This ad about the next way to break through the limitations Moore’s law has sent a few questions our way in the past two weeks, so let’s take a break from watching the short-squeeze train wrecks and look into this fella, shall we?
The pitch comes from Jimmy Mengel for his The Crow’s Nest newsletter ($99/yr), which is his “entry level” letter that we see promoted pretty regularly. The hook is that “Moore’s law is dead” — microchips have gotten so small, with the control gates down to 5nm now in wide use even a bit smaller, 3nm or even 1nm in the lab and in specialized situations, that they really can’t shrink much more, at least not if they’re built with silicon. New materials are needed if we’re going to make smaller and smaller transistors, and making smaller and smaller transistors is the way to cram more transistors onto a small chip.
There are plenty of ways to make advancements, of course, we’ve heard tell of special coatings that can speed things up, in the pitches about Atomera, for example, and about several different kinds of materials that might replace silicon… but this time, it’s about carbon nanotubes as a possible replacement.
Here’s some more from Mengel’s ad:
“… silicon-based microprocessors can’t become much faster than they are today.
“It’s the end of an era.
“And it’s why the Defense Department’s research wing initiated a $1.5 billion project. Its goal is to develop microprocessors that overcome silicon’s limitations.
“This project is called the Electronics Resurgence Initiative.
“It’s run by the Defense Advanced Research Project Agency (DARPA).”
Everybody loves to drop DARPA’s name in a teaser pitch, of course, because we’ve all heard stories about how DARPA funding was key to developing technologies as basic as the Internet, GPS, and the graphical user interface (and mouse). We can all dream about getting in early on a technology like that, right?
Of course, they’ve also blown billions on stuff that didn’t ever go anywhere — that’s the nature of basic research, after all.
But moving on…
“One little-known company is at the heart of DARPA’s latest project. It’s figured out a completely new way to manufacture microprocessors.
“Getting in on this company could generate a 950% gain in the next few months…
“That’s 10x your money on a single stock.”
Now that’s what we’re looking for! Bring on the solid gold bathtubs!
More from the spiel…
“Semiconductor companies such as Intel could be facing ruin soon…
“But one little-known company is expected to be the big winner.
“Because it discovered a way to overcome the death of Moore’s law…
“All thanks to what I call ‘God Chip’ technology.”
Why “God Chip?” He doesn’t really say. People try to make all kinds of things seem omnipresent or holy, of course, so we’ve seen pitches about a God Switch and God’s Gold and a God Key and, well, I’m sure there’s more I’m forgetting.
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The potential gains are shown off with plenty of impressive-looking diagrams, here’s what Mengel dangles by way of future profit potential…
“Let’s assume this little-known company captures only Intel’s earnings in the near future…
“That would mean its stock could rise by 950%.
“That’s enough to turn every $10,000 invested into $105,000….
“Of course, this still leaves the business from Intel’s competitors to be absorbed as well…
“And with the global microprocessor market to reach $112.7 billion by 2025, a 950% win is a highly conservative estimate.”
Ah, so just “taking Intel’s business” is the conservative estimate? Seriously? Do we get any timeframe on that?
“Intel, Nvidia, and AMD are among the biggest employers in Silicon Valley…
“But their past successes relied on silicon.
“This is why their downfall could be just months away…
“And with these companies going down, Silicon Valley is outright doomed.
“However, this won’t be the end of America’s incredible tech success story…
“Progress will carry on — only without Silicon Valley.
“And it’s all because of the company DARPA joined forces with.”
What the what? Intel’s downfall just months away? Certainly Wall Street is forecasting a long period of “blah” from Intel, with the expectation that revenues will be essentially flat for the next few years, though that’s not because silicon is going away anytime soon — it’s mostly because Taiwan Semiconductor has been eating their lunch for years.
But lets not get too far ahead of ourselves… back to the tease…
“Not only did it discover how to prevent electron leakage with its ‘God Chip’ technology…
“It also found out how to make microprocessors 10 times more energy-efficient.”
And he talks up the big spending on 5G, with the implication that this secret company with its “God Chip” will benefit from that spending…
“… long-term projection reported by CNBC of $12.3 trillion for 5G over the next 15 years and you’re looking at $17.4 trillion in new wealth waiting to be unlocked…
“If this company from Massachusetts captures 0.5% of all this cash, it’s stock could rise by 6,893% within 12 months.
