Yet Another Value Podcast - Doug from Fabricated Knowledge on the Semis industry and his RMBS thesis

Episode Date: June 10, 2022

Doug Olaughlin, founder of fabricated knowledge, comes on the podcast to talk about the semiconductor space in general and then dive into his thesis on Rambus (RMBS) and why the market might be missing their big growth call option.Fabricated knowledge website: https://www.fabricatedknowledge.comDoug's RMBS thesis: https://www.fabricatedknowledge.com/p/a-pure-play-on-datacenter-memory?s=wChapters0:00 Intro3:00 Why semis are so compelling 4:10 What's driving the auto / semi shortage6:55 What Doug's seeing in the semi world11:30 Why generalists struggle with semis15:15 Where are we in the semi-cycle right now?21:30 Separating semi inventory issues from long term supply coming on31:45 How fragile is the semi supply chain39:40 Does a crypto winter impact semis?44:40 Diving into RMBS56:00 What Doug is seeing the market is missing58:30 How sustainable is RMBS's FCF?1:02:30 Why is insider ownership so awful here?1:06:30 RMBS's acquisition program1:08:05 Will RMBS really own CXL?1:14:30 closing thoughts

Today's episode is sponsored by TIGIS. Understanding expert insights is table stakes for investors, and there's no better option than TIGS. I've been using them for almost two years to get up to speed on companies, and they've helped me immensely as an investor. TIGS also recently acquired BAM SEC, which adds a super fast way to access SEC filings and earnings calls and to incorporate financial data into my models. I run a monthly DeepDive series sponsored by TIGS on the blogs. I'll include a link to my cable deep dive in the show notes, and I'd encourage you to follow the link if you're interested in how expert interviews

can help you learn more about a company. Currently, anyone who signs up for Tigis gets free access to BAMSCC as well. So check it out. Hello, welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it wherever you're listening to it. With me today, I'm happy to have Doug O'Loughlin.

Doug is the founder of Fabricated Knowledge, a semiconductor dedicated... I don't know if it's a substack, a newsletter. I don't know what do you call it. But Doug, how's it going? Research service, you know? But, yes, it is mostly through a substack. But yes, Fabricated Knowledge is a semiconductor newsletter written with investment professionals in mind. It's a very hard place to understand.

And I just try to explain why it matters. And, you know, you don't have to go into the technical detail I do. And then I kind of, you know, explain in slightly... better English. I mean, but it's still pretty, you know, pretty gnarly. I was prepping for this podcast and it's like, oh, God, this is why generalist struggle in semiconductors, because it's tough. But let me start this podcast the way I do every podcast. First, a disclosure to remind everyone that nothing on this podcast is investing advice. Please do your own work, consult a financial advisor, all that type of stuff. And second, the second way I started

every podcast is with a pitch for you, my guest, I was telling you before this podcast started, but I am so excited to have you on because I have the best pitch I will, ever have for this podcast. So a few weeks ago, I was having dinner with a friend. And he's an analyst, super sharp guy. He's an analyst. He's been at four multi-billion dollar funds. He's covered semis. He's covered internet and all this. And him and I were just talking. He was like, look, I think a lot of Finchwit, they're flat out frauds, hucksters. Like a lot of these guys are people who are running a PA account and they've blown up multiple times. They have no idea what they're talking about. And then he's just stopped and he said, you know who I know is not a

fraud, that mule guy who covers semiconductors. I've covered semiconductors. That guy is unbelievable. Every single buyside shop in the world, if he was looking to get hired, would drop on a dime to hire this guy. He is fudging unbelievable at semiconductors. And when he said that, you and I, 24 hours ago had set up this podcast and he was saying this and I was just like, oh my God, this is going to be the best pitch of all time. So that's my pitch. My friend's a super sharp guy. I agree with everything he said, so sharp on semiconductors. So I don't know if you want to critique that or anything, but that's my pitch for you. You know, I will totally take, I'll take every compliment I can get. Thank you very much. I try pretty hard to cover this space. It's pretty hard. I would

definitely say it's a little bit of a passion because it's, it's brutal, man. Like, I was, I was reading something today and I was like, this isn't even English. Like, it really is like a whole other language. But like I really think one of the reasons why it's so compelling to me is like it's everyday magic that is part of every single, you know, all of our lives every single day and people just don't pay at any due where, you know, all the software stuff has to be built on something. And it starts with the hardware. And I think that like it's magic. Like the actual core semiconductor process is is magic. And I think everyone should learn a little bit more and be excited about how this magic runs are. entire lives. So, like, we tricked Sand into thinking. It's my favorite meme. Like, we just tricked a rock into thinking. And then now we have it think for us all day. It's amazing. It's, it's matchable. You know, I kind of think, like, there's that famous line software is eating the world or whatever, but, you know, the software needs to be powered by something. And as you said, hardware is powering it. And people for, we're going to talk semiconductors cycle and everything. But, you know,

there's an automobile shortage right now, which was driving all these used car prices, everything and everything got crazy. And correct me, if I'm wrong, the reason it was there was an automobile shortage was because there's so many semiconductors in autos, and they couldn't get semis. So, like, semis were driving an automobile shortage, which was driving inflation and, like, all these, all these knock on effects from semis. Yeah, actually, there's a, there's a whole interesting. There's like a multi-part to the auto shortage, but I think the first and foremost is a 2020 happens, right?

Autos cut, cut their orders. The first thing happens, hey, recession, no one's going to buy a car. They cut all their orders, and they essentially become, go from the front of the queue to the last the queue to getting to getting a semiconductor. Meanwhile, all the cloud companies are like ordering more and more and more because, you know, we're all on Zoom day by day. But then, you know, as it goes on, they're like, wait, we actually can't get these chips. And almost every single one of our roadmaps have meaningful amounts of more chips, whether that's EV, which means the power and like all the semiconductors related to power management and like, you know, higher, higher voltages and all

the complexity of that. And then also the ADAS side of things. Like, there's, there's probably for the next decade, there's a new roadmap of new safety features and every single new safety feature has more semiconductors. So there's about a quadrupling of semiconductor content. And most of the auto OEMs did not think about semiconductors as a real, like they thought of it as a pure commodity where it's like, hey, we put it in the order, we get it. They didn't realize if we all put in orders, we all 4X are content or whatever, we're just not going to have the supply availability, especially for the types of semiconductors they're ordering,

which is more trailing edge. Trailing edge, meaning older chips that have been around for a longer time that are not quite like the extremely small, five, three nanometer chips that are being built, you know, soon or tomorrow, but these older, you know, even larger, like 96 nanometer chips. They're very, there are 28 is actually probably the most popular note. They're very mature. And so, but no one, no one ever thought about these chips.

Everyone thought that, hey, well, we're just going to have these handing down fads. Like, we always have capacity at the old chips, and everyone ordered more old chips at the same time. And they're like, wait, we can't just make, you know, chips don't just come out of the ground. So that was the really interesting dynamic where these old chips that were thought of as extremely commodity became a lot more important all of a sudden all at once. So that was the big, the two big prongs for the automobile, the semi-guffrage shortage. That's perfect. And look, this podcast is going to be a little different because I want to start. you know, you're a semiconductor expert, as I said.

I want to start with a general semiconductor, just overview what's going on in the world. And then we do have a pitch that we'll do it then. We'll turn to a specific stock. But let's just keep going on the semiconductor. You know, I'll just toss it over to you. What are you? And semiconductor is a very broad space, right? Yeah, there's a lot of different companies, hundreds of different inches.

But let's just turn it over to you. What are you seen in the semiconductor world? Like, what are you thinking about today? I know you had a great article on the bullwhip effect, which certainly we started talking Yeah, I feel like that's even harder to talk about it. So, so, like, at the high level, I think, I think it's easiest to first think about the end markets. Like, there's really only a few big end of markets. The biggest two in the entire world is PC and phones.

