Curated by THEOUTPOST
On Sun, 21 Jul, 4:01 PM UTC
7 Sources
[1]
AMD: Premium Price For A Second Tier Chip Player (NASDAQ:AMD)
AMD's valuation, profitability, and demand outlook are concerning, making it a sell recommendation compared to competitors. Introduction Advanced Micro Devices, Inc. (NASDAQ:AMD) is the world's number two player in both the CPU and GPU, behind Intel Corporation (INTC) and NVIDIA Corporation (NVDA) respectively. The stock has been a high-flier over the past number of years on AI excitement. However, the market appears to be getting concerned about the lofty valuation amid signs the firm's data center GPU offering may not be as hot as initially expected. The firm sits in an awkward position as the distant number two player in the GPU accelerator market. The stock had previously outperformed in hopes it would pick up market share as large cloud players sought to diversify away from Nvidia to reduce reliance on a single vendor. I, however, see AMD as significantly threatened, by the move by the cloud hyperscale players to develop their own custom chips in-house. Large cloud players such as Microsoft Corporation (MSFT), Alphabet Inc. (GOOG), (GOOGL), and Amazon.com, Inc. (AMZN) have all been making significant investments in custom silicon to reduce reliance on third-party vendors such as AMD. This coupled with the increasing presence of firms providing Application Specific Integrated Circuits or ASICs, such as Broadcom Inc. (AVGO) leaves AMD looking particularly vulnerable in my opinion. The bull case for AMD looks to be reflected in the current price, given the lofty valuation multiple. I see an apparent danger to that thesis. Hence, I am recommending a sell on AMD. Earnings AMD last reported earnings at the end of April, with numbers that did not impress the market. Shares fell close to 9% on the day despite a top and bottom-line beat. The devil was as always in the detail. The big disappointment was the guide for AI-specific revenue, primarily through the sale of data center GPUs, such as the flagship MI300. CEO Lisa Su guided that for the full year, the firm should achieve revenue of about $4B, an increase in guidance from the prior expectation of $3.5B. On the surface, this appears a reasonable result, but when we consider that analysts were thinking guidance might be closer to $5-6B, we see this was a massive miss to consensus. Even more disappointingly, Su confirmed the limited guidance upgrade was, in fact, a demand-related factor and not due to supply being capped. See below her response to a question on the subject from Vivek Arya of BofA. "Yes. Vivek, let me try to make sure that we answered this question clearly. From a full-year standpoint, our $4 billion number is not supply capped. (Lisa SU, CEO, Q1 Earnings Call). AMD's results do not paint a pretty picture of demand, given the industry is experiencing a massive boom. We need only contrast results with Broadcom, which saw their shares jump 9% as they disclosed over $3B in AI revenue in the quarter alone. We also have reports Broadcom is working with OpenAI to develop custom AI chips, a clear indication they are not experiencing any demand headwinds. Then, when we layer in the big cloud players' custom silicon initiatives, such as Google's TPUs, Microsoft's Maia accelerator, or Amazon's Trainium chips I think alarm bells should be ringing for AMD's prospects. Why are they only modestly raising product revenue guidance in the midst of an industry-wide demand boom, especially when we know it is not a supply issue? To me, it looks clear-cut that AMD has fundamentally weak demand compared to their competitors, which makes me think the current consensus is far too optimistic. Valuation The valuation for me is another negative aspect of AMD's stock. The stock trades on close to a 40x forward P/E, despite generating a rather measly 1.7% ROIC and a net margin of just 4-5%. What is perhaps more concerning to me is the often-overlooked gross margin profile of the business. Gross margin is a measure of profit a business makes solely from the direct cost associated with producing and selling its goods. It comes before we account for items such as R&D, marketing expenses, etc. AMD's gross margin of around 50% sharply trails chip rivals such as Nvidia or Broadcom, both of which boast margins of around 75%. This indicates to me that at the product level, AMD's rivals are vastly more profitable. I think this best illustrates to us that AMD's peers are fundamentally better businesses and are likely to generate significantly higher profits for shareholders over the coming years. Nvidia trades on a similar P/E multiple to AMD, and Broadcom is a measure cheaper at around 29x. Hence, we are paying more for less profits with AMD. The lofty AMD valuation is based upon a high EPS growth expectation, which as I have discussed faces multiple threats. Risks The clear risk to my thesis is higher than expected adoption of AMD GPUs by both enterprise and cloud customers. It is absolutely a real possibility that AMD could launch a GPU which competes with Nvidia's offering. There is still the question of the software layer, which is a clear Nvidia advantage at present, but if AMD were to make inroads, they could pick up meaningful market share. The firm has been wonderfully led by Lisa Su, who has transformed the fortunes of the firm since taking the CEO role in 2014. It could turn out that the firm continues to relentlessly innovate and push ahead technologically. I fear AMD is an excellent company hemmed in by larger players all trying to achieve the same end goal. I think, on balance, the risks here are clearly to the downside rather than the upside. Given Su's record over the last ten years, I do have to acknowledge the possibility of an upside surprise, despite the super high bar currently baked into market consensus forecasts. If we look at AMD on a PEG valuation basis, the firm trades at a very attractive 0.8x. The market clearly thinks EPS growth will be extremely robust over the coming years. I think the PEG ratio is likely as low as it is due to the inbuilt level of doubt regarding the growth forecasts. My expectation, based upon the thesis of rising competition from ASICs and custom silicon, is that current EPS growth forecasts are overestimating AMD's potential. Conclusion In conclusion, I believe I have laid out a clear case of why AMD should be a sell in portfolios in favor of stronger, more profitable names. Markets have been enthusiastic about the prospects of the number two player in the GPU race, riding the coat-tails of Nvidia. I see the GPU market as dominated by a clear incumbent at the top in Nvidia, with second place up for grabs. AMD's tepid product guidance on recent earnings for its new flagship MI300 chip suggests customers aren't exactly knocking the door down trying to get hold of AMD chips. The firm faces stiff competition both in the form of ASICs from Broadcom and custom silicon solutions being developed by the large cloud players such as Google's new generation of TPUs. Advanced Micro Devices, Inc. stock is a sell for me due to the mixture of an expensive valuation, substandard profitability compared with peers, recent demand undershooting market expectations, and a host of deep-pocketed challengers in the accelerator chip space. Professional equity portfolio manager for a boutique buy-side asset manager.My focus is on finding high-quality companies, applying a disciplined approach to valuation and identifying underappreciated opportunities. My goal is to identify opportunities in cash-rich companies with strong balance sheets and shareholder friendly policies. I endeavour to incorporate a mix of quantitative and qualitative measures to identify opportunities in stocks. Long-only approach with a long-term investment focus. 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.
