Paul Mampilly is pitching his Profits Unlimited newsletter with a long spiel about artificial intelligence (AI), which seems to mostly be a tease from a presentation he recently made on stage at a Banyan Hill “Total Wealth Symposium” in Las Vegas.
And we like to think for ourselves, of course, so I thought I’d dig into the clues he drops and see if we can name that stock for you — maybe you’d love his newsletter, maybe you’d hate it, but if you subscribe to a newsletter just to find out about a secret stock… well, odds are pretty bad that you’ll be able to think rationally and independently about that stock afterward. Lots of biases get in the way, including: We all have a tendency to justify purchases, so you’ll probably want to love that newsletter because you just paid for it… and most investors end up being very strongly influenced by the first piece of information they receive about a particular stock, so if you buy into this “76,000% gains!” pitch without any context, you’re setting yourself up for disappointment.
So with that said, what’s the story? Mampilly here is pitching us on the huge growth in artificial intelligence… here’s a little taste of the ad:
“Major consulting firms predict this technology will create 2.3 million jobs in the next two years and give businesses the chance to raise profits, across the board, by nearly 50%.
“Which is why the big money is piling in.
“Microsoft has dedicated $12 billion to this technology.
“IBM is investing $15 billion.
“Google is spending $30 billion.
“Intel has already put up $32 billion to acquire multiple startups in this space, for the single goal of pushing this technology forward.”
And the 76,000% number that he throws out as red meat for us is just pulled from a big picture speculation:
“At $20 billion, this technology is tiny compared to the internet, smartphones and computers.
“However, the world’s leading researchers estimate it will explode into a $15.7 trillion industry in the next five years, growing bigger than all of these — COMBINED.
“That’s a 76,000% growth.”
You can throw around pretty much any numbers you want for that kind of big picture stuff, they won’t mean anything. Yes, we concede the artificial intelligence is a massive focus of most big tech firms, and is making its way into every part of the economy… but it’s almost impossible to even rationally guess at what the size of the “A.I. market” might be now, let alone what it might become, and we don’t even know what those numbers mean — Sales? Market capitalization? Profits? I have no idea. For context, the United States annual economic output, as measured by GDP, is just shy of $20 trillion. The world’s GDP (or GWP) is closing in on $90 trillion. Will AI, however you describe it, account for 20% of global economic activity?
But anyway, yes, we know that AI is big, and that tech companies and manufacturers and advertisers and product developers and pretty much everyone is trying to use artificial intelligence to make smarter decisions more quickly.
Man, maybe I should get me some of that AI. I do everything slowly, and am rarely as smart as I hope.
So how is one to make money from this idea? Mampilly says he’s identified a catalyst that will bring this technology forward… much like the assembly line was for the automobile, or miniaturization for the computer, or email for the internet. Something that turns a developing technology into a huge economic force.
What is it? Well, let’s see what he says:
“…. this company has developed THE catalyst that will cause the most important technology in the world to reach mass adoption.
“just like people doubted the use of the automobile, computer and internet, people have doubted this technology too!
“That’s because it’s been stuck in this range for the last 30 years.
“But they’re not focusing on the ONE catalyst set to usher in this breakthrough any day now.
“Nor have they zoned in on the one, little-known Midwestern company that holds THE KEY.”
He runs through a bunch of examples of big potential in medicine (diagnosing disease), law (document review), retail (inventory planning), self-driving cars, etc. And then we get more on this catalyst…
“AI Just Got Its BIG Catalyst….
“You see, in order for AI to work, it has to also be able to learn — and ‘retain’ — all the information it gathers and apply this knowledge to new tasks.
“To do that, it needs one thing … A LOT of memory.
“That’s really why AI has been stuck in this range for the last several decades.
“Over the last 30 years, computing power has risen exponentially, as much as a trillion-fold. And the number of internet users has increased 25,000% since 1995, generating quadrillions of bits of data.