And then the third biggest that's starting to come up and become much more meaningful part of the pie is data centers. So data centers, the growth, the growth segment. PC is the segment that has never grown until COVID. And ever since COVID, it's actually been growing. now it looks like it's going to shrink this year, obviously because it's like a lapping of a one-time effect. And last but not least, we have phones. You know, phones have become way more complex over the years, way more content as we become 4G, 5G. Each additional part or each additional phone has more packages, more parts of the package and more complexity. So that's been a huge driver

on the content part, but phones are pretty, pretty topped out in the penetration curve. Harry, everyone essentially owns a phone. So that's not exactly a growth market in terms of volume. It's a growth market in terms of value because there's higher, more content. PC is not a growth market in terms of units anymore because PC cycles, you know, PCs have essentially been broadly penetrated, ever so slightly maybe in terms of value. And so now the real market that everyone is really focused. on going forward in terms of volume and value is the data center. So data center is where I'm

focused on. And most people are focused on for the growth side of things. So yeah. Can I ask you just a dumb, dumb question? So you mentioned the big ones, but I do look across the world and it seems like semiconductors are everywhere, right? Like 30 years ago, I don't think people would have been really thinking cars for semiconductors. And now, as you mentioned, cars, you know, smart fridges, smart fridges, the Amazon, Alexis, all this sort of stuff. Like how do, do those, do those, I mean, I know there's a lot of them, but are those so small when it compares to just these giant data centers consuming hundreds and hundreds of thousands of units that they don't really move the needle? Or do those come into play at all? So, okay, so actually talking about the, so those are the big three.

And then the next two big markets is automotive, obviously, is this huge incremental growing market with all these new units. And last but not least is IOT. IOT will probably be the fastest percentage growth going forward for the next 10 years. And they just, there's just a really subtle penetration. It's super hard to nail. You can't be like, hey, this is the device that's growing IoT usage. A perfect example actually was the SC Micro Investor Day. They talked about how this drill went from one 32-bit MCU, which is just a microcontroller unit, to three.

And they're like, that's, you know, that's a tripling in content, right? And they're like, okay, it used to be just one to control the drill, essentially, the motor. Now we have one to control the motor, one to control the power management so that the battery is more efficient. since it's electric and one to control the connectivity. So it's connected to Bluetooth or Wi-Fi or whatever. And so that's like a perfect example in my mind of the linear step of how content increases. And it's kind of this, it's almost exponential, especially as we connect everything to Wi-Fi

or Bluetooth. And it's just entering every aspect of our lives. It's very hard to pin down the one thing that is causing the IoT thing. Because on the other side, you have this industrial thing. all these factories are starting to invest meaningful amounts in computer vision and even even in stuff in like very old world stuff like the walmart's for the world you know Walmart has like a GPU inside of it running a machine learning algorithm to like see where the consumers are walking around or like doing a heat map and like that's very sophisticated levels of

compute in something that was pretty dumb very recently so it's it's just essentially wherever software is eating the world, there's a little bit of hardware that's being attached to it. So everywhere that we're starting to add smart capability, there's going to have to be a semiconductor associated with that. So just as our world becomes more digital, it just creeps in by every single way. And it's everywhere. It's like, it's hard to, essentially, if it's like, if there's electricity in it, odds are, there's probably a semiconductor in it, too. So let me ask, again, I'm a generalist. And I think my history with semiconductors is generalists generally get their face reps on investing in semiconductors, right? Because semiconductors,

even though it is a secular growth market, obviously, like it is still quite cyclical and we can talk bullwhip and everything later. But I think journalists tend to get really pulled up on semiconductors at the heights of the cycle where they say this is going to grow forever. These multiples look attractive. And it's the famous, you know, in a cyclical, you actually want to sell when the multiple is low and you want to buy when the multiple is high because when the multiple's high, it's because earnings are depressed. Let me ask you, what are you? What are you? What are you? you think it is that when you're talking to generalists about semiconductors, what do you think it is where they most frequently talk to you something? They're like, oh, they don't understand this

thing or, oh, they're missing something here. One of the big ones for me is the stickality of memory and the cash intensity of some of these businesses is very intense. I mean, I wrote up Microns Investor Day. And I really advise you to take a look because one of the biggest, Like, I constantly hear, hey, it's a really low price to earnings. And that's like the typical general strap. But if you look at a free cash flow conversion, they do not make that kind of free cash flow conversions. Earnings to free cash flow is about 50%.

So that's one of the places that I really highly recommend you do like a really solid look at is like, where does, when does it become cash? Because that's a really important and hard part of the business. The other part is obviously the volatility. The chasing like, it's hard. Cycles are hard. And this cycle has been an actually. you know, investors are not dumb. Every cycle, I would say investors have become smarter. Like

the market tends to bottom one quarter or bottomed one quarter earlier than it did last time. The markets have been more forward-looking. They've been more intelligent. And so each cycle actually doesn't get easier. It gets a little harder. You have to be a little smarter. But I do think that if you can handle some volatility, it's a pretty interesting subsector. I, in over, I want to say, both the 2000s and the 2010s is one of the best performing sub-industries within the NASDAQ. It outperforms the NASDAQ over a long period of time.

Obviously, there are some intense drawdowns in between. But part of the reason why is because especially if you're a successful semiconductor or semi-cap company, you make a lot of cash, man. And those multiples get low because of the fear of the cyclicality. But sometimes, you know, a lot of your fears are usually bigger in your head than in reality. So a lot of times the companies get to buy back a lot of shares.

And the actual free cash flow per share growth over a longer period of time can be very impressive, but there could be some real troughs in between. And it's very rare that you have an entire industry that grows like mid single digits, but the actual end companies have been growing gross margins, EBIT, you know, at double digit rates. So it's a pretty impressive and a business that continues to still benefit. benefit from meaningful amounts of operational leverage. So as they become larger, they become more profitable, et cetera. I was just laughing when you said Micron as your first example, because I remember back in like the early 2010s when Monich Piroi and David Einhorn had big

positions in Micron. And I think at the time it might have been trading like around book value, around approaching networking capital. I can't remember. And I mean, people can go pull up the stock. This is the ultimate example of a volatile stock. You know, 2012, it's at six, 2014, it's approaching 40, 2016, it's around 10, heights of the COVID boom, it's approaching 100, and here we are today at 70. Where do you think, again, I know semiconductors are very broad industry, but where do you think we are in the cycle? Obviously, I don't think we're in the early 2021, like COVID, every slot, take everything. We're not in that boom anymore, though I think a lot approaching results, but just in the market, where do you think we are in the overall semiconductor

cycle right now? So it's pretty complicated and hard to know. If you listen to the company's talk, they're like, hey, 2023, 2024, we're starting to be booked out by then. So to them, this shortage continues and it kind of draws out the demand. They never really were able to match the supply needed to clear demand. And so it's just been pulling out the cycle longer than possible. And so I would say most public company CEOs and management teams have been saying, hey, this is still like, we're still going to be growing next year. The cycle is not over. The problem is some of the, some of the recent quakes and in the consumer over ordering, uh, over ordering of inventory, really bodes terribly for semiconductors, right? Because it's the classical, like, not classical.

This whip in COVID has put goods at the forefront of purchasing for the first time in a long time. And goods includes obviously stuff like phones, stuff like your smart, you know, your smart meters, all the stuff for your house, like all these like miscellaneous consumer-related products that have some kind of semiconductor in it. And these goods have been are the largest percent of the pie they've been in a long time. And so now we're starting to have the services snapback. And you're starting to see companies have overordered inventory against this. And this is the biggest fear, in my opinion, because, hey, now we have overordering at the end. And then meanwhile, all the suppliers, all the way up to it, have been over or, you know, they're like, okay, well, we can't meet demand.

