If you haven't achieved a net worth north of $1 billion by wisely investing in stocks, there's probably a lot that you can learn from the handful of folks who have.
One fund manager most investors could learn a lot from is David Tepper, the billionaire who manages the Appaloosa fund. It's delivered an average annual return of more than 28% since its inception in 1993.
In the fourth quarter of 2024, Tepper closed an Adobe (ADBE 7.58%) position worth more than $100 million. Also in the fourth quarter, Appaloosa increased its stake in Lam Research (LRCX +1.19%) by 1.15 million shares.
Tepper's track record speaks volumes about his ability to pick stocks that outperform, but even the best fund managers make decisions they later regret. Here's a closer look at recent results from these two companies to see if selling Adobe or acquiring Lam Research could be a smart move for your portfolio.
Time to sell Adobe?
Shares of the Creative Cloud subscription provider are down about 33% from the peak they set all the way back in 2021. The stock hasn't performed well, but its software business keeps growing. In its fiscal year that ended on Nov. 29, 2024, total revenue rose 11% year over year.
NASDAQ: ADBE
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Adobe's bottom line is rising more quickly than sales. Adjusted earnings rose 14.6% in fiscal 2024 to $18.42 per share. GAAP earnings that don't adjust for the $1 billion reverse termination fee Adobe incurred when abandoning its pursuit of Figma, rose just 4.6% to $12.36 per share.
Adobe's main advantage is a strong network effect, not necessarily terrific software. Last October, Photopea, a web-based Photoshop competitor, announced it served users over 1 billion files over the previous 12-month period. Photopea was developed by one guy working alone and is free to use. Four years of Photoshop access will run you more than $1,000.
There are plenty of less expensive alternatives to Adobe's most popular products, but completing projects with them can be a challenge. For example, the proprietary file type Adobe Illustrator employs is ubiquitous among professional illustrators. As a result, most print shops don't know what to do with an EPS file even though this file type is used by dozens of competing vector art applications.
Adobe's heavy investment in generative artificial intelligence (AI) functions could make its products stickier and offset non-professional users who are no longer willing to pay for expensive, recurring subscriptions. With a strong network effect likely to keep subscribers on board for the foreseeable future, selling this stock now doesn't seem like the right move.
Is Lam Research a buy now?
Lam Research is a member of a tiny group of companies that produce advanced etch and deposition equipment used to manufacture semiconductors. Laying down billions of tiny transistors on a silicon wafer requires an incredible level of precision now that they're spaced just a few nanometers apart.
NASDAQ: LRCX
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Lam Research is in an even more enviable position than most of its peers because it specializes in processes that stack semiconductor components on top of each other. Lam's verticalization expertise allows it to produce equipment used to manufacture high bandwidth memory (HBM), which is an increasingly important component of AI processing. The market for HBM chips is expected to soar from $4 billion in 2023 to $130 billion by 2029.
In 2024, Lam Research grew adjusted earnings by 23% to $3.36 per share, and investors can reasonably expect more gains in the years ahead. That's because it doesn't necessarily matter which memory chip manufacturer goes on to gain a leading share of the HBM memory chip space. An extremely limited number of etch and deposition equipment manufacturers with verticalization expertise means most of the winners, and losers will end up buying equipment from Lam Research.
Lam Research's equipment sales could surge on the back of demand for AI, but the market hasn't seemed to notice yet. At recent prices, you can scoop up shares of this well-positioned picks-and-shovels business for just 21.9 times forward-looking earnings expectations. Following Tepper's lead in this case seems like a very smart move.
