Semiconductor Industry Update: Mixed Signals Amidst Global Challenges

ASM International: Orders Growth Continue To Come Through Nicely (OTCMKTS:ASMIY)

Potential for ASMIY to beat FY25 guidance given the orders growth trend and demand backdrop. Summary Following my coverage of ASM International NV (OTCQX:ASMIY) in Apr'23, which I recommended a buy rating as there was new supporting evidence from the 1Q24 results that an upcycle is materializing, this post is to provide an update on my thoughts on the business and stock. While the share price has reacted negatively to the 2Q24 earnings, I remain confident in my buy rating for the stock as ASMIY continues to see strong order growth and the demand outlook has not changed. Investment thesis On 23-07-2024, ASMIY released its 2Q24 earnings, which were absolutely fantastic and supported my bullish view. Although the share price reacted very negatively to it, I remain buy-rated as the fundamental outlook has gotten a lot more positive than in April. The key operating metric to track if ASMIY is in an upcycle is order intake, and 2Q24 order growth came through very nicely, growing 56% y/y on a constant currency basis, driving total order to EUR755 million. This marks the 3rd consecutive quarter of order growth and is driven by 2nm GAA orders and High Bandwidth Memory [HBM] applications, both of which are key growth drivers for ASMIY, as I have noted previously: Notably, ASMIY has noted that it is seeing a lot of interest from customers regarding the 2nm GAA transition, especially for AI applications. Additionally, several key manufacturers (those that I am aware of: TSMC, Samsung, and Intel. While we do not know the exact split, ASMIY revenue concentrated to 5 big customers (49% as of 1Q24), have reiterated their intentions to start preparing for high-volume production using GAA in 2025. I believe this development is a very encouraging leading indicator for order growth ahead, and ASMIY could continue to see massive order ramp-up in the coming quarters and into FY25" I touched briefly on the impact of growing demand for AI on the ASMIY memory chip business (the High Bandwidth Memory [HBM]), but I now see the logic chip segment to have very favorable tailwinds as well. Since most AI GPU chips are now being made on 4/5nm nodes, I would anticipate that 2nm Logic orders will benefit from the eventual migration to smaller node sizes, which will further improve chip performance and efficiency. According to TSMC, there is strong demand for 2nm chips due to AI (TSMC 1Q24 earnings call), which supports my view. Jay Capital I don't really see a strong reason why this migration will slow down, especially when the economy continues to be strong (US GDP growth was solid) and the Fed is indicating that it will cut rates soon. Notably, the fact that orders so far are only for pilot lines vs. high-volume manufacturing suggests that there is still a lot of room for orders to grow. As such, given the current momentum and year-to-date order intake trend, I expect 2H24 numbers to be strong as well. The comments from TSMC about their N2 node during the earnings call last week were also very encouraging from a demand perspective: Brett, you are right. All the people want to move into kind of a power-efficient mode, and so they are looking for the more advanced technology so they can save power consumption. And so, a lot of my customers want to move into N2, N2P, A16 quickly. We are working very hard to build the capacity to support them. Today is a little bit tight. Not a little bit, actually, today is very tight. I hope in the next year or the next two years we can build enough capacity to support this kind of a demand. The growth in wafer fab equipment in 2025 is expected to be stronger than the slight increase that's forecast for 2024, driven by a further recovery in the memory market and increased investments in 2-nanometers. TSMC 2Q24 earnings Regarding HBM-related tools, the demand for high-k metal gate tools remains very strong, in line with what other large players (like Applied Materials, SK Hynix, and Samsung) are experiencing. With the expectation for HBM demand to double in 2025, I see a very strong case for ASMIY to see accelerating orders for the rest of the year. Management already noted that they are expecting further HBM orders in the coming quarters, of which most will be scheduled for 2025 delivery. Another potential driver for further acceleration in order growth is faster AI innovation and adoption that drives higher atomic layer deposition [ALD] and epitaxy layer intensity. As adoption of high-performance and high-power-efficiency devices continues to ramp up, the demand for the latest 2nm node will grow accordingly, as GAA can reduce power consumption. In order for such devices to work, they need to be well supplemented by advanced memory chips, which will drive additional ALD layer intensity growth, and this will be a growth driver for the ASMIY Si Epi business. Yes. Thank you very much for the question. And it's nice that you saw my presentation in SEMICON. I think that's for Epi. As I mentioned right now, 2-nanometer is the first technology node for gate-all-around. And the second generation is going to be 1.6, 1.4. And the third generation would be 1.0, which most likely is going to be a CFET. So as you go to next generation gate-all-around, two things will happen. Shrink is going to happen. So from that point of view, you need -- more Epi is happening there because especially in the contact area, when you have a very small width, having better contact would be the best. And Epi has a very intimate contact. Instead of having contact with CVD layer and so on, actually Epi will have more and more intensity just, I think, from the contact point of view. We see that. And also, you're going to have -- for some customer, you're going to have like more superlattice layer. Instead of having four layers, you might go to six and so on. Company 2Q24 earnings Valuation At the current pace of order growth, ASMIY should have no issues achieving its FY25 targets. Year-to-date orders total around EUR1.4 billion, and y/y growth is ~28%. Assuming this growth accelerates to mid-30%, which is not hard to imagine as high manufacturing orders have not come in and ASMIY is still at the start of this upcycle, ASMIY could potentially