We can't meet demand. So we have to overorder our semiconductor supplies or, or, and right now, semiconductor companies are like, well, we really hate you over ordering. So what we're going to make you do is you're going to have to order over the longer periods of time. And so effectively it's double ordering, but, but through like lengthening. the time that the orders are through instead of the intensity in a very short amount of time. So it's just been this really confusing cycle and

I want I mean it's so far it hasn't not cracked but a lot of second derivative numbers are starting to crack and now we're starting to look at some of the numbers lower because of Shanghai. TXN was one of the first companies to move down their guidance

which is the beginning of the lowering of numbers and when the numbers start to the forward numbers start to to lower, that's when the stocks usually start to bottom, actually, because the stocks actually reflect the cycle before it happens. Then the numbers start to lower. And then the stock's bottom actually when the numbers stop being lowered. So I don't know, man. Like there's this weird, like, some of the companies are still putting out beats and raises. Some of the companies are starting to lower their earnings. It's one of the weirdest cycles ever because you could look at

automotive. And I feel very confident saying automotive will probably grow, this entire time just because the content and unit problem and the fact that we have all these cars that there's just so much pent of demand and you use car prices are so high. But then you look at stuff like consumer PC. PC is definitely not going to grow. PC is going to be a market that's going to implode. Maybe not implode. It's not to be a strong word. But it's funny the beginning of this year, everyone was like, well, PC might be flat. And now everyone's saying PC might be down high single digits. And now, I mean, if it's down double digits, it kind of, and PC grew in Q1. So that implies that by the end of the year, PC is going to be contracting by meaningful

amounts in the exit rate in Q4. So that, to me, is extremely worrying. But then, you know, the bulls can say, hey, look at data center. Data center continues to accelerate. It's growing. It's adding more revenue in absolute terms. And it just really complicated. So because in the past, there really was only two cycles, there was only really one cycle, the PC cycle. And then there was two cycles, the PC and phone cycle. Now there's the PC phone, data center, automotive, and IOT cycle. So they might be able to smooth each other out, but it's starting to look like the shift from goods, services to goods and back to services will definitely impact semiconductors.

So in a long-winded way, we are probably starting to see the beginnings of a cycle. But I don't really like the downturn, but I mean, I don't have any strong evidence. instance saying like, hey, this is it. Like, you know, pricing is eroding because pricing is not eroding. They're still raising prices against all this, which is something that is different than past cycles. And then also another example of something that's different than past cycles, cycles can be expressed through capacity. There was a really interesting paper I could read. Maybe I'll send it over to you for show notes. But it talks about how historically the way you grade a cycle is the capacity utilization at fabs. And essentially, it's never been higher,

which implies, you know, it could get worse pretty quickly, but usually what happens is it's never been higher and then it starts to go off a high level and then it, then the cycle turns. But, you know, we keep adding supply every single quarter and they're like capacity or no, utilization has never been higher. Add more supply. Utilization has never been higher. And every semi-cap company, which is the company that sells the tools into these fabs, continue to beat that same drum that even though they're selling more tools, utilization has never been higher. So it's, it's confusing. There's more crosswinds than I, it's insane. So just on the, on the capacity thing, that's, that's something I want to ask because, all right, you can have one

thing where inventories get too high, right? Your customers over-order, so they need to draw down their inventories for six months. And you see that, you know, it's not just semiconductors. Right now, the retailers last year, they couldn't get enough inventory. They ordered as much as they could. And guess what? They ordered a lot of the COVID products that, like, you know, with at-home stuff that people were demanding. And then today you see Target. Target's like, oh, shoot, we're stuffed with like, we've got the stuff for, we've got the fitness of people,

equipment for people working at home, and people aren't buying that. People really want luggage, and we're short on that, and they get stuff. But eventually that will normalize, right? So there could be a short-term inventory issue where your automakers over-ordered. But the bigger worry, I think, would be, you know,

the oil thing, where prices are really high, everyone drill, drill, drills to hit these high prices. And then 12 months from now, everyone drilled, you know, and I say oil, not right now. I'm thinking more like in the 14th, 15 range. Everybody drilled so much. Oil prices go from 100 to 30 because all this supply comes online. And, you know, it went from there was 90 million of demand and 90 million of supply to now there's 100 million of supply and 90 million demand and prices just go through.

So my question for the semis is, obviously there could be some inventory issues in the short term, But the medium to longer term issue would be, do you see any signs of them overbuilding capacity? So that's definitely the top of mind question because you look at the, you know, you look at semi-cap and you look at the way for spending equipment. It's, it's been the longest bull run, essentially in the history of WFE spending, many, many positive years. And it's really rare that we've had, like, I couldn't find this much positive years, like, on an absolute, like, you know, on like a three-year stack, unless if I,

looked back into like 1980s when semiconductors were essentially like invented as an industry you know like it's it's been a long time since you've seen the percentage numbers like that um but there are some things to push back against that thesis that I think are really interesting and like I hate to say like this time is different right you know you you hate those words do a shot take a shot this time is yeah chug you know chug uh whatever you're drinking but um the the thing that is that is different this time is the economic side of Moore's law is over.

And that's one of the reasons that really got me interested in semi-caughts and writing about this whole space is that Moore's Law was this like sacred law that worked for a very long time, 30, 40 years.

And, you know, there's a joke that, you know, Moore's Law doubles every year, like the haters of Moore's Law double every year. Do you want to just define what Moore's Law is just, I'm sure most people know,

but just in case anyone else. So, yeah, so like in a high level, we're going to, essentially, you could double the capacitor, the effective, you know, the effective speed every two years for like half the price. And so you do that for a very long time. And things become a lot cheaper, quicker and faster very quickly. That relationship, I want to say it wasn't, I think it was, what was it? So it's like 40% improvement or something each year. They did that for like 30, 40 years. So it's astounding. If you were buying computers in the 90s in 2000, you know, you'd buy a computer in 1995 and they say, hey, we have a, I'm going to make the numbers of 128 megahertz processor. And then you'd buy one two or three earlier. And they'd say, we have a 256 megahertz processor. And it's actually a little bit cheaper to buy it now. And that's exactly what Morris Law is right there. Yeah. Yeah, it's amazing. It actually is, I mean,

it's, it's been a meaningful part of what's driven society for, like, like, just our availability of information technology is very much driven on this, on this. And what's interesting is this relationship actually quietly broke down at the 2012. So essentially, every year it became, it was cheaper to make a faster computer. That's amazing. But actually in 2012 at the end of 28 nanometer, it actually became not cheaper to, it essentially stayed the same. And then, and then quietly in around 2018, I want to say like 2018, it actually became more expensive on a per transistor basis to make a faster computer. So we actually had a U-curve where it's been going down for a super long time.

We hit 2012, it stayed flat, and then now actually it's starting to increase again. So that's something that is very different. And that is something that's not like, that's not like conjecture or like, oh, will this happen? That has happened. So the ability to double transistors or the effective doubling of transistors, that will probably continue, but will to be able to double at a cheaper price that will not continue. And so why is it? Why did, why did Moore's law, you can Google Moore's Law and the second thing that pops up is Moore's Law is dead, but what did it happen? Is it, we just ran into the limits

of physics. We literally couldn't fit any transistors into smaller spaces or was there something else? Um, so it's very philosophical, but, but at a high level, um, it became harder and harder to shrink. So once upon a time, it's called planar shrinking. Everything shrank in 2D, in two dimensions. So literally it was like making a smaller rectangle. Well, eventually that just stopped working because of whatever reason, being able to get the electrical charge to like really register. So they actually added what's called a,

they added a third dimension for the first time. So that added complexity and that complexity added cost. And then shrinking in the three dimensions, that was nowhere like the relationship shrinking in the two dimension. And so we've been shrinking in two dimensions for from like 1970, you know, 70 till now until 2012. And literally that's when the cost relationship started to break down. You add in the third dimension and then boom, now it doesn't cost as much. And now we're starting to add instead of just, it's called a fin-fet instead of this linear, you know, this upright gate.

Now we're starting to add what's called ribbon fed. So it's like really complicated. The shapes are now like instead of just two dimensions, like three, there's like all kinds of stuff, all kinds of materials, kinds of like the precision has to be higher and everything on the increment has added cost. And so that's where the relationship really down. Doug, a billion dollar ideas. Look, they max out on 2D. They're starting to max out on 3D.

