Semiconductor Industry Outlook: Intel's Resurgence and Nvidia's Dominance

Why Intel Stock Deserves A 'Strong Buy' Rating (NASDAQ:INTC)

Looking for a helping hand in the market? Members of Beyond the Wall Investing get exclusive ideas and guidance to navigate any climate. Learn More " I believe that considering Intel Corporation's (NASDAQ:INTC) future prospective market position from its current CAPEX, the stock has very strong long-term growth potential, especially given its current depressed valuations compared to most other companies in the semiconductor industry. I initiate coverage of Intel stock today, believing that it deserves a "Strong Buy" rating. After Intel reported its Q1 2024 revenue of $12.7 billion, up 9% year-over-year but down 17% sequentially, it faced significant market pressure as the results missed the consensus estimate by 0.44%, according to Seeking Alpha. Another reason for the weakness was INTC's losses in foundry operations, even though Intel's non-GAAP profit was $0.18 per diluted share, compared to a loss of $0.04 the previous year (surpassing both management and consensus forecasts of ~$0.13). Diving deeper into the segment performance, we can see that Intel's Client Computing Group (CCG) generated $7.5 billion in revenue, accounting for 59% of total revenue and marking a 31% YoY increase - this substantial growth is explained by the strength in desktop revenue (+31% YoY) and notebook revenue (+37% YoY). As a result, CCG's EBIT surged by 124% year-over-year to $2.65 billion, which is a lot. The Data Center and AI Group (DCAI), which is another important unit of the business (at ~24% of total sales), brought in sales of $3.0 billion, which is a modest 5% YoY expansion. However, it should be noted that DCAI recorded an operating profit of around $482 million, which was a big bounce back from the preceding year's $22 million. What should be discouraging news for Intel bulls is the fact that INTC keeps losing its market share as its rivals like AMD together with ARM-based solutions gain market presence. Intel's Network and Edge (N&E) segment (~11% of total sales) brought in $1.36 billion in top-line, which is only 8% higher YoY. N&E's profit was $184 million as opposed to a loss of $66 million last year; on the other hand, as I briefly mentioned above already, Intel Foundry Services (IFS) stayed in the red with deep losses, as its revenue was reduced by 10% YoY to $4.4 billion and so this led to a quarterly loss of $2.47 billion. Another chunk of bad news for Intel in Q1: in the "Other" category, which comprises Altera and Mobileye, revenues dropped by 46% YoY. The category's profits were zero for all units, with Altera's decreasing by 58% while those of Mobileye went down by 33%. In spite of these situations, Intel's management noted that AI remains an important growth area for the company in the long run as it seeks future profitability and market leadership through new processor technologies and foundry services. Looking at the financials, it's no wonder that investor skepticism about Intel's AI efforts and slow data center recovery further impacted the stock price performance in the recent past, widening the existing spread between the closest peers - Nvidia (NVDA) and Advanced Micro Devices (AMD): Fundamentally speaking, with no great exposure in GPU, Intel stayed far behind in this race. Over the past five years, the company's revenue has decreased by more than 1/5 and EPS has dropped by almost 77.5%. In contrast, the peers have managed to increase their EPS by hundreds or even thousands of percentage points: But what changes do I expect, so that I'm giving Intel a "Strong Buy" rating today despite its underperformance? First and foremost, I find the way in which data centers commenced to higher margins in recent quarters to be appealing. Amid better cost control, Intel's DCAI's top line is going to have a massive boost from its 5th-generation Xeon processors that include AI acceleration on every core, resulting in significant performance gains and cost savings over previous generations. We know that the Gaudi 3 AI Accelerator will be launched soon (assumingly Q3 2024), and it will seek to secure a bigger market share in AI and compete with known brands such as Nvidia and AMD. Based on that, Intel projects accelerated product sales of more than $500 million during H2 2024, with continued strength into 2025. I've previously written in my article on Nvidia and other technology companies, that new technologies like AI and chips for it are subject to various investment cycles. The company that succeeds is the one that can maintain its market leadership and get a proper IRR from its current investments, as advancements in AI, chip development, and related fields are very capital-intensive. Therefore, access to cheap capital plays a significant role here, and as far as I can see today, this hasn't been a challenge for Intel. The firm is making substantial investments in developing its $100 billion complex in Ohio and securing federal funding for that (at least for $25 billion). It's clear that Intel receives strong support from the U.S. government like almost no other semiconductor industry players, as the U.S. is concerned about the West's heavy reliance on the small South Asian region - Taiwan. Thus, the difficulty in obtaining capital, specifically for Intel, is not a significant obstacle to its development in the semiconductor market. So I believe that as the chips market becomes saturated, Intel is going to have more chances to emerge in areas that it hasn't previously covered and also in areas where it's currently lagging behind the "green" and "red" teams. Northland Capital Markets analysts seem to agree with me. Yes, they decreased their EPS estimates for INTC due to the impact of export restrictions on Huawei, loss of competitiveness in server CPU market share to AMD as well as anticipated deceleration of PC demand by 2H 2024. Yet, they consider Intel as potentially a leading-edge logic foundry alternative to TSMC (TSM). Their price target is $68, which implies nearly double the closing price on July 16th, 2024. The company has ambitious goals for its foundry services, hoping to be the second largest external foundry company by 2030; most importantly, it has already secured large orders from its key clients such as Microsoft (MSFT) for its 18A process node, which says a lot about the potential quality of Intel's offering, in my opinion. According to the earnings call, we can deduce that the management hopes for sequential sales improvement will be more robust over 2024 and into 2025, with Q1 2024 being the cyclical trough. The growth is going to be propelled by an enterprise refresh cycle, a growing pace of AI PCs, and data center market recovery. Despite the relatively positive outlook, the company's forecast for Q2 2024, which will be announced on August 1, assumes that sales will reach $13 billion (mid-range), reflecting a lack of growth compared to the previous year. However, the gross margin is expected to be 43.5%, almost 4% higher YoY. Unfortunately, INTC's EPS is expected to be $0.03 lower than in the previous year: Even given past earnings misses, Wall Street is evaluating management's statements as the most likely scenario. The consensus is that Intel's revenue will be a bit lower than $13 billion, with EPS at 10 cents - this aligns with management's forecast, indicating that expectations are realistic and not overly optimistic, in my opinion. If the first quarter really has marked the bottom of the cycle and management's recent cost-cutting initiatives have had even a minimal impact on the company's margins, then I think the current forecasts may be too pessimistic. This would mean that there's a great chance of beating the forecast if the above conditions are met. From a technical analysis point of view, I like the fact that the price reacted sharply from the $30 mark and quickly rose to around $34. If we look at the statistical data over the last 10 years, we are entering a seasonally strong period. The next strong resistance, which is the logical next target if the reversal continues, is in the $43-$44 range, representing a potential return of 24-28% in the short term. So in my opinion, the technicals are quite bullish. I believe any recovery in momentum like that should be supported by a favorable valuation, providing a margin of safety. In the case of Intel, Seeking Alpha Quant's rating gives it a "D+" because some TTM multiples are very high indeed. However, given that the company's EPS continues to recover, the forward-looking multiples for next year appear moderately confident. If the current consensus is correct, the company is expected to earn $1.93 per share in EPS in 2025 (a 78% year-on-year) - this would result in a price-to-earnings ratio of almost 18x. I think it's fair to assume that Intel's P/E ratio in 2025 will be around 25x - both historical norms and comparisons across the industry point to this multiple. Assuming the current EPS consensus is correct, we can calculate the potential share price by the end of 2025 by multiplying 25x by $1.93. This gives us a projected share price of $38.60, which is about 40.5% higher than the current price of Intel. Thus, I can conclude that the company indeed has a margin of safety. More than that - I believe the amount of INTC's undervaluation potential gives me a right to assign the stock a "Strong Buy" rating today. I think it's no secret that AMD is a major threat as their PC and data center segments have grown significantly. By looking at the stock price performance, it looks like INTC investors are indeed concerned, even though Intel's plans for products and solutions span several years from 2023. I think that the risk of intense competition and the possibility that Intel may continue to lose market share for several years, despite its efforts to revive growth and explore other end markets, may sustain negative sentiment around the stock - this could lead to serious negative consequences for investors who buy the stock on the dip today. A general economic downturn is also one of the main risks for all semiconductor companies, including Intel. Thus, should there be an economic downturn, this would lead to a decline in demand for semiconductors, followed by a build-up of inventories and a cyclical slowdown in orders. The risk directly related to my thesis today is my assumption that the consensus appears realistic. However, this may not be the case. The assumption that Intel will trade at 25 times its earnings by the end of 2025 is uncertain - the multiple could be much lower. Everything will depend on how well the company manages to implement, or at least show progress in implementing, its current plans and strategic vision. Based on everything I wrote above and despite some obvious risks, I think Intel stock deserves to be called a "Strong Buy" today. Due to cost controls and the introduction of 5th Gen Xeon processors with AI acceleration, improved margins in data centers are anticipated to significantly boost the top line. Intel's upcoming Gaudi 3 AI Accelerator aims to compete strongly in AI markets against rivals like Nvidia and AMD, thus the negative sentiment around INTC could also benefit as the firm gains further market share from its closest peers. Furthermore, Intel has strong access to capital, including federal funding for its Ohio complex, which may imply that it's well positioned financially in this capital-intensive industry. I think Intel could be a leading-edge foundry alternative with great upside potential from current levels. My valuation calculations show a possible price target which is ~40% higher compared to the current stock price level, giving a great margin of safety. Thus, I initiate coverage of Intel stock and give it a "Strong Buy" rating.