[2]
ASML: On Track For Q4 Ramp (NASDAQ:ASML)
However, the fundamental growth warrants a buy rating for the long-term, based on both semiconductor industry growth as well increased litho intensity. Investment thesis ASML (NASDAQ:ASML) had from the start projected 2024 to be a flat year, before growth would resume in 2025, based on several catalysts such as higher semiconductor industry growth, fab buildouts, and the introduction of new, pricier low- as well as high-NA EUV lithography tools. Since the valuation has remained reflective of a growth stock, with no major sell-offs, this meant ASML has been a stock for the patient this year. With the financial performance in the first half in-line with this expectation, the investment thesis remains unchanged: more neutral in the near-term, but more bullish in the long-term. More specifically, ASML is now (after a few subpar quarters) guiding Q4 revenue to ramp to over €9B, which bodes well for reaching (at least) the midpoint of 2025 guidance for €30-40B revenue. Background ASML received a buy rating in January based on its strong (continued) financial performance, although some caution or patience was required as ASML itself has repeatedly described 2024 as a transition year before growth continues more strongly in 2025, for which the company claims sufficient visibility, based for example on ongoing fab construction projects. So, 2024 will be a less stellar year compared to ASML's historical performance, while the stock has also remained quite expensive on a P/E valuation. Nevertheless, through the first half, the stock has performed quite well, with mainly weakness around both of its earnings reports (although to the detriment of potential dip buyers during this time of lower growth). Q2 results Revenue of €6.2B was down 10% YoY. This marked a relative improvement from Q2, which was down 24%. Nevertheless, a more bearish read from the report is that 49% of revenue came from China, which seems unsustainable. However, that was dismissed on the call (although the overall portion of China in the backlog was confirmed around 20%, which is more aligned with the expectation that most of the long-term growth will come from leading edge tools such as EUV). I think you have to look at the opportunity we see on the mature semiconductor market. That opportunity was defined as being significant in our Capital Market Day in November 2022. We still believe it's significant. In 2023, 2024, China has been investing a large part of this market. And this is why I think our revenue on China has been high. Moving forward, we still believe that this market is needed and therefore that the capacity [Technical Difficulty] coming out of somewhere. So that's a bit the position we take on that discussion. I think we always look at the end market, at what's the need of the end market. I think we are a bit less sensitive on where that capacity may be produced. Net bookings of €5.57B was up 54% from the quite low value in Q1, although Q4 net bookings had been very high, so this metric is quite lumpy. Overall, net bookings being lower than revenue signals a drain in total backlog, but this remains solid around $40B. Given around a 12 month lead time, in any case some further orders will need to come in to drive the aforementioned midpoint of 2025 outlook (as well as start to build up for 2026, etc.). Regarding the Q3 outlook, even the top-end of guidance was €0.2B below consensus. Nevertheless, as ASML is basically guiding for flat growth YoY, this would mark another relative improvement in the YoY growth in both Q3 and Q4. In addition, since the annual outlook remains unchanged, this suggests that (in absolute terms compared to the Q1-3 revenue) ASML is expecting quite a strong Q4 with over €9B revenue. As discussed during the Q&A, it is a combination of recognizing revenue of already shipped systems (fast shipments, one 3800E and one to two high-NA) and increased momentum. (...) And I think with that tailwind and with the building up of momentum both in terms of capacity and in terms of demand, we're indeed looking at a very progressive buildup of revenue throughout the year, this year and leading to over 9 billion expectation indeed in Q4. Further discussion: AI One sceptical comment remarked that this -10% revenue report comes in the midst of the AI boom, which ASML also confirmed: "We currently see strong developments in AI, driving most of the industry recovery and growth, ahead of other market segments." So, while true, one should remember that equipment is bought ahead of fab ramps. In this case, ASML is lapping a very strong 2023 with 30% revenue growth. This means there is a likelihood that the capacity bought in 2023 is sufficient. Logic customers continue to digest the significant capacity additions made over the past year. With this digestion, we see lower revenue from Logic this year relative to last year. In Memory, demand is primarily driven by DRAM technology node transitions in support of advanced memories such as DDR5 and HBM. In support of this transition, we expect growth in revenue from Memory this year relative to 2023. In addition, the reported shortages were mostly on the packaging side. Lastly, the AI boom so far has been mostly benefited Nvidia (NVDA), which has benefited not just from increased demand, but also very strong ASP (average selling price) upside in what had historically already been its most profitable segment. In other words, Nvidia is delivering its consecutive record quarters from relatively few wafers, and hence from relatively few litho tools. This is also reflected in reports about TSMC's (TSM) largest customers, of which Apple (AAPL) continues to be its largest in revenue and (hence) wafer volume. Valuation and risks After the recent post-earnings sell-offs, the stock price/valuation is basically unchanged from prior coverage in January. Of course, in time this means two quarters have passed, which as discussed both delivered a revenue decline, but with an improving trend throughout the year. In any case, with a flat Q3 and what should be a return to growth in Q4 and onwards, the prior conclusion of the stock being one for "patient" investors is becoming less true. Though, this would have been even more the case if the stock had declined somewhat over this period to lower the P/E ratio, which at 44x remains far from cheap. So, while ASML will be returning to growth in the next few quarters, this might not be sufficient to cause a strong (near-term) uptick swing. Indeed, investors who remain on the sidelines due to this valuation concern might continue wait a bit longer, as ASML will update its 2025 and 2030 outlooks at its upcoming November investor day. We confirm what we said in November of 2022, which is we expect 2025 to be between EUR30 billion and EUR40 billion. We've also said it's not the low point of that guidance. Last quarter, we've given you a bit of an -- a bit of an understanding of what it takes to be fully booked at the beginning of 2025 for the midpoint of the range. I think you can conclude with the bookings number that, that we've reported that we're nicely -- that we're nicely on track. Nevertheless, as the continued demand for AI indicates, it seems all but likely that the semiconductor (and hence the semiconductor equipment) industry will remain in a (cyclical) uptrend, as it has for decades. Still, as mentioned one possible risk is that due to the very high (even unseen) gross margins of AI silicon, perhaps a lot of the industry dollar growth will be based on ASP rather than wafer unit growth, which would benefit mostly the fabless companies selling those products,, rather than the foundries (and hence equipment vendors). On the other hand, one part of the ASML bull thesis is that it might or could outgrow the semiconductor industry's growth due to the trend of increased litho intensity: the (increasing) fraction of a complete fab cost spent on litho tools. This has been due to the introduction of EUV, and ASML has a roadmap for continued improved (and hence more expensive) EUV tools, as well as obviously the introduction of (the even more expensive) high-NA over the next few years in volume production, and even beyond that hyper-NA. Investor takeaway The year is progressing mostly as planned for ASML. Despite two quarters of noticeable revenue declines, the stock never even went below the levels seen in January. So, with a return to solid revenue growth impending by Q4, the current post-Q2 sell-off might perhaps be the most opportune time to enter or add to a position. Nevertheless, as the valuation remains all but cheap, using the stock solely for a near-term trade might not necessarily be guaranteed to work out. Still, as it is a widely known fact that ASML is the sole provider of EUV tools, which are required to manufacture the most advanced process nodes, the market does have a reason (or even tendency) to give the company a valuation that is bit higher, more Apple-like, than other stocks might receive. Although arguably a lot of ASML's stock valuation has simply been warranted (pretty much solely) due to its financial performance over time anyway. Hence, the overall the thesis remains unchanged: quite neutral in the near-term, but more bullish long-term, with a quite reasonable risk-reward profile due to the combination of both increased semiconductor growth as well as increased litho intensity back by a strong product roadmap. With an engineering background, looking for companies with expertise to be well-positioned for growth and leadership. 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.
[3]
Intel: Attractive Value After Large Sell-Off (NASDAQ:INTC)
Intel remains the market leader in CPUs and is poised to benefit from the rise of AI CPUs. In our previous analysis of Intel Corporation (NASDAQ:INTC) (NEOE:INTC:CA), we projected a rebound in Intel's desktop and laptop revenue in 2024, driven by an 11.5% growth in the PC market and the launch of advanced 2nm Arrow Lake CPUs, alongside a 5.7% growth in server revenue supported by positive IT spending and increased data center capex for AI by cloud providers. Additionally, we also expected Intel's NEX, Mobileye (MBLY) and IFS segments to recover, with NEX benefiting from market recovery and new products, Mobileye from ADAS growth, and IFS from capacity expansions. In this analysis, we reexamined the company as it experienced a 25% decline in stock value, underperforming the semiconductor industry since our previous analysis. We begin by examining why Intel's revenue recovery falls short of our initial forecast of 12%. Despite improvements in the PC and server markets, the company's recovery remains challenging, with analyst consensus now revised down to 3%. Additionally, we explore how the company's growth outlook could improve throughout the year, particularly in the CCG and DCAI segments, by examining new product launches and advancements in AI-powered PCs and Gaudi GPUs. Lastly, we address the persistent negative FCF margins despite revenue and margin growth. In this point, we examine why Intel's revenue recovery is still struggling despite the anticipated recovery in our previous analyses. We had forecasted Intel's full year 2024 revenue growth at 13.9% previously, which was in line with analysts' consensus as well during Jan 2024. However, Intel had reported 8.6% YoY growth in Q1 2024, which is not far off from our 2024 forecast but provided weak guidance for Q2 at flattish growth YoY while analysts' consensus had reduced the company's growth forecast in 2024 to 3%. We compiled Intel's Q1 2024 performance and compared it with our previous forecast for 2024 to identify underperforming segments. We then further examined the specific performance metrics for its key segments such as CCG and DCAI such as ASP, shipment growth and revenue growth, PC & server market growth and Intel market share. Source: Company Data, Khaveen Investments Based on the table, Intel's CCG segment, which is its largest (59.2% of revenue) grew by 30.6% YoY, indicating a recovery underway and higher than our full-year segment growth forecast of 15.2%. Despite the outperformance