You and I, we're going to go start a semiconductor. We're going to improve on 40. We're just going to go and improve on 40. Man, I, I, it's truly a billion dollar dollar idea. But unfortunately for us, there's way smarter people than already working on it. Like that's like the amazing thing is like these people have been thinking the people who work on in the industry. It's magic. And they've been working and thinking about this for like forever.

And what's actually interesting about the industry is that like, you know, the Moore's Law is dead. Like that was that was very predictable and like well known by a law like for a long time. And essentially a lot of the problems we have going forward are well known and understandable. Like the solutions are kind of debated years ahead. and then eventually they pick a path forward. And I think that's actually one of the most interesting parts of the semiconductor industry that is very interesting to invest in, if it makes sense. It's very, it's very rare, like, you know, you could debate the nature of, like, cloud software.

But imagine if everyone has, like, a general roadmap and you're like, yeah, this is what's going to, what it's going to be like, there might be a little, like, you know, kinks to iron out. But the future is pretty well known in the intermediate, in the, for the semiconductor industry. And that's really interesting from an investor perspective because you can go logically be like, hey, this company should benefit under this regime in the future. And you know that because the entire industry has decided,

hey, we're going to scale forward in advanced packaging, for example. Advanced packaging is the solution that we've decided that's really come to the forefront to continue to scale semiconductors at a bigger, you know, faster and bigger, but obviously not more cheaper, but this is how we're overcoming the limits of physics. And so you could just be like, okay, well, it's time to invest in advanced packaging. And then there's a lot of ways to express that bad.

And that's what's really interesting about it is like it's a very logical, well thought out and like long time in advance industry, if that makes sense. It does make tons of sense. And it sounds to me like, look, I think this is why pod shops love it. I think this is why, as my friend said, every buy side shop would love to have you. Because when you've got trends like that and stuff, it's the program. place for long short funds right like you can you can go buy the winners of this and you can go short the structural losers of this and that can create a heck of a lot of alpha now not without volatility not

without a lot of yeah i was going to say hopefully you could hold like you know like i you know sometimes you're like man this would so totally work but some of the like some of the names i really hated in 2021 just had like these ridiculous rippers and you're like am i wrong am i wrong like what is going on here um and you know you if you held through it would have it would have very much worked but it's hard it's hard to do the full cycle so i'll refer everyone to the disclaimer at the front of the show nothing on this this podcast is messing advice obviously but look like you know there's stuff like right now uh red box i don't know if you're following this so red box rdbx is the ticker they're in a merger with a chicken suit for the soul yes actually i did follow it it's very funny yeah so for people who

don't know this is a company red box you know you could go to cvs actually i was with my mom the other day and she saw a red box like the physical thing and she's like who gets DVDs at a CVS anymore. And I was like, I don't know, but I know they're in a merger. And anyway, the company is like in financial distress. They've got this distressed merger, but because they've got a small float, the company became a meme stock somehow. And it's like, the merger values them at 50 cents per share. I'll pull a number out my hat. And the stock is at $10 per share now because they're just meme stocking. It's like, yeah, if you could hold that forever and, you know, short it. Again, shorting's risky, especially meme stocks. Please remember that.

But you would make, you would theoretically make money, but guess what? You're probably going to get carried out in a body bag first. But yeah. Well, actually, speaking of which, I, I remember when that press release came out, I thought it was a mistake, right? Everyone thought they were missing a decimal because the stock. Yes, I know. Yeah.

And they were like, no, no, no. And the implied value was 50 cents. So everyone was like, oh, that's definitely missing a decimal. No $5 company would sell themselves for 50 cents. Yeah, but I checked the filing. I checked the press release. I was like, no, actually, you should be short this thing. obviously no paro but like i remember looking at it i was like this has to be a mistake and you're

like um no you're not alone and saying i i a lot of people text me and we're like hey is this a mistake this seems like the most obvious short on the world and i have 15 emails that said this is why we don't short meme stocks we do not short mean stocks but anyway uh neither here nor there i've got a couple more questions in some means and then we'll turn to the specific uh first question you know i i've just been thinking about this in a lot of it a lot in the light of inflation, supply chain issues, Ukraine rush up. You know, semis are you build these huge plans, right? Hundreds of millions, billions of dollars to build them and you build them. And I have been thinking like about fragility in the supply chain and stuff. And I do remember that

semis, I think it was Micron with flash drives in 2012 or something where there was a flood issue. One of their competitors got flooded. And they were like, we're minty money because can we talk about fragility for a second? Is there any fragility in the supply chain here? Oh, man. is their fragility. So it's a pretty big miracle that semiconductors work. It's each time you make a semiconductor, it's now thousands of steps. So each of these steps take, you know, hours long. So actually making a chip could take months because of all these different steps that go on. And each step has to be done at like 99.999% because if you if you make, if it's just 99% accurate, the compounding of all those steps will make like, essentially the chips will not work at all.

So the precision, the time, the amount of steps, and each step is pretty important in the process. And each step is filled with extremely intense physics, chemistry, and engineering for every single step. And sometimes there's a lot of very random one-off suppliers. So one of the ones that got a lot of media press was the neon and zion gas. That one actually ended up being a little bit of a nothing burger because essentially because it could be recaptured by air air product like apd stuff right the um they they can they could process

and make their own zion there's also recapturing there's enough inventory so that probably the supply chain could ramp the capacity additions elsewhere other than russia or other than ukraine and ukraine had this giant uh manufacturing footprint because they have a lot of heavy steel production um but then on the inverse there are real places where it breaks down and it's a legitimate shortage problem and that happens pretty frequently. I'm trying to think of the one that was there was one that was much, much scarier than Zeon and Neon. It escapes me off the top of my head, but there's, there's meaningful times where it's like, actually one of my favorite, one of my favorite ones ever was there was a specific type of epoxy plastic in like the 1995 era. It was one

plant in Japan and like, and that plant blew up and that was 60% of the world supply and everyone's like, well, we're screwed. We have no, like, and like, and you can go read articles. And they did manage it much better than honestly than everyone prospectively thought, which is actually, you know, the, the bowl case on almost everything. I actually really like, like there should be a pessimist archive post about that where it's like, actually they did manage through it. But it was the ball case is literally the smartest engineer, scientists and everything in the world are 100% laser focus on this. And, you know, when you've got the smartest people in the world focus on it, they somehow find a way. It just, they find a way. Yeah, and I was really amazed. But like, there's a lot of, at least in the semiconductor industry, what happens is it's pretty amazing to get the solution to work once. Like every single time they're like, okay, it works. Don't touch it. Like, that's it. But then they're like, okay, we need a second supplier. So often, and this is at least at least on the supplier side, it often ends up as three players with like 60, 30, 10. That's like a pretty common market share split. And it's extremely consolidated, and it's one of these places where there's not going to be a new entrant because like the entire total market of value of this will maybe be the cost, you know, if you could get 50% share, that will maybe be able to pay back in a three year period. And you're not going to get 50% share. So these things always end up in these super stable, extremely concentrated outcomes. And there's thousands of chemicals that go into these processes. And so it's really hard to know, but only. It's like whackamol. Something breaks and everyone's like, oh, my God, this is a huge deal. And then obviously the biggest and most fragile part of the entire supply chain is the fact that it's mostly like 50%.

And this is a number that I like guesstimate because I want to say TSM's like 30, 40% of all found. So we'll just say 50% of all semiconductors or the ones that are really leading edge are made on a tiny island, you know, 100 miles offshore of China. And that's like the most the most fragile part of the entire story. And what's worse is not only are all the semiconductor companies that support the fab, all the companies that make the chemicals for the fab, all the knowledge and engineering that helps make the fab, all the cumulative experience is all in that island, 100 miles offshore from China. And that is by far the most fragile part of the entire thing.

