Imagine it’s 2020 and you nail the big call: Artificial intelligence (AI) is coming fast. Chips will power it.
Two-for-two. You’re the next Warren Buffett!
Then you slip up.
You buy the world’s most valuable chip company, the one that used to sit inside almost every server and PC.
Not Nvidia (NVDA)...
but Intel Corp. (INTC).
Once the leading chipmaker in the US, Intel’s stock has been cut in half since AI took off in 2021. Meanwhile, Nvidia has become the AI poster child, gaining 20X.
This isn’t a hypothetical. It’s exactly what happened to a lot of smart investors over the past five years.
And it’s exactly the kind of mistake our Disruptor Investor Venn diagram is designed to help you sidestep.
It’s been in the news, with the US government acquiring a 10% stake worth $8.9 billion dollars.
Intel practically invented chipmaking and was king of semis for decades.
The biggest lesson we can learn from it is that every disruptor has its day.
Intel was once the most innovative, fast-moving company in the world. Now, it’s a slow-moving bureaucratic monster that needs handouts from the government to try to catch up to its competitors, like Taiwan Semiconductor (TSM).
Last year, Intel had its worst year since going public in 1971, cratering 61%.
Disruption Investor members know the answer is found this simple graph, our Disruption Investor Venn diagram.
The first circle in the diagram represents great businesses. Companies that consistently grow their revenues and make boatloads of cash.
The second circle symbolizes disruptive megatrends. Fast-growing, world-changing trends.
Where these two circles overlap is the “sweet spot:” Great businesses profiting from megatrends. That’s where the money is made. Only stocks that hit the sweet spot in the middle are worth investing in.
This framework keeps us disciplined. It keeps you from chasing names like Intel just because they sound connected to a trend. And it points you toward the companies that not only participate in a fast-moving megatrend but have the business model to profit from it.
|
Intel looked like the right way to play the chip boom. But if you’d run it through the Venn filter, the cracks were obvious.
For decades, Intel always made the fastest, most advanced chips. But then a decade ago, it slipped and lost its edge to Taiwan Semiconductor.
These fundamental problems didn’t show up in its financials until 2021. But for those of us paying attention, we knew trouble was brewing.
Like Intel, Nvidia is a chipmaker.
But unlike Intel, it’s also a great business.
You didn’t need a crystal ball to see this. All you had to do was look under the hood at its rapidly growing business.
Here’s Nvidia and Intel’s revenue growth over the past five years. Imagine some investors looking at this and still choosing Intel:
Source: Koyfin
Nvidia has surged 1,260% since we added it to the Disruption Investor portfolio. It’s a great example of the kind of money you can make buying stocks in that sweet spot.
Congratulations to Disruption Investor members who bought it last week before it surged 20% on earnings.
Broadcom is another US chip company headquartered about 15 miles from Intel’s Santa Clara campus. But its recent fortunes couldn’t be more different.
Broadcom rode the AI train, while Intel largely missed it.
Broadcom is the world’s leading provider of networking chips. They work like traffic control centers directing data, so the right information goes from point A to point B to point C, all at the blistering speeds necessary for AI workloads, without getting lost.
Big tech companies like Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META) often choose Broadcom’s Tomahawk series of switch chips to connect their large AI clusters.
It’s the least-known trillion-dollar company in history. But it’s one of the biggest winners from “Phase 2” of the AI buildout.
Look at its revenues stair-stepping higher as the AI boom kicks into high gear. This chart is so perfect, it almost looks fake:
Source: Koyfin
“Am I also buying a great business?”
Intel is a cautionary tale of nailing the megatrend but getting the stock selection totally wrong.
Until four years ago, Intel was the world’s most valuable chipmaker. Now, it ranks 15th in market cap among chip companies globally.
Our Disruptor Investor Venn Diagram would’ve saved you from Intel. And it would have put you into Nvidia, Broadcom, and the other true compounders of the AI era.
Print out the Venn Diagram and keep it on your desk. Put every candidate stock through it. If it’s not both a great business and riding a megatrend, walk away.
Stephen McBride
Chief Analyst, RiskHedge
PS: In this month’s issue of Disruption Investor, my co-editor Chris Wood and I recommended three new stocks to take advantage of Phase 2 of the AI boom. One of them was Broadcom… already up +18% in a little over a week.
If you’d like to learn more about the other two stocks in our AI “ETF”—and receive access to our entire Disruptor 20 portfolio—consider joining us at Disruption Investor today.