Now, while the chips are down: So you want to buy into semiconductors Part 2

Semiconductor chips – like Oscar Wilde or Elon Musk, (that the baffled wider world regards as complex, misunderstood and of many incomprehensible moving parts) – can be given to the occasional bout of unpredictable mood swings.

One could even say the cost of genius is cyclical. Or in the case of chip stocks, about 30% if it’s really bad like in ’22.

They’re in a bit of a funk now, as Q1 results suggest.

They were in one last year, then they weren’t earlier this year… and now they could come good again, or not, as semiconductor expectations soften.

If a sector ever deserved Prozac, then chips are it.

To be fair, it’s easy to see why. The spotlight’s been hot on the sector for a few years now.

They’re coming down from the highs of a COVID-lit explosion in demand for lustier laptops, funkier home electronics and snazzier smartphones – not a one of which make funny without a decent semiconductor. Thereupon several unhappy things happened for chip stocks.

There was a glut. An oversupply. A Koganesque inventory quagmire.

Then, instead of re-upping on their toys, consumers backed off – the fear of a US-led global recession also made business and corporates pull in their collective heads and a great slashing of budgets and cost-saving procedures led to the record spending on high-tech semiconductor products, fall precipitously.

Finally, after Biden their time, the Dept of Commerce over in the States got the White House call to pull their heads in and a great many restrictions came down hard on any sale, trade or making-nice regarding China and chips, semiconductor-kit, tools, secrets, advice or equipment.

China is fond of its chips, just as its mighty market is of its gadgets.

Now with the winds of change and legislation in the shape of both the CHIPS and Science Actin in full swing (providing substantial chip manufacturing incentives and research investments), as well as a tidal change for the more expensive, intensive chips, the sector’s smashed the volatile market this year by a good run.

To ensure the lion’s share of new manufacturing capacity is coming out of America, Washington enacted the CHIPS and Science Act with companies in the semiconductor ecosystem announcing more than 40 new projects in the US worth circa US$200 billion in private investments.

Down 30% last year and a few months into 2023 and we’ve got a year-to-date gain of about 30% for the Dow Jones US Semiconductors Index Vs barely 1.8% for the Dow Jones Industrial Average.

The Semiconductor Industry Association (SIA) on Monday announced worldwide sales of semiconductors hit US$119.5 billion during the first quarter of 2023, a decrease of 8.7% compared to the fourth quarter of 2022 and 21.3% less than the first quarter of 2022.

Sales for the month of March 2023 increased 0.3% compared to February 2023.

“Semiconductor sales continued to slip during the first quarter of 2023 due to market cyclicality and macroeconomic headwinds, but month-to-month sales were up in March for the first time in nearly a year, providing optimism for a rebound in the months ahead,” said John Neuffer, SIA president and CEO.

Regionally, month-to-month sales increased in Europe (2.7%), Asia Pacific/All Other (2.6%), and China (1.2%), but decreased in Japan (-1.1%) and the Americas (-3.5%). Year-to-year sales decreased across all regions: Europe (-0.7%), Japan (-1.3%), the Americas (-16.4%), Asia Pacific/All Other (-22.2%), and China (-34.1%).

 

The major chip stocks as of May 5

 

Nvidia (NVDA):

Nvidia has owned 2023.

It’s been all about Nvidia so far in 2023. We did some pretty good intro work into NVDA earlier in the year here at Stockhead.

The strangest NVDA news this week is from Reuters, who report that Nvidia short sellers have lost well over US$5.05 billion in this calendar year alone, since NVDA has been problematic enough to almost double in that time.

According to financial data firm S3 Partners, the semiconductor maker is Wall Street’s biggest equity short hoover this year, followed by Apple and Tesla.

Nevertheless, as we’ve discussed the long-term thesis for these products is Herculian.

NVDA stock jumped about 80% in the first three weeks of April.

Despite some profit making, it’s up over 50% since mid-Jan.

Analysts love NVDA and it’s performance has won over tech analysts despite their doubts.