And I am always terrified when people are like, you know, well, they should just invade it. And then like, have you heard like broken nest theory where it's like, well, they'll just rig the the fabs to blow like mutually sure destruction and i'm like that's a that's a dark age like to be clear that's a dark age like the network start like like i don't know maybe maybe i'm being a little pessimistic but if we had that much supply go offline it would be so bad like everyone would massively lose for forever i don't know it would be like burning the library of alexander or something like the modern equivalent the world is a scary place and you know russia ukraine opened everyone's eyes to a lot of like oh like really really

weird, crazy things can happen, especially if you're living in a dictatorship where news flow might not reach the people at the top who are making decisions accurately. And like, I think this scenario you're alluding to would be really negative for every party involved. You know, there's some really bad terrorist there. But the scary thing is it could happen because there is a controlled media there. So the accurate information might not reach the top. And yeah, it's just like like the world is filled with black swans, right? Like we just can't like that is just the crazy high vol events in the world that we we live in right like we it would be really wonderful we could always stay in the middle of the curve but just one tail event can really

screw it all up so I I mean that's that's one of the fragility there's a lot of fertility and a lot of things and there's there's there's even fragility in some of like our ability to progress it feels like it isn't a gamble every year everyone is working very hard but you know this is a this is a huge treadmill with billions and billions of dollars at stake, there's so many things that just seem so impossible and such hard solutions. And, and, you know, they, they, they come up and solve the solutions. But it's, it's just been, it's amazing the amount of progress that's, that's still now. So we'll see. But there's a lot of fragility. You only ever hear about it whenever it breaks, of course. And that's, that's, that's, that's like always a story, I feel like with super

complex, adaptive, like, you know, crazy. It's like the supply chain, right? Like, no one really cared about it. until it just constantly breaks. And even though everyone's investing in it and it just isn't fixed. And there's no like, no one cares about it until they can't get toilet paper. That's what people start caring about it. Yeah. Let me just, last question here. You know, one thing I always do worry about is when you've got this like inflated demand from something that's in a bubble, right? Like I remember in 2000 Yahoo, everybody, a lot of people would say, oh, you can invest in them because they have actual earnings, they look kind of cheap. And then what happened was all the earnings were from tech bubbles that were from tech bubble

startups that burst. And when those bursts, their earnings were completely gone, right? And obviously this doesn't apply to every semiconductor, but I do look at what's happening with crypto right now. And I say, hey, I do think a lot of demand, especially for probably like AMD and NVIDIA and stuff, was coming from crypto, Bitcoin mining, all this type of stuff. And maybe Bitcoin's here to stay, maybe it's not, but I can guarantee demand this quarter is going to be a lot lower than demand two quarters ago, especially for some of the really rug pulled stuff on Ethereum and stuff. So can you just talk, how much is crypto-driven demand? And is there any worry that we're three months from now, there's like a crypto winter and demand is just way down. And people are looking to say, oh, we overbuilt, especially, I think that's more bleeding edge supply for the crypto mining stuff.

We overbuilt supply a lot. And now we're in a really overbuilt situation. So, crypto is really interesting because, I mean, I even wrote up, I wrote up NVIDIA and talking about how the ETH 2.0 merge moves to proof of stake and that will destroy the entire. And so then there would be this entire backlog of cards that would hit the market and boom, you know, Nvidia doesn't grow. You know, it's actually really interesting is data center is large enough this time that it will and should be able to bail them out. I it's really really really hard to make the numbers work quite so essentially I assume I did some like modeling I assume that the Q over Q decline is as bad as it was in 2018 and obviously it's a larger base now so maybe that's like that's part of it and essentially if you if you assume that Q over Q revenue declines 50% in gaming or something like that sequentially. you can in video's revenue would be flat it wouldn't it wouldn't shrink so like that's that's a that's a heavy like that is a death now like that is really trying to kill the stock slash

company and you're like revenue would be flat like that's that's the worst case and obviously that would hurt the heck out of the stock a company that has an extremely high inflatex like high expectations high earning stock if it you know but this time the the revenue probably associated with crypto mining is a lot smaller than it used to be. The A6 side of it will definitely be hurt, like obviously in Bitcoin. But the Ethereum mining portion of it, I did some bubble math, you know, some some envelope math. And I think that's like 15 million GPUs or something, which is a lot.

But that's like a quarter, I think that's like a quarter of revenue of gaming for for Nvidia. So it's, yeah. Oh, and you can correct me from my. wrong, but I also think there has been a shortage of, like, I do remember, especially six months ago, people were having trouble getting little Xboxes, play shows, like there was a new Xbox so I would guess there's probably some demand to be made up for, like, if there's slack on the crypto side, there's probably a little bit of extra demand on the Xbox PC. I had trouble

getting a switch at the height of COVID, like maybe I can find, or switch or we or whatever it is. Maybe people can finally get their switch and play some Mario party. Like, it's all the people want, guys. Yeah, you know, it's funny is it's finally happened. So, some of the I think one of the best ways to track that is probably the secondary MSRP price. So MSRP versus the secondary prices of GPU, and they finally have kind of come into line, meaning supply availability is broad enough that you can buy a new GPU off the shelf. So if you've been trying to buy a GPU or an Xbox or a PlayStation, you can buy it now. So you should go buy one.

But the- Too much to do in the market today. And I've already got my Wii and I beat my wife all the time tomorrow. But hopefully on Wii, man. It's on, no, it's on Switch. It's on Switch. Okay, okay, okay. That's the new one, right?

Yeah, the Switch is the new one, yeah. But essentially TSM has been adding all this capacity, and right now the revenue percentage growth is one of the fastest it's ever been. So remember, TSMC is such a large part of the market that essentially it is the market. Like when you're 50% of the market, your revenue growth, approaches the entire market. It's growing like 30, 30 and change. We'll say like 35% revenue right now, which is the, for, for semiconductors, that is

astounding. Now, part of that is a price increase. So it's, it's been interesting because amid all this crypto bubble stuff, unlike last time, there's this huge DC, there's this huge data center market that is like so hungry for AI accelerators that they, like, the products are similar enough where they are substitutes to each other, where I'm sure they could do some amount of, like, hey, this ampere-based gaming GPU, we can actually just reallocate it to an ampere-based AI accelerator.

So that's the, like, I don't think it's, to be clear, like, I'm kind of bearish that, that whole, the pull-through demand from crypto, but I think, I think it's not as big of a death, like, it's not going to kill them this time. But it could be very, very bumpy in terms of Nvidia and an AMD. And actually, AMD probably matters less because they're really levered to the server CPU. That's really their biggest driver. And just to speak to the values, talk about like, look, I just put up Bloomberg. I don't know if these numbers are right or not, but like TSM, you say, hey, they're growing 25, 30% year every year.

I think I've got them trading at 20 times price earnings. Like that's pretty attractive for a company that's growing 25, 30% per year. Now, that's just high level. I mean, I haven't dove into them at all. but yeah and growing and in their margins are improving so like you know their EPS should be a little higher than that so yeah it's pretty attractive and I would say to get some C's multiple has contracted meaningfully in in taking into account the geopolitical stuff but then on the other side of things every multiple is contracted like there's a lot of interesting companies like

you could look at the the automotive semiconductor companies like on on a scene like a lot of companies are starting to trade at like we'll say low teens multiple on a forward basis. And they're growing, they're growing revenue. So it's, it's pretty attractive, but obviously you have cycle risk. How much can you hold? How much ball can you have? What type of time period? It's, it's a little bit harder than just saying, hey, look at this company growing, growing quickly at a cheap earnings multiple. So, but speaking of attractive companies, we've been talking cycle for 45 minutes, why don't we talk a little bit rambus? The ticker there is RMBS. You wrote it up in February. That's behind a paywall, but anyone who's interesting

and Semiconductor should be subscribing anyway. So I'll include a link to the write-up in the show notes, but let's just talk Rambus for a few minutes. You know, R&BS, what is it and what makes them so interesting? Yeah, so for context, what got it on my radar was kind of a traditional non-gap, dark arts thing. So essentially, the management team did a meaningful upsize in how much they paid themselves. And I was like, okay, interesting.

