SSNLF - Back To The Future 3.0 - Reviewing Our Semi Calls For Q1

2023-04-11 15:07:10 ET

Summary

• We end each quarter reviewing our work in the semi space - discussing our best calls and where we could’ve done better.
• Our favorite semi stocks this quarter have been Nvidia Corporation and Advanced Micro Devices, Inc.
• We’ve been more constructive on DRAM and HDD industry dynamics this quarter, upgrading Seagate Technology Holdings plc and maintaining a buy on Micron Technology, Inc.
• While we operate in a forward-looking market, it's necessary to constantly review our calls and fine-tune our process for the next quarter.

Semiconductor companies started this year on a positive note. We make a point of reviewing our ratings and thoughts in the semi-space at the end of each quarter to fine-tune our process and yield the best results. We've seen weaker spending trends continue this year, pressuring PC and smartphone end-market demand and spilling into data center markets as well. Still, we see attractive opportunities in the semi-space toward 2H23. This quarter, we've focused on upgrading and maintaining our bullish sentiment on several semis that we expect to outperform even if volume unit demand does not meaningfully recover in 1H23.

Best calls: AMD & NVDA

Since we started covering the semi-space, Advanced Micro Devices, Inc. (AMD) and Nvidia Corporation (NVDA) have been favorites at TechStockPros for our followers and us. While we were bearish on both stocks for the majority of 2022, we upgraded both over the past few months and revisited AMD with a downgrade last month on a short opportunity.

AMD:

We upgraded AMD to a buy from a strong sell back in November based on our belief that the worst of the weaker PC and GPU demand was priced into the stock. Still, we continued to expect the company's data center share gains against competitor Intel Corporation (INTC) to moderate. We argued that the pullback opportunity presented an attractive entry point into the stock at a discount. We downgraded AMD stock to a sell in March of this year, seeing a short opportunity; the stock was up roughly 63% between our buy rating and recent sell rating. Since our downgrade, AMD stock is down 3%, while the S&P 500 (SP500) is up about 5% during the same period. The following graph outlines our rating history on AMD.

We now expect AMD's real demand recovery in the PC market and share gains against INTC to lag behind Wall Street expectations. We believe the stock has captured the expectations of demand recovery and share gains, creating an attractive sell opportunity before the stock drops again due to the continued PC slump. We also highlighted that we don't believe AMD will ride the AI boom as NVDA has. AMD was one of our favorite stocks to cover this quarter, as it presented such an attractive short opportunity.

NVDA

Turning heads to NVDA, we upgraded the stock back in late October; since, the stock is up 109%, outperforming the S&P 500, up 6% during the same period. We expect NVDA to outperform the peer group toward 2H23, as the company puts its GPU-crypto scandal behind it and rides new tailwinds. We believe NVDA's investment in AI computing chips is paying off as the public wakes up to AI capabilities with the hype of OpenAI's ChatGPT. We expect NVDA's NVIDIA DGX solutions and other AI enterprise offerings to play a bigger role in driving revenue growth going forward.

The following graph outlines our rating history on NVDA.

Spotting trends

The storage space had a rough 2022, with Western Digital Corporation (WDC), Seagate Technology Holdings plc (STX), and Micron Technology, Inc. ( MU ) dropping significantly over CY2022. We expect 2023 to be a recovery year for the DRAM industry as inventory correction cycles near their end. MU is accelerating the inventory correction cycles through CapEx reductions and cutting down on memory chip production. MU further reduced its FY2023 CapEx plan and expects to invest around $7B in FY2023, down 40% from last year. Samsung Electronics Co., Ltd. (SSNLF) joined the production cut wagon alongside MU and SK Hynix after warning of a significant 95.7% Y/Y drop in its operating profit for 1Q23. The company pledged to reduce memory chip production to a "meaningful level." We believe this is good news for the memory industry and expect memory industry dynamics to improve towards the end of the year. Hence, we maintain our buy rating on MU. The following graph outlines our rating history on MU.

We've also upgraded STX this quarter, driven by our belief that HDD industry demand-supply dynamics will improve toward 1H24. STX is exposed to both HDD and flash markets, with higher exposure to the former. Hence, we expect STX to outperform due to increased adoption of higher capacity HDDs from cloud customers as well as improved ASP for STX's 20TB-plus family product line and 26TB SMR.

Timing is everything; where we could've gone better

We operate in the business of calculated predictions and follow the motto of buy low, sell high . We're revisiting our sell-rating on WDC after Samsung announced it'd be cutting production on memory chips. We've maintained a sell-rating on WDC, expecting the company's gross margins to be pressured in its flash business due to weaker PC and smartphone demand. Now, we're seeing a clearer road to recovery for the memory and storage markets as inventory correction cycles are accreted by Samsung's production cut. Still, we expect flash demand to remain weaker toward 2H23 due to the weaker consumer spending environment.

The following graph outlines our rating history on WDC.

What to do with the semis

We believe the semi-space is a forward indicator for the broader market, and we see the semi-space rebounding toward the end of the year. Hence, we believe monitoring the semi-space is more crucial than ever. We approach the semi-industry by understanding demand-supply dynamics; hence, we've maintained our bullish sentiment on MU and NVDA and upgraded STX. We've also continued to be bearish on WDC and downgraded AMD back to a sell. We'll continue to revert back to our predictions for the future and review our ratings quarterly.

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