Stocks of the Week!

In this email:

• The AI Stock You Have to Own 🤖

• Chinese Retailer Too Cheap to Ignore 🤩

• GameStop…. Again 😰

The AI Stock You Have to Own 🤖

AI is the craze right now. And if it’s the craze, it means the money’s there too. 🤑

The problem is the ship might’ve sailed for all the stocks you’re hearing about in the headlines.

Take Nvidia for example. Up 150% year-to-date, 222% for the last 12 months & now trading at just under a $3 TRILLION market cap.

Can it keep growing at that rate? Maybe. Is it likely? Probably not.

To get the real gems you have to start looking where other people aren’t 💎👀

Introducing…

The Taiwan Semiconductor Manufacturing Co! (TSM) 🎉

These are the guys that make the chips for companies like Nvidia, Apple, AMD to name a few. They're the leaders in producing the most advanced chips & if the guys that need chips are growing like crazy what do you think’s going to happen to the companies making them?

You guessed it.

Grow like crazy too! 📈

To get a bit nerdy with you for a second, the 3nm node is the star of the show right now. You’ll find them in things like Apple's iPhones and MacBooks. But the 2nm node is on the horizon & production should be ready for the end of 2025. The 2nm node will be up to 30% more efficient on power & performance.

Why should we care about more efficient nodes?

Because demand for the new, more efficient nodes is going to be crazy. And crazy demand in a space like this should set them up nicely for even crazier profits.🚀 It also means we’ll get to use better, faster tech too.😅

We’re already seeing the node demand buff the bottom line.

In Q1, TSM’s advanced nodes (3nm to 7nm) contributed a massive 65% of their revenue. That’s 51% more than last year.🤯

In fact, the whole earnings report was a success. 🙌

They smashed analyst expectations with revenue growth of 12.9% YoY, raking in a huge US$18.9 billion. Earnings per share (EPS) beat estimates too. Analysts had them penciled in for $1.32 and they reported $1.38. 🎉

To take a balanced view, there are some headwinds to be aware of⚖️

Margins are getting squeezed because electricity costs are increasing in Taiwan and the ramp-up costs of the 3nm node. In my opinion, these are minor issues. I’d expect the costs to smooth out as production scales, keeping the margins nice & healthy. 😋

TSM is as ready for the AI takeover as a squirrel on a nut farm. Most AI accelerators, (like Nvidia), already use TSM’s 5nm process. As the tech evolves, we're going to see these accelerators moving to smaller, more efficient nodes. And TSM is ready for it with their 3nm and upcoming 2nm nodes. 🌐

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Chinese Retailer Too Cheap to Ignore 🤩 

Pinduoduo (PDD). Ever heard of it?

It’s a Chinese e-commerce power house with at least a 40% upside potential 📈 (in my humble opinion)

So what exactly do they do & why is there so much upside potential?

PDD, is a marketplace that directly connects producers with retail customers. Imagine a huge virtual farmer's market but it’s not just fresh veg. There’s everything from eggplants 🍆 to electronics 📱

They’ve been growing super fast. $34 billion in revenue by the end of 2023 which is insane for a company that started in 2015 🤯

How have the managed to see such crazy growth?

One of the reasons is launching Temu in 2022. (Shout out to my Nan for putting me onto this site in the first place😅)

The aim of Temu is to connect Chinese manufacturers with international consumers 🌏

Think that sounds a lot like AliExpress? 🤨

Probably because that’s exactly what it is & they’re giving them a run for their money.

Hard data isn’t fully available yet, but best guesses are Temu's revenue is something like $6 billion based on GMV (Gross Merchandise Value).

They’re taking on giants like Jd.com & Alibaba & actually making a good go of it. The focus on perishables, farm-to-consumer products and creating buyer clubs for better prices is setting them apart in China.

In the global scene, Temu competes with AliExpress and Shein, with unbeatable prices and a huge selection. (Honestly, if you haven’t taken a look on Temu, I’d highly recommend. Shouts to my Nan again for putting me on to the bargains😅).

I wish PDD would disclose regional metrics so we could see exactly where it’s thriving & growing vs having a broad overview. In any case, the numbers we get look pretty impressive.

PDD's valuation is hard to ignore. Trading at 18x PE or just 0.5x PEG (Price/Earnings to Growth ratio), it's a lot better value than other companies in the same space.

The consensus price target is $181 which is about 25% upside. But PDD has traded as high as $210 a few years back before launching Temu & with lower revenue & profit numbers so no reason why we couldn’t be there again.

That’d give us over a 45% return.

What are the risks?

Well with all things Chinese you have to factor in the regulatory uncertainties and geopolitical tensions. The Chinese government can change the rules whenever they fancy it.

But ultimately I don’t think the Chinese government want their large companies to do poorly so I’ll let that put me off Chinese stocks. Especially when the value is this good.

GameStop….Again?! 😰

Unless you’ve been living under a rock, you’ll probably know GameStop’s back at it… again.

I’ve already written about how to actively trade these meme stocks on the spikes here before so you can take another read if you want to.

This time around I’ve taken the approach that it’s not very often I get the chance to short a company that is so clearly overvalued. There is no debate. GameStop is not worth what it is trading at.

The only chance a giant price spike from here is a short squeeze.

I believe the risk of a huge short squeeze now is low at best.

When Gamestop spiked from the huge short squeeze back in 2021, over 100% of the shares were being shorted. That’s insane.

As of right now, 25% of Gamestop shares are being shorted. That’s still a lot but that doesn’t even put it on the list of most shorted stocks. You can see that here if you’re interested.

So that’d be 4 times less buying pressure if the shorters were to get squeezed out.

On the quest to grow this small account to $100,000 I’ve jumped on the chance. My average entry is a little higher than I’d like at $32. I wouldn’t add any more to the shorts unless we go back above $40

My target price to close the shorts is $22 but I’ll reassess based on news, momentum & volatility. In a perfect world I’d like to ride it down to single figures.

That being said I’d strongly encourage you not to trade GameStop with any money that’d impact you if it went to $0 if you’re planning to hold. That includes buying or shorting.

Just my $0.02.

That’s all! See you same time next week 👋 

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️