Unraveling the Future: The Rabbit and the Giants - A Leap into AI and Hardware

The next day, Seva called. "Good morning, Uncle," she greeted. "Ferret is Apple's thing. Their new LLM. Didn't I say that Apple has been investing in this space for a long time?"

Alex responded affirmatively, "Yes, you did. There are lots of updates this morning. Also, I can't wait to get this Rabbit device. Can you imagine that? It's only $199. Maybe I'll look into Apple; it's been years."

Seva mentioned, "Matthew is the one to watch. He's very good at marketing." Alex and Seva followed Matthew, who hosted a YouTube channel with the latest AI 'how-to' videos. "When I follow his stuff, it doesn’t really work," Alex said. Seva speculated, "Yeah, he has tools that I don’t have. I bet he has a team of people who write for him and work on the show."

Alex brought up the Rabbit again. "The Rabbit is going to be a collectible. I need it to build my app. Let me go; I need to finish up my research."

Let me introduce myself: I'm Jasmine, the new narrator.

"Let's see, Rabbit is a startup funded by VC money, operating out of Los Angeles," Alex continued with his research. Later, he called Anne. "Did you take a look at my update?"

"No, I'm baking. Then I have to pick up my kid," she replied.

"Well, I've just updated my MVC list. You've got to look into those few companies I've highlighted. This AI thing isn't going away anytime soon. The demand for chips will go up; it's insane. Qualcomm was at $68 at its low in March 2020, and now it's $153. The price is up 225 percent. They're eight times book value, not cheap, with a market cap of $171 Billion. Since 2018, their performance has been stellar, and their Free Cash Flow (FCF) has gone up from $4 Billion to $9.8 Billion. It also pays a dividend. You need to start looking at it." Alex's valuation was $330 per share."Can it double in price?" he pondered.

"I don't know, but this AI thing isn't slowing down. This year the rumor is that Apple is going to join the dance. Qualcomm is all in on AI chips, their latest being the Snapdragon. Guess what?"

"What?" Anne was eager to end the call.

Alex excitedly shared:

"The chips were designed by the same people who created Apple’s M1, a breakthrough in hardware.”?

“This could rival NVIDIA.”?

“It's a dance, and the two partners need to up their game.”?

“GPTs, the software, went up a few levels last year, so now hardware needs to do more.” Apple has done more with hardware than most people give them credit for.”

“NVIDIA has been the superstar for the last two years, but I don't like their stock buyback program.”?

“It's a waste of money. I think they are overpriced." Alex checked the ranking on his MVC list, placing QCOM at the top, right behind MediaTek, which he noted, "the Chairman of MediaTek has been winning awards. At its low in 2020, it was $274 (TWD) and now $930, that's 330 percent. P/B was 3.7." Alex knew Anne wasn't paying attention but continued regardless.

"MediaTek isn't cheap," he added.?

"Their Retained Earnings have been positive, and their Free Cash Flow has gone from $69 Billion to $108 Billion, with low debt. The dividend is fantastic. I started looking into MediaTek when Rabbit launched their device." This approach kept Alex on top of advancements, often yielding more from investing than from the business itself.?

"Their earnings are going to jump," he concluded.

"Alright, I've got to go," Anne interjected, clearly frustrated with the call. Before hanging up, she expressed concern, "Are you alright?"

"What do you mean?" Alex inquired.

"You know what I mean. Are you still talking to your cat? Mom is worried about you."

"I know it sounds weird, but Blue can talk."

"Mom mentioned you have a camera attached to his collar so you can call him. How does that work?"

"It's no big deal," Alex brushed off.

"That's weird. Cats don't talk. Should I be worried about you?"

"I'm not crazy. I just talk to my cat, that's all. Maybe it's my imagination."

"I've got to go; don't go crazy on me."

"Wait, last item, I've moved TSLA down the list." Alex had been researching EVs but was recently unsettled by industry changes and big oil's pushback. The narrative and propaganda were intensifying. He needed more time for research. TSLA shares were down, and the soft landing narrative for the economy was gaining traction. "No sitting president wants to fight with rich people who have just lost a bunch of money in the market. That's not failure, just not electable," Alex thought.

That evening, Alex continued his analysis on Qualcomm and MediaTek. It was late, and he wasn't particularly interested in reading everything available on the two companies. Instead, he turned to Gemini for help. He wrote, "I'm researching AI hardware. I'm interested in two companies, Qualcomm and MediaTek. Can you help me with the research? I need to know their profit margins for 2023."

"I can definitely help you with your research on Qualcomm and MediaTek's profit margins for AI hardware," Gemini replied. "Their relevant segment is called 'QCT' (Qualcomm Chipset Technologies), which encompasses all their mobile processors, including those used for AI applications."