Intel: A Cheap Chipmaker, Let's Look Ahead To Quarterly Earnings (NASDAQ:INTC)

The article will explore whether it is a good time to consider buying Intel shares. Intel Corporation (NASDAQ:INTC) has been doing quite poorly in terms of earnings and sales for many years now. This is certainly reflected in the stock price. In fact, INTC stock is trading at multi-year lows. Yet, the company invests heavily in AI and is a sound competitor to Nvidia (NVDA). The company is expected to report its 2Q earnings on 1 August. I will discuss the expected earnings. This is my first article on Intel. However, I have previously written about Nvidia, its competitors, including Intel, and NVDA stock's ridiculous valuations. In my most recent article on Nvidia and its rivals, I wrote that Intel and Advanced Micro Devices (AMD) were serious threats to Nvidia. Although NVDA stock price has risen since then, the competition risk remains. Let me analyze Intel to see if it is worth buying now. Intel Corporation's results Intel Corporation has been reporting rather disappointing results for a while. As you can see from the tables and graphs below, sales and net profits have reached their lows in 2023. Intel Corporation's annual sales and profits 2016 2017 2018 2019 2020 2021 2022 2023 TTM Revenues 59387 62761 70848 71965 77867 79024 63054 54228 55237 Net income 10316 9601 21053 21048 20899 19868 8014 1689 4066 Click to enlarge Source: Prepared by the author based on Seeking Alpha's data. This is true. However, we can clearly see that trailing twelve-month (TTM) results, both net profits and sales, seem to be somewhat better compared to the ones recorded in 2023. We can see a very similar picture if we take a look at the company's quarterly earnings and revenues. Let us compare the first quarter of 2024 to the first quarter of 2023. We can see there was a clear improvement. The net loss decreased while the sales increased. Apr 2022 Jul 2022 Oct 2023 Dec 2022 Apr 2023 Jul 2023 Sep 2023 Dec 2023 Mar 2024 Revenues 18353 15321 15338 14042 11715 12949 14158 15406 12724 Net income 8113 -454 1019 -664 -2758 1481 297 2669 -381 Click to enlarge Source: Prepared by the author based on Seeking Alpha's data. The results for the last two quarters were strong compared to 4Q 2022 and 1Q 2023 and, therefore, made the TTM data look better compared to 2023. Why is that, then? That is because the Intel products and Intel foundry segments' revenues were rising in 2023. 4Q 2023 was the best period last year for most of the segments. However, Intel's stock price decreased upon its latest quarterly report because revenues were short of estimates. The revenues and earnings were worse compared to 4Q 2023. The company also provided a not-so-strong forecast for the current quarter. However, the results were still better compared to the same period a year ago. The strongest revenue rise was due to Mobileye, 48% YoY. But all of Intel's departments reported better results YoY. Intel's 2Q 2024 earnings As I have mentioned above, the company will report its quarterly earnings on 1 August. According to analysts' estimates, the current second quarter's earnings will total 10 cents per share. This is substantially less than September's estimated earnings of 32 cents per share. But if analysts are right in their estimates, the EPS for the current quarter will rather be mediocre, neither particularly high nor negative. As I have mentioned above, Intel's March 2024 quarter earnings totaled ($0.09) per share, while for the December 2023 quarter these totaled $0.62. However, Intel's sales are expected to increase. The average sales estimate is $12.97 billion, a rise from the March 2024 result of $12.724 billion. But I would not only focus on the reported revenue and earnings figures, but instead watch the management's conference, during which the business strategy updates will be discussed. In my view, the most important upside factor for Intel is its foundry. So, it is critical to watch for the news on that front. I will discuss this in the next section. Intel's upside factors Nvidia Corporation has been leading the AI chip race. But it is not a monopolist, certainly. After more than one unsuccessful attempt to enter the GPU market, Intel, the largest company producing PC and server CPUs, now seems to be close to becoming a large player in this field. According to PassMark Software, Intel's share of the x86 CPU market is equivalent to 64%. Unfortunately, it has given AMD a lot of market share over the years thanks to AMD's cheaper and more advanced CPUs. Intel's CPUs were not small, dense, and power-efficient enough. Despite the not-so-brilliant but improving last set of quarterly results, the Gaudi 3 release is expected to bring in more than $500 million in revenues during the second half of the year. Intel also differentiates itself from AMD and Nvidia with lower prices. It is also betting big on becoming the leader in the foundry market. To achieve that, the company plans to open chip fabs throughout the US, which is an expensive move because Intel does not expect to break even on this front before 2027. But it could eventually become a good chance for the company. The idea to become a leading semiconductor foundry is part of CEO Pat Gelsinger's IDM 2.0 plan. The plan was announced when Pat Gelsinger became Intel's CEO in 2021. According to Mr. Gelsinger, the IDM (Integrated Device Manufacturer, the term for semiconductor companies that both design and manufacture chips) 2.0 plan involved three key components, namely: 1) expanding Intel's manufacturing capacities with industry-leading process technologies, 2) expanding the use of third-party foundry capacities to meet Intel's needs, and 3) becoming one of the leading foundries with the aim of being the number two foundry by 2030. These aims were to deliver five new process nodes in four years' time. This would regain Intel's leadership, while expanding fab capacity at an estimated budget of $100 billion through expanding existing fabs and building six new fabs in Arizona, Ohio, and Germany. Well, these goals seem to be ambitious and require money above and beyond anything the industry has ever seen before. To become a foundry player, Intel's business strategy has to change. Both Samsung (OTCPK:SSNLF) and GlobalFoundries (GFS) have made this transition, but with some problems. GlobalFoundries is now a pure foundry, similar to Taiwan Semiconductor Manufacturing Company Limited aka TSMC (TSM), while Samsung manufactures products and provides foundry services, similar to what Intel is doing. Intel attempted to provide foundry services before, but was unable to compete. Intel did not want to modify its manufacturing process for every single product, a necessary condition to deliver an optimized product, which is particularly important for cost- and power-sensitive applications like mobile devices. So, to succeed, Intel had to start thinking and behaving like a pure foundry. Investing in semiconductor manufacturing is expensive. It requires a constant investment in new manufacturing process technology, and also a continued investment in new manufacturing capacity. Both types of costs have been rising substantially over the history of the semiconductor industry. Sure, if everything goes as planned, Intel will become the leading foundry in 2030, which will mean much higher revenues and earnings than the company is experiencing now. But as I have mentioned before, this requires very high capital expenditures, and the result will only be seen in several years' time. But the company is already doing all it can to progress in the field. Intel's foundry officially opened in February this year, but its