And this is a company I've actually been following for a little bit. So I knew the story. I understood. Can I just pause you there for one second? So just for people who don't know, dark arts is the dark arts of corporate governance. And when Doug says they did a meaningful increase in what they paid themselves, this wasn't they took their salary from $500,000 to $1.5 million. This was, they said, hey, we generally give ourselves 5,000 shares per year.

This year we're going to give ourselves 15,000 shares this year. And what the dark arts is is generally people give themselves a big increase in shares right before a lot of good news pours in and the shares go up quite a bit, just to give people that disclosure so they understand what you're saying here. Yeah, yeah. I mean, it was a meaningful size and how many shares. And so that's what kind of pinged me on it, like, where I was like, okay, I really need to be take, because it's a, it's an IP company. So IP companies are historically very, very frustrating to, to an analyze because they're kind of black boxes, right? You don't really know what it's going on. But this IP company in particular- What does an IP company do just so people know?

So intellectual property, right? So when you make a semiconductor, it takes a village. There's a lot of different parts and components, and a lot of times the technology, you're not going to go out and reinvent the wheel every single time. Rambus has certain wheels that are off the shelf when it comes to making the total package. Could you just give one quick example of the wheel that they would take? Okay, so actually, I'm going to start with the, I was going to actually start with their history, which actually is really helpful.

So they originally invented the Rambus, I think it's like DR RAM. So it was essentially the prototypical, it was the prototype before DDR, which is this industry-wide standard. They created this type of synchronous DRAM that was like one of the foundational technologies to just making RAM work. You know, actually they didn't get chosen. It didn't become this ubiquitous thing. And so in their death throes, they sued everyone they could. And so that's what the, that's what the history of Rambus is mostly known for us, this legatious. Pat control. And like, seriously, like, like, if you look from, I want to say, 2002 to 2011, like,

lawsuit with, with big semiconductor company, like, every single year. And so their core IP, the stuff that they own is mostly around DRAM. So DRAM is a type of memory. There's NAND, which is, like, the, the memory that remembers stuff, even when you turn it off. And then there's DRAM. DRAM does not remember stuff when you turn it off, but it's very quick and it's very important. And so in particular, they have two, they have two big segments, products, which is LRD, LR dim, which is essentially a special type of DRAM that's mostly used for data centers. And the point of it is that essentially you can, with a little bit of higher latency, you have a like an effectively quicker memory. And this is just like extremely technical, but it's

very attractive in, in hyperscalers. So that segment is growing pretty nicely right now. Data Center is growing very, very well this year. That segment is growing. I want to say like 40, 50% revenue. And then they have this IP business. This IP business is this long history of things they've acquired or they've owned that is all related to memory. And IP business is extremely concentrated. So their top five customers are 59% of revenue. And they are SK. Heinex, Micron, Samsung, a broadcom. So companies that are large. And so these companies are not forced to, but work with them because they just have the IP. It's available. And it's cheaper to just pay someone, you know, two cents or something, a chip, and instead of reinventing the will. And these kind of, these IP are these foundational building blocks

into making a semiconductor. They probably go into everything. But the thing that's so interesting is in particular, Rambus has this IP and interconnect in particular for PCIE and CXL. CXL is this protocol. that's coming along in the next few years, there is no revenue today, which is, but, but in 23, we should start to see the beginning of this market form. And when that happens, revenue is going to become their revenue should meaningfully accelerate because essentially this is a

market that is going to grow for a long and long time because it's like essentially a re-architecture of the data center. So it's, it's pretty complicated as to why this is so compelling, but CXL is going to essentially finally unlock memory from the CPU. So one of the core problems of semiconductors since the beginning, it's called the von Neumann bottleneck. And what this is, and like John von Neumann, like he's one of the OG physicists, right? So he invented like the concept of a computer. And essentially, if we had it our way, we would have infinite and infinitely fast and infinitely available memory right next to the processor. Because the processor, like the CPU is actually much faster than the memory. Being able to, like, going out and fetching the memory

and bringing it back and then cranking all the numbers and then putting it out to the memory, that is actually one of the slowest parts of making, of doing any kind of computation. In the data center, even more so, especially for stuff like machine learning. Machine learning in particular is this huge new, extremely data, data-hungry application. And DRAM in particular is starting to become a larger, larger portion of this. But the problem is you can only stick so many DRAM sticks next to the next to the NVIDIA GPU. What's going to happen is CXL

is going to essentially make this plug in play where you just plug it into the accelerator and you have infinite memory. And that is going to, like, that's going to break the Von Neumann bottleneck finally. Like, that's the very bullish way to put it. And so what that means is that it's going to fix this core bottleneck

that's always been a problem in the semiconductor industry. And this is pretty much the architecture that I think is most likely to continue going forward in machine learning. So you have this huge call option. And I don't think Rambos is quite frankly the best purest way to play it. No, well, it is the purest way in terms of a public market company. Like I'm sure Mark Bell, Broadcom or even Micron, those segments will probably do better, but you're betting on something different. Rambus, this will be material. This could be and should be a material part of their revenue going forward. How big we're going to see. But until then,

the business itself, and so that's what I think the core part of the bullishness of the grants of management themselves are. They see this market that should be, in Micron's TAM estimate, a $20 billion market in 2030. That's huge, right? Right now it's zero revenue. Next year it should be $1 billion. So that S curve of potential market size is absolutely enormous and it will be meaningful for Rambus. Meanwhile, you get that huge call option that is not like, I mean, it will see it come, but it's, it's going to be how a future data center is architected. And that call option, they would just, if it's a, I can't remember what the micron number you said. It was a 20 billion market. 20 billion by 2030, yeah. 20 billion, but they will just,

because they've got the IP, they will just get a, you know, right off the top, little fraction of it for licensing their IP, right? And that'll be super high margin. So, yes. Any piece of that or, or inversely, they get bought. Like, this frankly is, is an extremely strategic asset, in my opinion because of this aspect. And then like meanwhile, while this is all happening, their entire business as is is doing very well. Like the the company itself trades it around, I want to say $220 million to free cash flow on a $2.4 billion EV. So we'll say like 11 times EV to free cash flow. And it's growing revenue of like 40% this year. And I, and I have a high conviction that yes, maybe the first half of 2023 could be bumpy. But eventually when we get

to this next level, this next leg of growth, it's going to start to accelerate with essentially a completely new business segment that is not being written in today. So today, we have this company that is pretty cheap, growing fast because of their current business in LR. DIMs, which is, you know, levered a very pure play levered to the data center, the data center market. That is like one of the most attractive places you can be. But tomorrow, we will have this increasing content story in CXL that they have a very good option. They are one of the forerunners. So probably them, Alpha Wave, cadence and synopsis. So and then, and meanwhile, cadence and synopsis, those are by the way, the logical buyers here because cadence and synopsis, they are the 800-pound

grillas, but essentially the likes of AlphaWave or Rambus exists because they don't want to give all their businesses to cadence and synopsis. And so right now, if cadence and synopsis, which are have not gone down materially as you know on a share price basis and like like their earnings yield is is much lower than uh than rambus they could buy rambus and it would be almost immediately extremely free cash flow accretive to them and i think all of this is um it's ticking to a totally different cycle than the rest of the market if it makes sense this is an adoption story of cxl that should that will continue for the next 10 years it's a very long dated growth story, in my opinion, that is trading on a very near-term, low, multiple that is pretty

attractive and it's just like very idiosyncratic, if that made sense. So that's the high-level pitch. It's a fantastic pitch. Look, the first question I ask everyone is, what do you think you're seeing that the market is missing? But I think I could just infer here that what you're seeing is this big adoption story. But if you think there's something else you're seeing the market's missing. Please tell me. It's CXL. Yeah. It's definitely this like so and and you know, I actually did this call today talking about CXL versus Ethernet. Like it might not be like the end all be all, but CXL is going to be this huge new new growth vector going forward. And I think this is actually my favorite

type of story in some connectors where a giant protocol happens. A company wins or is a large percentage. Is a meaningful share gainer or like a shareholder. in this. And essentially, they just ride this wave of adoption. And then the, you know, the fundamental results follow through, obviously. One of my favorites ever was the first post ever written by my substack on my substack was in FI. They, they rode this huge wave of adoption. And now they're put, now they got acquired by Marvell. They're putting triple digit numbers in in Marvell, essentially. I was supposed to say, I think I remember they got acquired, but. Yeah, they got acquired. Dude, I, I posted that and actually they got acquired like a week later. It was ridiculous. It was pretty weird.