generate ~EUR4.2 billion of orders and ~EUR4 billion of revenue in FY25 (beating FY25 estimates). If so, I think ASMIY achieving the high end of FY25 operating margin estimate (31%) is not implausible, and that translates to a net margin of around ~25% (31% operating margin -21% tax rate), which means ASMIY could generate ~EUR1 billion of net income, or an EPS of EUR20.31. I am sticking to my original view that ASMIY valuation will trade at a premium to history given the strong growth outlook. The problem is how much of a of a premium is justifiable. This is hard to quantify; hence, I think a scenario approach will give a better view of the potential upside. The past 3-year average is 29x. Using this as a starting point, the up/downside ranges from -10% to 40%. Risk Weak demand from China is something to watch for that could impact near-term order growth numbers. Management noted that sales in China have likely peaked in 1Q24, and sales in 2H24 are expected to fall. Depending on how big this decline is, it might cause the market to panic as it drags down overall performance. Conclusion In conclusion, my rating for ASMIY is a buy rating as it continues to see robust order growth. 2Q24 results showed more evidence that ASMIY is in an upcycle, driven by 2nm GAA and HBM applications. The near-term risk to watch for is the potential weakness in the Chinese market. 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. I take a fundamentals-based approach to value investing.I disagree with the common misconception held by many investors that low multiple stocks must be cheap. I look for companies that offer the best long-term durability at the most affordable prices. Consequently, I have a propensity to be drawn to companies with steady long-term growth, no cyclicality, and a robust balance sheet.Nevertheless, investing in successful company is risky because one may end up paying too much (this is where valuation matters). I firmly believe this, yet there are situations where the development runway is so vast that price matters much less in the immediate future. 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.

ASML Stock: Q2 Results, China Risks And The Recent Drop (NASDAQ:ASML)

Although the long term growth thesis for the company seems to be intact, these additional China risks cannot be ignored. On July 17th, ASML (NASDAQ:ASML) published its Q2 2024 financial results. Revenue came in at the high end of the company's guidance, and quarterly net bookings looked quite good at €5.6B, of which €2.5B was EUV (extreme ultraviolet, the company's flagship product). Also, the company's Q2 gross margin was at 51.5 percent, above guidance. Still, the company's shares dropped by more than 12 percent on that day, and the shares have continued their drop until today, where is it trading 20% off its recent all-time high. This had everything to do with China. The prospect of more US restrictions on China, which could not only impede machine sales but also revenue from service on existing machines, materially hurt the share price of ASML. In this article, I will zoom in on the 2024 Q2 results, the China risk, and try to assess what this means for ASML's future prospects. 2024 Q2 results My previous article about ASML of February this year, I focused on the fact that the company was likely to experience close to zero growth in 2024, but seems to be on the right track for strong recovery in 2025. I rated ASML shares as a hold, and in this article I will try to assess whether this thesis still holds. So without any further ado, let us skip to ASML's 2024 Q2 financial results, as they are listed in the company's investor presentation: Compared to ASML's outlook, these numbers look good, but unspectacular. There were no huge beats. But when compared to ASML's figures of a year before, there has been a slight decrease in almost every metric, as can be seen below: The company expects though that the difference between 2023 and 2024 will be erased in the last two quarters of the year and that 2024's results will end up more or less at the same level as the year before. These financial numbers were all more or less expected by the market, but a main reason for concern among investors was listed later in the investor presentation: 49 percent of ASML's net system sales in Q2 2024 were sales to China, which was on the same level as it was during the previous quarter. And the problem is that trade relationships between China on the one hand and the US and Europe on the other have not exactly improved recently. The China risk With almost half of ASML's revenue in the first half year of 2024 originating from China, it is important to keep current developments and politics in mind. Most notably, Donald Trump recently mentioned that he believes that Taiwan should pay the US for defense, and also incorrectly claimed that Taiwan stole the US chip business. These statements are of course not beneficial for the trust in tranquility of the semiconductor business, as the bulk of the world's chips are produced in Taiwan. But what might be a more serious threat is that the US government is considering tougher trade rules on China, directed at the chip industry. These possible measures cannot be seen in isolation from what has already become a trade war between the US and China. And ASML is one of the companies stuck straight in the middle. As a response, China plans its own investment package to simulate the domestic chip industry. Although no firm in China is currently able to produce a chip machine which is anyway near the level of sophistication of the ones that ASML produces (let alone EUV, which ASML is not allowed to ship to China), it is likely that China strongly wishes to replace ASML with a domestic producer. This will be especially true if the trade war is about to tighten, as both the Biden government and Trump have recently signaled. Whoever will win the upcoming US elections at the end of the year, it is likely that the trade war between the US and China will be moving up a gear. Investors were rightfully spooked. Any company that risks losing almost fifty percent of its revenue due to politics on which they have very little influence is likely one with elevated risk. During the Q2 2024 earnings call, ASML answered a couple of questions asked by participants concerning the China risks. Below, I listed and highlighted two parts of this call which I believe are most relevant with regard to the company's answers about China: Krish Sankar (participant): .. Obviously, the article today about the US administration looking to impose some severe trade restrictions using the foreign direct product rule on China shipments. .. Kind of curious what do you think about the potential implication for ASML from here? Christophe Fouquet (CEO ASML): Well, I think, first we don't comment on rumors, and there's a lot of rumors on that topic. .. before you look at China, 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. .. 