of CCG, Intel's total revenue grew by 8.6% YoY in Q1 2024, lower compared to our full-year forecasts (13.9%). The reason is due to the lower growth of its remaining segments such as DCAI, which had not yet reached our full-year growth expectations (4.7% vs 8%), while other segments such as NEX (-8.4% vs 12.1%), Mobileye (-47.8% vs 24.9%) and IF (-9.6% vs 11.9%) contracted significantly. CCG had a higher YoY growth of 30.6%, surpassing our previous full-year forecast of 15.2%. There was higher growth across CCG subsegments including Desktop and Laptop as management highlighted "a strong product portfolio and share position and significantly improved customer inventory levels." Besides, we observed a negative growth of 18.7% in CCG Other, which was lower than our full-year forecast of 15.2% "primarily driven by the exit of legacy businesses" according to the company. Moreover, performance in Datacenter and AI is in line with our full-year forecast given that it has a growth of 4.7%, close to our full-year forecast of 8.0%. To determine the reason for the performance differences in the CCG and DCAI segments, we examined the company's revenue growth breakdown by Desktop, Laptop and Server in terms of shipment, ASP, end market growth and market share. Source: Company Data, Khaveen Investments Revenue growth in Q1 2024 Desktop segment was 31.0%, surpassing our full-year forecast of 16.6%, primarily attributed to the Shipments growth since the ASP growth remains flat (0%) for the quarter. Besides, Intel's Q1 2024 Desktop market share decreased by 4.7% YoY was 5.2% below our full-year forecast. According to Mercury Research, AMD (AMD) gained market share following its recently launched new "Zen 4-based Ryzen 8000/Ryzen 8000 Pro processors", which was released in Q1 2024 while Intel released its processors earlier in Q4 2023, which may be a reason for the share gain for AMD in the quarter. Similarly, in terms of the laptop segment, Intel's Q1 2024 performance surpassed our forecast in both revenue and shipment growth by more than 20%, mainly due to an increase in shipment growth, with ASP growth remaining flat. Moreover, the company's Laptop Q1 2024 market share was 80.7%, which was fairly in line with our full-year forecast for 2024. In terms of end market, the overall PC market (laptops and desktops) growth was 1.5% YoY in Q1, compared to our full-year forecast of 11.5%. Still, we believe this indicates an improving trend; the previous Q4 2023 quarter growth was -2.7% YoY. In contrast, we believe Intel's high shipment growth could be a forward indicator of the PC market growth for 2024 as PC makers order chips in advance to manufacture PCs. Additionally, we observed a revenue growth of 4.7% in the Q1 2024 server segment, which is around 1% lower than our full-year forecast. Besides, shipments growth in the quarter was -16.3%, much lower than our forecast of 2.1%, however, it was offset by a large ASP growth of 25%, which is 20.8% higher than our forecast as management highlighted it benefited from "higher server ASPs" and "a higher mix of high core count products" as Intel had released its 5 gen Xeon processors which increased its core count to 64 for its flagship model. Intel's server market share decreased by 5.6% YoY in Q1, but is still fairly in line with our full-year market share forecasts. In our previous analysis of AMD, we determined a lower competitive factor score for Intel's server CPUs (0.99x) compared to AMD, as we believe AMD continues to have a slight advantage over Intel's server processors due to its superior performance. Furthermore, the server end market shipment growth was -1.6% YoY, which indicates an improvement towards recovery. For the remaining segments under the Intel Other business, segments across Network & Edge as well as Mobileye both showed negative YoY growth of 8.4% and 47.8% respectively, deviating from our 2024 full-year forecast. In NEX, the company continued to "significant declines in the 5G market", which we previously analyzed. However, the company's NEX segment growth rate in Q1 was negative (-8.4%) but indicates an improvement compared to the large decline of -35% in 2023; therefore we believe the company's NEX segment is gradually recovering. Management also highlighted the improvement in end markets, with "channel inventories approaching normal levels" in its latest quarter. During 2023, telecom companies' capex spending declined mainly due to the normalization of 5G buildout where telecom operators such as AT&T were reducing capex for 2H 2023 by $1 bln after "historically high levels of investments in 5G". However, despite the decline of Network Operators' capex to $543 bln in 2023, total capex is expected to recover by 2% to $552 bln during 2024. Furthermore, for Mobileye, management cited the decline in the segment due to "inventory headwinds impacting Mobileye." We previously highlighted the automotive market weakness as the reason for the company's slowdown in 2023, with the production of automotive vehicles exceeding demand, leading to a cutback of chip orders impacting automotive chipmakers including Mobileye as automakers draw down existing inventories. In Intel Foundry Services, the company had changed its reporting structure to Intel Foundry, which consists "substantially of process engineering, manufacturing, and foundry services groups that provide manufacturing, test, and assembly services to our Intel Products business and to third-party customers". However, despite the increase to $4.4 bln, it had intersegment eliminations of $4.3 bln which indicates most of the revenue is due to intercompany transactions for its Intel Products business as mentioned. Furthermore, based on its IF segment revenue and intersegment eliminations, we calculated its Q1 2024 revenue was only $16 mln, which is an 86% YoY decline compared to the previous quarter. This is compared to our expectations of positive growth while the foundry market grew by 6.8% YoY in Q1 2024, which is still an insignificant portion of the company's overall business (0.1% of total Q1 revenue) as we believe Intel is still trying to attract customers for long-term growth. For example, management highlighted that it had recently secured 6 customers for its new Intel 18A process and its total contract value for foundry increased to $15 bln, higher than $10 bln previously. Overall, Intel's growth rate in Q1 2024 was 8.6% which was slightly below our full year 2024 growth projection of 13.9% for its total revenue as we believe the company's segments such as DCAI and NEX are still trying to stabilize after the large contractions in 2023 with Q1 2024 indicating an improvement. However, despite the decent performance in Q1, management has guided flattish growth for Q2 of 1% YoY at the midpoint of $13 bln but sees a better growth outlook in H2 204. The company highlighted that "Q2 client revenue is constrained by wafer-level assembly supply". Notwithstanding, management also provided a more positive outlook for H2 2024 as it is building "more wafer-level assembly capacity" and expects "growth across all segments" with the upcoming product launches for next-gen Lunar Lake CPUs for CCG and Granite Rapids for DCAI. On the other hand, Intel guided growth for its Intel Other segments including Mobileye, NEX and IFS, indicating a recovery. We had anticipated the slowdown to persist throughout H1 2024 and affect Mobileye's growth until a recovery in the second half of the year. Mobileye's management also reiterated this, expecting its Tier 1 customers inventory levels to return to "normal orders by end of Q2". Furthermore, in NEX, we highlighted the expected recovery in telecom capex in 2024 after the contraction following the normalization of spending for the 5G infrastructure rollout. Additionally, while its IF segment revenue to external customers is insignificant (0.1% of total revenue), we see its growth supported by its new customers and total contract value rising to $15 bln, which could bode well for its long-term outlook. While its foundry segment still has a long way to reach $15 bln in revenues by 2030, we believe the expected launch and ramp of the Intel 18A in 2025, which aligns with the expected completion of its new Arizona fab expansion indicates growth potential. One of the key customers Intel has secured using Intel 18A is Microsoft (MSFT), which we mentioned previously introduced its own custom CPUs and GPUs for its data centers and is positive for the company's outlook as the second-largest cloud provider (25% share). Therefore, we believe our projections remain appropriate for H2 2024. This is as management indicated growth acceleration in H2 2024 following flattish guidance for Q2 2024 as the company faces backend supply shortages which it is stated that it was building more capacity. Among factors for the growth acceleration is the improving end market outlook with normalizing inventory levels for NEX and stabilizing PC and server market shipments as we believed excess market shipments during the pandemic have been absorbed and cloud service providers' capex spending recover in 2024 as previously highlighted in past analyses. Source: Company Data, Khaveen Investments We updated our revenue projections based on our actual Q1 results, Q2 guidance and our growth forecast for H2 2024 based on management of our previous full year 2024 projections. For CCG and DCAI, we prorated its Q1 actual growth, flattish guidance assumption of 0% YoY in Q2 and our previous forecast for H2 2024. Whereas for NEX, Mobileye, we prorated its Q1 actual growth and our previous projections while for the IF segment, we annualized our calculated Q1 external IF segment revenue and prorated its revenues to reach the target of $15 bln by 2030, which represents a CAGR of 148%, representing an acceleration coinciding with the expected ramp of Intel 18A in 2025, but only accounting for only a minor portion (0.5%) of total revenue in 2026. In total, we revised our growth projections for Intel in 2024 at 9.3%, which is lower than 13.9% previously but still expect a better growth performance in 2025 onwards. In the next point, we examined drivers for how the company's growth outlook could improve throughout the year. Firstly, for CCG, management highlighted AI PCs and stated that "demand for AI PCs, particularly Core Ultra products, is exceeding expectations" during its latest earnings briefing. Meanwhile, in DCAI, the company emphasized the upcoming launch of Gaudi 3 as its next-generation server GPU and mentioned that "Intel is seeing increased interest in Xeon's AI capabilities and the potential of Xeon plus Gaudi for enterprise AI use cases". We compared Intel's Ultra processors with its 13th Gen (Raptor Lake) and 12th Gen (Alder Lake) core processors, focusing on processors with matching total core counts (12) and maximum clock speeds (4.4 and 4.8 Ghz). Then, we derived five Ultra processors and five combining 13th and 12th Gen Core processors to analyze the difference in the average benchmark performance and pricing. Source: PassMark, Company Data, Khaveen Investments Based on the table, the average pricing of Intel Ultra processors is 17% higher than the average derived from Raptor Lake (13 Gen) and Alder Lake (12 Gen) processors with similar core count and clock speeds. In terms of performance benchmark average, Intel Ultra is lower by 27.7%, resulting in a lower average value score (performance per pricing) of 38.2%. In our previous analysis, we highlighted that AI PCs have an NPU which is "a dedicated processor or processing unit on a larger SoC designed specifically for accelerating neural network operations and AI tasks." Furthermore... Compared to GPUs, NPUs offer greater efficiency for AI-related tasks because they extract dedicated circuits from GPUs, allowing them to handle AI workloads more effectively and at lower power levels. NPUs complement CPUs and GPUs by specializing in AI-driven tasks, such as background blurring in video calls or object detection in photo editing, while the other processors handle broader tasks. - Khaveen Investments Therefore, we believe the implementation of Neural Processing Unit (NPU) is considered a differentiator for Ultra processors in comparison to Intel Core processors, thus potentially contributing to the pricing premium which we expect could benefit Intel's ASPs due to the shift to AI PCs. In our previous analysis of Dell (DELL), we highlighted "Canalys forecasted that the AI PC market will grow at a CAGR of 67.1% from 2023-2027, reflecting strong demand for AI PCs. AI PCs' market share is expected to increase from 19% to 60% in 2027, driving the global PC shipment market". Intel's own estimates indicate the share of AI PCs to increase to 80%. Therefore, to maintain competitiveness in the PC market, we believe Intel introduced its Ultra processors to capitalize on the shift to AI PCs. Additionally, competitors such as AMD and Qualcomm have also introduced their processors for NPU chips, requiring Intel to respond to avoid losing competitiveness. Moreover, we updated our comparison of server GPUs from our previous analysis of Nvidia in terms of performance specifications and updated our ranking to include more details on AMD's new MI325, MI350 and Intel Gaudi 3. Source: Company Data, Khaveen Investments Based on the table, Intel's latest Gaudi 3 processor uses TSMC's 5nm process, surpassing Huawei's Ascend 910B, however, trailing behind NVIDIA (NVDA) and AMD. In terms of transistors, Intel's Gaudi 3 has approximately 200 bln transistors, as it is estimated to have 2x more compared to its previous model. Thus, surpassing AMD's latest MI325 but trailing behind Nvidia. Furthermore, Gaudi 3 is reported to have 1835 FP16 Peak in Teraflops, surpassing AMD's latest model as well as Huawei's Ascend 910B. However, in terms of memory capacity, Intel's latest model is around 128GB, trailing behind both AMD and Nvidia. One advantage that Intel touts is in terms of costs, "Intel's Gaudi 3 will cost half the price of Nvidia's H100" according to Tom's Hardware. However, in our previous analyses, we highlighted performance to be the major factor for AI, due to the rising parameters of LLMs and the necessity for greater GPUs for training AI models. Therefore, we continue to believe Nvidia's performance advantage remains intact with a large gap for its GB200 Superchip while AMD is expected to introduce MI350 which is based on a more advanced process compared to Intel's Gaudi 3. Intel's management also guided $500 mln in expected revenue from Gaudi this year. In our previous analysis of Nvidia, we determined a competitive factor score for Intel at 0.7x and the market growth rate at 39%. Source: Company Data, Khaveen Investments Overall, we believe the company's latest developments in CCG and DCAI could provide an additional boost to its growth outlook such as the introduction of Intel Ultra processors to benefit its CCG revenue growth by capitalizing on the shift to AI PCs with premium pricing with its NPU component to support AI application workloads. We forecasted its ASP growth for CCG Laptop to increase 1.5% with the Intel Ultra processors by multiplying a share estimate increase in AI PCs by 9% in 2024 and our derived pricing average difference of 17%, for a total ASP growth of 3.2%. Moreover, we DCAI, we factored in management guidance of Gaudi revenue of $500 mln in 2024, which is only a minor portion (3.9% of revenue) but with our growth forecast of 27.3% based on our market growth estimate of 39% multiplied with a competitive factor score of 0.7x as we expect competitors Nvidia and AMD to outperform Intel due to their performance advantage, reaching $800 mln by 2026. In total, we forecast Intel's total revenue growth accounting for AI PCs and new Data Center GPUs at 9.5% in 2024, representing only a slight 0.2% increase compared to our base estimates from the previous first section but with a higher difference of 0.7% in 2025. Finally, we focused on the company's profitability and determined why are the company's FCF margins still negative and deteriorating, even though there has been an improvement in revenue and margin growth. We analyze the company's profitability margins in comparison to our forecasts. Additionally, we explain the trend in profitability margins through an expense analysis and break down the FCF margins to understand the reasons behind their negativity. Source: Company Data, Khaveen Investments Based on the table above, we compiled an expense analysis of Intel's Q1 2024 performance and compared it with our previous 2024 full-year forecast. Firstly, the company reported a gross margin of 41%, lower than our full-year forecast of 49.11%, which is primarily due to the higher-than-expected COGS and Depreciation & Amortization. However, the company's gross margins improved, higher by 6.8% compared to Q1 2024, therefore indicating a recovery in gross margins. Furthermore, the company's Q1 2024 EBIT margin was -5.67%, compared to our forecast of 18.08% for the full year. This was mainly due to a higher R&D expense as well as SG&A expense % of revenue. This further resulted in a negative EBT margin of 5.65%, which deviated from our 19.32% full-year forecast. However, the company recognized a tax benefit which is reflected as a -2.22% tax expense in Q1 2024, suggesting that the company benefited from a tax shield. This contrasts with our forecast, where we anticipated a positive tax expense of 11.84%. Overall, the company in the end reported a net loss margin of -3.43% in Q1 2024, in contrast with our full-year net margin projection of 17.04%. One of the main reasons for the lower-than-expected margins is due to its gross margins. Based on the chart above, the company's gross margin had been trending downward from 2014 to 2021, which we believe could be due to the intense pricing competition between Intel and AMD based on our past analyses. However, in 2022, the company's gross margins declined substantially and continued to decline in 2023 as its revenues contracted by double digits during the period; thus the period affected the companies' economies of scale. In Q1 2024, the company's gross margin did not match our expectations based on our full-year projections as we believe its scale had not recovered yet as we mentioned in the first point, the company's revenue growth had not yet reached our full-year expectations, leading to lower scale benefits. Furthermore, based on our 2024 forecast, we expect its gross margins to recover to 2021 levels by 2027 when we see its revenue reaching $80.6 bln, compared to the 2021 level of $79 bln. Source: Company Data, Khaveen Investments In terms of operating expenses, the most significant for the company is R&D. The company's R&D expenses % of revenue was 34.4% in Q1 2024 and had increased compared to 29.6% in 2023. According to its quarterly report, the company's R&D increase was attributed to the company pursuing investments for the company's process technology roadmap. In 2021, Intel launched its new IDM (integrated device manufacturing) 2.0 strategy, aiming to improve and catch up in terms of its technology process capabilities while expanding into the foundry market to leverage these advanced process technologies. In our previous analysis, we highlighted that Intel has developed various advanced process technologies and currently has successfully developed Intel 7 (7nm process). Based on its roadmap, we highlighted Intel's plan to further close the gap with competitors and the Intel 10A is scheduled to be launched in 2027. We continue to make significant investments to accelerate our process technology roadmap. This requires continued investments in R&D and focused efforts to attract and retain talent. - Intel Quarterly Report During the period Intel's R&D expenses increased since 2021, it outpaced the growth in revenues and only declined in 2023 as its revenues continued to contract. Therefore, we believe this strategy led to the outpacing of R&D spending. We projected its R&D spending in 2024 by prorating its Q1 R&D spending and based on its 3-year average of 6.3% in 2025 and beyond. However, we see its revenue growth outpacing its R&D growth, thus resulting in a projected decline in R&D % of revenue. Source: Company Data, Khaveen Investments According to the table above, we observed that the company's Q1 2024 Free Cash Flow margin significantly deviated from our previous full-year projections, where we projected a positive FCF for both the total investing and capex only at 4.2% of revenue, and in contrast, the FCF margins were -30.2% and -56.9% respectively. In terms of cash from operations, Q1 2024 ended with a negative 9.6% margin. This is followed by a high capital expenditure in Q1 2024, at 46.9% of revenue, which exceeds our full-year projection of -35.0%. We believe this is due to the company's investment towards acquiring equipment from ASML, where it is reported that Intel has reserved all high-NA EUV machines and took delivery at the start of 2024 as the first customer of ASML to obtain these advanced lithography equipment. Therefore, we believe this could have resulted in a higher capex in Q1 2024. Furthermore, management reiterated its 2024 and 2025 capex guidance at mid-30% of revenue in its earnings briefing, which is the assumption we had previously applied for 2024. All in all, we determined the company's profitability margins were lower compared to our full-year forecast for 2024, mainly due to lower gross margin as we believe the company's economies of scale had not improved to the full potential as its revenue growth still struggled to recover based on our full-year expectations. Looking ahead, we expect its gross margins to recover steadily through 2027, recovering to their 2021 levels (57.8%) by 2027 as we projected its revenue to recover by then, reaching $80.9 bln. Additionally, we believe its R&D growth surged as the company invested to increase its process technology capabilities to catch up with the intense competition, though we expect its revenue growth to outpace the growth in R&D as its revenues recover and its R&D spending % of revenue to moderate going forward. We believe one of the risks to Intel is competition from AMD and Nvidia in the CCG and DCAI segments. AMD's upcoming Ryzen launch (Ryzen AI 300) and EPYC launch (Zen 5-based EPYC) are expected to bring powerful processors that could potentially challenge Intel's offerings in both the client and server markets. Similarly, Nvidia's Rubin architecture, which is also designed for high-performance computing together with AI applications, further intensifies the competitive landscape between the 3 companies. Thus, we believe this overall could impact Intel's market position, pressuring Intel to further innovate. We updated our DCF valuation model, with revised revenue and margin projections. Based on a discount rate of 8.3% (company's WACC) and terminal value based on its 5-year average EV/EBITDA of 10.02x, we derive an upside of 18.65%. In summary, we continue to believe Intel's outlook for the second half of the year and going into 2025 has a potential for growth acceleration during the second half of the year with the recovery in various end markets as well as new developments such as AI-powered PCs with the introduction of Intel Ultra processors supporting ASP growth as well as new Gaudi GPUs for data centers. In terms of profitability, we revised our expectations for its margins to be lower due to lower gross margins, which we believe could recover in the long run as its scale improves. Furthermore, while we forecast R&D spending as % of revenue to remain high surge in the near term, we expect its revenue growth to outpace R&D growth as Intel's revenue recovers. All in all, we upgrade our rating for Intel from a Hold to a Buy given the recent stock drop since our previous coverage of Intel by 25%. This is despite a slightly lower price target in this analysis of $39.13 ($41.70 previously), primarily due to our lower revised margin forecasts as the company focuses on its process roadmap as we have adjusted our 5-year forward average net margin forecast downward to 12.7% from 20.87% since our previous analysis factoring in the company's R&D spending to support its advancements in process technology as part of its IDM2.0 strategy.