“The company that can create a new class of memory — that will power artificial intelligence — will stand to become the most valuable company in the world … because that new class of memory will be the catalyst for AI launching it into mass adoption.
“And today, one company in America’s Midwest has done just that.”
Aha! Now we begin to get some specifics…
“This company is the undisputed leader in memory technology. Their memory chips have been described as ‘the crude oil of the 21st century.’
“… artificial intelligence will soon begin solving major world problems like pollution, disease and hunger. It will also give every business the chance to increase earnings by nearly 50%.
“Which is why I am convinced this Midwestern company is the No. 1 stock you should buy, as AI ignites a $15.7 trillion revolution, surging 76,000%.”
And we get a few clues about large investors in the company:
“David Tepper, the highest paid money manager on Wall Street, has dumped 20% of his portfolio into this one stock — a $1.9 billion investment.
“It is the top holding in Vanguard’s popular Selected Value Fund, to the tune of $4.4 billion.”
And some big partners and financial details to throw into the mix:
“This company has already signed a $2.5 billion deal with Apple and an $8 billion deal with Intel. With this latest innovation, it expects its memory business to quickly grow to $62 billion.
“This stock trades at just five times earnings….
“Best of all, you can buy a stake in this company for as little as $50….
“Company earnings are up 94% over the past year. And they’re heading higher.”
While the Thinkolator chugs away on those clues, we’ll note this bit of Mampilly’s opinion for posterity:
“This stock is an absolute bargain at today’s prices.
“If you’re going to invest in any one company the next decade, this company should be it.
“It will be like buying Ford, Microsoft, and AOL … before they surged 250,000%, 105,000%, and 70,000%.”
“Buying this stock today will be like buying Netflix 10 years ago — setting you up for gains of 14,000% or more.”
So who is it? Well, I confess that this was a pretty easy one just going by the clues that were dropped along the way, though after chewing on the Thinkolator’s results for a little while I did waste some time trying to match the photo that Mampilly showed in his demonstration to illustrate that “midwestern company,” just as a bit of final confirmation.
But, the joke’s on me — he apparently just bought a stock photo of a generic suburban office building and used that… maybe it has some relation to the company he’s teasing, but I doubt it. Here’s the image, by the way, I use a stock photo service, too, so I bought a copy of the same photo. I even left the handy canned caption attached. This doesn’t mean anything, but I bought the photo and didn’t want to waste it.
So who is this mysterious company that’s going to be vaulted higher by the rise in demand for memory as the artificial intelligence revolution marches forward? Thinkolator says your initial guess was right, dear friend, this is Micron Technologies (MU), the company that has been among the cheapest mega-chip stocks for a long time now.
Yes, the clues all fit — other than that building photo, which is not a picture of Micron’s headquarters in Boise or any of their other meaningful “midwestern” locations (I’d say Idaho is more western, but Mampilly also teased a Utah company as “midwestern”… so he clearly uses a pretty loose definition of that geographical term.
David Tepper’s Appaloosa fund does indeed own a ton of Micron shares, about 40 million shares as of the last quarterly update (so that’s now worth a bit more than $2 billion) — Tepper has been building this stake for two years now, and it’s now almost a quarter of his reported 13F portfolio (hedge funds and other institutional investors don’t have to report the full details of their portfolios, just the US-listed equities). He’s had just as much trouble picking the right price to pay as the rest of the world, given that he’s been adding most quarters since mid-2016 he almost certainly has bought some shares in the teens as well as some in the $50s.
And thanks to the recent downdraft in the market and in the semiconductor sector, which includes some of the more cyclical-acting stocks out there, the shares are a bit cheaper than they were when Mampilly initially made this presentation last month. Chip stocks tend to be prone to big swings of over-investment and supply gluts and technological obsolescence that requires constant, massive capital investment, particularly those who produce a lot of somewhat “standard” or commoditized chips like Micron… so add that together with some freaking out about Chinese tariffs and the stock is now well south of $50 a share and trades at three times earnings. You can pick up Micron shares for about $35 now if you’d like to, and analysts are predicting a pretty steady diet of $9/share in profits for the next couple years. Analysts do not agree with Mampilly about the profits growing over the next few years, but how much growth do you expect for three times earnings?