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. As I interpret the CEO's response, Christophe Fouquet mentions that ASML views the semiconductor market as a global entity which has a specific level of demand, which is worldwide. For ASML, it does not directly matter in which geographical location this demand originates, as the global demand is likely to stay more or less the same. So if China had not invested a lot in the mature semiconductor market in 2023 and 2024 this demand would have been likely to originate from elsewhere. My own opinion about this statement is that it is likely to be true now, and has also been true at the past, but it is uncertain whether it will still be a valid worldview in the future. With more trade barriers being initiated, especially trade barriers for advanced technology, it could be that the world becomes more segregated, and the semiconductor market cannot be viewed as a single entity anymore. Adithya Metuku (participant): ... I just wondered if you could give us a sense for how big domestic Chinese demand is as a part of your backlog today, just to get a sense for the level to which it may contribute to revenues next year. ... can you give us some idea of what the US government would ideally like you to ship to China regardless of the rules that are in place today? And how does that compare to what you're shipping to China today? Any color on that would be helpful. Thank you. Roger Dassen (CFO ASML) Adithya, on the backlog, I think we said it before that our backlog is a little bit north of 20%, and that's still the case. So that's on the Chinese share in our backlog. .. I think what is very important to understand and Christophe said it at the beginning of the call, the way we look at the demand for our tools is not from a specific geography. In this case, China. ... We don't have a specific China element in our models. It is the global demand for wafers that drives our modeling. So, the backlog of orders from China is a bit higher than 20 percent. This is not insignificant, but much less than the almost fifty percent of sales being shipped to China during the last two quarters. Based on these numbers, it looks likely that ASML's exposure to China will drop in the future. But then again, please allow me to speculate on the 20 percent backlog figure for China. China is not ordering any EUV systems (which has been banned by trade rules already in place), but older systems. In fact, ASML CEO Christophe Fouquet recently advocated to let China focus on producing older generation chips. The mature systems to produce these chips are more likely to have a quicker time to produce and deliver since ASML already has so much experience with them, and they are less advanced. This makes it possible that that the time from order to delivery is significantly lower for these types of systems. So the 20 percent does not tell the whole story. 20 percent of backlog may well translate to more than 20 percent of sales every single quarter, if the orders are shipped quickly and the backlog is replenished. My own estimate is that the China risks of ASML are not going away. But it is unlikely that the company will lose half of its expected revenue overnight without it being partially replaced by some other demand. As ASML CEO Fouquet also mentions, there continues to exist a large demand for legacy chips, especially in the automotive sector, and for instance Europe is currently not even able to produce half of its own demand. So if exports to China would fall away someone else would likely take their place. The world view of ASML itself is an enticing one, though I'm not sure how long it will remain true. If China becomes a market which ASML isn't allowed to serve anymore, a significant part of ASML's market would seize to exist, which causes harm to ASML even if someone else starts producing legacy chips at scale. Another longer term risk of ASML is Chinese companies copying their products and knowledge illegally, although this is likely to be quite difficult. ASML is likely to suffer if the trade war gets worse, but with the expected growth for next year and with demand continuing to grow, I am not sure if the blows will be hard enough to have a major effect on the bottom line of the company. That is unless an extreme event happens which causes the complete seizing of exports to China overnight, which is not very likely. Domestic developments On the 'domestic' level in the Netherlands, there has been some good news recently. The government of the Netherlands decided to invest €2.5B to improve the business climate for the chip industry in the Eindhoven region, where ASML is situated. In this project, called 'Project Beethoven', the government will try to improve education, knowledge and spatial infrastructure in this region, as the chip industry has come up against limits of personnel, space and energy. Of course, this is good news for ASML, as this investment package shows that the government of the Netherlands is dedicated to support its chip industry, which had become somewhat unclear over the last couple of years, when companies repeatedly asking for government support. Share price, or how expensive does ASML look? When looking at ASML's share price development of 2024, it becomes clear that the recent drop was nothing to sneeze at, but did not erase the shares' upsurge of the first half of the year. ASML's shares are trading at more or less the same level as February this year, when I wrote my previous article and wrote about my hold thesis. Also, the company's forward P/E ratio is more or less that same. So yes, the company still looks expensive, but considering the potential future growth it could be well