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ASML Stock: EUV Tailwinds Intact, Upgrading To Buy (NASDAQ:ASML)
I do much more than just articles at Tech Contrarians: Members get access to model portfolios, regular updates, a chat room, and more. Learn More " We're upgrading ASML (NASDAQ:ASML) to a buy after a long, neutral stance. The company reported its 2Q24 results earlier this week, causing a massive pullback of over 12%, as shown in the stock's one-month chart against the S&P 500 and semi-cap names Applied Materials (AMAT) and Lam Research (LRCX). The sell-off was a reaction to management's guidance for next quarter missing consensus; the company guided for a 7-17% Q/Q growth to €6.7B-€7.3B, trailing consensus estimates of €7.67B and forecasting downside if the U.S. semi-export ban on China expands further. Our bearish stance on the stock was due to our belief that ASML held a higher risk profile, more specifically concerns over "softer extreme ultraviolet ("EUV") demand in the back end of the year due to lackluster end demand in 2023 and 1H24." Our negative thesis has played out over 1HFY24, and risks associated with softer EUV demand and heightened geopolitical tensions have been priced into the stock and outlook. ASML's guidance has been lower than consensus expectations for three consecutive quarters, and concerns over an expanded U.S. export ban have been in the spotlight and digested by the market. Now, we're upgrading to a buy as we see minimal downside after the outlook has been de-risked and significant tailwinds for ASML in 2025 from increased industry adoption of EUV tools to keep up with AI demand. For the quarter, ASML reported total sales up 18% Q/Q to €6.24B, a little ahead of consensus estimates of €6.03B. Here's the breakdown: logic and memory-related system sales grew sequentially, up 3% Q/Q and 49% Q/Q to €2.57B and €2.19B, respectively. China-related system shipments have become the main topic of discussion as geopolitical tensions increase and grew 20% Q/Q to €2.33B, making up 49% of total system shipments. Why does EUV matter? We agree with management that 2024 remains a "transitional year" for the company as semis recover from the cyclical downturn of inventory correction cycles. We think the market has finally recognized and digested this, particularly after the massive sell-off on Wednesday. Our positive thesis for ASML is based on a necessary acceleration in demand for EUV lithography tools in 2025, supported by the increased need for advanced tools in DRAM and foundry/logic markets. EUV is the future as it's the only window to enable more advanced process nodes and keep up with Moore's Law; hence, our upgrade is based on expectations that we'll have a booster in EUV sales next year. We're anticipating industry adoption for next year in particular as we think customer wafer fabrication spend, or WFE, is due for a rebound after pulling back in 2023 in response to "weak memory spending, macroeconomic slowdown, inventory adjustments and low demand in the smartphone and PC end markets." The second reason we're optimistic about EUV sales next year is because of AI; on the relevance of EUV to AI, Chris Zeoli on DataGRavity wrote the following; "NXE machines use extreme ultraviolet light to create very small and complex parts necessary for high-performance AI chips." This June, ASML CFO Roger Dassen's comments cited in Jefferies's report on improved orders from TSMC (TSM) confirm our thesis for 2025. EUV tech represented roughly 31% of total net system sales compared to 46% a quarter prior; we'll see a bigger chunk of net system sales coming from EUV in 2025. The following chart is outlines ASML's net system sales breakdown by technology. Most of the market is taking ASML's transitional year status as a negative, we disagree. We believe we're in the pre-moment of an industry-wide transition to sub-5nm for logic and sub-14nm for DRAM because of hyper demand for AI servers and edge AI devices. ASML has yet to see its AI tailwind play out; we say there's more upside to be recognized and recommend investors load up on the pullback. Valuation and Word on Wall Street While expensive, ASML stock is fairly valued, in our opinion, for its technological leadership in the lithography market through its EUV monopoly. On a P/E ratio, the stock is trading at 48.4x C2024 compared to a group average of 32.0x. The stock's EV/C2024 Sales ratio also sits above the peer group average at 13.1x versus the group average of 7.6x. ASML is uniquely positioned to achieve the future earnings the market is pricing into its valuation. The following chart outlines ASML's valuation against the peer group average. Wall Street's bullish sentiment on the stock confirms our own. Of the 14 analysts covering the stock, 13 are buy-rated, and one is hold-rated. Sell-side price targets are also noteworthy in comparison to other leaders in the semi space; the median sell-side price target is $1,185, while the mean is $1,157 for a 25-28% upside compared to a potential upside of 16-30% back in October. The following charts outline ASML sell-side ratings and price-targets. What to do with the stock? We're positive on ASML and the semi-cap names AMAT and LRCX. We do recognize the still present risk of the U.S. export controls on China expansion, but we believe the worst of ASML's exposure to China has already been priced into not only the next quarter but the FY24 sales outlook; the company expects sales to be flat Y/Y to ~€27.5B as a result of weaker logic sales and higher memory. Management is guiding for FY25 bookings to be in the range of €30-€40B; we think this number will likely be revised up as the AI TAM is discovered. ASML should be on the radar for longer-term investors due to the strategic nature of lithography spend; the company serves as an early indicator of the broader semi market, or in other words, it helps foreshadow industry movement. We believe ASML will rebound materially in 2025 and see the stock beating and raising guidance in late FY24. 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. If you want first-hand access to our analysis of software/hardware and semiconductor spaces, best ideas within the current macro backdrop, and our coveted research process, you're in the right place. Tech Stock Pros is a team of three former technology sector engineers with a long history of investing in the tech sector. They run Tech Contrarians, an investing group providing institutional-level company research to individual investors. Utilizing a live portfolio with quarterly updates, bi-weekly newsletters, and answering questions daily via chat, Tech Stock Pros aims to demystify investing in the technology sector. Learn more. 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.