That is, indeed, a truly compelling valuation — it seems like it should be rare to come to ruin if you only pay three times profits for a company, and, frankly, a PE of 3 is almost unheard of these days. There are about a dozen companies right now that have both forward and trailing PE ratios of 3.5 or less — and most of them are in dirty, ugly and old industries or in obvious decline (auto parts, chemicals, coal mining), many of them with balance sheet problems (debt is currently not a worry for Micron)… so what’s this little microchip maker, a global leader in memory chips and the pride of Boise, Idaho, doing with this kind of valuation? Should you bite?
Well, sentiment is terrible — so you would at least get to call yourself a contrarian if you went “all in” on Micron here. The overarching concern right now seems to be that Micron is at or near the top of the cycle in memory chips, and that looming oversupply will soon create another crash in prices… perhaps like the one that saw Micron’s share price fall by about 2/3 from 2014 to 2016, when revenues fell 20% or so. Of course, back then the PE ratio only got down to about five or six, so perhaps we’ve already bottomed out?
I have no idea, of course. I left my crystal ball in my other pants.
What are the analysts predicting? They, after all, are supposed to be the experts on the industry and the best at predicting where things will go (stop laughing!) — and in Micron’s case, they are predicting stable revenue of between $30-31 billion for the next several years, roughly the same as the company reported over the past four quarters.
The analysts are predicting that margins will suffer a bit and earnings will dip, as 2019 brings $10.52 in earnings per share, followed by $9.85 in 2020 and $9.51 in 2021… and investors almost universally despise seeing FALLING earnings on that bottom line, so perhaps that’s the main reason the stock has failed to get any big buying. It’s worth noting that Micron has no net debt, so there’s no imminent risk of a cash crisis even if earnings fall… so what on earth is it that people don’t like? Is it really just the fear of a cyclical peak, concern about Chinese tariff wars that cause supply chain headaches in the chip sector, or a rising glut in memory chips? Probably mostly the latter, but it’s hard to see inside the head of other investors.
There’s a “Micron has peaked” article from Investorplace here if you’d like a different perspective, and there’s a Motley Fool piece about the recent Intel/Micron divorce in their next-generation memory business and the impact that might have on Micron’s finances (incidentally, that next-generation 3D XPoint memory is what has led some other newsletters to pitch Micron in the past as well… it was even teased as a cryptocurrency play last year).
And yes, artificial intelligence plays heavily into Micron’s future growth plans — like everyone else, they’re aware that faster processing and more storage and faster memory access will increase the demand for artificial intelligence processing in all kinds of devices and industries… and particularly that we’ll need a lot more processing power and memory in more data centers as more of this AI processing moves to the cloud. Though that doesn’t guarantee that the newer, better, stronger memory chips they develop will be adopted fast enough to make up for competitive pressure or falling margins in their core “commodity” memory chip business (supplying DRAM for computer processing memory, NAND chips to replace disk drives for memory storage), but there doesn’t seem to be any reason to expect revenues to crash or the market for memory to disappear… it’s just possible that it will become less profitable as pricing pressure settles in.
Where do I come down? Well, I can’t claim to have any insight into whether the market for commoditized memory chips will rise or fall this year, but everything I read indicates that pricing is falling and estimates are falling for Micron as well as for other memory makers like Seagate (STX) and Western Digital (WDC)… and going from a partnership with Intel to possible competition with Intel over the next year or two doesn’t make your tummy feel great.