worth it. Takeaway As I also mentioned in my previous article about ASML, the company is having a year of transition - low or zero growth but strong investments which are likely to direct the company towards strong growth from 2025 on. This thesis has not changed. What has changed is the worsening trade situation between China and the US/Europe. As China has been the destination of almost fifty percent of ASML's sales during the first half of 2024, this seems to be a huge business risk for ASML. Or at the very least, the market seems to believe this, since ASML's shares dropped by 20% in a very brief time period during which these risks were highlighted. In this article I mentioned that, although ASML's backlog only consists of 20 percent of China orders, these orders could have an outsized impact on the company's revenue because these could be faster moving orders. Would all these orders fall away, it would be foolish to state that this does not impact ASML's bottom line. On the other hand, ASML itself is signaling that it doesn't worry too much about the China risk, as the company views the semiconductor and wafer market as a global entity with a demand level that is likely to be relatively independent of its geographical origin. This world view might be true with open borders and few trade barriers, but as trade barriers increase, the semiconductor market is risking becoming a more local one, or at least a segregated one where China and the US/Europe are on different islands. If ASML would be cut off from the China part of this market, there will almost surely be loss of revenue for the company. Of course, this is not the case yet, but current political and economic developments seem to signal a wider separation instead of an integration. And this will likely remain a risk for ASML and the rest of the semiconductor market for the coming years. I continue to give ASML a hold rating. Shares are trading at more or less the same price as when I gave my previous hold rating, in February this year. Even though geopolitical risks for the semiconductor markets seem more elevated compared to February, the time period to 2025, when strong growth is expected, has been significantly shortened. Also, technological advances such as AI are likely to continue to provide major tailwinds for semiconductor companies for the upcoming years. As ASML is a vital part of this industry, I believe the company has some bright years in front of it, but the current share price seems to reflect this. Hold. 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. I am a private investor from the Netherlands in my mid thirties. I have a very long term view and with my own investments I focus on a combination of stable, dividend-paying investments, and growth stocks. My favorite holding period is forever, but I am looking for new and interesting opportunities. I am writing for Seeking Alpha because I like to share my insights and enjoy the interaction about investing ideas. My writing is mostly about stocks I own, and others I am interested in.I have a university degree in engineering and professional experience in many industries, including government, engineering, supply chain, mobility and IT. But please do not read investment articles because the writer has nice degrees or fancy references. Read my articles because I provide an authentic, humble and realistic voice with some good old common sense.In the picture you can see my cat, who sadly died a couple of years ago. He has been the logo of Giesbers Investment Strategy since its inception. I chose his picture since my investment strategy mimics his behavior: more than 90 percent of the time, investment means doing nothing, and my cat was a genius at this. Also, during brief periods of time he could become very agile and active, just like what I should do when I notice great investing opportunities. Also, my cat was very picky with his food, which a good investor should also be with his holdings. Only the very best is good enough. Analyst's Disclosure: I/we have a beneficial long position in the shares of ASML either through stock ownership, options, or other derivatives. 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 Stock: I Bought The Dip, Here's Why You Should, Too (NASDAQ:NVDA)

Looking for a helping hand in the market? Members of Ultimate Growth Investing get exclusive ideas and guidance to navigate any climate. Learn More " Nvidia Corporation (NASDAQ:NVDA) investors who chased the recent enthusiasm surrounding NVDA's stock split have been battered. Accordingly, NVDA has plunged into a bear market decline, falling more than 25% from its June highs through this week's lows. Down, but not out, NVDA has still significantly outperformed the S&P 500 (SPX, SPY) and its semiconductor peers (SMH, SOXX), as the stock notched a total return of almost 150% over the past year. Consequently, I assess that the recent battering should be considered within the framework of a welcomed pullback rather than something more "sinister," prefacing a potentially debilitating bearish reversal. In my previous bullish NVDA article in May, I upgraded the stock and explained how I had misunderstood its bearish thesis. The Generative AI gold rush has transitioned from initial hype into sustained AI investment spending across several sectors and industries. It has also lifted hyperscaler spending to new heights as they race to develop the most cutting-edge AI models to maintain their competitive advantages. Google (GOOGL, GOOG) highlighted the surge in AI spending, as CapEx increased by more than 90% in Google's Q2 earnings release. The momentum is expected to continue, emphasizing the need to invest heavily in AI infrastructure to maintain its leadership. Google CEO Sundar Pichai's commentary underscores the monetization potential of its AI investments, articulating that they "have already generated billions in revenues and are being used by more than two million developers." ServiceNow's (NOW) solid earnings performance demonstrates the immense AI opportunities for leading SaaS companies. CEO Bill McDermott telegraphed the significant influence of its GenAI products, contributing to its solid execution, emphasizing that the "extraordinary results" wouldn't have been possible without GenAI. Consequently, I believe it sets the stage for Nvidia investors