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Micron's Selloff Poses As A Good Buying Opportunity For The Cyclical Upswing (NASDAQ:MU)
Capacity for their HBM chips will begin to improve in 2027 with the Idaho fab bringing in meaningful production; the New York fab is expected to begin production in 2028. It's no secret that Micron Technology's (NASDAQ:MU) share performance has been relatively lackluster since reporting q3'24 earnings at the beginning of July 2024. Though investors may have been spooked by the higher-than-expected capital investment forecast for eFY25, this should not have come to anyone's surprise as Micron is in the process of transitioning their chip manufacturing equipment to cater to higher powered chips using EUV lithography as well as breaking ground on their Idaho fab, which is expected to contribute production in 2027. While this is in the process of being constructed, the New York fab remains in purgatory as Micron awaits permitting and regulatory approval to break ground and isn't expected to meaningfully impact the income statement until 2028. I believe one of the other challenges afoot is that Micron's HBM sales for eFY25 are fixed at this point, which may result in the firm not reaching their full pricing potential for the newest piece of technology. Management mentioned that capacity for their HBM chips is sold out in 2025, which may be a limiting factor when considering growth. I believe that one of the benefits of this is that Micron has a guaranteed book of sales for eFY25, and it proves that the demand for their HBM chips is there. I anticipate that the success of HBM3E will drive sales for their next generation HBM4 & HBM4E chips. Given Micron's recent performance and the anticipated margin expansion that will be driven by HBM sales and the market's reaction to q3'24 earnings, I am increasing my eFY25 aEBITDA forecast to $21.5b with a modest change to my price target from $235/share to $208/share and reiterate my BUY recommendation. Be sure to catch up on my previous reports covering Micron: Micron Technology Is Positioned For AI Factory Growth Micron Will Experience Strong Tailwinds As GPU Capacity Loosens Up Micron is positioned for significant growth in eFY25 both in terms of revenue generation and margin expansion. This growth will primarily be driven by the ramp-up process of their new HBM chips. In q3'24, HBM3E generated over $100mm and is expected to bring in multiple-hundreds of millions in eq4'24 and several billions in eFY25. HBM production will take some share of their fab away from DRAM; however, HBM is said to be margin accretive, suggesting that the share of manufacturing allocated to HBM will profitably scale. Modeling out the financials, I anticipate HBM to drive DRAM growth in q4'24 above the 76% year-to-year growth rate in q3'24. This should also drive stronger gross and operating margins to 35% and 19.60%, respectively. Despite the cyclicality of the memory and storage chip industry, Micron may be heading into an elongated upcycle driven by the AI factory megatrend. The biggest appeal is the firm's HBM3E chip that has been ramping throughout 2024 and will experience a full production cycle in eFY25. Given that power consumption is one of the biggest challenges faced in AI factories, the HBM chip should be expected to be heavily adopted as it offers a 30% reduction in power consumption and offers better performance when compared to competing chips. Looking to segments, it appears that Micron may be positioned to improve across nodes. Dell Technologies (DELL), in their q1'25 results, reported flat year-over-year storage segment sales, which could potentially be the end of the cyclical downturn. Though it is too early to tell whether this is a trend or a one-off data point given that FY24 experienced a decline in each quarter, the reversal does appear promising. The same can be said about the firm's traditional server and network segment, as the sales trajectory experienced a major reversal in q1'25. Hewlett Packard Enterprise (HPE) experienced a similar improvement in their traditional server segment in q2'24. I believe that this may be the beginning of an upcycle for general compute servers, which may help drive Micron's CSS sales in the coming quarters. Within Micron's data center presence, the firm announced the beginning of the sampling phase of their multiplexed rank dual inline memory module, or MRDIMM, which is expected to perform with 40% lower latency and a 39% increase in effective memory bandwidth when compared to their RDIMMs. The MRDIMM integrates with Intel Xeon 6 processors and is expected to be utilized to accelerate memory-intensive virtualized multi-tenant, HPC, and AI data center workloads. Similar to the IT infrastructure companies listed above, I anticipate much of the growth for Micron to be concentrated in data center as regional AI factories are built out by firms like Oracle (ORCL), Microsoft Azure (MSFT), and Amazon AWS (AMZN). Oracle alone is investing $10b in eFY25 to build out their OCI platform and regional data centers. As far as mobile chips are concerned, I do anticipate some push-pull to the segment that may lead to mixed results. The "push" is that AI-enabled smartphones require more content per device and will provide more revenue on a per-device basis. The "pull" is that smartphone sales may remain relatively flat for the time being as consumers aren't flocking to upgrade to the newest devices. I anticipate the same for AI-enabled PC sales as well. Though I do expect consumers to begin refining their devices to the newest models, I do anticipate that this cycle may take longer than one may expect as consumers remain grappled with inflationary pressures. My broader thesis is outlined in my recent report covering Nvidia (NVDA): Nvidia Faces Macro Headwinds And Micro Tailwinds. If this turns out to be true, I do believe that mid-to-late CY25 will be the timeframe for device refreshes. For the embedded segment, I anticipate Micron to realize strength as more content is concentrated on vehicles in the automotive industry. Though I do anticipate some headwinds in terms of vehicle sales and growth in automotive as EV sales continue to return net losses to the automotive OEMs, I do anticipate that a flat market can provide significant benefits to Micron given that content per vehicle is growing. Ford announced in their q1'24 earnings call that the firm will be pushing back production of their next generation of EVs as the firm awaits lower-cost battery technology. In terms of growth within the segment, I anticipate CY26 to be a ramp-up period, with CY27 to result in a more meaningful impact to growth. Industrial IoT may realize strength in the meantime as firms seek to automate more processes. Statista forecasts this market to grow with a CAGR of 13.79% between 2024-2029. Accordingly, IIoT devices can have the capacity to drive increased sales for network equipment and storage devices, given the vast amount of data collected by sensors and other devices. Funneling this into my financial forecast, I am raising my expectations for eFY25 given the forecast for eq4'24. Micron has a few factors that will work to their advantage when it comes to cash generation, including the higher sales growth of their HBM chips that will result in accretive margins and an inventory drawdown. Despite management guiding mid-30%'s capex for eFY25, I anticipate Micron to be in a position of strength for cash generation and will likely be in a greater position with these investments. Much of these investments will be dedicated to the foundry buildouts and manufacturing equipment for their DRAM chips. Though the ~$14b in capital investments in eFY25 will create some headwinds to free cash flow, I anticipate this to create more benefits to the firm as opposed to setbacks. Micron is positioned for a major cyclical upswing in their data center chips. I anticipate the growth of regional data centers being built-out by the hyperscalers will result in substantial growth in data center storage and memory chips for the foreseeable future, regardless of whether the US economy falls into a contractionary state. Given that AI applications are said to margin-accretive for enterprises as they automate administrative tasks, I anticipate enterprises to continue to invest in these applications. The ramp-up of their HBM chips is expected to be highly accretive to margins and revenue growth. A baseline for sales generation for eFY25 is almost guaranteed, given their HBM chip capacity is sold out. HBM capacity being sold out for eFY25 can be a limiting factor, as the firm may not necessarily be able to participate in dynamic pricing and may have priced the chips too low. Micron will be investing $50b through 2030 to develop their next leading-edge foundries to support domestic production, which may create some pull on free cash flow generation. Consumer handhelds and PCs may undergo a cyclical downturn as consumers remain stretched from inflationary pressures. According to the recent retail sales report, electronics and appliance store sales grew 80bps for 1h24 when compared to 1h23, suggesting minimal growth across consumer electronics. From a macro perspective, the general business outlook as reported in the June ISM-PMI readings suggests that the broader economy may be undergoing a contractionary state and may result in less investment across enterprise IT. MU shares currently trade at 19.87x EV/aEBITDA as the firm reaches the beginning of a major cyclical upswing. Forecasting out to eFY25, I believe MU shares' valuation will moderate at the midpoint of ~11x EV/aEBITDA on $21.5b in aEBITDA generation. Taking into consideration analysts' forecasts for eFY25 EBITDA of $17-25b, I believe Micron's growth trajectory is significantly undervalued. I believe Micron's shares may be a "show me" story and will sharply react to quarterly updates as HBM is cycled into production. Given the market's reaction to Micron's q3'24 results, I am adjusting my probability analysis in my valuation table below to more heavily weigh the midpoint. Given this factor, I am incrementally lowering my price target from $235/share to $208/share at 11.12x EV/aEBITDA and reiterate my BUY recommendation.