Now so very much more than just a semiconductor designer, Nvidia is also developing an ever-expanding library of cloud-based subscription software and services (such as a business AI software platform) built on its powerful hardware.

GPU chips are uniquely well-suited to artificial intelligence processing because they can perform large numbers of tasks simultaneously, reducing the time needed to churn through billions of pieces of data.  GPUs are also more expensive and Nvidia Corp NVDA controls 80% of the market.

Nvidia is the Tesla of GPUs and while the field is catching, it has a big headstart on making the semiconductors that are behind the driving ideas in the flood of AI.

The technology research firm IDC says AI-centric spend is going to rise almost 30% and easily top US$150 billion this year alone.

Nvidia shares can extend their 2023 rally once the chip maker’s growing artificial intelligence business is fully appreciated by Wall Street, according to HSBC.

Frank Lee, the firm’s head of technology research in Asia, double-upgraded the chip maker’s stock to buy from reduce. Lee also more than doubled his price target to $355 from $175. His new price target implies an upside of 31.5% over Monday’s close.

“We believe there’s more earnings upside vs market expectations in FY24 and beyond,” he said in a note to clients Tuesday. “Overall we believe we were too cautious on Nvidia.”

And Nvidia has been busily branching out beyond its core business targeting Intel’s ARM Semiconductor designs, while keeping data centre acquisitions front of mind since it snapped up Mellanox a few years ago.

GPU chips are uniquely well-suited to artificial intelligence processing because they can perform large numbers of tasks simultaneously, reducing the time needed to churn through billions of pieces of data.

 

Taiwan Semiconductor (TSM): Generative AI offers 25% upside

Given the immense hassle, genius and cost of setting up a semiconductor manufacturing business, the early-moving, China-enraging island of Taiwan, for a few years yet, remains the overarching birthplace of chips for most of the devices we use today.

Taiwan is the chip world’s factory. It’s the way biggest manufacturer of semiconductors. It produces more than 60% of them globally, and more than 90% of the most advanced ones.

TSMC lowered guidance for full-year sales to drop into the low-to-mid-single digits y/y (vs. slight growth previously).

This is more or less in line/slightly below recent buy-side expectations and is based on a more cautious cycle comment that fabless destocking could last into 3Q23 vs. 1H23 previously.

UBS for one, has noted that at this point in the cycle, it is not uncommon for TSMC to take a conservative approach.

That said, TSMC affirmed 2023 capex guidance of US$32-36b and indicated it would spend to support long-term growth in 2024 if appropriate, reflecting confidence in structural opportunities such as AI/HPC and its steady market share in N3 and beyond.

In this regard, UBS has trimmed its 2023 sales to -4% from -2% y/y to reflect more conservative demand assumptions. They have trimmed 2023E GM to 54.4% from 54.5%. This sees 2023/2024 EPS cut by 3%/6%, respectively.

Given the near monopoly Taiwan enjoys on the uncanny production of chips, a Taiwan vs China (which it regards as a renegade province) Vs US Plus Everyone else including us war would have mega global repercussions, specifically around the movement and access to chips.

Taiwan’s near monopoly on semiconductor production gets referred to as the ‘Silicon Shield’ by bored analysts, but the gist is there – while only Taiwan is capable of delivering the key elements in everything, China could be kept at bay from forcing it back into its fold.

China has vowed repeatedly, and at length to ‘reunite’ Taiwan with the mainland, a goal that Western countries interpret as a coded language for a possible full-scale military intervention sometime in the future

The latest military drills around the island by China raise questions about how strong the shield is.

“Fifty per cent of global commercial traffic goes through the Taiwan Strait every day,” US Secretary of State Anthony Blinken told Euronews last week.

“Seventy per cent of the semiconductors that we need for our smartphones, for our dishwashers, for our cars, they’re made in Taiwan,” he went on.

“If there was some kind of crisis as a result of something that China did, that would have terribly disruptive effects on the global economy, which is why countries around the world look to everyone to behave and act responsibly”.