to have the confidence to buy significant dips in its stock price. I also expect Huang and his team to clarify the momentum of its upcoming product launch cadence, lowering execution risks in the second half. Unless you live in a cave, I believe you would have known about the criticality of the data center segment to the company's stellar performance. The segment accounted for over 85% of its FQ1 revenue base, as Nvidia's data center revenue surged by 427% YoY and 23% QoQ. As a result, investors need to temper their expectations of another similar increase, even as the company prepares for a pivotal second half as NVDA begins to ship its Blackwell platform. Nvidia emphasized that Blackwell has moved into "full production and forms the foundation for trillion-parameter scale generative AI." Nvidia's full-stack ecosystem approach is predicated on the hardware foundation "of Grace CPU, Blackwell GPUs, NVLink, Quantum, Spectrum, mix and switches, and high-speed interconnects." The company's robust software ecosystem underpins its competitive advantage, which is bolstered by the development of the Nvidia AI Foundry. As a result, the company is committed to scaling its partner ecosystem across the stack to "support AI-driven digital transformation projects." Notwithstanding my optimism, Nvidia investors must be prepared for an extended normalization phase, as its YoY growth momentum could have peaked in FQ1. As seen above, the company is expected to report a potentially sharp slowdown in revenue growth at Nvidia's upcoming FQ2 earnings release on August 28. However, the magnitude of the company's growth prospects is still remarkable, with revenue and adjusted EBIT anticipated to increase more than 100% in FQ2. Hence, I don't expect semiconductor investors to jump ship, even though they shouldn't expect similar valuation re-rating opportunities over the past two years (it gained almost 600% on a total return basis). Nvidia investors must also consider inherent risks to the company's thesis. Tight demand/supply dynamics in TSMC's (TSM) ability to produce its leading AI chips could hamper a more successful rollout of its next-gen architecture. The leading foundry has indicated tight supply through 2026, although I have not assessed imminent risks to Nvidia's shipments cadence. Arch-rival Advanced Micro Devices (AMD) is also anticipated to make further progress through its MI300 series AI chips in its attempt to unhinge Nvidia's dominance. AMD's open standards approach could be more favorable in helping customers avoid potential lock-ins and align with the FTC's Open AI models framework. As a result, it could weaken the ability of dominant players like Nvidia to lock up the AI ecosystem. In addition, the subsequent growth phase through AI factories and Sovereign AI is still nascent. Given the unprecedented surge in Nvidia's AI data center growth, the company increasingly relies on the segment to drive its valuation. Therefore, unanticipated execution risks in the emerging growth vectors could hamper its ability to maintain its current momentum, potentially impacting its valuation. Don't be fooled by glancing over NVDA's supposedly "expensive" valuation because that was what I did in the past. Ask yourself why NVDA has outperformed the market over the past two years. Is the market really that dumb that it couldn't differentiate between hype and reality? Furthermore, Nvidia's demonstrated revenue and profitability growth metrics should have silenced the bearish investors who thought it was only pure hype. The growth prospects for increased hyperscaler spending, Sovereign AI growth, and AI factories developments are needed to push the GenAI boundaries further. Coupled with NVDA's solid execution ("B+" earnings revisions grade), the AI chips leader also boasts best-in-class profitability. I urge investors to consider the growth-adjusted valuation metrics for such growth stocks. NVDA's adjusted PEG ratio of 1.25 is more than 30% below its tech sector median. In addition, it's also markedly below its 5Y average of 2.1. Therefore, I don't consider NVDA overvalued when incorporating its growth prospects. In contrast, the market seems to have already reflected potential execution risks in the company's next growth phase as it looks to broaden the AI growth vectors further. NVDA's price action remains incredibly resilient, with no signs of a bull trap. Previous pullbacks have led to solid dip-buying enthusiasm at its lows in October 2023 and April 2024. Subsequent rallies followed, helping NVDA to maintain its incredible market outperformance. The stock has recently dropped into a bear market following its split in June 2024. However, it shouldn't be construed negatively, as the stock remains in an uptrend bias. There's a possibility of a bottom above the $110 level, although we don't have a bullish reversal validation yet. A further drop to a support zone between the $75 level and $110 level is also possible, but not my base case for now. As a result, I view the pullback in NVDA constructively, corroborated by the stock's remarkable "A+" buying momentum. Stock rating: Maintain Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing, unless otherwise specified. Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something significant that we didn't? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

STMicroelectronics Stock: Looking Beyond 2024 (NYSE:STM)