two foundries in Arizona and a pair in Ohio appear to have been delayed. They are expected to come online later this year or early in 2025. According to recent reports, the Arizona two fabs as well as upgrades to Intel's existing Ocotillo plant, will cost almost $32 billion. The Ohio fabs were predicted to cost almost $10 billion. But as of early 2024, the estimate is about $28 billion. The new fab sites are not only limited to the ones based in the US. Construction of new fabs was announced in Germany and Israel. Detailed assembly, test, and packaging facilities are under development in Malaysia and planned for Poland. One of the largest fabs is the one in Magdeburg, Germany. It was announced at the beginning of 2022 as part of a €33 billion ($35.1 billion) manufacturing plan across Europe, of which the German plant would account for about €17 billion. It was expected the plant would break ground in early-to-mid 2023 and start manufacturing components as early as 2027. However, the fab plant started having problems. Despite the fact not all of its projects go as planned, Intel still hopes to beat Samsung as the world's second-largest foundry next year, with its manufacturing revenue of more than $20 billion. Market leader TSMC's estimated 2024 revenue is $85 billion. If Intel catches up with TSMC and Samsung, it will get contracts to build high-performance chips from clients like Apple (AAPL), Nvidia (NVDA) and Qualcomm (QCOM). These companies do not run their production facilities and contract for Taiwanese and Korean firms to make chips of their design. Despite the fact some of Intel's projects do not go as planned, Intel's capabilities and the US government's support of its chip giants might still help Intel achieve its targets. The US government has earmarked almost $30 billion in subsidies for advanced semiconductor production, aiming to bring cutting-edge AI chip development and manufacturing to America. As concerns Intel's aims, it wants to maintain its status as a reliable partner in the semiconductor industry. It aims to become a customer-centric business with its foundry to meet the needs of its clients. Intel's plans to introduce 14A process technology and several specialized node evolutions. These advancements are designed to meet the requirements of AI and other cutting-edge applications, helping Intel to lead the semiconductor industry in innovation and technology. Intel also aims to become the leading AI chip manufacturer. So, it launched new AI accelerators this year and started expanding its manufacturing capacities. The launch of Gaudi 2 and Gaudi 3 accelerators, capable of running AI workloads for data centers, will highly likely improve the company's results. Intel is changing its business model, albeit quite slowly. Intel's fundamentals It is quite common to estimate a company's value by using the discounted cash flow (DCF) model. However, it is quite difficult to do so in the case of Intel because it is difficult to predict both its future earnings and cash flows. As I have mentioned above, its earnings have been falling for a while, while it may take the positive factors lots of time to translate into cash. But let us take a look at its debt and liquidity indicators. Indicator Value Debt-to-Equity ratio 81,977/105,973=0,77 Current ratio 42,608/27,213=1,57 Interest coverage ratio (EBT/interest expense) 762/872=0,87 Click to enlarge Source: Prepared by the author based on Seeking Alpha's data. Intel's debt ratios show us quite a mixed picture. The debt-to-equity ratio shows us that the company's total liabilities are lower than its shareholders' equity, which is a piece of good news for Intel's investors. The current ratio is also reasonable, since it shows that Intel's current assets are more than 1.5 times greater than its current liabilities. Many analysts consider a ratio between 1.2 and 2 to be normal. However, the most worrying indicator is the interest coverage ratio. The company's 2023 earnings before tax were even lower than its interest expense. As concerns Intel's profitability figures, its net profit margin is higher than some of its peers'. For example, Micron Technology's (MU) and Marvell Technology's (MRVL) net profit margins are negative. Analog Devices (ADI) and Texas Instruments (TXN), meanwhile, have net profit margins of 20.45% and 35.16%, respectively. So, Intel net profit margin is rather average. As concerns Nvidia, one of Intel's close competitors, its profit margins are much higher. Nvidia's net profit margin is a whopping 53.40%. In my previous article on Nvidia, I also wrote about the company's debt and liquidity indicators. Indicator Value Debt-to-Equity ratio 27930/49142=0,57 Current ratio 53729/15223=3,53 Interest coverage ratio (EBIT/interest expense) 47741/255=187 Click to enlarge Source: Borrowed from the author's other Seeking Alpha article. In short, Nvidia's indicators are much better than Intel's. This is especially true of Nvidia's interest coverage ratio, which is a whopping 187. But as I wrote in my previous article, Nvidia's valuations were sky-high. Now, let us take a look at Intel's valuations. INTC valuation It is true that Intel is not as profitable as many investors would like it to be. However, Intel is also cheaper than most of its competitors, MU, Analog Devices (ADI), Texas Instruments (TXN) and MRVL in terms of profitability ratios, P/S, P/B and EV/EBITDA. But the most expensive competitor is arguably Nvidia. Its profitability, P/S, P/B and price-to-free cash flow ratios are all much higher than those of INTC. This is explainable, indeed. Intel is not as profitable and cash-rich as Nvidia. Still, Intel is also cheap compared to its other competitors, as illustrated by the table above. But let us take a look at Intel's valuation ratio histories. First, the company's P/E ratio is not near its all-time highs but not as low as it was before 2023. The price-to-sales ratio is also quite average compared to the highs recorded in 2018 and 2020. As concerns Intel's P/B ratio, it is near multi-year lows. All this means INTC stock is cheap relative to its peers and also to its history. Risks The risks are obvious. To start with, Intel has been reporting falling sales and earnings for a while. It does not have as brilliant cash holdings and a debt position as Nvidia. The competition with AMD and Nvidia is also fierce. Moreover, general risks, including a recession and deteriorating US-China relations also apply because Intel operates in the semiconductor chips industry. So, as you can see, there are serious downside risks. However, all these risks seem to be already factored into the current stock price. Conclusion I fully appreciate that it feels very rewarding to be invested in Nvidia's phenomenal sales, earnings growth and surging stock price. Buying INTC appears quite a risky buy, given its earnings track record and its not-so-brilliant financial position. But there is still a probability that the company might do much better if it wins a substantial market share in the AI market. Its recent innovations might lead to substantial progress, but only in several years' time. Thus, I would not buy Intel Corporation stock or sell INTC short, but instead remain neutral on the stock. Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. A research analyst and a freelance writer looking for value investment opportunities. I have several years of investing experience. I am mostly interested in writing about bargain stocks of large companies. My interest is not limited to American companies but extends to firms operating in other countries but listed on US stock exchanges. 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.