“That’s enough to turn a small $500 stake into $34,965…
“And a slightly bolder investment of $5,000 into a whopping $349,650….
“Make no mistake, 0.5% is a ridiculously low estimate. This is a very conservative projection.”
I’m not sure how that math works, but sure, I guess we can say that some folks are estimating the total “new wealth” created by upgrading to 5G networks will be $17 trillion, and one half of one percent of that would be about $85 billion, right? This is all made up, so I guess the math doesn’t matter… but still, that’s right in the neighborhood for Intel’s annual revenue, just for some context. If this company is one twelfth of Intel’s size in some way (which is another clue dropped in the ad), I don’t see how that could bring us to a 6,893% gain for the stock.
Particularly because, of course, all this happening in one year is cloud cuckoo land talk.
So we’ll skip ahead here to make sure we can just get to answer and start thinking rationally for a minute…
“I’m talking about graphene….
“The off-radar company I’m talking about found a way to manufacture microprocessors with these one-atom-thick graphene tubes.
“It’s extremely difficult to pull this off…
“Billions of tiny 1-nanometer tubes have to be aligned perfectly across a 200-millimeter wafer….
“As one scientist explains, ‘It’s like trying to cover the entire state of New Hampshire in perfectly oriented dry spaghetti.”’
“The method they use for depositing the graphene tubes is called incubation….
“… recently the research team achieved a major breakthrough.
“They were able to reduce the incubation time from 48 hours to 150 seconds.
“That’s why the mass production of ‘God Chips’ is around the corner.”
The best thing about phrases like “around the corner,” as far as marketers and pundits are concerned? It doesn’t really have a legal meaning, but it does conjure up immediacy in the brain of those of us who read the hype… you can imply that something is happening in, well, two shakes of a lamb’s tail… but it might actually be 2,000 shakes, and the lawyers will probably still sign off on “around the corner.”
What else do we learn about this graphene chip breakthrough?
“… silicon-based transistors are made at very high temperatures.
“I’m talking about 900 degrees Fahrenheit.
“But the ‘God Chip’ can be manufactured at near-room temperature.
“This is a huge game-changer…
“Layers of circuits on top of previously fabricated layers are now possible…
“This way, three-dimensional chips can be created.
“This can’t be done with silicon-based technology. Existing layers would melt at 900 degrees.”
OK, I’m no expert but it sounds logical that going more three dimensional would also help to push through and keep Moore’s law going, and I can see how temperature would make that easier. Fine. Any more clues?
“This Company Surged by 932% Already… but this is just the beginning…
“Like I said, the company behind the “God Chip” teamed up with MIT…
“Yet I estimate not one in 100,000 Americans knows its name.
“Make no mistake — I’m not talking about an unproven penny stock. This company has customers across countless sectors…
“Including aerospace, defense, automotive, health care, and energy…
“It’s a supplier to Apple, Dell, Raytheon, Lockheed, Cisco, and HP…
“And its technology is protected by an astonishing 14,000 patents.
“So it’s no wonder its stock soared by 932% in recent years…
“That’s right, this company could’ve made you 10 times your money already.
“But since it’s more than 12 times smaller than Intel, there’s still huge room for growth.
“And with the ‘God Chip’ hitting the market soon, I expect it to shoot to the moon.”
We often hear references to the number of patents a company holds, and that can be a rough measure of their relative strength in R&D-intensive areas… but, of course, the quality and value of a patent are not set in advance. Each one is different, so whether you have 14,000 patents like this large company being teased, or more than 40,000 like Texas Semiconductor or Intel, doesn’t necessarily matter when it comes to one specific technology. What matters is who has the best patents… and sadly, there’s no way I can figure that out in advance, or figure out who’s going to win the key patent lawsuits over carbon nanotubes in ten years, so I tend to not waste too much time on those kinds of numbers.
But anyway… what’s the stock? Can we finally get our freakin’ answer?
Just one more little group of clues… we’ll get there, I promise.
