Analyst Downgrades Hit Intel and Super Micro Computer Amid AI Boom

5 big analyst AI moves: Intel, SMCI hit by downgrades; Micron still top semis pick By Investing.com

Investing.com -- Here are the biggest analyst moves in the area of artificial intelligence (AI) for this week. InvestingPro subscribers always get first dibs on market-moving AI analyst comments. Upgrade today! New Street Research has upgraded NVIDIA Corporation (NASDAQ:NVDA) to a Buy rating with a target price of $120 this week. The move comes following a significant decline in the chipmaker's stock since its June peak, leading Nvidia to underperform other semiconductor stocks linked to data center AI. "We find the correction healthy overall, recognize some limited and tactical headwinds specific to Nvidia, but overall see the stock moves as an opportunity to gain more exposure," analysts said. The recent dip in Nvidia's shares has been partially attributed to reports of a potential three-month delay in the release of its Blackwell chip due to design flaws. This delay could push volume shipments to Q1 2025. Blackwell's design features two large dies interconnected at 10TB/s using TSMC's CoWoS-L packaging technology, which has faced ramp-up challenges and may require redesign. To address this delay, Nvidia might extend the lifecycle of its Hopper chip, which uses the more mature CoWoS-S packaging and can be produced more efficiently. Also, Nvidia could introduce a simplified version of the Blackwell chip with a single die, New Street explains. "While it would have lower performance than the dual-die Blackwell SKUs, it would still be an uplift vs. Hopper," analysts noted. New Street also maintains a positive outlook on Nvidia's market dominance in the data center XPU space. "We see in-house XPUs doing well against GPUs and being deployed in millions across gigantic in-house captive markets," though they acknowledge AMD (NASDAQ:AMD) as a potential challenger. Moreover, expectations for hyperscaler capex in 2025 have risen, now forecasting 13% growth, with AI infrastructure capex projected to grow by at least 30%. This supports the firm's forecast that AI semiconductor spending could increase by 50% annually. Mizuho analysts on Wednesday downgraded Intel Corporation (NASDAQ:INTC) stock from Outperform to Neutral and adjusted their price target to $22 from $36. The investment bank initially upgraded Intel in November 2023, driven by expectations of strong AI momentum and new products boosting PC and data center traction. However, nine months later, the outlook has changed. "We were wrong -- INTC has continued to lag its peers and is losing share in all key markets AI/DC/PC through 2025E," analysts wrote. "We see INTC headwinds continuing, with execution risks on its product portfolio, and we're downgrading INTC to Neutral." The technology gap between Intel and its competitors has widened, and while there is long-term potential for foundry and 18A tailwinds, regaining lost leadership is likely to be challenging, Mizuho notes. Despite launching new products in Server (Sierra Forest/Granite Rapids), AI (Gaudi 3), and PC (Meteor Lake), Intel is losing market share in PCs and data centers, remains "a distant 3rd in merchant AI." Mizuho also cited internal challenges, including headcount reductions that could impact morale and execution. The decision to cut dividends has further weighed on investor sentiment toward the stock, analysts pointed out. Earlier in the week, Bank of America (NYSE:BAC) analysts cut their rating on Super Micro Computer (NASDAQ:SMCI) stock to Neutral from Buy following the company's report of worse-than-expected margins for the fiscal fourth quarter. Although Q4 revenue met both the firm's and street estimates, the gross margin of 11.3% fell significantly short of the anticipated 13.6%. SMCI stock fell 20% on Wednesday. The data center company's revenue guidance for the first quarter of fiscal 2025 exceeded expectations, and