Nvidia: Prepare For A Correction In H2 2025 Or H1 2026 (NASDAQ:NVDA)

High valuation compared to peers; current Hold rating with potential Strong Buy opportunity in 2026-2027 as undervaluation emerges, opening up high long-term growth potential in robotics and automation. I've covered Nvidia (NASDAQ:NVDA) twice before, and in my first analysis of the company, I was skeptical about the valuation -- albeit, at that time, I arguably should have been bullish. In April 2024, I provided follow-up coverage, and I rated the stock a Buy. Since then, the investment has gained ~60% in price. Now, I think the investment is certainly overvalued in the near term, and I think there is some potential for the stock to contract significantly in price in late fiscal 2025/early fiscal 2026. It is important for investors to begin to ascertain how the market is going to react once the company begins to report slower YoY growth, which Wall Street analysts have forecasted is likely to truly begin in 2026. It is somewhat speculative to ascertain whether the market will sustain the high valuation, but my own perspective is that NVDA is in for somewhat of a correction, and I think this could be relatively steep and could begin somewhere in H2 2025. Please note that throughout this analysis, years always refer to fiscal periods, not calendar years. Nvidia's surge over the last 12 months has largely been driven by its leadership in AI and data center technologies. The growth is anticipated by Wall Street and independent analysts to continue through 2025, but the consensus is a slowdown is likely in 2026. For fiscal year 2024, NVDA reported 126% YoY revenue growth. Furthermore, in fiscal 2025 Q1, the company reported 262% YoY revenue growth. This was largely driven by exponential demand for AI chips and data center solutions. For example, its data center revenue saw a 409% increase in 2023 and continued to grow exponentially into 2024. The company has secured major partnerships with Amazon (AMZN), Google (GOOGL) (GOOG), Meta (META), Microsoft (MSFT), and Apple (AAPL), who have collectively pledged to invest $200B in AI chips and data centers in 2024. This build-out, AI arms race and total attention on the field of AI has positioned Nvidia as one of the undoubtable lynchpins in the semiconductor supply chain, alongside TSMC (TSM). I don't see this changing, but in my estimation, there is likely to be a momentary slowdown circa 2026 as major tech companies complete phase 1 of the AI build-out. I think this is going to open up a significant moment of lowered sentiment in the market for NVDA. I also think this will be one of the best times to buy NVDA shares because I think over the next 5-10 years, big tech companies in the United States and the Western world could begin phase 2 of the AI build-out, which I think could involve tax incentives and federal spending support from the United States government among other leading public institutions. In the near term, continued growth is set to resume for NVDA throughout 2025, with new products being launched, including the Blackwell platform, which supports generative AI at a trillion-parameter scale, and Spectrum-X technology for Ethernet-only data centers. Management has also committed to expanding its presence in autonomous vehicles and edge computing, which are expected to drive further revenue growth. However, come 2026 the growth prospects could look less appealing as the firm achieves potential market saturation in the AI training market. As I mentioned, as companies complete their initial AI infrastructure setups, the demand for AI training hardware may start to reduce. There is also evidence that some of Nvidia's top customers have double-ordered to secure their near-term needs -- once these infrastructure setups are complete, this double-ordering could lead to a significant cyclical downturn that the market has not anticipated fully yet. Furthermore, as I mentioned in my last thesis on Nvidia, while its moat is unlikely to be challenged significantly, emerging competitors like Groq, Cerebras and SambaNova continue to vie for market share through more efficient chip designs, and Amazon and Google are also developing in-house chips. In other words, the market is evolving and becoming more diverse, and I think it is worth remembering that these last few years have been notably lucky for Nvidia -- it was largely in the right place at the right time with the right GPUs and infrastructure to support the largely unimaginable AI boom. Moving forward, new players and established tech giants will be trying to consolidate their positions, which further emphasizes why, over the next few years, the fundamental growth story for Nvidia is likely to change forever as phase 1, the AI infrastructure build-out, culminates. Nvidia has been nothing short of extraordinary on the financial front over the past couple of years: However, analyst estimates for 2025 are already lower than the growth delivered in 2024. As we can also see from the following table, 2026 is a significant drop from 2025 in normalized EPS YoY growth if forecasts prove to be accurate. As it has been covered by almost 50 analysts for both years, I'm convinced that the forecasts are likely to come to fruition. What Nvidia shareholders need to remember is that the valuation is much higher than other big tech companies at the moment. This makes the investment notably more prone to volatility. For example, compare NVDA to the rest of the magnificent seven on normalized PE ratio: Arguably, NVDA deserves this rich valuation, but it is also worth remembering that the stock is much more prone to volatility if it fails to deliver such high fundamental growth as it has in the past moving forward. I think because the normalized PE ratio is so high, even on a forward basis, where it reduces to 47, the likelihood of a correction is likely in H2 2025 in anticipation by the market of lower fundamental growth for NVDA for fiscal 2026, which is when Wall Street is forecasting much lower YoY EPS growth. While I understand the argument that NVDA has an immense amount of cash and ST investments and masses of free cash flow, giving it the capability to buy back shares aggressively, I think this will not be enough to keep investor sentiment high throughout 2026. However, share buybacks are a worthy strategy to please investors and bolster shareholder value until the next phase of AI spending begins, which I believe will be heavily oriented toward robotics and automation. A lot of semiconductor companies are cyclical, and NVDA is proving to be no different as it continues to position itself at the epicenter of advanced computational capabilities. I think that the end of the first semiconductor upcycle related to AI and data centers will be in late 2025 and early 2026, and skepticism about high levels of AI spending is already apparent, for example, in a report from Goldman Sachs titled 'Gen AI: too much spend, too little benefit?'. Doubt is starting to surface about whether AI is worth the amount big tech companies and other industries are spending to develop and deploy its capabilities. This argument is warranted in the near term, but I think that once the spending settles, industries will begin to notice new potentials in the technologies, and I believe the focus will shift much more aggressively from LLMs, which are largely information-based tools, to robotics through AI-assisted automation. In my opinion, this is likely to be phase 2 of the AI build-out and NVDA shareholders who buy during the correction that I predict circa 2026 will be able to profit very well when new enthusiasm for intelligent technologies begins. In the interim, if buying at a low valuation, NVDA is likely to continue to keep growing amid support for information-based AI primarily, but I think the current valuation is too high to warrant an investment at this time. This is why my rating for NVDA is a Hold rather than a Buy, but I can see it becoming a Strong Buy at some point in 2026 or 2027. By H2 2025 or H1 2026, I think the non-GAAP PE ratio could contract to around 40 on a TTM basis as the market reacts to lower growth prospects in the near future. If normalized EPS is $3.67 in January 2026 (in line with the Wall Street consensus), this would make the stock worth $146.80 in July 2026 if the market prices this into the stock approximately 6 months early. That indicates a 12-month CAGR of 16.17%. However, there is also the possibility that the market overreacts and opens up a more significant undervaluation, which I think is not unlikely considering how richly valued NVDA currently is. If the normalized PE ratio contracts to 35 on a TTM basis, the stock would be worth $128.45, meaning a 12-month CAGR of 1.65%. I think in both of these instances; the investment becomes a Strong Buy with a long-term horizon strategy hinged on the thesis of high growth coming in the future related to automation, robotics, and AI demand surging both domestically and potentially internationally through a re-globalized world order in conjunction with China. Please refer to my recent Palantir and S&P 500 analyses for why I think the West could continue to lead the global economy. NVDA has a notably strong PEG ratio at the moment -- currently just 0.09; but this is likely to come under pressure, and this is already evident in the discrepancy between the PEG GAAP TTM ratio and the PEG non-GAAP FWD ratio. I think that as this metric begins to indicate poorer growth performance on a forward basis, institutional investors are going to begin questioning the near-term valuation, and it could trigger heavy selling action down to the retail investor level. As a result of my analysis, I would be looking to hold off from investing until circa 2026, when hopefully the TTM normalized PE ratio is nearer to 40 or 35. Alternatively, if one is already an NVDA investor, I would certainly not sell, and I would hold this stock for the long term. It is prudent to consider that the sentiment toward AI could shift toward the negative over the long term. The result of this shift would be very bad for NVDA. Although I think this is unlikely, what is perhaps more likely is that the infrastructure build-out for AI, automation, and robotics becomes much slower and elongated. I do not think this is the wisest strategy for Western companies to take, especially due to how bullish China's CCP is in supporting AI at the moment (I think it is paramount that the West hold the lead in technology during this time of geopolitical tension). However, it is conceivable that due to high costs and not enough near-term profits from these infrastructure expenses related to AI, companies stop investing in them heavily, at least for some time. The enormous power requirements of AI data centers are currently straining existing grids. ClearBridge Investments notes that "The path of least resistance is one of higher power prices in markets with outsized AI infrastructure builds". This could slow down expansion plans, especially as we are concerned about net-zero policies and are yet to have a stable renewable energy infrastructure to meet such high demands. Furthermore, Sam Altman, OpenAI's CEO, has mentioned that the industry might need as much as $7T in investment to build the necessary AI infrastructure. I think some caution around how the money is being spent and why is paramount, and I think there are likely to be delays in spending affecting NVDA's revenues due to a more prudent and measured allocation strategy related to intelligent technology moving forward. This point is also further reinforced by growing regulatory constraints, which I believe are likely to compound as the technologies become more proficient. There are also long-term risks that could compound related to China that have already made themselves present. For example, Nvidia's business has already been affected by U.S. export controls on advanced AI chips to China. Huawei's Ascend chip is being positioned as a long-term solution for Chinese enterprises, and Nvidia is losing a big portion of the market if it is further inhibited from selling to China. There is both geographic and company diversification related to AI and semiconductors at the moment, as well as a growing notion of isolationism that is hinged on the geopolitical debate. In my opinion, both are somewhat bad for Nvidia over the long term as more companies begin to become viable alternatives to Nvidia, potentially at lower costs for specific workloads, and certain international markets become less accessible. In my opinion, these inhibitions are likely to get somewhat worse in the short term until the West has solidified a dominant lead and moat in AI infrastructure and capabilities, at which point I believe China is likely to be more dependent on the West for such capabilities and cross-border trade will have less friction and be more tenable. These are core reasons why I think bearish sentiment surrounding AI companies is going to build in the near term, but this will open up a significant buying opportunity for investors who capitalize on the lower valuations with a long-term horizon strategy. In my opinion, NVDA is currently overvalued when taking into consideration the contraction in YoY growth rates expected in 2026. I think the market is likely to begin pricing this contraction in YoY growth into the stock in H2 2025. Therefore, I think investing at the present valuation is not wise, and I think it would be much better to allocate to NVDA during 2026/2027 when I think there will be a more bearish stance on AI as the infrastructure expenses do not prove as profitable in the near term as initially assumed. That being said, I think this sentiment will be transitory, and the potential undervaluation that evolves in 2026/2027 could make for a Strong Buy opportunity. I think over the next 5-10 years, NVDA will likely continue to be one of the biggest beneficiaries of AI growth and be a lynchpin in the advanced semiconductor supply chain, particularly related to robotics and automation capabilities. For these reasons, my rating for NVDA is a Hold for now.