Despite downside risks, STM's net cash position, buyback program, and long-term growth prospects make it an attractive buy with a target price of €48.6 per share. In early January 2024, we analyzed three main downside risks to STMicroelectronics (NYSE:STM). Despite a guidance cut in May, we (still) reported an Attractive Risk/Reward. At that time, our buy target incorporated further market deterioration and a positive view on the industrial and automotive segments that we believe were sufficiently derisked. On 25/07/2024, STM reported its Q2 results, and the stock price was down by 12% when writing. Source: STM Q2 results presentation - Fig 1 Q2 Earnings Results STM reported Q2 net sales of $3.23 billion, with a gross margin of 40.1% and a core operating profit margin of 11.6% (Fig 2). Cross-checking Wall Street analyst estimates, the company's Q2 EBIT was 12% above consensus. Compared to last year, STM's turnover decreased by 25.3%, which was mainly due to OEMs. On a quarterly sequential basis, sales decreased by 6.7%. Going down to the P&L assessment, the company's gross margin was aligned with STM's previous guidance. However, we should note an 890 basis points decrease compared to Q2 2023, mainly due to product MIX and higher unused capacity charges. Looking at the H1, on a divisional level, the Power & Discrete and MCUs segments were the negative outliers for the company. Q1 and Q2 2024 were not positive quarters. Source: STM Q2 press release - Fig 2 Adjusting Estimates with Pros and Cons Given the size of the previous cut and the bottoming out in end markets seen by competitors, we believe it was the last guidance adjustment. Since management statements in mid-March indicated a stable demand, we believe demand worsened significantly towards April. The first quarter is not usually the strongest for STM, and in the scenario, this negative trend was confirmed in Q2. In this environment, this decline might signal darker times on the horizon. H1 was a soft semester; however, we are more concerned about the Q3. Regarding Q3 sales, the CEO guided a $3.25 billion in results at the mid-point. This implied a minus -27% on a yearly level and a plus 0.6% on a quarterly basis. Our Q3 sales projections were set at $3.6 billion. Therefore, in our model, we adjust sales by a minus 5%; Going down to the P&L analysis, the company presented a 38% Q3 gross margin outlook, compared to an average consensus estimates of 40.9%. Assuming consensus OPEX is unchanged, this would imply a Q3 2024 core operating profit around 20% below consensus. Therefore, this might pressure STM's shares in the upcoming days. In numbers, these 350 basis points of margin deterioration are reported as a consequence of unused capacity. There are two considerations to report: 1) we positively report a resilient price on STM product offering, and 2) on a negative note, the company's inventories increased to $2.8 billion (or 132 days compared to a ten-year average of 109 days). This might further drag on STM's valuation. Having said that, in our previous estimates, we already incorporated a margin decline. Therefore, our core operating profit moved from $2 billion to $1.9 billion. The new 2024 company's guidance implied Q4 sales up by 8%. Applying the new company's outlook, we would expect at least a 20% downgrade to the 2024 consensus EBIT. The CEO highlighted that "during the quarter, contrary to our prior expectations, customer orders for Industrial did not improve, and Automotive demand declined." Here at the Lab, we have good coverage of the EU auto industries, and having listened to Stellantis and Renault's analyst calls, we are now more cautious. That said, there are also optimistic takes to report: STM's net cash reached $3.20 billion compared to the $3.13 billion achieved in Q1 (Fig 3). In the meantime, the company paid dividends for $73 million and executed a $88 million buyback. More than 10% of STM market cap is in cash equivalents; Post Q2 guidance cut, we still believe STM is at an infection point, and the negative price reaction is now incorporated into the share; Still related to the capital priorities, STM adjusted its CAPEX investment and is progressing with a buyback (Fig 4). During the quarter, the company announced the launch of a new repurchase plan program with a value of up to $1.1 billion to be executed within a three-year period. Fig 3 Fig 4 Valuation Following the STM outlook revision, we see a good entry point. Here at the Lab, we use our 2025 earnings per share estimates to better capture the company's long-term exposure to structural growth areas such as the energy transition, data centers, and microcontrollers. For this reason, STM valuation continues to be attractive. Even if we report lower sales and EBIT in 2024, mainly due to lower volume, our valuation is set for 2025 numbers. Our 2025 sales and EBIT projections are at $15.5 and $3 billion, respectively. This is based on 1) expectations for a return to a low to mid-single-digit growth in sales, 2) the World's first fully integrated silicon carbide industrial facility for high-volume 200 mm modules and power devices. In our 2025 estimates, with an EPS of $2.7 (and adjusting for the cash components), STM trades at a P/E of 11.7x. This is much below respect to a five-year average of > 18x. In addition, we continue to report a higher discrepancy related to PHLX Semiconductor Sector Index performance. STM peers trade on average at a 23x P/E multiple. Continuing to apply an 18x P/E multiple aligned with the company's historical average (Fig 5), we confirm our buy rating target of €48.6 per share($52 in ADR). Upside risks also include AI market potential and the higher use of microprocessor products in daily life. Fig 5 Risks As already reported, STM downside risks include price changes, weakening of the $/€ exchange rate, comps capacity growth, imbalance supply/demand, utilization rate, and technology product life cycles. The company is also exposed to different types of customers (Fig 6). Other risk factors are lower GDP growth rates and the ability to deliver new image-sensing products to smartphones. In addition, our team continues to see Industrial MCU as the segment with the most pricing risk. This is due to elevated inventory levels. That said, we believe the Industrial cycle has reached a trough, and after the second guidance cut, the new estimates are largely derisked. Fig 6 Conclusion Q2 results were mixed, but the company's price product offering was supportive. We believe STM is at an infection point and could potentially be re-evaluated from multiple perspectives. Our buy rating is then confirmed. 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. Buy-side hedge professionals conducting fundamental, income oriented, long term analysis across sectors globally in developed markets. Please shoot us a message or leave a comment to discuss ideas.DISCLOSURE: All of our articles are a matter of opinion, informed as they might be, and must be treated as such. We take no responsibility for your investments but wish you best of luck. Analyst's Disclosure: I/we have a beneficial long position in the shares of STM, STMEF either through stock ownership, options, or other derivatives. 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.