its full fiscal 2025 revenue projection of $28 billion topped the consensus estimate of $23.8 billion. However, BofA noted that Super Micro's gross margin is expected to gradually return to its typical range of 14-17% by the end of fiscal 2025, assuming improvements in manufacturing efficiencies, a better customer mix, and the launch of new platforms. "While the long-term benefit from AI remains intact, we move to a Neutral rating, from Buy, as we see the next several quarters remaining margin challenged as SMCI navigates a competitive pricing environment, delayed shipment of Blackwell GPU systems that require liquid-cooled racks (higher margin), and ongoing issues with component availability." Reflecting these headwinds, they also lowered their price objective for Super Micro Computer from $1,090 to $700, aligning with the broader sector trend where valuation multiples have seen a notable decline. Palantir (NYSE:PLTR) and Microsoft Corporation (NASDAQ:MSFT) have announced a partnership this week to develop an integrated technology suite designed for the U.S. Defense and Intelligence Community. This collaboration will leverage Palantir's AI-powered platforms within Microsoft's government and classified clouds, enabling secure cloud, AI, and analytics capabilities. As part of the agreement, Palantir will deploy its full product suite, including Foundry, Gotham, Apollo, and AIP, on Microsoft's cloud platforms. This will allow government agencies to build AI tools for operational and logistical purposes, with hands-on experiences to test the technology. Also, Palantir will integrate Microsoft's Azure OpenAI Service into secure environments, combining cloud computing with advanced language models to support AI-driven operations in defense and intelligence. "With this marquee deal solidified and MSFT leveraging PLTR for AI and LLM capabilities to the US government, the company can now increase the pace of AI implementation while PLTR continues to accelerate AIP adoption within the federal sector," Wedbush analysts commented. "We believe this will be a launching pad for the PLTR AIP story to hit the DOD (Department of Defense) and broader Beltway ecosystem over the next 12 to 18 months," they added. Semiconductor stocks have seen a sharp decline recently, driven by macroeconomic challenges and disappointing earnings that fell short of high expectations. The downturn has been linked to slower-than-anticipated replenishment of analog inventories and potential risks from the automotive sector, which accounts for 14% of semiconductor demand. However, analysts at Citi remain optimistic about the sector, stressing that "the main reasons we are positive - AI and memory strength - remain intact." Despite the recent drop, Citi continues to favor Micron Technology (NASDAQ:MU) as their top pick within the industry. They believe that "it's time to double down as the DRAM upturn should persist given reduced capacity and DRAM pricing in 3Q24 is better than expected." The DRAM market is showing signs of improvement, with strong performances from major players like Samsung (KS:005930) and SK Hynix. Citi analysts have revised their forecast for 2024 DRAM pricing, now expecting a 62% year-over-year increase, up from their previous estimate of 53%. This adjustment is attributed to limited supply growth and a shift by memory makers towards high-bandwidth memory (HBM). While there are weaknesses in the automotive and industrial sectors, the demand from the largest end markets - PCs, handsets, and servers, which collectively represent 61% of semiconductor demand - remains relatively strong. Micron has reported that inventory levels in the traditional data center market improved during the first half of 2024 and anticipates further growth in the second half. Citi analysts have also indicated that they "expect upside to guidance when Micron reports earnings in September." Micron saw its shares slump more than 30% over the past month.