Nvidia Stock Is Still A Gift At $130 (NASDAQ:NVDA)

Nvidia's AI capabilities, including Generative AI, position it at the forefront of the AI revolution, with potential for substantial sales growth and multiple expansion. Explosive growth from the artificial intelligence industry triggered a massive rally for Nvidia Corporation (NASDAQ:NVDA) in the last year. The stock has done well even after a ten-for-one stock split and some investor concerns about the sustainability of Nvidia's growth path. Considering the mind-blowing momentum in Nvidia's main business, data center, I think investors are still underestimating Nvidia's sales potential, particularly as the expansion of the data center market and the AI cluster upscaling opportunity are concerned. The company is poised to exploit accelerating growth in the data center segment and, in light of big investments in machine-learning capabilities, Nvidia's valuation is actually not excessive at all. Nvidia has the profit growth to back up its valuation, and the risk/reward relationship still looks rather compelling. Nvidia's 1Q earnings were spectacular, particularly in the data center segment where sales skyrocketed to $22.6 billion, reflecting QoQ growth of 23%. Total sales reached $26.0 billion, up 18% QoQ, which put the company on a run-rate to a $100 billion plus sales trajectory each year. Sales in data centers accounted for a whopping 87% of sales in 1Q25, up from 60% a year ago. Nvidia's data centers profit from the sale of the Hopper GPU platform. With demand for machine-learning capabilities only growing, there is a good chance that Nvidia will manage to outshine even its last earnings release in the remaining three quarters of the company's present financial year. The reason is that growth for data center GPUs does not appear to be temporary, and the AI cluster upscaling opportunity is significant. The machine-learning market is red-hot as companies are struggling to get their hands on GPUs. Nvidia's chips are used for various purposes such as edge-to-cloud computing, the powering of automotive driving technology, cryptocurrency mining and professional applications. In recent quarters, however, they are mainly used by large data centers that need to stack them with tens of thousands of GPUs to train large-language models. Machine learning is a very compelling sector that is poised to see skyrocketing growth until the end of the decade, and Nvidia is sitting right at the spearhead of this AI revolution. This growth is also secular, driven by demand for AI capabilities, not by temporary factors. The market for machine learning is poised to grow at 19% per annum, according to Statista Market Insights, which obviously presents an enormous lever for Nvidia to scale its existing AI capabilities. Nvidia could profit from this accelerating growth through its main GPUs that power AI applications, but also through its AI software platform, which is mainly marketed to companies. Nvidia AI software includes Generative AI capabilities. These could help companies deploying Nvidia's AI arsenal to realize productivity increases, optimize supply chains/cost structures, and deliver in-depth analytics insights that could impact the speed and accuracy of business and investment decisions. Nvidia's GPUs, like the RTX, are used for deep learning purposes and Nvidia's lead processor, the NVIDIA H100 Tensor Core GPU, is used as the foundation for artificial intelligence usage on the data center level. The NVIDIA H100 Tensor Core GPU has been designed for optimizing the development, training and at-scale deployment of generative AI/language models that are demanded by almost every major company right now. It was the fastest GPU available in the market and therefore particularly demanded by companies that require a fast tackling of AI and HPC workloads. With Nvidia providing the cornerstone of such generative AI/language models, Nvidia has positioned itself at the very center of the AI revolution. Nvidia has a pole position in the AI processor market (as reflected in its financials) over competitors like Advanced Micro Devices, Inc. (AMD) which only recently got around to announcing competing processors. One product that is coming users' way is the AI accelerator MI300X, which is specifically tailored to support machine learning. Currently, Nvidia is the leading AI processor manufacturer. According to Advanced Micro Devices' (AMD) CEO Lisa Su, industry demand is substantially outstripping supply. This means both Nvidia and Advanced Micro Devices are poised to see big upside in data center sales and GPU shipment growth moving forward. Expanding the view beyond mere machine learning potential, and including all Generative AI pathways for monetization, leaves us (and Nvidia) with an even rosier picture for sustained, long-term sales growth. As a long-term investor, I am primarily interested in seeing strong underlying market growth that a company at the forefront of its industry, like Nvidia, can leverage to its advantage and, possibly, grow even faster than the market. According to Bloomberg Research, the Generative AI market is poised to grow even faster than the Machine Learning market. Generative AI leverages concepts like deep learning and neural networks and is used primarily, but not exclusively, in the content creation space. The market for Generative AI is anticipated to grow to $1.3 trillion by 2032, up from just $67 billion in 2023. This means the market is anticipated to grow 39% per year in the next nine years. The takeaway for investors here is that the AI revolution more likely than not indicates that we are at a very early stage of AI adoption. Put simply, Nvidia's AI growth curve is just getting started, which implies substantial potential, if not for multiple expansion, then for sales growth. Common clusters to train artificial intelligence models include tens-of-thousands of GPUs, but the market seems primed for exponential growth in this core area of Nvidia's business. In turn, this could lead to investors still underestimating Nvidia's data center sales growth potential. The trend is for much bigger AI clusters and supercomputers, which could drastically increase demand for GPUs moving forward. AMD's Lisa Su said at the end of last year that the chip company anticipates to see the data market grow into a size of $400 billion by 2027. Nvidia owns more than 90% of this market. Some companies, like Microsoft and OpenAI, have said they intend to build supercomputers with more than 1 million GPUs to train large-language models ("LLMs"). With AI GPU training clusters now made up of 10ks of GPU, the AI clusters used in the future could potentially include millions of GPUs, representing a 10x increase over the present size. My view here is that the upscaling in the size of AI clusters (a larger number of GPUs included in a training cluster), represents an opportunity for Nvidia particularly to leverage its strength in the GPU market. H200 chips are shipping in the latter half of this year, and Nvidia's Blackwell GPU is hitting the market as well at the end of the year. These new chips promise higher performance and reduced power consumption, which could make them top-sellers for Nvidia at a time of accelerating demand for compute. If AMD's estimate for $400 billion in data center chip sales by 2027 is correct, then Nvidia could capture $360 billion or more of this market, considering a present market share of 90% in the AI GPU market. Nvidia had a GPU shipment share of 98% in 2023, but could lose some market share to other GPUs offers from AMD or Intel. With that said, though, Nvidia's new Blackwell GPU launch later this year, could supply a solid growth catalyst and the same is true for the start of H200 shipments. Presently, based on 1Q sales, Nvidia has a run-rate sales volume of $104 billion and sales are anticipated to grow 35% next year. This sales estimate could thus be conservative, however, and, based on AMD's market projections, Nvidia's data center sales could be more than triple between 2024 and 2027, to more than $300 billion, up from $90 billion in 1Q (on a run-rate basis). With just about $100 billion in run-rate data center sales today, Nvidia could be poised to grow its sales at closer to 50% annually, leaving room for a multiple decompression. Nvidia's multiple is, in my opinion, shockingly moderate given the 30% (or much higher) annual sales growth potential that is presented by the Machine-Learning market (40% by the Generative AI market) and Nvidia's accelerator release road-map. Presently, Nvidia is selling for just 35x leading (next year's) profits, which seems shockingly inadequate when considering the company's implied sales growth potential. Nvidia, based on the Yahoo Finance consensus, is anticipated to earn $3.69 per share this year, implying a YoY profit growth rate of 36%. AMD is anticipated to earn $5.56. AMD's consensus reflects 59% YoY profit growth as