Semiconductor focus

First up is Qualcomm (NASDAQ:QCOM). It’s a US-based semiconductor and telecommunications equipment company, with a share price down 4% over the past year.

It designs advanced semiconductors used in things like smartphones and automotive systems, as well as owning one of the deepest patent portfolios in wireless communications, including the essential 3G, 4G, and 5G standards (something I only just found out!).

The licensing segment is the profit engine, while chip sales drive scale and cash flow. I think this makes the business a good option for consideration, as it’s not as volatile in terms of earnings as other semiconductor shares that are purely reliant on the current AI boom. Of course, the surging AI demand is one reason why the stock could rally in coming years, but the fate of the company doesn’t rest on this alone.

It currently has a P/E ratio of 15.81, making it good value relative to the index. Going forward, it has the solid cash flow to enable further investment into whatever lane becomes the best opportunity, be it automotive, phones, AI chips, or something else.

One risk is the geopolitical exposure to China. The country accounts for over half of annual sales, so trade restrictions with the US could be painful depending on how things go.

An old favourite

Another idea is Cisco Systems (NASDAQ:CSCO). The business has been around for a while, but I often think of it as providing the plumbing of the internet. Most of us have (or currently do) use a Cisco product in some form, either in hardware or software form.

Over the last year, the US stock has rallied by 25%, yet the P/E ratio is still at 21.85. Although it’s not as cheap as Qualcomm, it’s still good value in comparison to the Nasdaq. The business model is steady, making money from selling products, providing software licenses, maintenance, and support contracts.

A big area of growth is selling security and cloud services, which I think could be something to watch in coming years. Cybersecurity is becoming more of a buzzword, and companies are allocating more money to this critical area. Yet even if this doesn’t take off, the firm is making 40% of revenue from recurring sales. This visibility of future revenue is something investors value highly.

One concern some might have is growing competition from new challengers. Cisco indeed needs to keep adapting in order to survive, especially in the innovative tech space.

I think both shares are good value that investors can consider if wanting to increase US exposure.

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It’s now a $3.1trn colossus! Yet analysts at Evercore ISI reckon Nvidia’s market cap could one day reach $7trn and make up 15% of the S&P 500. Another broker predicts $10trn by 2030.

Has Wall Street become silly street? And is the Nvidia share price now simply a joke?

Echoes of Cisco?

We’re currently in the middle of the generative artificial intelligence (AI) gold rush. Nvidia, whose graphics processing units (GPUs) underpin most AI applications today, seems truly unstoppable.

But Tesla also appeared unstoppable in years gone by. Today, though, the electric vehicle (EV) pioneer seems far less formidable as it guides for “notably lower” sales in 2024. The EV mega-trend has hit a major speedbump and Tesla’s stock is now 55% off its peak.

AI is undoubtedly another mega-trend. Indeed, it’s arguably the biggest tech innovation to come along since the internet.

Speaking of which, Cisco Systems (NASDAQ: CSCO) was the Nvidia-esque winner of the late 1990s.

Its networking equipment enabled much of the internet and its revenue surged from $1.2bn in 1994 to $18.9bn in 2000. Unsurprisingly, Cisco’s share price also took off like a rocket and it became the world’s most valuable company.

Then the dot-com bubble burst and its stock fell more than 85%. It took two decades to recover on a total return basis, despite the firm continuing to grow its revenue.

Valuation

In 2000, Cisco stock was trading at a dizzying 39 times sales. Nvidia today? 39 times!

On the other hand, Nvidia is growing a lot faster than Cisco was at its internet-fueled peak. It reported revenue of $26bn in Q1 FY25, and it’s forecast to post another $28bn in Q2. That’s slightly more in two quarters than Cisco is expected to record for the full current year ($53.7bn).

Meanwhile, Nvidia’s Q1 net income of $15.2bn was more than the consensus forecast for Cisco’s full year ($15.2bn). And its net profit margin is currently above 50% versus Cisco’s 15% back in the day.

Moreover, the ‘Magnificent Seven’ group of AI-powered stocks — Apple, Microsoft, Google-parent Alphabet, Amazon, Tesla, Meta Platforms, and Nvidia — aren’t about to go bust like Pets.com and countless other start-ups did back then.

So for me, comparing the current AI revolution to the dot-com bubble — or Nvidia to Cisco — isn’t fully justified.

$2trn in 12 months

Still, I’ve been considering how it took over 100 years for a firm to reach a $1trn valuation. And how Nvidia went from $1trn to $3trn in just 12 months. Now some eager analysts are talking up $7trn and — gulp –beyond.

I wouldn’t go as far to call the Nvidia share price a joke, but my fear is that the valuation is simply unsustainable. Remember, hardly any companies are making profits from generative AI applications today. They’re being given away for free.

Consequently, I envisage more value destruction — particularly for subscription-based apps — than value creation when it comes to generative AI. Nvidia’s pricing power could decline as competition increases and demand wanes.

If I still owned the shares, I’d consider taking some profit while the going is good.

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WASHINGTON, DC — Last month, an incredible streak was broken in international sports. In a football match against Spanish League adversary Rayo Vallecano, Futbol Club Barcelona walked off the field with fewer minutes of ball possession than their opponent for the first time in 136 games. The game (which Barcelona won 4-0 nonetheless) marked the first time in three years in which Barcelona, or Barca, as it is popularly known, did not win the battle of possession.