Super Micro Computer Gets A Reality Check (NASDAQ:SMCI)

Despite challenges, SMCI is ramping up production to meet demand for AI infrastructure, but faces risks such as supply chain constraints and economic uncertainties. Super Micro Computer (NASDAQ:SMCI) was hit with a reality check in q4'24 as the firm experienced exceptionally strong growth at the risk of marginally disappointing operational performance. Much of this was the result of the firm managing their supply chain risk in order to capture market share for their direct liquid cooling server racks as the AI infrastructure investment frenzy continues. Despite the substantial top-line performance, I believe analysts are growing concerned about SMCI's attempt to grow too fast; as the firm continues to leverage their balance sheet to raise capital in the debt and equity capital markets to finance their hypergrowth state. Though I anticipate this growth to be sustainable through eFY26, I believe the firm may be trading off operational excellence for market capture, posing a risk to overall performance during a time of unclear economic growth. Given the operational challenges afoot, I am downgrading my recommendation to a SELL rating with a price target of $450/share at 8.15x eFY26 EV/aEBITDA. Operations & Risks Super Micro Computer is finding itself in a similar place as Intel (INTC) in which the firm is ramping up production to catch up with demand. Though the two firms are day and night different, they're both playing catch-up to take full advantage of this AI infrastructure buildout while risking operational efficiencies. In SMCI's case, the catch-up is expediting materials for their DLC liquid-cooling racks. In Intel's case, the firm is outsourcing A20 production in order to manufacture more AI PCs while demand is ramping up. In both cases, margins are severely compressed, resulting in lackluster operational performance that was reflected in each respective stock's performance following their earnings releases. There were some peculiar questions asked by analysts that were left unanswered on the call. Mr. Nehal Chokshi asked about DLC failure rates, as he had heard rumors that the technology may have higher rates when compared to direct air cooling. Given that I don't have direct exposure to data center operations, I cannot attest to any information pertaining to challenges with DLC; however, a quick search for DLC failures provides information relating to the subject. Accordingly, the top issues include increased costs, coolant leakage, system failures, and supply chain difficulties. Though a heightened failure rate for DLC may be concerning, I do not believe this will materially impact sales to the downside, as DLC is said to be 30-40% more power-efficient than direct air cooling. This feature is exceptionally appealing given that hyperscalers will likely be partnering with utilities, midstream operators, and upstream gas producers in order to source adequate power for these massive facilities. Depending on the contractual agreements, this could either drive up services revenue or impact margins through a warranty feature if failure is expected within the limitations of the agreement. According to SMCI's 10-k, the firm does offer 1-3 year and extended warranties that include servicing of the equipment. One additional factor that may impact this is the cost of the coolants. Depending on the type of coolant used within the DLC rack, the price for coolants may be increasing in the coming years as more stringent regulations are placed for production of virgin HFCs. In terms of this infochart, SMCI faced challenges relating to supply chain constraints in sourcing materials, leading to the firm expediting materials in order to fulfill orders. This was one of the leading challenges that resulted in the 10.54% adjusted gross margin in q4'24. For reference, this fell significantly below the firm's recent range of 15-19% adjusted gross margin. The other side to the decline in the gross margin was the customer mix, which was more heavily weighted to hyperscalers as opposed to enterprises, which pose tighter margins. Though I believe AI/LLM models will inevitably be located in private data centers given the high costs associated with running models in cloud environments, I do not anticipate this transition to occur until enterprises begin bringing their applications into the production environment. In the instance of an economic contraction or recession, I believe enterprises will push out further investments into their private data centers as they pertain to AI/LLM applications and will require significant capital investments and operational expenses in order to source and manage the infrastructure. If these two cases play out, hyperscalers may remain a heavier weight of SMCI's customer mix. One question raised on the q4'24 earnings call was whether the delay in the production ramp of Nvidia's (NVDA) Blackwell GPUs would impact sales targets for SMCI. This question was also asked during Arista Networks' (ANET) q1'24 earnings call, as sourcing GPUs was more challenging at the time. I do not believe that enterprises and hyperscalers would necessarily choose a different cooling system or push out cooling rack infrastructure as a result of delays in their next generation GPUs, given that IT-related investments are made for future scale as opposed to the current demand. I believe that there are bigger constraints at play that could result in delayed purchases: construction of the facilities and power sourcing. Power transmission may be a major bottleneck worth considering, given that transformers are in short supply. According to the July ISM-PMI Services print, construction contractors & subcontractors and electrical components & electrical equipment are in short supply. CleanSpark (CLSK), a bitcoin mining company, has been facing delays in bringing