Everspin Technologies Stock: Shorts Have Come Looking (NASDAQ:MRAM)

The bear argument for MRAM is not that persuasive, but long MRAM does not have strong arguments either. Everspin Technologies (NASDAQ:MRAM), the leading provider of magnetoresistive RAM or MRAM, is scheduled to release its Q2 FY2024 report on July 31 after the market closes. The last three reports all fell short in one way or the other and were thus followed by double-digit declines in the stock. This has driven down MRAM's market cap with the stock hitting a new 52-weeks low as recently as June 4. Some might want to bet another selloff might happen again, and there has been an increase in short interest recently, but that is no sure bet. Why will be covered next. MRAM has recovered recently after a major decline A previous article from last January took note of how MRAM had benefited from investor interest in potential artificial intelligence or AI plays, which pushed up the price of the stock. On the other hand, the stock had reached a point where it was at risk of falling below support after an extended rally. This could open the door for lower stock prices, especially if an AI-induced boost in demand failed to materialize. Accordingly, the article concluded MRAM was hanging on a cliff and therefore rated it a hold. Half a year has passed since the article in January and MRAM has lost about a quarter of its value after the stock closed at $6.35 on July 24 to give MRAM a market cap of $136.65M. The chart above shows why the prior article was right to be on the lookout for a breakdown below support because that is what happened to the stock. Note how the stock was held aloft for weeks by support around $8.50 or so until February 29, a day after the release of a weak Q4 FY2023 report caused the stock to fall below support after many failed attempts. The Q1 FY2024 report that followed also fell short and the resulting decline in the stock eventually resulted in a 52-weeks low of $5.54 on June 4. However, the stock rallied from then on, before MRAM fell by 8.8% on July 19. MRAM announced the departure of its CFO that day, and the stock sold off, even though the departure was not accompanied by any material changes. MRAM has lost 29.8% YTD. Shorts are still few in number, but growing very fast However, other factors also appear to have contributed to the drop. In the days preceding the drop on July 19, the stock managed to close at $6.74 on July 16. This is the highest close since May 1, before the stock dropped 13.1% on May 2 after the Q1 FY2024 report came in soft. The stock stalled for a couple days to hit an intraday high of $6.83 on July 18, but the stock was unable to close any higher than $6.74 before the stock dropped on July 18. This likely did not happen for no reason. It's therefore worth mentioning that the stock fell in the past 12 months from a high of $10.50 in September 2023 to a low of $5.54 in June 2024. Note that the stock hit $10.50 several times in the September-October timeframe. More importantly, the 23.6% Fibonacci retracement of $10.50 to $5.54 is $6.71, which is just $0.03 from the aforementioned $6.74 or the most recent closing high. In other words, MRAM appears to have encountered resistance, which is probably why the stock fell like it did in the past few days. This suggests a few things worth noting. There are those who believe the stock has yet to hit bottom after the decline in the past year, despite the recent rally. Otherwise, the bears would not have picked a Fibonacci retracement level to become a seller. This helped drive down the stock price as soon as it came close to the selected Fibonacci level. In addition, it is worth noting that short interest is on the rise. According to the Nasdaq, short interest rose to 610K shares on 7/15/2024, up from 61K on 2/29/2024 or ten times as much. Keep in mind that February 29 is the day MRAM fell below support after the stock sold off in the wake of a weak Q4 FY2023 report as mentioned earlier. Shorts have been upping their bets ever since. Still, it is worth mentioning that short float is low at just 3.5%, which suggests overall sentiment towards MRAM is not all that negative. Shorts are strong in their conviction and are placing bets accordingly with another report scheduled soon, but the vast majority of market participants do not appear to believe MRAM is worth a short. Remember though that there are a couple of weeks between 7/15 and 7/31 for short interest to rise even further. What shorts may be looking at MRAM is scheduled to release its upcoming Q2 FY2024 report on July 31, and the shorts seem to believe the Q2 report will turn out like the preceding ones based on the increased number of shares sold short. Shorts are likely to remember how the stock fell by double digits after each of the last three quarterly reports. This includes a 13.1% drop after the Q1 FY2024 report on May 1, an 11.4% drop a day after the Q4 FY2023 report on February 28 and another 11.4% drop a day after the Q3 FY2023 report on November 1. If this pattern holds on July 31, shorts can expect to be rewarded for multiplying their bets in the lead-up to the Q2 report. Q2 FY2024 (guidance) Q2 FY2023 YoY (midpoint) Revenue $10-11M $15.7M (33.12%) GAAP EPS ($0.09-0.14) $0.18 - Click to enlarge Source: MRAM Form 8-K Expectations are that Q2 results will come in roughly at the midpoint of guidance from MRAM, which calls for a GAAP loss of $0.09-0.14 on revenue of $10-11M. This Q2 guidance, together with the Q1 results, was much worse than expected, which helps explain why the stock dropped after the Q1 FY2024 report. The table below shows how the numbers have gotten worse. (Unit: $1000, except for EPS) (GAAP) Q1 FY2024 Q4 FY2023 Q1 FY2023 QoQ YoY Revenue 14,430 16,706 14,846 (13.62%) (2.80%) Gross margin 56.5% 58.1% 56.8% (160bps) (30bps) Income (loss) from operations (600) 1,587 696 - - Net income (202) 1,968 761 - - EPS (0.01) 0.09 0.04 - - (Non-GAAP) Adjusted EBITDA 1,910 3,557 2,317 (46.30%) (17.56%) Click to enlarge Source: MRAM Form 8-K The numbers are expected to get better at MRAM Shorts may be betting against it, but MRAM is expected to announce better numbers when it releases Q3 guidance on July 31. This is in line with what MRAM itself called for earlier, which is a stronger H2 compared to H1. From the Q1 earnings call: "Looking ahead, we expect to see flattish product revenue in the second quarter compared to Q1 due to continued weakness in Asia Pacific and in industrial, consumer and auto end