I'm kind of actually a little salty about it if it was a standalone I think it would be worth a lot more today but you know you wouldn't let some you know I felt that way before but it's funny for everyone I feel that way I do have to remember that there's one where they get acquired I'm like this is a this is bullshit

this is way too cheap and then three three months later or three years after the acquisition closed eye look and I'm like oh that stuff would have down not down 90% yeah they wrote it down to zero you know not to throw stones at people but I do remember were at home, which was a retailer, it got acquired last year. And I knew so many shareholders who were curious, who were arguing, and you can go look at the bonds. You could just look at

the price of retail stocks in general. Like, I think those shareholders are probably pretty happy. Yeah, that's true. They're probably pretty happy. Anyway, so back to R&B. So we've already talked about what the market is missing that you're seen. But let me push back on a few other things. So the first thing, we talked free cash flow year. You mentioned 240 million or so and free cash flow. And I look at this thing and I say, oh, well, you know, EBIT for, I'm just choosing 2021. And I know there's adjustments and stuff. But even for 2021 was $24 million. And their free cash flow was, they did CFO of $200 million, free cash flow of $100 million. And I look at that and say, oh, well, it seems like a lot of this is coming from the unbilled revenue, a big working capital drawdown

and all this sort of stuff. So I look at it and say, like, how sustainable is the free cash flow number? And again, I've done work here. I know that there's IP licensing, which, as you said, is black box. It can draw down at all different times. But, like, when you say that free cash flow of the number, how solid do you feel that it's kind of sustainable at those levels? Because I look and say, maybe free cash was just going to go down a lot. Yeah, that's probably the hardest part about knowing this.

It is cheap optically, and I do acknowledge the black box aspect of it, where it is a lot of deferred revenue. And frankly, this is part of the reason why it trades so, quote, unquote, cheap is it's extremely complicated on a accounting basis. So the change to ASSC 606 essentially ruined. how they report revenue, and now we have like this hybrid, like they report non-gap revenue from the old metric and its billings. So that is probably, probably are rightfully so, the most complicated part of this thesis, in my opinion, is the fact that how sustainable is it?

So on the other hand, what I think, and I think about like pushing back on that is it's really rare so that you get a business where you're growing revenue at like a top line at this rate where it's like trading at this price. So maybe, maybe this free cash flow is not as sustainable as it looks. And I think that actually EBIT will start to, one of my concerns is actually EBIT will start to maybe not, like their margin should not maybe as improve as much as they have in the past because the fact that they're going to ramp all these expenses into CXL in order to, you know, in order to make that launch work well. But I think that right now at this point in time, I think that it's a little bit more sustainable than it's been in the past just because it's going to be mostly from products, which is going to be, in the interim, it's going to be more product-based, which is more predictable and more normal type of free cash flow conversion where it's like, hey, product, gross margin, operating costs associated with it, then that flows to cash from operations.

So that's how I push back against that. But I also am very cognizant of the fact that it's a pretty sticky story in terms of like the face, the counting and like actually keeping up with it is actually very involved. And I think that's maybe one of the quote unquote opportunities of why it is quote unquote so cheap because it is a complicated stock to value. That makes sense. Let me another question. So these guys, second question I always like to ask, if they're so cheap, why aren't they buying back shares? I mean, these guys do do. They're pulling in a lot of free cash flow.

they've got a lot of cash on the balance sheet. So if they're so cheap, management's pulled up as we can see through those equity grants, why are they going back and buying back shares? And I do have an addendum there related to the convertible notes, but I'll pause there and ask you that question. Yeah. So I'm not sure. Honestly, that makes sense that they should be buying back shares.

They have been buying, they bought back their convert, correct? Is that the, so they are. Yeah. So how I would argue is they're buying back shares through different, through a hybrid security instead of open market. And I feel like that's pretty common where you buy back your convert first and then you start to buy back shares. But I also think that most companies right now are definitely a little bit cautious in building

cash. One of the weirdest parts about this story, at least, is last quarter, after putting out amazing results, beating earnings, beating revenue, beating every metric they have available, they talked down the results for the rest of the year. And then, you know, in callbacks with other investors, they're like, okay, maybe we talked back to, we talked it down too much. It's not quite this bad. But that's part of, I don't know, but I don't know why they're not buying back shares out right right now,

given the fact that they're issuing themselves shares. So you'd think they're really bullish, but they did buy back to their convert. That would be my pushback there. Yeah, that was the addendum I was going to put it. They did this convert buyback and they bought back the hedges and everything. And so I wasn't sure. But let me turn to my third pushback. And I'm just a dumb, dumb generalist, but I look at this.

And the first thing I look at is Doug says there's some dark arts equity grant. So, you know, I flipped to the prox. see, I flip through, and I just look at this and I say, oh, I forgot to tweet out my notes, but every transaction in the stock has been an insider sale for the past two years, right? And they've been pretty hefty inside our sales. And insider ownership here is pretty dismal. You know, the CEO. It's pretty de minimis, yeah.

Yeah, the CEO he owns, I think it's like $4 or $5 million worth of stock. I'm trying to see it in my notes here. It's really small on the side of my screen for those on the YouTube. But it was like $4 or $5 million worth of stock, but it's all been granted to him. He makes $5 million per year. Same with the COO. Like these guys, they basically don't own anything. And I look at this and say, okay, well, all they do is they sell stock as soon as their stock vests.

They don't own a lot. If this stock is so cheap, if they see like, I've seen companies where they know they're riding a big wave, they've had something big happen to them. And all the insiders just start buying shares like crazy. And they're not using an MNPI. They just say, hey, we've got this massive call option that the stock market is valuing and we want to take advantage of it. and you're not seeing that there and that's kind of strange and you also mentioned there's a

I don't want to call him an activist because he doesn't own a lot of stock but they had someone with activist history who got added to the board or was he a board did he get out of so so that one actually I think it's that one is a really weird one so he's now an advisor that one actually is is a little bit more gray than I thought it was and I was like hey hey a board an activist there if you look at his book rambos is a single best performing stock I think they blew out of it and then he got a consulting deal to leave the board. So you've got this activist who gets a board advisory seat and maybe blows out of the stock. He still doesn't own a lot.

All the insiders don't know anything. And I just look at it and say trading cheaply with this huge call option, like, why aren't we seeing at least some share insider ownership, some share some insider buying? Why isn't this activist getting on the board? And the moment the window opens just buying as much shares as possible, pushing the company to buy back shares. It just seems strange. Yeah, I would love to see that, honestly. But so far, we have not seen that. So we're going to have to see over time. But I still think that maybe you're right. Maybe the correct reading on this is that these guys just like to pay themselves a lot. And right now, this is the time to get paid, I guess. But I do think that regardless, I still think it's an interesting strategic option. And I still think that the absolute change in grant sizing is interesting. They have been selling along all along the way. But the fact that it's such a meaningful step-up is an interesting signal to me against what I think is right now a good market for deals, for them at least, to be bought because cadence and synopsis

materially do the exact same business in their IP. But cadence and synopsis get a 30 times earnings multiple on the market. And so imagine being able to be the likes of cadence and synopsis, you buy this stock, you roll it into your stock, and boom, you get to buy something at, say, you know, mid-teen's earnings, and then you get to turn around and write it up instantly to your share price. I mean, maybe there'll be some adjustments, right, the dilution cal. But it'd be unlikely that buying Ramblust would be extremely materially eroding their margins, their, you know, their entire business, and frankly, they're multiple. So I think that's the slight more interesting way to think about it. And I think that there's definitely a chance. But I don't know why the activists, I think