He also goes on for a bit about how he expects their technology to dominate in lithium ion batteries, too, thanks to their ability to mass-scale “graphene tubes” production, so he throws another few thousand percent in there…
“According to Wintergreen Research, the global battery market is projected to reach $1 trillion by 2026.
“And if this company captures 10% of this market, its stock could rise by 5,902%…
“That’s on top of the 6,893% I told you about earlier.
“We’re looking at a total potential gain of 12,795% within a few short years.
“Enough to turn a small $500 stake into $64,475…”
And when is this “carbon nanotubes chip” news coming out? Here’s what Mengel says:
“I expect a huge announcement from this company very soon.
“When this happens, investors will rush into this stock in droves.”
Sheesh, I kinda guess they already have — it is, after all, up 932% over some undefined time period.
And one last bit of hype for you:
“The first transistor built with graphene tubes was developed in 1998…
“And in 2019, this off-radar company figured out how to build a microprocessor with 14,400 transistors…
“As a result, we’re looking at an increase in the transistor count of 1,439,900%
“That’s a nearly 1.5 MILLION percent increase in 21 years.
“And an annualized increase in the number of transistors of 68,566%.
“We have every reason to assume that progress will continue at this pace…
“Remember, incubation time has just been slashed from 48 hours down to 150 seconds.
“That’s a 1,152x increase in production speed…
“The number of transistors on the “God Chip” keeps rising as we speak.
“According to my calculations, it could surpass the best Intel microprocessor very soon…
“When this happens, it will replace every silicon-based microprocessor on Earth.
“The ‘God Chip’ will be faster, consume less energy, and put off less heat than any silicon-based chip.
“This off-radar company will dominate the semiconductor market.
“It could happen as early as tomorrow.”
Again, I dare you to misprove “could” … another term the lawyers love… but what is our “God Chip” company?
This must be, sez the Thinkolator, giant chip pioneer Analog Devices (ADI).
Yes, it’s a Massachusetts company… yes, it’s about a twelfth the size of Intel (in revenue terms, at least — in terms of market cap, at around $50 billion it’s only about a fourth the size of Intel).
There are other cool companies doing a lot of work in carbon nanotubes, though much of it is also happening in academic labs or in the bowels of Samsung and Taiwan Semiconductor, I’m sure — Nantero is one of the clear leaders in developing actual carbon nanotube products, focused on their NRAM technology that is denser and as fast as DRAM, and they are a Massachusetts company, too, but they’re not actually public — they’ve gotten venture funding and partnership funding from several public companies, including On Semiconductor, Cisco, Dell and a few others… including ADI’s founder (and still Chairman), Ray Stata.
So where do our connections to this “God Chip” lie? Mostly in the fact that this work being led by MIT has been funded by and partnered with Analog Devices for years, and uses one of ADI’s foundries. And yes, those carbon nanotube chips are coming, and have made some big advances to get to the realm of something useful, but it’s early days yet — they are showing good signs of energy efficiency so far, but also are nowhere near as precise as current silicon technology (while most leading edge chips use 7nm gates these days, the gate length for these chips produced last summer was 130nm).
So yes, ADI has always prided itself on being out ahead of the current technology, and working on stuff that their customers don’t even need yet, and this effort to make chips using carbon nanotubes that they’ve participated in has been in process for decades and is genuinely impressive… but it’s not going to show up on ADI’s income statement anytime soon, and they’re not going to announce commercial production tomorrow.
I don’t have any problem with buying ADI shares, it’s a little pricey but is a company that’s very well suited for the current pricing dynamics in industrial and automotive chips, with shortages from COVID helping to drive up prices, and it’s been a steady performer with investor-friendly management for a long time… but I wouldn’t buy it because you think it’s going to rise by 5,000% in the next year. If you need gains like that, you’ve got to either give it a few decades to play out, or start out with a much smaller and riskier investment than Analog Devices.
But again, it’s not the wild promises of 5,000-10,000% returns we have to evaluate — that’s obviously idiotic. What we have to look at is the company, think about the price it trades at now and whether there’s potential for growth… maybe even some surprise growth from carbon nanotubes in five or ten years… and decide whether we want to buy a piece today.