If China were to blockade Taiwan, or invade, it would cause an immediate cut-off of supply of the majority of semiconductors used in products around the world.

Its biggest producer by a very long way is Taiwan Semiconductor Manufacturing Company (TSMC), with around a 54 per cent share of the global market (by comparison the US share of market amounts to around 12%, while EU combined is under 10%), supplying chips to companies such as Apple, Qualcomm, and Nvidia.

Last week, the world’s largest contract chipmaker announced a better than expected Q1 despite weaker consumer demand.

The company generated a 3.6% increase in revenue to NT$508.63 billion (US$16.7 billion) while net income also increased by 2.1% to NT206.99 billion (US$6.6 billion).

Directionally, TSMC could be a key beneficiary of generative AI as the major foundry provider, with a strong technology position in N3/N2. So far, UBVS does not think much upside has been priced in, based on TSMC’s stock performance vs. GPU fabless names such as Nvidia. UBS in late Apirl reiterated a Buy rating for TSMC.

Meanwhile, Farhan Badami, Market Analyst at eToro says:

“Although TSMC beat expectations, their revenue decreased by 4.8% year-over-year and 16.1% from the previous quarter. Poor macroeconomic conditions as a result of high inflation and rising interest rates meant demand for TSMC’s products dropped significantly. Additionally, geopolitical tensions didn’t make it easier for the semiconductor giant that continues to see weakness in PC and smartphone markets.

“Looking ahead, TSMC’s management expects revenue to be between US$15.2 billion and US$16 billion. Investors will be reassured as this outlook comes after the firm announced plans to upgrade and expand a new factory in the US which will make it easier for them to supply some of their biggest American clients like Apple and AMD. After all, semiconductors remain a hot property.”

“Taiwan Semiconductor has a massive footprint in a delicate domain, it has size, scale and more scale.”

According to Bank of America, Taiwan is poised to ride the generative AI trend and could gain 25% from its current price.

What sets TSMC apart is experience and capacity to deal with the complexities of semiconducting.

Its up high and down low figures really look in terrific shape with a good run of double-digit margin growth over the past few years.

Intel (INTC)

Intel is thought to be turning its fortunes around after an indifferent few years and a poor start to 2023.

CEO Pat Gelsinger reckons the company delivered ‘solid’ first-quarter results, representing steady progress with our transformation.”

• Q1 revenue of US$11.7 billion, was down 36% year over year (YoY)

• Q1 GAAP earnings (loss) per share (EPS) was US$0.66

• Q2 2023 revenue of $11.5 billion to $12.5 billion; expecting second-quarter EPS of $(0.62).

So revenue and EPS were a slight beat on expectations (admittedly low).

“We hit key execution milestones in our data center roadmap and demonstrated the health of the process technology underpinning it. While we remain cautious on the macroeconomic outlook, we are focused on what we can control as we deliver on IDM 2.0: driving consistent execution across process and product roadmaps and advancing our foundry business to best position us to capitalise on the $1 trillion market opportunity ahead.”

Gelsinger says the numbers “representing steady progress with our transformation.”

Over the quarter Intel exceeded Q1 expectations on the top and bottom line, and showed discipline on expense management and cost savings. Importantly the business is prioritising its investments “to advance our strategy and establish an internal foundry model, one of the most consequential steps we are taking to deliver on IDM 2.0.”

Intel expects to return to positive free cash flow in the second half, due to these cost crunches and subsequently lower capex as well as some strong capital offsets.  And on a non-GAAP basis the loss was quite limited.

Analysts have calculated that if revenue returns – post consumption slump – to previous levels then EPS would rise to $3-6, easily justifying the current stock price.

Wedbush analyst Matt Bryson called Q1 a “mixed bag” but says that if this is a corner then Intel has turned it.

“Net, we no longer see a near-term catalyst that might push revenue and earnings below recent results,” Bryson wrote last week.