I think the activist was there mostly to get that consulting agreement, but that's a, that's an aside. I don't want to talk too much about that because that's, yeah, it stroke me as very strange, but yeah. It was very strange. You can, you can read it for yourself. The, they just did an acquisition. It's not a major acquisition. It was 20 million Canadian, which I believe the Canadian to USD conversion rates, that makes it $200,000 USD. It was a bad joke. It was a bad joke. It was a very small acquisition for a company this. size, but you know, I look at that acquisition. Do you think that they are, it was an acquisition worth PR and it's $20 million. You know, I just looked at it and said, hey, if Doug thinks this might be a sales candidate, would they be doing these kind of bolt on acquisitions while they're in

the, while they're in the midst of maybe sailing? Or do you think it's just too early? There's not much to read there. So first off, it was the, it was an acquisition for their CXL-based solution. So, like, it's the correct thing to buy if this is really the, the future that you're going to put your hat on if it makes sense. But the second thing is they essentially have, they report CAPEX inclusive of acquisitions. Like that's part of the continuing cost of this business. And I think they'll be doing these kind of acquisitions for forever. Not forever, but like it's going to be like, that's part of the, that's part of how they've gotten their IP portfolio. And that should be maybe, maybe that's the, the correct way to think about free cash flow, right? You have to, you have to account

for some amount of acquisitions in there as well to make that recurring growth continue. Because Yes, it probably is not material for in terms of this part of the revenue, but that's part of the shaping and selling of this IP conglomerate, essentially. In order for them to continue to be relevant, you're always adding an IP. I think it's the right move. Essentially, if I was Rambos, I would be buying every single CXL, PCIE thing you can buy from here until much further from now. Just one more question on CXL.

So they bought hard end. They've got, what are the odds like CXL takes off? It's this huge market, as Micron says, 20 billion market and everything. And Rambis isn't getting a cut of this, you know, like for some reason there's a workaround so they're property. Or people use other people's IP. Does that make sense? Is there any chance of that happening?

Or are they just? There is a chance. It is a competitive market. So I was hoping it was a little less competitive. It did some calls, did some work. It is a competitive market. I guess one of the biggest opportunities Rambos has is actually. playing against cadence and synopsis, right? Because cadence synopsis, essentially they have

a lot of the, like, at least everyone has IP that is like, can get you eventually to the same spot. But cadence and synopsis, unfortunately, don't support you because they're a large company. They don't really care. They're an EDA software company versus Rambus is going to support you because you're, you're their primary business. And so they're, one of the reasons why they would get acquired is probably because it was essentially just lower competition to aid it, to cadence and synopsis, whereas Rambus and Alpha Wave and the smaller players have been more nimble and been able to win business against others because of the fact that they can, they can, you know, they can kind of be more nimble and support the customers where they need it. And so for that, that's the reason why I think they're

going to be around because they, um, no one wants to just give the keys over to cadence and synopsis forever. And so that's the reason why I think they should be able to get a meaningful part of the take. now it's it's it's complicated and like this is the part of the part this is the part where it becomes really uncertain um i debt like let's let's put it this way if the company was trading it a lot higher multiple and it didn't have this like relatively recurring IP business i think this would be a much harder uh bet to make like meaningfully much harder bet to make in my opinion because cxel is this co option it is not like you know i was reading the cxel spec 2.0 like today and yesterday and like there is no revenue right now for these companies

is like this is a bet on the future a very like a reasonable bet that you like that makes a lot of sense logically that it will happen like if cxl happens it will make the total cost of compute in a data center much cheaper like it is just a very like common sense um conversion to like what the next you know iteration of a data center looks like but in this moment in time it is a little it is a bit a bit of divining the future. I think it's very likely because, you know, CXL happens to be, or Rambus is one of the leaders in the CXL consortium. They definitely have a lot of PCIE 5.0 IP, which is part of what CXL is built on top of.

But you're making a bet on the whole ecosystem and that ecosystem has not been played out yet. We will see. I think it's very likely. Like, it's very highly likely. And the price is what makes it able for you to sustain that bet with positive carry. But at a different price, this would be a lot harder. to make. Let me ask a really stupid question, but when you describe how how this is going to impact the data center market and how it's going to bring down costs and stuff, and then

you say micron says it's going to be a $20 billion market by 2030, I think about just the cost and bringing down the cost, it seems like it should be, CXL should be just like a much bigger market. Am I kind of missing something? Again, this is a generalist just asking, but when you say bring down costs of this market, I say, that's a $20 trillion market or something. Yeah. Yeah. And that's the problem, though, is if it really brought down costs so much by adding an incremental unit, does that really bring? You know, it's like, oh, we brought down the cost by adding a new, a new cost to the, you know, to the total thing. It's like adding a new, new aspect of health care. It's like, oh, we brought down costs, but, you know, now we have another intermediary. So realistically, the thing about that 20, you know, that 20, you know, that's a big, that's a long time away from here. You know, it's a big, that's a big, extremely long dated call. I do think that the, ecosystem and momentum behind CXL is very, very real. And it's very palpable right now. And so when would you start noting, when would you start noticing? Second half of 2023. Yeah. Second half of 2023. We should probably have some kind of at least a

conversation or interest like about design wins to like the magnitude of what that kind of means into into the stock pretty soon. But like you're definitely going to be paid by being forward looking. And this is like a very nascent market. Like this is a huge like super foundational change. change that is going to happen. Like, it is definitely one of the biggest incremental growth drivers that I could think of in the entire universe of semiconductors. Like, it's going to change a lot. Like, it's a big deal.

The freeing memory from the CPU is a big deal. Like, that is how we scale these, you know, the Megatron, the GPT3s and the GPT4s. Like, the biggest bottleneck is the DRAM. And we're going to unlock that by essentially, having this pooled memory option enabled by CXL. So it's very like, it's going to happen, but it's not yet. You know, we're still early days. So when that is and when that becomes reflected in the story, that will

meaningfully change probably the multiple and how and the potential, like the durability of growth expectations of the company. And I think that's when, that's probably when you get rewarded. So we're bought out. You know the other thing here? Just commenting, I was just flipping through the proxy. So the CEO in a change of control, he gets 17 or 18 million, which is nice. And that's probably before those, the dark arts equity grant that you talked about.

But, you know, he makes five or six million per year. So I'd almost rather see that number be higher, just like really incentivize this guy. So to be clear, I don't think they're probably like, like the change of control is not really what I'm betting on. I think that's like the downside protection scenario is that essentially if there's mis-execution, it gets bought because of, and then if there is execution, it should be better off on its own. And with low insider ownership, mis-execution, an activist has already stepped in here in a kind of strange way, but there has been activists, like, semiconductors and activists are, there's

a lot, you see it all the time, there's mis-execution, an activist will step in here at some point and enforce their hand, kind of. Look, you've been super generous with your time, but I always do ask, we talk semiconductors, we talk grambis. Is there anything in our conversation that you think we kind of lightly touched on that you wish we had hit harder or that we didn't touch on that you think we should have been talking and thinking about? No, honestly, I just feel bad for some of the listeners for all the like, you know, mumbo

jumbo if they're around. I feel bad. I'm like, I swear, I like, sometimes people are like, dude, I have no idea what you're writing about. And I'm like, I swear to God, I'm writing in the simplest language. I can, you know, that's always my concern. You and I were talking about this is why, A, this is why generalists get their face ripped off when they come to semiconductors. Because I come over and I say, oh, semiconductors are in computers and you're, you've got the history of the semiconductor and the whole supply chain and stuff.

But no, I think this has been super helpful. You know, I've learned so much from reading yourself from, I've learned so much from this podcast. It's been super helpful. And as I said before, you are, you're a real guy doing this stuff. So, Doug, thank you so much for coming on. I'm hoping before our buyside shop snaps you up. We can get you on for another one and talk what's going on in semis. It's constantly changing.

It's a really interesting space. But Doug O'Loughlin, Fabricated Knowledge. Everyone should go check it out and subscribe. But thanks so much for coming on and looking for it. Thanks, Andrew. I'm happy to be here.