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Semiconductor Watch List: Intel, Nvidia, AMD

Some are beginning to wonder whether chips have already peaked.

The benchmark PHLX Index started the week at 3,434 this week before Monday’s wild session, which saw it end up 1.3%.

As of the end of trading Friday, the index had lost 11.94% for the week, and 12.96% on a year-to-date basis.

Trouble brews in the sector, as the major semiconductor manufacturers are looking to expand their chip-making facilities at a time when semiconductors are in high demand and short supply.

Taiwan Semiconductor Mfg. Co. Ltd. 

The world's biggest contract chipmaker  (TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report and a lead supplier for Apple  (AAPL) - Get Apple Inc. Report iPhones recently posted record quarterly profits and forecast a record boost in capital spending to meet the surge in global semiconductor demand.

“TSMC said earnings for the three months ending in December rose 16.4% from last year to just of $6 billion, with revenues surging 24.1% to $15.75 billion as the group ran its global chipmaking fabs at full capacity in order to meet unprecedented demand,” reported TheStreet’s Martin Baccardax.

Taiwan Semiconductor also recently announced it would boost capital spending to between $40 billion and $44 billion this year, a 33% increase from 2021 levels, and doubled its compound annual growth rate targets for revenue to between 15% and 20% amid what it called a "multi-year industry megatrend" for global semiconductor demand.

“Our fourth quarter business was supported by strong demand for our industry-leading 5-nanometer technology,” said CFO Wendell Huang. “Moving into first quarter 2022, we expect our business to be supported by HPC-related demand, continued recovery in the automotive segment, and a milder smartphone seasonality than in recent years.”

Investors are weighing in with concerns that the major chip makers are getting too zealous about expanding their operations, with many saying demand for chips will subside sooner than expected by industry leaders.

For example, Bernstein analyst Stacy Rasgon, in a recent research note, suggested the chip sector has already entered its “peak cycle.” While “demand remains off the charts” because of shortages and “company sentiment is among the most positive we have ever heard,” Rasgon has started “being nervous for what 2022 might hold.”

For instance, “auto semis are over shipping normal content trends by over 40% at the moment, and some end markets that showed substantial over ship are beginning to show correction,” Rasgon said..

“For all the talk of lean channels, distributors appear to be actively building substantial inventories,” Rasgon added. “And there has been incremental talk of supply chains, while still tight, beginning to show signs of normalization, normally a signal of a turn.”

With supply and demand still a big issue, what semiconductor stocks are TheStreet’s experts tracking this week? Here’s a review.

Intel

Intel  (INTC) - Get Intel Corporation Report  has been “dead money” for the past four years as it struggled in the hot semiconductor sector,” said Real Money's Brad Ginesin. “But in today's market this is a good thing as froth gets squeezed out of over-loved and over-owned stocks.”

The company has been out of favor as market-share losses have chipped away at its dominance in PCs and servers. Plus, slow-to-market microprocessors have impacted Intel's product roadmap and competitive position, exposing management miscues.

“After years of missteps, there are signs that Intel is at the beginning stage of a recovery,” Ginesin said. “The new CEO, Pat Gelsinger, has laid out a competitive product roadmap over the next few years.”

The shares may have a catalyst by mid-year when Intel is scheduled to IPO their Mobileye unit. “In 2017, Intel purchased the autonomous driving company for $15 billion, and expects to float a stock offering that values the unit at $50 billion,” Ginesin noted.

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Meanwhile, a highly-awaited analyst day on Feb. 17 could shift the narrative toward a cohesive turnaround story. “This year's Wall Street expectations are low in anticipation of lower profit margins,” Ginesin added. “The de-risked numbers -- $3.70 in EPS on flat revenues, down from $5.30 last year -- can be considered a trough earnings year ahead of a resumption of growth in 2023.”

Cowen's semiconductor analyst has an optimistic take on Intel: "Despite the share loss challenges, we believe the company is taking appropriate steps/investment to turn the battleship, reaccelerate technical timelines, and slow share loss."

The firm believes if Intel executes, they can reinvigorate its competitiveness in time.

With all those issues in play, Intel's turnaround should take time.

“The company will have a solid fundamental base to build on as it undergoes a recovery,” Ginesin said. “For now, the near-term picture looks solid for demand and expectations are low. Earlier this week, Citigroup's analyst put a positive catalyst watch on the shares, citing channel checks that indicate a recent surge in enterprise demand and notebook orders.”

With its reasonable share price, engineering talent, product breadth, and solid new management, Intel can stage a turnaround that most on Wall Street are not positioned to make.

