Cabot Explorer 743

Markets are facing end-of-the-summer doldrums as concerns about job and Covid growth dampen enthusiasm. We move two stocks from buy to hold, while on the positive side, Cloudflare (NET) shares are up 73% this year and Novonix (NVNXF) shares are up 58% in the last 10 days of trading. Today we have a new semiconductor-related idea for you in an area usually overlooked by investors.

Cabot Explorer 743

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The Space Race
No less than Morgan Stanley predicts private space markets could become a $1 trillion industry by 2040, built largely on the ideas of private companies.

Companies like Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin have the goals of building a permanent human presence on Mars and, incredibly, a future where millions of people are living and working in space. To accomplish this they will need space infrastructure such as satellites, telescopes and other tools to be much less expensive.

A more achievable goal is establishing a constellation of internet-beaming satellites such as Starlink, being launched by SpaceX. This network of small satellites is potentially huge business for companies trying to reach their bigger goals. Other interesting initiatives include Rocket Lab, which plans to launch its own mission to Venus, while other companies are sending satellites to space to monitor the Earth’s surface and climate. Companies like Blue Origin, Virgin Galactic and SpaceX have just started launching their first passengers to space. Beyond revenue and hopefully profitability, it adds publicity and momentum to the private space race. The U.S.-China rivalry will be at the heart of this space race, as both now seem focused on the moon.

The risk is that as things get more crowded in the heavens, the risk of collisions proportionately increases. Yearly satellite launches have roughly doubled since 2019, according to the UN Office for Outer Space Affairs, and some project up to 50,000 satellites could be orbiting the planet in the next decade. Another risk is the weaponization of space as countries use electromagnetic pulses, lasers and microwaves to stun, disable or blind targets. On the plus side, the International Space Station has shown that microgravity can benefit the manufacturing of fiber optics, drugs, and especially semiconductors, which brings us to our new recommendation

New Explorer Recommendation
Veeco Instruments Inc. (VECO)
Semiconductors are crucial and the most strategically important technology because they are the materials and circuitry needed to produce microchips that are at the heart of everything from smartphones to advanced satellites. You might think of these microchips as the brains inside all advanced technology. Roughly speaking, there are three different types of firms in this sector.

The first are the chip designers, such as Nvidia (NDVA), which is a competitive space with low capital requirements and huge margins.

Then comes the actual making of the chips in what are referred to as fabrication plants. The advanced chip-making business, which is extremely capital and talent intensive, has gone through a rapid consolidation as the number of companies producing cutting-edge, high-performance chips has declined from 25 firms to three firms.

The third leg, in which America has the lead, is semiconductor equipment used to make and process wafers as well as test and assemble the final chipsets. According to the U.S. International Trade Commission, U.S. chip equipment firms, which have roughly 60,000 domestic employees, account for about half of global production. America is even more dominant in chip design software, controlling about 80% of the global market.

Veeco Instruments Inc. (VECO) is an American high quality provider of state-of-the-art semiconductor fabrication equipment. The company delivers the leading edge technology to U.S.-based and international high-end chip makers, some of which are 100% reliant on Veeco technology to deliver the next generation chips due the company’s base in New York since 1945.

If you walked the factory floor of one of those billion dollar-plus fabrication facilities, you would likely read the Veeco name on the machinery that fabricates the microchips. Therefore, they are more of a secondary play on the continuing growth and complexity of semiconductor production.

Plus, they sell the equipment and services that let semiconductor fabricators make better, faster, more sophisticated semiconductors. So they’re best described as a semiconductor capital equipment company, which ought to be a big growth business these days with more fabs being built and with a strong focus on expanding U.S. semiconductor production.

Veeco has been through a few restructurings and strategic shifts over the years as well as a number of acquisitions, most recently with the purchase of Ultratech a few years ago.

On the numbers side, analysts expect revenue to pick up nicely in 2021, with revenue growth close to 30% and with up to 50% earnings growth, from 86 cents per share to $1.29, and then to grow further in 2022.

If this comes to pass, Veeco is growing earnings at a solid 20%-plus rate but is valued at about 18X current-year earnings and about 15X forward earnings estimates.

As always, let’s begin with a half position.

BUY A HALF POSITION

Model Portfolio

Portfolio Changes
Altimeter Growth (AGC) MOVES FROM BUY TO HOLD
Pershing Square Holdings (PSHZF) MOVES FROM BUY TO HOLD

Updates
Explorer Trading Stocks
Altimeter Growth Corp. (AGC) shares are acting a bit better in anticipation of the company’s impending merger with Grab, which recently announced that second-quarter deliveries demonstrated strong year-on-year growth of 49%. Grab is Southeast Asia’s leading super-app platform with over nine million users in Southeast Asia, offering them a wide range of delivery, mobile payments, and financial services. We need to watch this stock carefully as any further delays in closing its SPAC deal would raise a red flag; for now, let’s bump it to a hold. MOVE FROM BUY A HALF TO HOLD

ChargePoint Holdings (CHPT) shares, despite the company reporting that quarterly revenue grew 61% year over year and raising its full-year revenue guidance by 15%, have been quiet and are trading at a bit less than half their peak share price (44) from January of this year. This is a relatively new Explorer recommendation. With more than 112,000 charging points in North America and Europe, ChargePoint is one of the biggest EV charging companies in the world. The company claims to control 70% of the charging market share in North America.