“Without another significant negative near-term catalyst on the horizon, and given we have little concrete insight (yet) as to how Intel’s manufacturing transitions will proceed (creating both opportunity and risk depending on forward execution), we no longer see a clear argument to maintain our Underperform rating and we are shifting to a Neutral view on the name,” he added.

Qualcomm QCOM

Qualcomm (QCOM) is the company that builds APPL.

It’s been the key Apple supplier for donkeys’, riding high on the smartphone boom with only the occasional HR issue, an angry Chinese Communist Party or a growing dependence on the one pony it supplies with all the tricks for a business model to hold it back.

Now Apple’s got a plan to get its own chips in-house, Qualcomm’s worth will be tested properly.

It’s begun the era of diversification well enough, expanding into new areas  such as automotive chip technology.

Still QCOM revenues have been negatively impacted by a slowdown in the global smartphone market, as 5G infrastructure spending has drifted downward in 2023.

According to Deutsche Bank analyst Ross Seymore, Qualcomm has strong legs and is a longer-term play.

“Heading into Q1 earnings, the key message from our point of view is ‘patience,’” Seymore told clients last month.

“(QCOM) priced in a V-shaped fundamental recovery beginning in the second half of 2023 that may prove challenging to deliver due to high levels of inventory and continued macroeconomic headwinds.”

Historically…

5G networks are creating a massive upgrade cycle as telecom companies update their services and consumers buy new smartphones to take advantage of the new network performance.

Qualcomm’s long-term growth is particularly tied to increases in connected devices ranging from wearable devices to “smart” household appliances to connected industrial equipment and vehicles. Profit margins on many of these end markets are even higher than the older smartphone business.

Qualcomm hasn’t been able to avoid some of the sales declines connectivity chipmakers experienced in 2022 during the bear market. It has nevertheless positioned itself to earn higher revenue as mobile networks and automotive technology evolve. With 5G changing the networking landscape, Qualcomm’s mobile chip business is getting a second wind.

ON Semiconductor (ON)

ON track to deliver $2 billion in free cash flows by 2025. ON Semiconductor have done well last week after the Arizona-based chip supplier delivered better-than-expected Q1 results and Q2 outlook.

The company posted EPS of $1.19 on revenue of $1.96 billion, beating the consensus for earnings of $1.08 per share on revenue of $1.92B. The adjusted gross margin came in line with expectations at 46.8%.

“As secular tailwinds propel our business, we are prudently managing our operations to deliver consistent and predictable results in the current market environment,” said Hassane El-Khoury, president and CEO.

For this quarter, the company sees EPS at $1.21 on revenue of $2.025B, at the midpoint of the guidance.

Wall Street was expecting Q2 EPS of $1.06 on revenue of $1.93B.

According to analysts at Vital Knowledge, there was “some anxiety last week after a few semiconductor firms posted whelming results and raised potential red flags about auto demand, but this ON print/guide should put those fears to rest.”

Broadcom (AVGO)

Jericho3, with AI better than Jericho2 and Jericho1, and investors say it will bring Broadcom back from the brink.

ASML (ASML)

ASML Holding NV (ASML.AS) is Europe’s largest technology firm by market cap and really has the run on the market for lithography equipment – important equipment needed to make computer chips. ASML reckons 175 zettabytes of data will be created annually by 2025.

Apparently this is the same as one trillion USB sticks, each holding one gigabyte each of of data.

To process this enormous volume, more computer chips will be needed. And ASML is confident it’ll benefit from this rising demand.

The big question for these guys too (short and long-term) is China.

ASML’s CEO Peter Wennink said last week it’s totally “logical” China will make its own semiconductor-making equipment (like ASML’s extreme ultraviolet light – EUV – machines) when it is restricted from purchasing tech products made abroad.

Last week, the company released its earnings for the first quarter of 2023. It said China sales would increase as Chinese chipmakers rush to buy older tools that do not fall under US-led restrictions that the Dutch government said it would adopt in March.

The stock is up 50% over the past six months. And since this time in 2018, it’s gained over 220%.