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Aehr Test Systems: At Better Odds To Exit FY25 Better Than It Entered It (NASDAQ:AEHR)
I hereon share my thoughts on Aehr and why I think it's a catch for longer-term investors. I published on Aehr Test Systems (NASDAQ:AEHR) in late March (before its fourth-quarter FY2024 results and outlook) with a positive thesis that the weakness had been priced into the stock and FY24 guidance, arguing that the stock is better positioned to outperform expectations as SiC demand picks up in FY25. I'm now updating my thoughts on Aehr post-earnings. I believe my positive thesis has played out, and now the market has priced in a lot of the good news, with the stock surging +22% after earnings. I continue to be buy-rated on the stock for longer-term investors as I think there could be more upside to come in 2025. I see Aehr as an attractive pick into FY25 on two factors: the company's acquisition of Incal Technology that'll help solidify its venture into the AI industry, and tailwinds from EV-led SiC demand recovering in 1HFY25. I do, however, warn near-term investors of having high expectations for 2H24. The reason I recommend caution for the near-term investor is that a lot of the good news from Aehr's better-than-expected results and new market opportunities through its acquisition have been priced in. In fact, Aehr's stock is up ~85% over the past three months and around 64% over the past month, significantly outperforming the S&P 500 on both spreads; the three-month chart of Aehr against the SPY is shown below. "While most forecasters are saying that the inflection point for silicon carbide and electric vehicles is now the second half of 2025 into 2026, from our many meetings with semi-suppliers, tier-ones, and electric car companies themselves, it's even more clear now that silicon carbide is the plan of record for electric vehicles and preferred over IGBT." I think this inspires confidence in the recovery of SiC and EV demand, which is a positive for EV-exposed players like Onsemi (ON), which accounts for a big chunk of Aehr's total sales. This is most likely something that'll play out more visibly next year rather than this year. I do think there's more upside from here as management noted the current framing they've set for FY25 takes a "pretty conservative stab at the silicon carbide things" and focuses on other high-volume markets; this means the better-than-expected guidance doesn't even account for a material rebound in auto demand, which inspires confidence in Aehr being able to diversify its revenue streams and grow its top-line simultaneously. My thesis on Aehr is oriented towards more long-term investors to add on any pullbacks this quarter. I see more momentum for the company once SiC picks up in 2025 and better orders from its position in EV and AI markets. I think the stock remains a safe bet for longer-term investors due to secular tailwinds from the EV-led demand. In spite of the rough EV market this year, the company managed to report revenue of $16.6 million, down 25% year-over-year, ahead of market expectations of $15.45 million, and earned an adjusted $0.84 per share, while analysts expected $0.10. I think the beat is based on market expectations already being low, as I argued back in March, but I do see another beat next quarter. My disclaimer for investors looking to add this name is to choose their entry points wisely. Aehr reported its last quarter of FY24 earlier this week, beating expectations and guiding for better-than-expected revenue in FY25; the big takeaways from the earnings call are two, in my opinion. The first is management's guidance for FY25 which boosted investor confidence in the stock, and piggybacking on this is management's plans to diversify its business. CEO Gayn Erickson noted: "Our full-year revenue and net income results exceeded our previously provided guidance and surpassed analyst consensus." Indeed, the company guided for total revenue of at least $70 million and net profit before taxes of at least 10% of revenue compared to a consensus of $67.86 million, as shown in the image below. The second is management's acquisition of Incal Technology, a company that manufactures computer peripheral equipment. Aehr plans on acquiring Incal for $21 million, including $14 million in cash. The reason this is good news for Aehr is because it strengthens its position in the AI industry; this is what Erickson had to say about the benefit of the acquisition on the call: "They [Incal] have a particularly strong new product family of ultra-high-power test solutions for AI accelerators, graphics and network processors, and high-performance computing processors. Their ultra-high-power package for our test capabilities, combined with Aehr's industry-leading lineup of wafer-level test and reliability solutions, uniquely position us to fully capitalize on the rapidly growing opportunity within the AI semiconductor market as a turnkey provider, a reliability and test that spans from engineering to high-volume production." I like the acquisition for Aehr as it provides leverage for the company to penetrate new target markets for test and burn-in and wafer-level burn-in for artificial intelligence processors, flash memory devices, hard disk drive magnetic read/write heads, data centers, solar power conversion, and integrated circuits used for optical IO Communication between chipsets and processors. For reference, these are the new target markets mentioned by management on the call; Erikson noted that hard disk drive application could be a 10% customer, production forecast for AI is a 10%, and GaN or gallium nitride could be a 10% customer as well. This translates to three different 10% customers aside from SiC, and that's what gives me optimism in Aehr even if the near-term outlook on EV remains mixed. This quarter already proved that Aehr can outperform in spite of slower EV demand in the second half of their FY24. There's a third thing that this quarter told us about Aehr, which is that a lot of the positives have been factored into the stock price and outlook after earnings, but there remains no clear near term trigger for the EV market to rebound. I'd more bullish on Aehr had we seen indication of a turnaround moment for EV demand post-inventory correction because that would translate into tailwinds for SiC demand and Aehr. I don't think this an issue for Aehr alone but a broader industry wide cyclical downturn pressuring auto and industrial markets. SiC remains "crucial for EV power systems operating in environments with elevated temperatures due to energy dissipation and thermal cycling." What SiC offers is "higher breakdown voltage, faster switching speeds, lower on-resistance, and better thermal conductivity" enhancing the performance of EVs. The functionality of SiC in this market makes me more confident about the longer term secular tailwinds at play for Aehr. Nonetheless, there remains a very real near term risk on the stock price performance considering the recent run up. Part of the reason I continue to be positive on Aehr now is because I think management will be discipline in diversifying their footing after their vulnerability to the auto market and largest customer, Onsemi, weighed on earnings in 1H24. Aehr stock is still not cheap but I think it has the growth drivers that'll enable the company to achieve the forecasted growth. Aehr's Price/Earnings ratio is 30.8, and its EV/Sales ratio is 7.8 for CY2024 compared to a peer group average ratio of 33.3 and 7.5, respectively, based on data from refinitiv. I think Aehr has more secular tailwinds working in its favor than its valuation gives it credit for particularly when contextualizing the company in the semiconductor peer group and after the Incal acquisition. Aehr remains a growth stock in my book, and I think it'll see more upside as its serviceable available market expands into next year. I think Aehr still has more to benefit from into 2025, and I remain confident that management's strategic efforts to diversify into new target markets could support outperformance. The key to making this happen for Aehr is its recent Incal acquisition, which will provide support through its ultra-high-power capabilities for AI accelerators, GPUs, and high-performance processors. AI is leading the industry outperforms this year so far and the market seems to be pricing in AI exposure to Aehr after the acquisition. I'm watching to see how management's diversification impacts top-line growth and gross margins next quarter.
[7]
AXT Inc.: Playing An Expected Rebound (NASDAQ:AXTI)
The China factor will not go away anytime soon, but long AXTI has enough in its favor to make it worth backing. AXT, Inc. (NASDAQ:AXTI), a supplier of single element and compound wafer substrates to the semiconductor industry, is expected to release its Q2 FY2024 report on August 1 after the market closes. The last time AXTI reported, the stock soared higher after the Q1 FY2024 report blew past expectations. However, the stock has not done much since due to the lack of a follow through. However, this could be an opportunity, especially if one is long AXTI. Why will be covered next. AXTI has released two quarterly reports this year and the stock jumped higher after each one. The stock gained 69.3% the day after the release of the Q4 FY2023 report on February 23 and the stock gained 20.8% on May 3 after the release of the Q1 FY2024 report. As a consequence, AXTI has gained 39.6% YTD after closing at $3.35 on July 19. However, it's worth noting that the stock has not done much in recent months. The stock reached an intraday high of $4.23 and it closed at $3.66 on May 3 after the last report, but there have been no new highs in the 2.5 months that have passed since. The chart above shows how the stock has essentially gone sideways in the last few months. Note the higher lows in the chart. If all the recent lows are connected, an ascending trendline appears. The stock seems to be respecting the boundaries imposed by this trendline. The trendline thus offers support to the stock, which can be seen as a bullish sign. If support is moving up due to the ascending trendline, then this points in the direction of higher stock prices. The stock is now at this trendline, which suggests the stock is at a potentially good entry point, assuming support holds and the stock stays above the trendline. Keep in mind the stock needs to stay above the trendline for the trend to hold. A break below could break the trend of higher lows. In addition, the prior chart shows how the stock seems to have issues getting past $4 or so. Note the number of times the stock changed course whenever it got to or close to the $4 price point. It happened on May 3 when the stock got to $4.23, only to retreat to close much lower at $3.66. The table above shows the number of times the stock had problems getting past or staying past $4 or so. This is also what happened on February 23, when the stock gained 69.3% after the Q4 FY2023 report. The stock got as high as $4.85, only to fall back to close below $4 at $3.86. AXTI was able to get past the $4 region the next day and stay there for a few weeks, but a 34% drop on April 4 put the stock back below $4. This pattern is unlikely to be a coincidence. The most likely explanation is that sellers have settled on the $4 or so region, which shows up as resistance in the charts. If AXTI is to move higher, it will need to break resistance first. There is something else worth mentioning. In the prior chart, the stock posted a 52-weeks high of $5.64 on March 21, although it closed at $5.40 that day. Together with February 27, these two days are the only two times the stock was able to get above $5 in 2024 and then only briefly. On both days, the stock fell back below $5 the very next day. Mind you, the 