Nvidia 

Nvidia  (NVDA) - Get NVIDIA Corporation Report shareholders are having a rough go of it in 2022, with NVDA down 20.5% on a year-to-data basis.

Still, Nvidia is expected to weather any further financial storms, with size and performance on its side, experts say.

“At last check, semiconductor company Nvidia had a market cap of $682.8 billion,” said Bernard Zambonin, a guest contributor to TheStreet.com. “That makes it No. 9 on the list of the 10 most valuable companies in the world.”

In November 2021, the company's stock reached an all-time high with a share price of $347 and a market cap that exceeded $800 billion. NVDA grew more than 125% during 2021. And looking at the past five years, the stock has grown by nearly 1,000%.

“If Nvidia can maintain the strong growth it has seen over the last few years, it's possible it could become the next company whose market cap surpasses $1 trillion,” Zambonin said.

Even so, many analysts think Nvidia's valuations are already stretched and some are wondering if the company is really worth $1 trillion.

“Like many technology companies, the market prices NVDA primarily on its potential, rather than the actual units the company has produced,” Zambonin noted.

In its favor, Nvidia has direct exposure to three major tech markets:

  1. The global semiconductor market, which is expected to reach $803.15 billion in 2028 at a compound annual growth rate (CAGR) of 8.6%
  2. The gaming market, which has been valued at $155 billion and is expected to grow at a CAGR of 14.5% by 2026
  3. The artificial intelligence (AI) market, which is expected to reach $62 billion in 2022 and to grow at a CAGR of 36% to $641 billion by 2028.

Looking at Nvidia's valuation, it's difficult to conclude whether its high multiples actually reflect its full growth potential in these markets.

“NVDA currently trades at a price-to-earnings (P/E) multiple of 83.4 times, which indicates that the market is willing to pay nearly double the profit of competitor AMD  (AMD) - Get Advanced Micro Devices, Inc. Report, which trades at a P/E of 40 times, and eight times the profit of Intel, which trades at a P/E of 10.6 times,” Zambonin said.

However, one of the factors that may help explain Nvidia's stretched P/E ratio is the company's profitability.

“Nvidia has a very high gross margin of 64%,” he added. “That's higher than its main peers like Qualcomm  (QCOM) - Get Qualcomm Inc Report at 57%, Intel at 56%, and AMD at 46%. Better margins might mean more predictable or stable earnings going forward.”

Nvidia's latest earnings report also showed solid earnings and robust guidance for 2022. That led the market to send its stock to an all-time high and its market cap past the $800 billion mark

“Even if its current valuations are stretched, it wouldn't surprise me if the market reaction to Nvidia remains favorable, driven by the potential of the growing markets it serves,” Zambonin said.

“In the short term, the market is punishing high-valuation stocks in the expectation of rising interest rates,” he noted. “But in the long term — say, within five years — Nvidia should be on track to becoming a trillion-dollar company.”

Advanced Micro Devices 

Advanced Micro Devices  (AMD) - Get Advanced Micro Devices, Inc. Report was hit with a downgrade to neutral from Piper Sandler, primarily due to a slowdown in the personal computing market and the ongoing vulnerability of technology stocks.

Here’s how Piper put it:

“Our downgrade is driven by a combination of factors:

1) Our concerns about a slowdown in the PC market during 2022,

2) The earnings and growth headwind from closing the Xilinx deal, and

3) The broader market dynamics around high-multiple, high-growth technology stocks,” Piper analyst Harsh Kumar wrote in a commentary cited by CNBC.

Yet AMD could get some good news in other quarters.

“Data center demand, blue-chip clients and the $35 billion takeover of Xilinx should drive meaningful gains for AMD this year, KeyBanc analysts said,” Martin Baccardax reported on TheStreet.com.com.

KeyBanc Capital Markets analyst John Vinh lifted his rating on AMD to 'overweight', with a price target of $155 per share, on the basis that demand for its data center chips should "meaningfully outpace" growth in the broader industry, particularly given the links to flexible CSP contracts with tech giants Microsoft  (MSFT) - Get Microsoft Corporation Report and Meta  (MVRS) - Get Meta Report.

AMD's pending takeover of Xilinx, which it expects to complete by the end of the current quarter, will add a new dimension of programmable FPGA semiconductors to the chip maker's arsenal, Vinh noted, which will "position it well for the long-term transition to heterogeneous compute architectures."

"We view AMD as one of the most compelling server growth stories in the semiconductor industry, given its outsized exposure to CSPs vs. enterprise," said KeyBanc's Vinh. "Additionally, we expect AMD to significantly outpace cloud industry growth in 2022 of high teens, as we expect continued market share gains." 

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