Net sales were up 4.9%, net income lifted by 7.6% to €1.96bn. But Wennick said there were mixed signals on demand.

Its bigger customers like, Samsung, SK Hynix, and Micro, are scaling-back production.

The Dutch government is also placing export restrictions on some of ASML’s sales to China.

ASML’s extreme ultraviolet light (EUV) machines – about the size of a single-decker bus, at a cost of US$150 million – have become precisely what chip makers need to print smaller circuits while increasing capacity and speed. ASML, which focuses on the lithography step of the chip-making process, which is almost like using a high-tech photocopier.

There’s also general optimism that ASML will benefit from the new factories being built by Intel (INTC) and Taiwan Semiconductor Manufacturing Co (TSCM).

Regarding Applied Materials, the company should benefit from its “diversified semi portfolio aided further by growth in the company’s services divisions,” Sankar said. The analyst also expects the company’s profit margins to improve as its manufacturing costs decline.

 

Advanced Micro Devices (AMD)

AMD reported on Tuesday in New York and that took the wind out of chips stocks pretty quickly.

Q1 earnings dropped almost 50% YoY to 60 US cents a pop, while revenue declined 9% to $5.35 billion. Gross margin declined 3 percentage points over the three-month period to 50%.

Unfashionably, operating expenses climbed 18%.

AMD’s gaming division (32.8%) was the largest contributor to first-quarter revenue, followed by its data center segment (24.2%).

The largest year-over-year increase in revenue came from the company’s embedded section (+163%), which makes central processing units (CPUs) for high-performance computing systems, automakers and cloud services companies.

Meanwhile, its client division, which makes processing units for desktop and notebook personal computers, suffered the biggest year-over-year decline in revenue, down 65.2% over Q1 2022.

“We executed very well in the first quarter as we delivered better than expected revenue and earnings in a mixed demand environment,” said Dr. Lisa Su, chair and CEO of Advanced Micro Devices, in the company’s Q1 press release(opens in new tab).

Dr Su told Barrons ahead of the report that AMD is still in a unique position within the semiconductor world.

It’s the chief rival to both Intel – in the PC processor business as well as Nvidia – but that’s in the graphics chips sector for gamers and such.

As discussed those are the semiconductors crucial for gaming and artificial intelligence applications.

AMD shares fell sharply on Wednesday after the chip maker gave a disappointing revenue forecast for the current quarter, citing a difficult PC environment. Analysts were pretty disappointed about the near-term performance for AMD’s data centre business.

While acknowledging the mixed economic conditions for the first half of 2023, Su told Barrons she’s optimistic AMD will grow its cloud and enterprise business later this year thanks to the company’s technology leadership in chips for servers.

Samsung Electronics

Samsung Electronics logged a shocker in its first-quarter profit on Thursday, driven largely by a colossal loss in its semiconductor business.

Samsung’s operating profit for the 3 months to March 31 fell by a fart from 100% to 640 billion won (US$1 is about 1,341 won).

Samsung revenue fell 18% to 63.75 trillion won.

The catastrophic profit slump was almost all semiconductors, where the segment logged an operating loss of 4.58T won, compared to a profit of 8.45T won in ’22.

The good phone maker blamed weak demand in the PC market, as well as slowing orders from its biggest customers.

Although the South Korean conglomerate expects a recovery in 2H, it’s Samsung’s semiconductor division which is the cash cow and Samsung analysts expect further sluggish demand in the second quarter.

Samsung already slashed chip production last month, in line with similar moves around the sector amid tepid demand.

The firm which makes my phone invested 9.8T won in capital expenditures for its chip production during the quarter, pumping the cash into new production units.

But the glum economic conditions and some weakening sentiment towards tech have wrought some turbulence in chip demand over the past year.

But everyone needs a new phone and demand they reckon should recover in 2H  as investment returns to technology infrastructure, and as said mobile toys and PC sales pick up.

The post Now, while the chips are down: So you want to buy into semiconductors Part 2 appeared first on Stockhead.

health
hardware
devices