Gemini continued:

"Their profit margin was 22 percent. MediaTek's relevant segment is called 'Smart Edge,' which includes processors targeting smart devices, IoT applications, and AI applications.”?

“The profit margin for MediaTek was 40 percent." Alex thought that was amazing.?

Alex asked, "Qualcomm has a new product. Firstly, how new is it, and what is the history behind Snapdragon?"

"It seems you might be under a slight misunderstanding about Qualcomm Snapdragon. 'Snapdragon' isn't a single new product but rather a brand name used by Qualcomm for a whole family of mobile processors they've been developing and evolving since 2007."

"Which chipsets were designed by the same team that worked on Apple's M series chipsets?"

"Unfortunately, there's no publicly available information confirming that Johny Srouji or any specific former Apple employees directly worked on Qualcomm's Snapdragon 8 series chips."

After searching through all the videos and not finding that specific content again, Alex decided to watch the Snapdragon summit 2023. Cristiano Amon said that AI on the phone is going to be on all the time, sending information about you to the cloud, learning, and predicting what you want to better help you. Alex thought to himself, "This is terrifying." He hoped it wouldn't be based on a free and its twin 'advertising' business model. He shook his head, wondering when Apple would come up with something to steer the industry away from the advertising model and help protect users' privacy and its twin, the paid or subscription business model.

Alex inquired, "How do Apple's M series chips compare to MediaTek and Qualcomm's Snapdragon Gen 3, 4, and X?" He had been researching hardware for AI over the past few months. Apple’s M series stood out as superior.

"Direct comparisons can be challenging due to variations in testing methodologies and software optimization. Apple uses its custom ARM cores in the M series, while MediaTek and Qualcomm utilize licensed ARM designs with their optimizations," Gemini explained.

"Tell me more about how Qualcomm utilizes licensed ARM designs with their optimizations."

"ARM is a British company that designs the instruction set architecture (ISA) for most mobile processors, including those from Apple, Qualcomm, and MediaTek," Alex thought. "This is new, and if true, it would provide very valuable insights."?

"Tell me more about ARM, the British company. Is it public?"

"Yes, ARM Limited, the British semiconductor design company, is currently a public company. ARM went public on the Nasdaq under the symbol 'ARM' on September 14th, 2023, valued at $54.5 billion. SoftBank still owns 89.9% of ARM's shares," Gemini shared.

Alex pondered, "What is 89.9 percent of $54.5 billion?"

"$48.99 billion."

"And what was SoftBank's market cap in 2016?"

"$296.24 billion." Alex thought, "That cannot be right. I knew the market cap in 2021 was only $115 billion."

"What was the NAV as of March 31, 2021?"

"With an exchange rate of 1 USD to 108.5 JPY in March 2021, 29.8 trillion yen was approximately equal to $274.65 billion."

"What is SoftBank’s current market cap?"

"$89 billion."

"What is the EV?"

"$175 billion."

Alex thought, "Softbank might earn a lot from selling some of its investments or making them public, especially since they invest in advanced technologies like AI, biotech, and futuristic transportation." Ironically, their strength is also their weakness. They are good at picking winners but horrible at keeping them.

"And who designed Qualcomm's Kryo CPU subsystem and Adreno GPU?"

"It's impossible to pinpoint specific individuals due to confidentiality within the industry."

"In what year did SoftBank acquire ARM Limited?"

"2016."

"And what is the current market cap for ARM?"

"$123 billion."

Alex realized that the stock price had more than doubled in a few months. It was $49 on September 30, 2023, $70 by January 1, 2024, and as of February 13, 2024, it had reached $119. Everyone was valuing ARM as the best-kept secret, perhaps rightly so. The real secret, however, might be SoftBank.

At dinner, Alex posed a math question to Helen. "If company A is worth $89 billion and company A owns company B, which is worth $110 billion, and company A has $7 billion in cash, what is company A worth?"

Helen confidently answered, "$89 billion."

Alex, hoping for a different response, repeated the question, expecting an answer like more than $110 billion plus $7 billion, or $117 billion.

Helen reiterated, "$89 billion."

Walking to the office after dinner to finish his analysis, Alex realized Helen was right. "Why would you pay more than what you need to? $89 billion was the correct answer." Everything else seemed like a bonus, he thought. “It’s time to make money.” Alex thought.?

Jasmine narrated: "I think Alex forgot he was researching Qualcomm and MediaTek. This is what he likes to call 'Pulling the Thread.' You never know what surprises await. Until the next chapter when we wrap up Anne's portfolio."