one of their data centers online as a result of the transformer shortage. These factors could result in slower sales growth for SMCI if the supply constraints persist. Super Micro Computer Financials Taking into consideration management's guidance, I anticipate SMCI to run on tight margins throughout eFY25 with incremental improvements quarter-by-quarter. I anticipate eFY26 to experience more normalized margins but still remain below their FY23 level of 18% gross. I anticipate enterprises to moderate IT investments throughout the duration of eCY24 and eCY25 as a result of the persistent economic challenges as they pertain to inflationary pressures and challenged margins. The automotive OEMs have suggested challenges in moving inventory, which I believe to be an early sign of further economic woes to come. Consumer demand appears to be moderating, if not declining, across different nodes, which may result in tighter budgetary constraints for enterprises in the coming quarters. This may result in tighter capital investments for new IT infrastructure in the near-term as enterprises grapple with tighter margins paired with lower revenue growth. Given that hyperscalers are dependent on providing the best user experience gives me reason to believe that capital investments will not slow, regardless of the economic climate. My rationale behind this is that AI training is dependent on low latency, high speeds, and cost moderation in order to be successful. This suggests that hyperscalers will do everything within their power to invest in the latest GPUs, cooling systems, networking equipment, and power transmission in order to maintain their competitive quality of service. Investment Risks For Super Micro Computer Bull Case The bull case for SMCI is that the firm is scaling their operations in order to cater to the heightened demand for their plug-and-play server rack technology. Management suggested that the firm will have the capacity to ship 3,000 server racks per month by November, up from 1,000 seen in q4'24. This can be a major revenue growth catalyst for the firm, allowing for the firm to reach guidance of $26-30b in eFY25. Through scaled operations, gross margins should migrate back to more normalized ranges between 15-19%, a major improvement from q4'24's adjusted gross margin of 10.54%. Management also remains focused on enhancing their go-to-market strategy for building up their enterprise sales pipeline, which will likely attribute to margin expansion. The increasing demand for AI infrastructure leads me to believe that investments within the AI space will persist for the time being. Dell Technologies (DELL) and Hewlett Packard Enterprise (HPE) each show growing backlogs for AI infrastructure that may persist as the next generation of GPUs are released between Nvidia and Advanced Micro Devices (AMD). Bear Case For SMCI SMCI is raising capital as if they're in a hypergrowth state. The ultimate question is, will all these investments pay off, or will the rug be pulled out from under them? Though I do not anticipate any shortage of investments at the hyperscaler-level any time soon, adoption of AI/LLM applications in the cloud may determine the capital outlay in the coming quarters. Microsoft (MSFT) and Oracle Corp. (ORCL) continue to make major investments in infrastructure to build out their AI factories. What I'm getting at here concerns whether this level of spending will persist if their customer base pulls back on their AI/LLM journey if found less viable than initially expected during the hype mania? If this does occur, SMCI could be caught flat-footed in the process as the firm undergoes a major round of capital investments, catering to consistently growing capital investments towards AI factories and leaving equity investors tied up in a company with growing debt and equity dilution. Valuation & Shareholder Value SMCI shares experienced a significant decline post-q4'24 earnings that resulted in a decline of -15% to the share price. Shares have continued to remain at this level as investors digest the lackluster margin performance despite the significant growth outlay. Taking into consideration SMCI's historical valuation, the shares appear to be undervalued based on my eFY26 forecast for adjusted EBITDA. From a company comps perspective, SMCI appears to be relatively overvalued. Given the recent operational challenges SMCI was exposed to in q4'24, I believe that we may be in the early stages of the stock's valuation coming back down to earth and more in line with its peers. From a tactical perspective, shares may continue their downward trend as the stock began its wave retracement in March 2024. Given the stock's trajectory, I have reason to believe the stock could land at ~$400/share to complete its c-wave. Net of market dynamics, I believe that eq1'25 will determine whether SMCI will experience an upward retracement once the c-wave is completed, or an extended downward retracement. Given the economic headwinds paired with the need for operational improvements, I recommend SMCI shares with a SELL rating with a price target of $450/share at 8.15x eFY26 EV/aEBITDA. This valuation will place SMCI more in line with its IT infrastructure peers at 1.93x TTM price/sales, just over the market cap-weighted peer price/sales average of 1.83x. Michael Del Monte is a buy-side equity analyst with over 5 years of industry experience. Prior to working in the investment management industry, Michael spent over a decade in professional services working in industries that range from O&G, OFS, Midstream, Industrials, Information Technology, EPC Services, and consumer discretionary.Michael takes a macro-value-oriented approach to investment analysis and prides himself in being able to make investment recommendations based on cross-industry analysis. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.