Right now, ADI trades at about $150 a share, riding the recent surge in pretty much all semiconductor stocks (OK, except Intel), but it has also lagged behind the booming semiconductor stocks over the past two or three years to some degree — partly that’s because it doesn’t grow as fast as some of the darlings like like NVIDIA or AMD, but it has also lagged some closer-to-peer companies like Texas Instruments (TXN).
If you want to look forward to any surprise gains, then that could come from increasing demand from their key industrial and automotive sectors, dosed with a lot of strength in communications chips that, yes, are in demand as 5G continues to be adopted. Lots of chip companies have exposure to similar industry trends and economic cyclicality, though, so if you want to bet on them outpacing the sector, the most reasonable reason for that is probably their pending takeover of Maxim Integrated Products (MXIM), which will give them some potential for improving efficiency, broaden the array of products in which they have a technology lead or possibly resilient margins and significantly boost their 5G-related business, and create a larger competitor for Texas Instruments (MXIM is roughly a $25 billion company, and it’s an all-stock deal so we’ll end up with roughly a $75 billion company).
The best sum-up I’ve seen of that rationale was in Barron’s a couple months ago, with the RBC Capital analyst predicting that the company will “run lean” going into the closing of the Maxim deal in the next few months, and will also be well-positioned to benefit from investment in space exploration and satellites and car manufacturing as the year progresses, all while they’re also getting the promised cost savings out of their merger deal. He also said he expects the next quarter to be strong, and put a $150 price target on the stock… so that tells you just about everything you need to know about the stock market today: Everyone loves it, everyone has it rated a “buy”, but even the biggest fans are having to up their price targets… between November and January, that same analyst raised his target again (it had been $135, it went to $150 in November, and a couple weeks ago he ramped it up to $174). Those targets don’t really mean anything, of course, but it’s an indicator of sentiment.
In terms of actual numbers and forecasts, here’s where we are: ADI finished its last fiscal year with $4.91 in earnings per share and $5.6 billion in revenue, so it’s now trading at almost exactly 30X (adjusted) trailing earnings… and the forecast for this current fiscal year is about 15% earnings growth, slowing to 10% or so in the next couple years. The forward PE is about 26, so if you think there’s any chance at all of them beating those expectations, either because of the Maxim acquisition or just because the industrial economy recovers more quickly than the analysts are forecasting, then you can still argue that the price is pretty fair. At least, compared to the rest of the stock market (which is an important caveat, of course — the S&P 500 trades at a trailing PE of about 34 right now, which is close to as expensive as it has ever gotten).
I’m not particularly enthused about chasing ADI after a strong few weeks, but I could see nibbling some on the stock if we see it drift lower in a little pullback for the markets — I don’t have much semi exposure in my portfolio, and it’s a relatively strong company with a good dividend growth history and a potential catalyst in the pending merger. I wouldn’t think twice about carbon nanotubes as a reason to invest in ADI, though, that’s an R&D project and a deep future potential, I’m sure the team of folks working on that at ADI have great dreams about that, and I wish them well, but that project doesn’t even rise to the level of generating press releases for a huge company like Analog Devices.
That’s just what I think, though, and when it comes to your money it’s your opinion that matters — so are you jazzed up about carbon nanotube chips? Think that’s the future, and that ADI might lead in that area? Otherwise excited about a large and relatively pricey leading analog chipmaker in the era of 5G and continuing industrial and automotive automation? Let us know with a comment below.
P.S. Maxim trades at a very similar valuation to Analog Devices, so the deal won’t have a big immediate impact on earnings per share (as analysts would say, it’s not dramatically accretive — they expect it to be “accretive to adjusted EPS in 18 months post-close”)… but MAXIM is a slightly cheaper entry into ADI shares if you expect the deal to go through (shareholders have approved, but they need some regulatory approvals from governments around the world — I don’t know of any likely hiccups, but those are never guaranteed). The deal is for each MXIM share to turn into 0.63 shares of Analog Devices, so at today’s close ($147.34) that would mean MXIM should be worth $92.82. MXIM closed today at $87.44, so, all else being equal, you would get a little discount of a little more than 5% just by buying MXIM instead of ADI. Such discounts are common in mergers and acquisitions, but for a deal that already has shareholder approval and could close within a few months that seems relatively big — so it might represent some sentiment that the deal could face some pressure from regulators.