markets. However, we expect a ramp in our Toggle and STT-MRAM design wins in the second half of 2024. Our PERSYST industrial STT-MRAM product line has demonstrated consistent strength as it has continued to gain momentum in terms of design wins. We continue to expect to begin translating these design wins into revenue starting in the second half of 2024." Source: MRAM earnings call MRAM is expected to improve on Q2 by breaking even in Q3, give or take one or two cents. Q2 is seen to be the low in the current downturn with continued improvement in Q4 and beyond. Nevertheless, MRAM is most likely to end FY2024 with a GAAP loss since the second half improvement is unlikely to be enough to offset the losses in the first half. On a TTM basis, MRAM has earned $0.38 on revenue of $63.35M, which means MRAM trades at a P/E ratio of 16.7x with the stock at $6.35. In terms of sales, MRAM is valued at about 2.2x sales with TTM sales of $63.35M and a market cap of $136.65M. MRAM is also valued at about 2.4 times book value of $2.61 per share and a stock price of $6.35. These are all below the sector median. MRAM has not had much success over the years It's also worth mentioning that MRAM's ability to generate a profit is suspect. For instance, the balance sheet shows an accumulated deficit of $137.85M at the end of Q1 FY2024. In other words, MRAM has lost more than it has earned over its life. MRAM has been forced to raise capital to make up for the shortfall, which can be seen on the balance sheet with $193.64M of additional paid-in capital. Keep in mind that this is for a company that has been around for a fairly long time. MRAM was spun off from Freescale Semiconductor as a separate entity in 2008 and its roots can be traced back all the way to the nineties when Freescale was part of Motorola. So MRAM has had plenty of time to make the numbers work, but it does not have much to show for after all these years even if the numbers have gotten better. MRAM finished Q1 FY2024 with cash and cash equivalents of $34.8M, partially offset by $5.58M of total debt. Could MRAM do better in the future? As mentioned earlier, MRAM went on a rally last year, starting in May, which is when AI interest spiked and the search was on for potential AI plays. This rally petered out after an AI-induced boost in demand failed to materialize. Instead, MRAM reported a decline in demand. However, MRAM could still benefit if AI use moves towards the edge where MRAM could play a bigger role as a supplier of non-volatile memory. MRAM, the technology, may also find increased uptake in radiation hardened and space applications where memory that does not rely on a charge can have its advantages. The defense sector is an area where MRAM may find additional demand. MRAM, the company, recently announced a new contract with QuickLogic Corp (QUIK) that will see the former provide its IP to the latter. Yet, it is fair to say that MRAM, the technology, and MRAM, the company, are niche players. In theory, they may find additional use cases, but there are no guarantees here. Both have been around for a long time and neither has been able to move beyond a niche space. This can change in the future, but that is how it is right now. Investor takeaways MRAM is scheduled to release its Q2 FY2024 results and Q3 FY2024 guidance on July 31. Shorts are betting the upcoming report will fare as well as the preceding three, which is to say not very well. This is why the bears have greatly increased the number of shares sold short heading into the upcoming report. The shorts are looking for an encore on July 31 after double-digit drops in the stock following the release of the last three reports. The Q2 numbers are expected to be the worst so far during the current downturn, but the numbers are expected to improve with Q2 expected to be the trough. Still, MRAM has seen demand come in weaker than expected and bears seem to be betting that this will continue to be the case when MRAM releases its latest guidance. However, the bear case for MRAM is not all that strong. True, all the recent reports have been followed by major selloffs, but that alone does not necessarily mean the same will happen to the upcoming report. If you exclude disappointing quarterly reports, then there is not much else to warrant being bearish. Valuations, for example, may not be a bargain for a stock like MRAM, but they're not excessive either. While the last guidance was a huge letdown, it was likely an aberration. The coming guidance is likely to be much better. The rather sudden departure of the CFO shortly before the upcoming report is likely to strengthen the conviction of the shorts and short interest may now be much higher, but that would be speculation. People may think otherwise, but, officially, he left to pursue other opportunities. There is not enough here to work with. On the other hand, there is not much to be bullish about when it comes to MRAM, the company. MRAM's track record has been rather underwhelming. MRAM has done better more recently, but that does not change the fact that it has lost more money than it has made. The need for future capital infusions is likely, especially given past history. MRAM, the company, and MRAM, the technology, have yet to show they can be anything more than a niche player. There are applications where MRAM can be used and it is possible the market will improve in the future, but MRAM demand remains limited. This limits MRAM's growth potential and the need to bet on the stock by extension. It's also not out of the question that MRAM, the technology, may be superseded down the road by an alternative form of non-volatile memory of which there are many in the works. Both the bear and the bull case for MRAM can be debated and I am therefore neutral on MRAM. Shorts have upped their bets greatly, but they are taking a risk betting against a stock that has already fallen by as much as MRAM has in the past 12 months. There are after all reasons why the vast majority has opted not to sell MRAM short. The majority opinion is likely to be correct. Welcome to my author's site. As an avid follower of SeekingAlpha, I take great interest in articles posted as the subject matter is often something that appeals to me. However, I will sometimes encounter an article that I might not agree with. My purpose is to present an alternative view to readers that they may want to take into account. I hope you find my articles interesting and informative. 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.