52-weeks high of $5.64 is close to the average price target of $5.50 on Wall Street, which may be what triggered the decision to sell. Furthermore, it's worth mentioning that the $5 price point is close to a Fibonacci level. Recall how the stock bottomed at $1.89 on November 2, 2023. In doing so, the stock concluded a multi-year decline that started with the February 2021 high of $15.84 as shown in the chart above. Note how in the chart the peak of $15.84 was preceded by a stock rally that started with a low of $1.85 in March 2020. This is just $0.04 below the November 2023 low of $1.89. AXTI went from the March 2020 low of $1.85 to the February 2021 high of $15.84 and then almost completely retraced the prior move by going from the February 2021 high of $15.84 to the November 2023 low of $1.89. The stock may now be retracing the last move. It's thus worth mentioning that the 23.6% Fibonacci retracement of $15.84 to $1.89 is $5.18. This is roughly where the stock topped out earlier in 2024 as mentioned before. If we assume AXTI continues to retrace and makes it past the 23.6% Fibonacci level, then the next Fibonacci retracement of $15.84 to $1.89 is 38.2%, which would take the stock to around $7.22. However, before it gets there, AXTI will need to get past $4, which may take some effort due to the presence of resistance. If resistance is to be broken, AXTI will need buyers to step in and bid up the stock price. Buyers are more likely to do so if they have a reason and it is therefore worth mentioning that there are several reasons out there. For starters, an argument can be made that AXTI is undervalued at its current price. AXTI has a market cap of $148.7M with a stock price of $3.35 a share. On the other hand, AXTI's book value is significantly higher. Tangible book value is $197.5M, which converts to $4.45 a share with the number of outstanding shares at 44.4M. This means AXTI trades below book value with a price-to-book of about 0.75x. An argument can therefore be made that AXTI is undervalued due to this. However, a counterargument can be made that AXTI deserves to trade below book value since it is running at a loss. This will reduce book value. The consensus estimate, for instance, is that AXTI will report a non-GAAP loss of $0.05, or $0.06 in terms of GAAP, on revenue of $26.3M when AXTI releases the Q2 FY2024 report on August 1. These estimates are somewhat worse than the midpoint of guidance from AXTI. From the Q1 FY2024 earnings call: "In keeping with our comments today, we expect Q2 revenue to be between $25.5 million and $27.5 million. We expect our non-GAAP net loss will be in the range of $0.03 to $0.05, and GAAP net loss will be in the range of $0.05 to $0.07." Source: AXTI earnings call Bulls could argue the bar has been set low, which increases the likelihood of a beat due to low expectations. AXTI has after all soundly beat estimates for both the reports released earlier in 2024. Non-GAAP loss of $0.03 per share in Q1 FY2024 was $0.05 better than expected and non-GAAP loss of $0.07 per share in Q4 FY2023 was $0.06 better than expected. This could happen again when AXTI reports on August 1, especially if AXTI lowballed guidance. In addition, while it's true being in the red will reduce book value, bulls can feel confident in the fact that quarterly results are improving as shown in the table below. If we extrapolate the rate of improvement in the top and the bottom line, AXTI could realistically be out of the red as soon as next year or FY2025. AXTI has cash, cash equivalents, restricted cash and short -term investments totaling $41.27M as of Q1 FY2024, offset by total debt of $51.72M on the balance sheet. Source: AXTI Form 8-K AXTI has lost $16.8M or $0.39 per share in the last 12 months, in terms of GAAP. In comparison, AXTI is valued $48.8M less than its book value of $197.5M with a market cap of $148.7M. The market has priced in roughly 3 years of TTM losses into the stock, but this looks excessive if the recent improvement in earnings continues and AXTI finishes FY2025 in the black with a profit, GAAP or non-GAAP. AXTI is still dealing with soft demand in some end markets, but that can't be said of demand for indium phosphide or InP, which has outperformed in recent quarters. Indium phosphide is used in, among other things, silicon photonic devices and lasers for high-speed data transmissions in, for example, datacenters. As a consequence AXTI stands to benefit from growing adoption of AI-powered applications because AI should increase the need for more and faster bandwidth, and indium phosphide by extension from a supplier like AXTI. It's also worth reminding that AXTI continues to work towards a listing of its subsidiary Tongmei on the Shanghai Stock Exchange in China. True, this has been going on for a couple of years, but an IPO could serve as a catalyst to power the stock price of AXTI higher, especially if stock buyers subscribe to the argument that AXTI is undervalued. The IPO application is still pending, but even in the absence of one AXTI could generate investor interest since it holds stakes in ten companies in China producing raw materials that are likely to see growing demand in the semiconductor industry, including germanium or Ge and gallium arsenide or GaAs. All this could serve as an incentive to get in on AXTI, while the stock price is relatively low, if not undervalued. AXTI is headquartered in the U.S., along with production facilities, but it also has exposure to China since that is where some of its facilities are located as part of Tongmei. As a consequence, there is the possibility a change in U.S. export rules or even the government itself could result in a renewed tech/trade war between the U.S. and China, which may affect AXTI. Nothing has been settled here, but the mere possibility of a renewed trade war could serve as a headwind for AXTI and its stock by extension. It's no coincidence the big decline in the stock price the past few days came in the wake of recent comments by one of the candidates running for POTUS. Anyone who intends to be long AXTI ought to be mindful of the risks political change could have on AXTI. AXTI has lost almost 15% in the last three trading days, going from $3.93 to $3.35, after comments made by a presidential candidate triggered a selloff of semiconductor stocks as a whole. The fact that the stock was bumping against what is most likely resistance around $4 or so likely contributed to the decline. AXTI is connected to China in several ways, which means the China issue could serve as a headwind for the stock for some time to come. However, the recent decline has brought the stock to a trendline that has provided support in the past. If support holds, now may be a good time to get in. And even if support does not hold, going long may still prove to be worthwhile. True, AXTI is currently in the red, but an argument can nonetheless be made that AXTI is undervalued at 0.75x book value, especially if quarterly results continue to rapidly improve and AXTI becomes profitable next year. If AXTI returns to being in the black in FY2025, then that would remove the argument AXTI should be trading below book value due to being in the red. Book value on the balance sheet should increase once the income statement gets back to posting sustained profits. In addition, AXTI has solid growth prospects to keep it profitable as a supplier of substrates that are expected to see increased demand, including in AI. AXTI is currently under pressure due to the China factor and longs should not be surprised if the stock price gets pushed lower, but I am nevertheless bullish on AXTI. There are more pros than cons to be found. If the stock price drops further, then that would only further increase the existing gap between market cap and book value. Quarterly earnings have come in much stronger than expected this year with AI-related demand playing a significant role and this could happen again when AXTI reports on August 1, especially since expectations are on the low side and the stock having not done much in months. Nothing is set in stone, but the conditions are there for another post-earnings jump in the stock, just like what happened the two previous times AXTI reported in 2024. Bottom line, there are risks to keep an eye on, but the bull case for AXTI has enough backing it up. The stock looks mispriced by basically pricing in far more losses than AXTI is likely to incur. If or when AXTI gets out of the red, AXTI will need to be repriced to account for this. Odds are this will happen sooner rather than later.
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Recent analyses of major semiconductor companies reveal mixed sentiments. While AMD faces skepticism about its valuation, ASML shows promise with its EUV technology. Intel presents as a potential value opportunity, and Micron's recent selloff might offer a buying opportunity for investors.
Advanced Micro Devices (AMD) is currently facing scrutiny regarding its market valuation. Despite its strong performance in recent years, some analysts argue that the company's current stock price may be too high for a "second-tier chip player" 1. The concerns stem from AMD's position relative to industry leaders and its ability to maintain its growth trajectory in an increasingly competitive market.
ASML Holding N.V. (ASML), a key player in the semiconductor equipment industry, is garnering positive attention. The company is reportedly on track for a strong fourth-quarter ramp-up, largely due to the growing demand for its extreme ultraviolet (EUV) lithography systems 2. This technology is crucial for manufacturing advanced chips, positioning ASML favorably in the industry.
Further analysis suggests that ASML's stock may be an attractive buy, with EUV tailwinds remaining intact 4. The company's unique position in providing essential technology for semiconductor manufacturing could drive long-term growth and market dominance.
Intel Corporation (INTEL) has experienced a significant sell-off, leading some analysts to view it as an attractive value opportunity 3. Despite facing challenges in recent years, including increased competition and manufacturing delays, Intel's current valuation might present an interesting prospect for value investors.
The company's efforts to regain technological leadership and expand its manufacturing capabilities could potentially drive a turnaround, making it an intriguing option for those willing to bet on its recovery.
Micron Technology (MU) has recently experienced a selloff, which some analysts view as a potential buying opportunity 5. The semiconductor memory market is known for its cyclical nature, and current market conditions suggest that an upswing may be on the horizon.
Investors considering Micron should be aware of the industry's cyclical patterns and the company's position within the memory chip market. The potential for increased demand in areas such as artificial intelligence and data centers could drive growth for Micron in the coming quarters.
The semiconductor industry continues to be a dynamic and crucial sector, with companies facing various challenges and opportunities. While some firms like AMD face valuation concerns, others like ASML are well-positioned to capitalize on technological advancements. Intel and Micron present potential value propositions for investors willing to navigate the industry's cyclical nature and competitive landscape.
As the demand for advanced computing power grows across various sectors, including AI, cloud computing, and 5G, the semiconductor industry is likely to remain a focal point for investors and analysts alike. The coming months may prove critical in determining which companies can effectively capitalize on these trends and deliver value to shareholders.
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