the chip company accelerates its AI GPU products. Thus, AMD is selling for 33x leading earnings. With a nearly identical earnings multiple, I would choose Nvidia any day of the week given its commanding market share in the GPU market. Furthermore, I think that the market underestimates Nvidia's sales growth for reasons stated, which means the actual valuation ratios may not be as high as they appear. In my view, Nvidia could sell for 45x leading earnings (implied intrinsic value of $166) when considering the ramp in data center sales in the next three years, catalyzed by growth in Machine-Learning and in the escalating size of AI GPU clusters. Nvidia might not be able to realize its AI potential, or grow slower than I proposed in the calculation above. With that being said, though, Nvidia's growth potential is very secular and sustainable, in my view, and the company is already taking a big bite out of the evolving AI opportunity. Over the long run, 126% YoY growth rates are not sustainable, so there might be a point of sales growth deceleration moving forward. My calculation above was also assuming that Nvidia could possibly grow its sales 50% per annum, and there is no guarantee that this will be realized either. Nvidia presented stellar growth in the last year, due to skyrocketing growth in data centers. Though the stock has soared, Nvidia's earnings potential is shockingly reasonable when considering the underlying AI market opportunity that is set to drive the company's main business data center. With the stock selling for 35x leading earnings, I think that investors are getting a very good deal. The real potential moving forward will be in Machine-Learning and Generative AI. This is poised to boost the scale of AI GPU training clusters. Since Nvidia's processors are the preferred choice for companies to train their AI models right now, it is in an excellent position to leverage its H200 and Blackwell GPU chips and scale shipments up into a red-hot market. The 35x earnings multiple as well as the potential for substantial sales estimate beats in the data center segment moving forward make Nvidia a solid growth investment.

Everybody Loves Qualcomm V 2.0. Reiterating Buy (NASDAQ:QCOM)

Citing growth from autos, its partnership with Microsoft (MSFT) for AI PC's and its treasure trove of patents and licenses for high margin revenue, I also made a sum of its parts valuation, estimating that Qualcomm was worth $249Bn in market cap and undervalued by 57%. At today's price of $200, Qualcomm is close to that number with a market cap of about $222Bn. Even though I'm close to my target, I'm reiterating another buy. I strongly believe in the company and believe that the stock deserves a higher multiple on strong earnings growth and the opening up of another revenue stream from PC's. In this article, I want to focus on AI PCs - will Qualcomm's Snapdragon set the market on fire, or is it just the usual hype, and will fizzle out when we realize that without the computing power of the cloud, there's precious little AI that can be done on a desktop, laptop, or a tablet like the Surface. I also want to update its auto pipeline, which I wrote about at length in July 2023, elaborating how the race for the auto cockpit was dominated by the three giants, Nvidia (NVDA), Qualcomm and Mobileye (MBLY), with massive pipelines in excess of $60Bn and the necessary scale and experience to thrive in one of the most difficult markets - the computer on wheels. For the level of difficulty, don't look further than Apple's (AAPL) $10Bn auto write off. I'll also update the financial forecast. I cobbled together an estimate of possible PC revenues for Qualcomm from Gartner, Canalys and others. I believe this is a conservative forecast. The PC market has never been a fast-growing market and as we can see above, the CAGR from 2024 to 2028 of 265Mn units to 292Mn units is just 2.5%. According to Jitesh Ubrani, research manager with IDC's Worldwide Mobile and Consumer Device Trackers.. Commercial buyers, both enterprise and educational, are on the cusp of a refresh cycle that begins later this year and reaches its peak in 2025. I'm going with this estimate and the assertions that initially AI will be mostly co-pilot, with limited uses. I also don't believe that there will be too many benefits derived from AI for a while, simply because a) the computing power needed to make a major difference in output and in usefulness - such as in cybersecurity, biotech, code testing, or data ingestion and analysis will only be available in the cloud. b) Personal computing AI applications and tools will take a while to develop. I also believe from the low level of PC growth that AI PC's will be cannibalizing regular PC purchases as total PC's are only slated to grow from 265Mn to 292Mn a CAGR of just 2.5%. I'm including a report from Canalys, which forecasts higher rates of adoption, but I'm going to be conservative here. I'd be happy to be pleasantly surprised if Qualcomm hits it out of the park! Like Canalys, there are other estimates, such as this one from Forbes, which suggests that AI PC's are higher, and Intel alone is going ship 40Mn AI PC's in 2024. Again, if those estimates are correct, I'd happily take them, they only augur well for Qualcomm. 3. The PC market share of Qualcomm's Snapdragon's Elite series is from Samik Chatterjee, an analyst at JP Morgan Chase. Based on his assumption of 25% by 2026, I estimated a higher percentage in 2024 and 2025 for Qualcomm for two reasons a) They have an exclusive with Microsoft through 2024, b) AMD (AMD) and Nvidia won't be ready before 2025. 4. Pricing assumption of only $125 for the Snapdragon chip is also on the lower side, which I estimated assuming heavy OEM discounts and Microsoft driving a hard bargain for exclusivity. The AI PCs are priced substantially higher at retail, so this will be revised by me subsequently. Based on these assumptions, I arrived at $400Mn in revenue for Snapdragon Elite, which I reduced to $100Mn for FY2024 because Qualcomm has a September Year end, and a) they launched in June and b) management has guided to negligible PC revenue for FY2024. But the going gets better from FY25, with estimates of $1.6Bn, growing to $2.1Bn in FY26 as AI PC's start taking a larger share of the pie. And even as new entrants start taking share, Qualcomm continues to grow, with big inflections in 2027 and 2028. That's a 20% spike in the last week of the launch, indicating that demand should be good. These numbers look good for Qualcomm, and again I may have been conservative with only $400Mn in PC revenue for 2024. In terms of competition, Snapdragon compares well in performance with Intel (INTC), AMD and Apple. Battery and price should be key to Qualcomm's success in penetrating and expanding this segment. From the verge article. Better performance and longer battery life for less money are going to be the major selling points for most people -- and these Snapdragon Copilot Plus PCs hit all three. Regardless of the accuracy of the estimates, which will get better over time, the crucial and critical factor for Qualcomm is they have created an entirely new business segment - a segment they could not penetrate even after trying for a decade. And because this is business segment cannibalized from regular PC growth, the real story is that new entrant Qualcomm has a much larger benefit than AMD and Intel, who are replacing existing PCs with AI ones - the overall PC market is mostly stagnant with just 2-3% growth. And as the Verge article states, this can only grow from here with more Apps and usage. And now that every major Windows laptop manufacturer has at least one Snapdragon X-based machine, there should finally be enough of an install base to entice developers at large to create native Arm64 versions of their apps, which will make these an easier sell. In two years, even with these low-ball estimates, PC's can be accretive to about 7% of total Qualcomm revenues and help make up for the loss of 80% of Apple's modem business from FY2027. Here are the estimates of Qualcomm's revenue segments from FY2024-2026. I may be conservative for the phones business as well, especially with iPhones bouncing back with iPhone 16 shipments expected to be over 90Mn, higher than the 80-84 Mn estimated earlier, and Qualcomm likely getting better prices for its new N-3 chips for its Android devices. While PCs are the smallest segment now, it's growing the fastest, it will be over 4% in FY2026 and even higher in FY2027 when Apple's modem business goes down by 80%. The auto story, which I wrote about in detail in July 2023 projected Qualcomm's pipeline at $30Bn. It continues to do extremely well, with the pipeline having grown to $45Bn. The auto segment grew 33% in 1H of FY2024 and is slated to grow 28% for the full year. Qualcomm continues to ramp up design wins all over, including in China. Summarizing from the same previous article, the crucial