realistic picture of X's performance. The model revealed that X is undervalued with a 42% margin of safety. Steel demand tends to decline during recessions, but countries like the US view steel as strategic and protect the industry during economic downturns. The Infrastructure Bill and Chips and Science Act will support the steel sector during the coming recession, and X, which is financially stronger than in 2007, is considered a recession-proof investment for the coming economic downtrend.

Philip Morris International Inc. (PM) reported a decline in Q1 results due to one-off events and currency headwinds, but underlying trends are strong with IQOS and ZYN dominating. The investment case for PM is based on the potential for growth from two dominant Reduced Risk Product franchises. PM has set financial targets for 2021-23, including a CAGR of at least 9% for Adjusted EPS. RRPs have transformed the source of PM's growth, with affluent, politically stable Developed Markets becoming increasingly important. PM's profit targets are based on adjusted EPS, preserving flexibility for margin-dilutive investments.

The article also discusses the continued growth and dominance of IQOS and ZYN in their respective markets. The author expects PM to focus on growth investments and deleveraging in the next few years, with only token dividend increases and no buybacks. The forecast indicates a total return of 51% (18.1% annualized) by 2025 year-end, making it a Buy.

The article discusses the author's preference for simple stocks with easy-to-understand stories and basic bull theses. The author recently looked at Cogeco Inc and its subsidiary, Cogeco Communications, despite their needlessly complex corporate structure. Cogeco Communications owns Canadian and American broadband services and has two business units with approximately a 50/50 split in revenue between Canada and the US. The company has acquired smaller local cable operators in the United States to add to its pile and take synergies with each deal.

The article notes that Communications' shares are cheap, trading at 7.2x trailing earnings and 5.2x free cash flow. The author suggests that Communications offers a high dividend yield (4.7%) and potential for future growth, making it an attractive investment opportunity. The article concludes with a disclosure that the author owns shares in both Cogeco Communications and Cogeco Inc.

DigitalOcean has revised its medium-term growth guidance due to a challenging macro environment. Despite this, the company plans to accelerate its free cash flow margin expansion, positioning it to benefit from long-term digital transformation trends. Although the stock has dropped since February, it remains undervalued considering its focus on cash flow generation.

DigitalOcean recently reported 36% YOY revenue growth and 400 bps of operating margin expansion. The company is a pure-play cloud computing provider catering to smaller businesses seeking simpler, cheaper solutions. The author estimates an 85% upside in the stock over the next 12 months but notes risks like uncertainty regarding Wall Street's valuation of the company and competition from mega-cap tech companies.

Netflix's Q1 2023 earnings report revealed slightly below consensus revenue but better-than-expected EPS. The paid sharing initiative has been slower than anticipated, while the advertising tier is outperforming the standard tier in the US. Paid memberships increased by 1.75 million, and the company's financials show YoY growth in revenues and cash flow. Free cash flow projections for 2023 have been raised to $3.5B.

Although subscriber growth has slowed, Netflix is still a growth stock in a growth market. The company's valuation is high, but it is discounted across both P/E and operating cash flow basis when compared to itself. Despite selling off more than the NASDAQ Composite over the past year and a half, Netflix has begun to generate significant cash flows and is deserving of a higher valuation. The author recommends Netflix as a buy for a 3-5 year investment horizon.

The Federal Reserve has acknowledged a possible recession, as evidenced by an inverted yield curve since July 2022 and two consecutive quarters of negative Real GDP in 2022. The author advises investors to hold more cash in their portfolios but also considers some companies that may perform well in a recession. They suggest that the upcoming downturn may resemble the 2008 recession, with Consumer Staples outperforming other sectors.

Dollar Tree is identified as a potential recession-resistant company due to planned business improvements, such as enhancing Family Dollar locations, raising employee wages, and better inventory management. The recent stock purchases by Dollar Tree's CEO and CFO also indicate the company's potential for long-term growth.

The article highlights Upwork's sustained revenue growth despite inflationary headwinds and market challenges. The company outperformed 4Q estimates, with revenue growth of 22% YoY and financial positioning that showcases high cash reserves. Upwork efficiently combated inflation impacts and stabilized costs to limit operating losses. Although facing competition from Fiverr and new entrants in the freelance market, Upwork's remote work flexibility gives it an advantage.

The fintech revolution and cashless transactions further boost the freelance market's appeal. Upwork's stock price has been in a downtrend, potentially offering opportunities to buy shares at a discount. With solid fundamentals and resources to sustain operations, Upwork is well-positioned in the market, and its stock remains undervalued, making it an attractive investment. The author recommends buying Upwork Inc.

The article suggests that investors should consider Bandwidth, a lesser-known competitor to Twilio, as its share price has fallen ~40% this year. Despite a conservative growth outlook for 2023, the company's long-term prospects are bright, with opportunities in the relatively less competitive CPaaS space.

Bandwidth has a diverse client base and potential for product expansion. It expects 30% YoY growth in adjusted EBITDA, and aims to increase its direct-to-enterprise revenue share from 5% to 10% in the medium term. With a current share price of $13 and a market cap of $341.6 million, the author recommends staying long on Bandwidth, as it is an appealing investment at ~1x forward revenue.

The article discusses the formation of two camps, Team Bubble and Team AI, regarding the potential formation of a bubble in the AI industry. The article explores the behavior of institutional investors during past bubbles and how it may differ from the narrative of unsophisticated retail investors getting caught holding the bag. Hedge funds face a dilemma when dealing with technology stock bubbles. The article discusses the fall of the Quantum Fund, managed by Stanley Druckenmiller, during the dot-com bubble in 2000. The article discusses the potential risks and rewards of investing in NVIDIA and related stocks, which have seen a surge in demand due to the growing interest in AI and supercycle in chips.

The author discusses the background check industry and the three major players, HRT, STER, and FA, all of which are controlled by private equity investors. HRT has bought back over 1 million shares in a month, which is almost 1.5% of shares, and believes it is the best use of their excess capital. The author is interested in the industry and is considering questions about the stickiness of the product and the ease of in-house versus outsourcing for large companies. While there are risks involved, the author believes that these companies could be a good starting point for value investing.