One of the world’s elite football teams, Barcelona has enjoyed success that stretches across decades. While borrowing from different football philosophies, Barca’s style and system are unique in the football world. The principles by which the team plays, moreover, translate well into the world of investing. Let’s review four hallmarks of Barcelona’s style that have parallels in that most unheralded of sports: long-term equity investing.

One-touch, two-touch

The Barcelona style is affectionately referred to by fans as “Tiki-Taka” football. Tiki-Taka is a Spanish onomatopoeic term roughly similar to “click-clack,” the sound of the ball being passed crisply from one player to the next using only one or two touches.  This makes for remarkably efficient ball movement and furthers the primary obsession of possessing the ball. The Tiki-Taka concept maximizes ball sharing between players.

Outside game day, Barca players (whose average club salary would make any NBA owner reach for an Alka-Seltzer) relentlessly practice fundamental drills, some of which even preschoolers can emulate. In my personal favorite practice set, called “rondo,” players form a small circle, and play keep-away from two chasers in the middle, using one-touch passes. While the speed at which the team moves the ball can resemble a Japanese pachinko game, the underlying premise is utterly simple.

Investing Parallel: Buy companies that structure themselves to exchange ideas quickly and fluently.
Susan Wojcicki, employee number 16 at Google (NASDAQ: GOOG.US) and now a senior vice president of product management and engineering with the company, had this to say on idea sharing in an insightful article entitled “The Eight Pillars of Innovation:”

By sharing everything, you encourage the discussion, exchange and reinterpretation of ideas, which can lead to unexpected and innovative outcomes. We try to facilitate this by working in small, crowded teams in open-cube arrangements, rather than individual offices.

This past week, Google’s share price crossed $1,000 on stellar earnings.This is due in no small part to the profusion of ideas that are monetized year in, year out at Google. Like the Barcelona rondo drill, companies that crowd teams together and share ideas quickly have an edge.

Keep possession of the ball

By passing the ball among themselves and denying the opposition touches, Barcelona mathematically reduces their opponent’s chances to score. Hoarding the rock also wears down the rival side, until a designated assassin such as Lionel Messi or Neymar da Silva Santos Júnior (known simply as “Neymar”) slices through the defense for the kill.

While some criticize Tiki-Taka as boring, it requires an immense amount of physical skill and keen decision-making to keep the ball within your team’s possession, to say nothing of the reserves of patience the team draws upon until it is the right time to strike. 

Investing Parallel: Buy companies that don’t give up market share easily.
While Coca-Cola’s (NYSE: KO.US) revenue growth rate has slowed over the last few years, the company just recorded its 25th consecutive quarter of increased market share by value. And just as statistically, teams that control possession tend to win more games, companies that obsessively increase market share while retaining profitability tend to make great long-term investments.

The importance of the triangle

The triangle is the basic unit of the Barcelona offense. During a game, three players loosely form into a triangle, and transfer the ball via those quick, one-touch passes. Approaching teammates from any angle instantly form more triangular possibilities. This forces other teams to run more and chase the ball while Barcelona players employ their keep-away skills, expending relatively less energy. It’s a simple, logical, and efficient field formulation of which Euclid, the father of geometry, would no doubt approve.

Investing parallel: Avoid companies whose business segments are organized inefficiently, and seek out companies with superior segment organization.
Part of Hewlett-Packard’s (NYSE: HPQ.US) current malaise is its patchwork of seven gargantuan and disparate business segments, which range from “Printing” to “Storage and Networking” to “Enterprise Servers” to “HP Financial Services.” Another tech bellwether, Oracle (NYSE: ORCL.US) , describes itself as operating in just three businesses: hardware, software, and services.Which company do you think has an easier time focusing on its business?

For the last several years, in any given quarter, Oracle’s net profit margin has landed in a range of between 20% and 30%. HP’s net profit margin — when it’s been positive — has fluctuated between 2% and 8%. 

Keep the defensive line high

When Barcelona moves the ball deep into enemy territory, the entire defensive line moves up. This puts enormous pressure on their adversaries, as the field effectively becomes smaller. As triangles multiply and the short passes fly, defense and offense merge into a single organism, zinging the ball at numerous angles, but moving it methodically ever closer to the goal.

Investing parallel: invest in companies that understand how to keep pushing their defense (their existing legacy business / cash cow) while innovating in new areas.
My favorite example of this philosophy is Cisco Systems (NASDAQ: CSCO.US) . Cisco has placed bets on a number of alternate revenue streams, for example, security, which is a small fraction (3.7% to be exact) of total yearly revenue of $48.6 billion.

Yet while it expands these areas, the company never loses focus on its strength in networking. This has paid off recently, as a good chunk of computing that is migrating to the cloud runs through Cisco’s networking. To quote CEO John Chambers from Cisco’s last earnings call, networks are “squarely at the center of the cloud, mobility, BYOD (Bring Your Own Device), [and] security…” 

Parting ‘shot on goal’

There are many more investing insights you can glean from watching the sophisticated Barcelona side play. Are you a fan of football? Let me know in the comments section below what other investing parallels you notice when watching Barcelona. And fans of arch-rival Real Madrid, feel free to weigh in on your phenomenal team as well!

The post Learn To Invest Like FC Barcelona appeared first on The Motley Fool UK.