factors in auto-tech are Auto-tech is one of the most difficult markets to excel in, it is fragmented and constantly evolving between technology and the traditional assembly line. Projects take years from blueprint to production, and Qualcomm has threaded this needle exceedingly well. With these reasons I can see the big four, Qualcomm, Nvidia, Mobileye and Tesla (TSLA) consolidating market share and getting stronger as weaker players get weeded out or absorbed. Challenges remain, and one of the biggest threats could be the loss of the handset business. Besides the iPhone, Qualcomm's biggest customers are Android phone makers like the giant Samsung Electronics (OTCPK:SSNLF) with a market cap of $407Bn and revenues of $230Bn; it has the tech expertise to make chips for its own phones. Qualcomm has to constantly look over its shoulder. Qualcomm's IoT business is lower by 20% in the first six months of FY2024, with excess inventory still being cleared out. This could take longer to recover. The high margin (over 70%) licensing business is stagnant this year with no growth. These two are a drag on overall revenues. And even as I take very conservative estimates for the AI PC business, this is still a Show Me story with a lot of sharks like Intel, AMD, and Nvidia jumping in the mix. I've revised the model including the PC business, the numbers are upbeat. I estimate revenues growing 13% and 9% in FY25 and FY26 respectively, with the fast-growing auto and PC segments as the main catalysts. Earnings growth is even more appealing. Qualcomm is a high operating margin business with a lot of leverage, especially helped by the licensing segment, with over 70% in operating margins. Earnings grow much faster at 55%, 20% and 14% in FY24 - FY26. At $200, Qualcomm is very reasonably priced at 20x current year earnings and a strong bargain at just 15x FY26 earnings of $13.60. Given its market leadership in auto-tech, AI PC's, and sustainable, and recurring high margin licensing business, Qualcomm should be priced at least 22x earnings. It spends a good 25% of revenues in R&D, which will enable it to continue innovating and growing. Even after that it still returned $1.6Bn to shareholders with $0.7Bn in share buybacks and $0.9Bn in dividends. At 22x 13.6 FY2026 earnings the stock has the potential to reach $300 in two years, that's a strong 50% return on investment in two years.

Super Micro Computer: Another Big EPS Quarter Expected, AI Fervor Levels Off

I see SMCI's valuation as fair, but seasonality is bearish, and industry competition may pressure margins in the future. Super Micro Computer has been the poster-child AI superstar in the past year, at least aside from NVIDIA (NVDA). Shares are up 209% so far this year, besting the 154% performance in NVDA. But those gains all came in the first, call it, 50 trading days of the year. Since mid-March, the stock has been negative. That's not to say it has been a disappointment, after all, some consolidation in price action is generally healthy for the durability of a long-term trend. But there's a troubling trend fundamentally regarding many AI-exposed names; according to Bank of America Global Research, earnings expectations for some of the major AI ETFs have retreated in the past few months just as the "Other" S&P 493 are seeing EPS upgrades. Perhaps it is not surprising then that SMCI is off its highs as momentum eases. I have a hold rating on SMCI. I was bullish on the stock in mid-January, which probably seems like ages ago to most of its shareholders today. My call was primarily technical in nature, as I saw emerging bullish signals on a high-earnings-growth company. I concede I by no means expected a multiple-fold rise in the stock over the subsequent two months, but that's what happened. For now, I see the valuation is achievable but merely fair, while the chart suggests the consolidation may endure. Finally, seasonality is actually bearish now through early Q4. Back in April, SMCI reported a strong set of quarterly results. Q3 non-GAAP EPS of $6.65 was a massive $1.08 beat while revenue of $3.85 billion, up more than 200% from year-ago levels, was about in-line with estimates. The sales miss was not a detractor, though, as it was due to component shortages amid sky-high demand for its products. Normally, an inventory jump is concerning, but the management team noted that a large amount of it arrived toward the very end of the quarter. Shares fell big after the report, however. The 14% decline on May 1, 2024, was the worst post-earnings day performance since August 2023. Looking ahead, the options market prices in a high 10.4% earnings-related stock price swing when assessing the at-the-money straddle pricing, according to data from Option Research & Technology Services. The survey shows operating EPS of $8.22 in the quarter that just finished up - that would be a 134% YoY earnings jump. Be on the lookout for an earnings preannouncement in the coming days if history is any guide. Back to the previous quarter, its unique position in liquid-cooled racks and growing semiconductor vendor relationships should support the high EPS growth rate ahead. The management team was also optimistic in the previous conference call, offering Q4 guidance of $5.1 billion to $5.4 billion in revenue and non-GAAP EPS in the range of $7.62 to $8.42. I'll be watching gross margins and how the company, which is free cash flow negative, handled its liquidity position. Key risks include rising competition, pressuring margins, and potentially sales. We have already seen a dip in SMCI's gross margin lately. Material availability is another short-run issue due to intense AI capex ongoing. Also, the bar is simply higher today, evidenced by rising valuation metrics - the forward non-GAAP P/E was just 23x when I last analyzed SMCI. Today, it's about 40x. On the earnings outlook, analysts at BofA see operating EPS having risen by 101% in the year that just ended (FY 2024) and earnings growth is expected to ease to 'just' 40% this year and 26% in the out year. The current Seeking Alpha consensus numbers are very close to what BofA projects, while sales growth of 110% in FY 2024 should slow to 57% in the current year. Free cash is expected to inflect positive, but don't expect much of an FCF yield with Super Micro anytime soon. On valuation, if we use CY 2026 earnings as a normalized amount (given the very high-growth rate today), and apply a market multiple, then we are talking about a stock that is worth about $900. While that's a bit above where the stock trades today, I see it as roughly right. It's difficult to pin down a precise valuation on such a fast grower like SMCI, so it's also helpful to look at the price-to-sales ratio, which is currently historically high at 3.5x. I was too cautious on my previous valuation, but overall EPS expectations from the market were also much lower six months ago. I also noticed that this No. 1-ranked stock within the Information Technology sector has historically traded down in each month from August through October, so that's something to consider. Compared to its peers, SMCI sports a weak valuation grade, but with so much bottom-line advance seen, I expect SMCI to grow into the valuation. Profitability trends are also soft, but that is likely driven by poor free cash flow as the firm invests in its future. What's clearly strong, though, is the trend in sell side EPS upgrades in the past 90 days, while SMCI's technical momentum has been impressive this year. I will note later that the chart is not so great over the last few months, while highlighting important levels ahead of earnings due out in early August. Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q4 2024 earnings date of Tuesday, August 6 AMC. No other volatility catalysts are seen on the calendar. SMCI's remarkable run has been a bit more lackluster since mid-March. Notice in the chart below that the stock remains well below its all-time high from the first quarter. I see resistance emerging near the $1010 to $1020 range, while support is seen at a pair of points. First, a rising uptrend line comes into play just below the flat 50-day moving average at $800. Second, the $671 to $693 zone has been historically important, so that is another potential buying area if we see a pullback, perhaps post-earnings. Also, take a look at the RSI momentum gauge at the top of the graph - it's been ranging in a neutral zone while there is a high amount of volume by price in the $700 to $1000 area, and I see no reason why the consolidation will break in the coming weeks. Bigger picture, the long-term 200dma is rising, suggesting that the bulls control the primary trend, so that's a positive attribute. I have a hold rating on SMCI. Shares continue to coil after a remarkable start to 2024. With the stock near a fair price, bearish seasonality on tap, and a neutral chart, I expect SMCI to hold current levels for the next several months.

