Nvidia Can't Buy Enough of It. I Found 2 Ways In
Summary
Brian's central thesis focuses on identifying companies that own "scarcity" within the AI supply chain. Brian asserts that revenue growth is a misleading indicator of success; instead, investors should look for expanding gross margins as proof of a company's leverage over its customers. Brian uses a "four-quarter test" to compare current margins against the previous year to find winners where supply cannot meet demand.
Brian argues that the memory sector, including companies like Micron and flash memory providers, currently displays the strongest evidence of scarcity. Brian notes that Nvidia’s massive financial commitments to memory infrastructure confirm this bottleneck. Furthermore, Brian explores the energy sector, distinguishing between equipment providers with low pricing power and owners of existing nuclear assets with high leverage.
Mentioned Stocks
Reasoning: Brian observes that Micron's gross margin more than doubled to 84.6%, proving it owns a massive bottleneck in AI memory. Brian mentions that the stock trades at 6x forward earnings and Brian's system identifies a 33% margin of safety between the current price and fair value.
Reasoning: Brian acknowledges that Vertiv is in high demand, but its margin growth of 4.3 points is much lower than memory competitors. Brian notes the stock is at the 94th percentile of its valuation history, which suggests it is not currently 'on sale' according to Brian's metrics.
Reasoning: Brian identifies Constellation Energy as a winner because it owns existing nuclear reactors, which are scarce assets that cannot be easily replicated. Brian points to its 24.5 point gross margin increase as evidence of significant market leverage.
Reasoning: Brian highlights that the flash memory business (SanDisk) saw gross margins jump from 26% to 85% in one year while revenue tripled. Brian notes it lacks the long valuation history of others, but its margin of safety is similar to Micron's.
Reasoning: Brian points out that despite revenue growing by 46%, gross margins fell by 2.2 points. Brian concludes that nVent's products, like cooling loops, are managed like commodities and the profit is flowing to the buyers rather than the company.