But still, a market-dominating company that trades at 3X earnings is soooo cheap… and it’s possible that they can both buy back stock and continue to fight for leadership in next generation memory technologies. Sometimes we underestimate the biggest companies, and Micron is indeed big… their competitors are large, too, from Samsung to the Chinese state-backed emerging giants to Intel, but most of their competitors are huge and diversified… they don’t have any listed competitors who are as tightly focused on memory chips as Micron, and sometimes being big is enough to guarantee survival through the downward cycle in the sector and leadership the next time the cycle turns.
That said, yes, it can obviously still fail — I would have said the same thing a month or two ago when the stock was near $50 with a P/E ratio of 5, and that would not have stopped the stock from going down 30%. Cheap stocks can get cheaper, because people have a tendency to want to pay for future earnings, not past earnings. Micron is also ramping up capital spending, partly because they lost that Intel collaboration on 3D XPoint memory,
There are a couple dozen relatively big tech stocks that trade at single-digit P/E ratios and with Price/Sales ratios below 1.5 or so, evidence of the cycle of destruction that comes down on this sector with some regularity as competition and innovation and commodification of products bring down former darlings… AU Optronics and Fujitsu and Hitachi and Seagate and Tower Semiconductor all look awfully cheap, too, among others… but none of those other important (or formerly important) billion-dollar industry leaders are even close to as cheap as Micron when it comes to earnings multiples, even as the fact that many of them are much, much cheaper when it comes to price/sales measures provides some room for worry about falling margins.
There was an interview with Micron CEO Sanjay Mehrotra in the Silicon Valley Business Journal yesterday, and he summed up the strategy pretty well in this Q&A:
“How do you plan to lead the company’s strategy in areas that may not be as strong? The CPU shortage caused PC makers and customers to pull back a little bit in recent quarters, which was reflected in a weaker outlook by Micron. How do you plan on keeping that strength in areas like that?
“We plan to continue to focus on innovation, in terms of advancing our technology roadmap. Bringing new technologies, new products to market. We really want to continue to strengthen our cost competitiveness, with respect to those products, manufacturing cost structure, as well as continue to evolve our portfolio of solutions toward higher value solutions.
“Whether you look at data centers or you look at autonomous driven vehicles of the future, or you look at the growing needs of mobile, or smartphones — all of these applications are requiring more memory and more storage. All of these applications are also being touched by artificial intelligence and machine learning in one way or another. Artificial intelligence and machine learning are in very, very early stages. We have barely seen the tip of the iceberg there. Fast memory and fast storage, is really the heart of that artificial intelligence evolution and these are the kind of products that Micron makes and will continue to make.”
So sure, I can see why Paul Mampilly is tempted… but I can also see why a lot of people wouldn’t have the stomach to try to catch this falling knife. I’d probably lean more on the “decent companies with a PE below 5 are probably worth a gamble” side, particularly when the company’s balance sheet looks pretty solid, like Micron’s does… but I don’t have any particular confidence that the stock will recover quickly, or that their next-generation memory products will benefit meaningfully from AI investments in the next year, so I haven’t bought. Cheap is good, but cheap stocks often test both your stomach and your patience. Micron isn’t likely to generate any big news soon — sentiment can shift anytime, of course, but their next actual earnings release isn’t until December 20… and most of the bellwether semiconductor stocks have already reported for this quarter, so you’ll have to get to big picture guessing if you want to predict how Micron ends this year.
That’s just my thinking, though, and I don’t think I’ve ever owned Micron stock… I certainly haven’t scoured their detailed filings in recent years. Perhaps you’re more informed than I am, or have a perspective to share — if so, I’m sure we’d all be delighted to hear what you think, just share your thoughts with a comment below. We don’t bite.
P.S. Paul Mampilly has definitely had some fans hereabouts in recent years, thanks in large part to his teaser pitches for ST Microelectronics in 2016 and Foundation Medicine in 2017, both of which did very well — but opinions change pretty quickly and our readers do always want to hear more, so if you’ve tried out Profits Unlimited, please click here to share your experience with your fellow investors. Thank you!
Disclosure: I own shares and/or call options on Alphabet, Apple and Intel among the companies mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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