Marvell's AI Chip Story Has More Upside Ahead (NASDAQ:MRVL)

We previously covered Marvell Technology, Inc. (NASDAQ:MRVL) in September 2022, discussing the drastic decline in its stock prices as the company struggled to deliver during the EV boom, attributed to the global supply chain issues. Even so, we believed that the headwinds were likely to be temporary, since the company's well-diversified offerings across different end markets were likely to drive its eventual recovery in both financial and stock performances, resulting in our Buy rating then. Since then, MRVL has charted an impressive +72.4% return, well outperforming the wider market at +53.7%. Even so, we are reiterating our Buy rating, since its data center segment has delivered a robust double-digit top-line growth, thanks to the ongoing generative AI boom. Combined with the management's positive commentary surrounding its projected performance from the second half of FY2025 through FY2026, we believe that the stock continues to offer a compelling growth investment thesis, despite the premium valuations. As a leading supplier of data infrastructure semiconductor solutions across the well-diversified data center, carrier infrastructure, enterprise networking, consumer, and automotive/industrial end-markets, it is unsurprising that MRVL has charted an impressive recovery since the 2023 bottom. While the automotive and industrial end-markets continue to underperform expectations, with EV sales slowing, MRVL has had an impressive near vertical rally in May 2023, thanks to the management's promising commentary with AI-related sales expected to "at least double in fiscal 2024." For reference, MRVL had first broken down their revenues by end markets in FY2021 (CY2020), with the company reporting $1.04B of Data Center revenues, comprising 35.1% of its overall sales. By FY2024 (CY2023), these numbers have risen drastically to $2.21B (-7.9% YoY)/40.2% (-0.5 points YoY), respectively, implying an accelerated CAGR of +28.5% compared to its overall revenues at +22.9%. The same has been observed in MRVL's Enterprise Networking sales at a 3Y CAGR of +24.5% and Carrier Infrastructure at +20.6%, with the latter attributed to the ongoing 5G capex observed in multiple telecom companies thus far. Despite the inline FQ1'25 performance, MRVL has already guided for notable QoQ improvements in the FQ2'25 quarter while noting "a very substantial ramp in the second half of this year," attributed to the ramping of custom AI silicon and growing share in the 5G end-market. Assuming that the management delivers as guided, we believe that the consensus FY2025 adj EPS estimates of $1.40 (-7.2% YoY) are not overly aggressive. This is on top of MRVL potentially selling out much of its FY2026 production, thanks to the robust growth in "custom accelerated compute, which is expected to grow from approximately $7 billion in calendar 2023 to over $40 billion in calendar 2028, a 45% CAGR," attributed to its strategic partnership with three of the US hyperscale operators. These numbers appear to be relatively prudent as well, based on Technavio's accelerated projections of global artificial intelligence chips market growth at a CAGR of +68% through 2028, thanks to the ongoing data center capex boom and shorter replacement cycle from two years to one year. With these numbers relatively in-line with those observed in market leaders such as NVIDIA (NVDA), we believe that MRVL's projected top/bottom line growth at a CAGR of +16.6%/+30.1% through FY2027 remains reasonable, as they aim to achieve a doubling in market share from the 10% reported in FY2024. At the same time, readers must not forget MRVL's automotive opportunities moving forward, with the demand destruction observed in the market unlikely to last forever. Despite the pessimistic market sentiments surrounding the slower EV adoption, the management has already guided incremental revenue growth opportunities in the automotive segment from the second half of FY2025, as it continues to report design wins across EVs, Hybrids, and ICE platforms with major OEMs. With the global automotive market size expected to grow from $3.56T in 2023 to $6.86T in 2033, expanding at an accelerated CAGR, we believe that MRVL remains well positioned to report robust profitable growth ahead. This is significantly aided by the secured third-party manufacturing capacity over the next few years, and its healthy balance sheet and growing Free Cash Flow generation - implying its ability to incrementally invest in its growth opportunities while returning value to long-term shareholders (through share repurchases and dividend payouts). Combined with the guidance of "our revenue in the second quarter from the consumer end market to rebound and approximately double on a sequential basis," we maintain our belief that MRVL's well-diversified offerings allow the company to tap into multiple growth/recovery levers, no matter the end-market's cyclical nature. Even so, we are not certain if the market's exuberance surrounding MRVL at FWD P/E valuations of 51.48x is warranted. This is up drastically from its 1Y mean of 37.06x, 3Y pre-pandemic mean of 18.75x, and the sector median of 24.64x. This is especially since the projected growth through FY2027 represents a moderate step up from the normalized growth at +13.2%/+21.7% between FY2017 and FY2024, respectively. At the same time, when compared to its direct chip peers, such as QUALCOMM (QCOM) at FWD P/E of 20.08x at a projected bottom-line growth at a CAGR of +14% through FY2026, Broadcom (AVGO) at 35.57x/+19%, Advanced Micro Devices (AMD) at 52x/+40.2%, and NVDA at 46.61x/+49.3%, respectively, it appears that MRVL is rather expensive here - offering interested investors with a minimal margin of safety. While we concur that there are great tailwinds during MRVL's transition to a leading data center company, we believe that with elevated P/E valuations come great expectations, as observed in the recent rotation from growth stocks to value stocks. Most importantly, with the NVDA and the VanEck Semiconductor ETF (NASDAQ:SMH) already hitting double tops since mid-July 2024, as MRVL also trades sideways on a YTD basis, it appears that the stock is at best likely to continue trading sideways as it grows into its premium valuations. Otherwise, if the recent bottom ($260 for SMH and $120 for NVDA) is breached, we may see more volatility for semiconductor stocks as we enter the Q2'24 earnings season, MRVL included. As a result, we believe that it may be more prudent to temper our near-term expectations and exuberance as the stock market's Greed Index also increases, resulting in our next segment's calculation using the more moderate 1Y P/E mean of ~37x for an improved margin of safety. For now, MRVL has charted an impressive recovery since the October 2023 bottom, while trading sideways on a YTD basis and nearing the 50/100 day moving averages. Based on the LTM adj EPS of $1.44 (-24.6% sequential) and the 1Y P/E mean of 37x (nearer to its peers with similar growth rates as discussed in the risk section above), it is apparent that the stock is trading at a massive premium of +38.3% to our fair value estimates of $53.20. Even so, based on the consensus FY2026 adj EPS estimates of $3.33 and the more reasonable FWD P/E of 37x, we are looking at an upside potential of +67.4% to our long-term price target of $123.20. While minimal, MRVL also pays out annualized dividends of $0.24, allowing long-term shareholders to continue DRIP-ing while accumulating additional shares on a quarterly basis. Combined with the robust support at its YTD levels of $61s, we believe that the stock offers a compelling growth investment thesis, warranting our reiterated Buy rating. Even so, there is a caveat to our Buy rating, with it remaining to be seen if MRVL may be able to break out of its sideways trading pattern since the start of the year, with the market likely awaiting the Q2'24 results with bated breaths. Based on the MRVL stock movement thus far and the upcoming FQ2'25 earnings call in August 2024 (estimated), readers may consider observing a little longer and adding between its YTD trading floor of between $61s and $67s for an improved margin of safety, with those levels also nearer to our fair value estimates.