This lead is a huge advantage because of network effects as the company already has partnerships with more than roughly 60% of the Fortune 50 companies. ChargePoint has told prospective investors it believed its revenue would soar from about $135 million in 2020 to almost $1 billion by 2024, and to more than $2 billion in 2026. Therefore, I believe that the stock can be accumulated at its current levels. BUY A HALF

Cloudflare (NET) shares at 128 are up 73% this year, surging past the S&P 500’s 20% gain. The company grew revenue 53% in its most recent quarter – an acceleration compared to the 48% revenue growth it posted in the second quarter of 2020. This company provides network security, performance and reliability services to a growing portion of global web traffic. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF

Fisker Inc. (FSR) shares have been flat for the last three weeks as investors maintain a wait-and-see attitude toward the stock with expectations that it will begin delivering product by the end of next year. Fisker’s Ocean EV has a sub-$40,000 retail price point, making it a more affordable EV option. We have to accept that the company will have little or no sales revenue in 2021 and that the company’s first product won’t launch until 2022. This is an aggressive stock but I confirm a buy rating on Fisker. BUY A HALF

Marvell Technology Group (MRVL) shares have been trading in the low 60s even as the company recently reported a strong quarter. On a year-over-year basis, Marvell earnings jumped 62% while sales surged 48%. Credit Suisse upgraded the stock with a 70 price target, calling Marvell “one of the most strategic assets in semiconductors.” Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of new 5G capabilities, plus the majority of those products are proprietary and made in-house. I recommend buying at current prices if you have not already done so. BUY A HALF

Novonix (NVNXF) shares are up 58% in the last 10 days of trading.

Novonix is an Australian technology and advanced materials supplier focused on synthetic graphite for the electric vehicle and storage battery industry. Wood Mackenzie, a research and consultancy firm, projects that demand is expected to grow from 165,000 tons in 2018 to almost one million tons by 2030. This is an aggressive idea but this stock has been in an uptrend since May and is a play on an important clean technology. BUY A HALF

Palantir Technologies (PLTR) shares have been stuck in a trading range and seemingly facing some resistance around 25 despite posting good numbers. Its maverick brand makes it a favorite amongst retail investors but institutional investors remain wary. This data and software company looks to expand its commercial client base with its non-government commercial revenue already growing 90% year-over-year. The company recently reported closing 32 deals of $5 million or more and 21 deals of $10 million or more. I encourage you to consider buying shares with a medium-term outlook if you have not already done so. BUY A HALF

Sea Limited (SE) shares were up 23% in August following an impressive second-quarter earnings report, though shares have pulled back a bit over the last few days. Garena’s popular hit game Free Fire continued to be the highest-grossing game in Southeast Asia, Latin America, and India and achieved a record of over 150 million peak daily active users during the quarter. Total revenue in the quarter was $2.3 billion, up 159% year-on-year, and total gross profit was $930.9 million, up 363% year-on-year. Sea has become both the largest digital entertainment platform and the largest e-commerce operation in Southeast Asia.

I would be an incremental buyer of this stock but long-time holders should definitely take partial profits from time to time. BUY A HALF

Taiwan Semiconductor (TSM) shares are up 12 points over the last two weeks to reach 122 in the wake of the company announcing plans to raise prices in line with increased demand. Consensus expectations are for TSMC to post $56 billion in revenue this year and it could generate $75 billion in revenue in 2025. A potential headwind is that the company plans to boost its capital expenditures roughly $100 billion over the next three years. I encourage you buy this dominant, strategic semiconductor stock if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares, after reaching 35 in early August, are now in a trading range right around 25. The reason for the fall is a report that the Federal Aviation Administration grounded Virgin Galactic pending an investigation of the company’s previous spaceflight. The FAA determined that Virgin Galactic’s VSS Unity “deviated from its Air Traffic Control clearance” during the spaceflight. Thus, I believe a hold rating is appropriate and for the time being. HOLD A HALF

Explorer Core Stocks
International Business Machines (IBM) shares, after having a good first half in 2021, have since cooled a bit prompting the age old question: Is this dead money or a potential turnaround play? The positives are pretty clear. IBM has a new CEO and ambitious plans for the future. Big Blue will split into two companies by the end of the year and the stock’s valuation is cheap, trading at just 11 times prospective earnings – less than half the level of the S&P 500. Plus, it yields 4.7% while sitting on $8 billion in cash. BUY A HALF

Pershing Square Holdings (PSHZF) shares were quiet this week as Bill Ackman is staying in the news related to his SPAC activities. PSHZF shares trade at around a 27% discount to their net asset value. Pershing Square Holdings has a concentrated portfolio of about 10 stocks. This fund offers you access to the stock selections of Ackman, a highly respected investor, and his judgment in hedging markets. The question is what catalyst will unlock these underpriced assets. This fund may be worth holding long term but it is taking up room needed for new ideas so I’m moving this to a hold. MOVE FROM BUY A HALF TO HOLD

The next Cabot Explorer issue will be published on September 16, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.

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Chief Investment Strategist: Timothy Lutts
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