WDC - Back To The Future: Review Of Our Semis Work

Summary

• We end the July quarter having written about 20 of our favorite semiconductor names, and this article studies how our ratings played out.
• We got a lot of backlash on our bearish stance on, NVDA, AMD, WDC, and MU, among others, but the stocks did drop, consistent with our belief.
• We were picky regarding our bullish calls, but the names that qualified included MPWR and two EDA giants: SNPS and CDNS.
• We work in the business of educated predictions, and in turn, it is necessary for us to quarterly review the accuracy of our predictions and financial advice.

Over the past few months, we've published ratings on 20 of the world's most important semiconductors. We end every quarter by reviewing our ratings and studying how each rating played out post-earnings. This year has been a rollercoaster for the industry, to say the least, with the Russian invasion, China's COVID-19 lockdowns, GPU crash, weakening consumer spending causing declines in PCs and smartphone sales, and inflationary pressures. While we operate in a very forward-looking market, we also like to review what we did well and learn from what we could've done better.

Our Favorite Calls:

We predicted a significant downside in NVIDIA Corporation ( NVDA ) and Advanced Micro Devices, Inc. ( AMD ) and received a lot of angry comments, including, "Like Jesus, you will be crucified. Sell all you can, genius." Since we published our sell ratings, both companies have declined significantly; NVDA deprecating 44% and AMD around 25%.

NVDA:

We called NVDA's exposure to crypto-mining GPUs in late April, arguing that NVDA has dramatically understated its GPU exposure to crypto-mining. We estimated the exposure range from $1.5B to $1.8B per quarter. Our central bearish thesis at the time was based on NVDA's exposure to crypto-mining GPU sales that we predicted to decline due to Ethereum's switch from Proof-of-Work to Proof-of-Stake ("PoS"). Indeed, consistent with our belief, NVDA's July quarter reflected a haircut of $1.8B in the gaming segment of the business.

Sell-side now preaches that the weakness has been priced into the stock, but we think that's far from the case. Ethereum announced they're completing their transition to PoS this September, and we think this will continue to harm NVDA's GPU inventory. We also believe there will be a huge wave of selling once crypto-mining GPUs hit the secondary markets. Our newest concern for the company is weakness in its data center segment. We expect data center demand to normalize due to the weakening consumer spending. We also continue to be worried about the U.S. ban limiting sales from American semis to China. We believe there's more downside ahead and maintain our sell rating.

The following is a graph of NVDA's stock performance since our first piece in April.

AMD:

Our sell rating on AMD was also a bullseye in more ways than one. In the case of AMD, we were bearish on the stock based on our belief that AMD's PC total addressable market ("TAM") was inflated and didn't reflect the reality of the market. We expected PC demand to decline; indeed, the PC market saw its worst decline in nine years. In addition to the continued weakening of PC demand, we predicted a decline in AMD's GPU demand. Similarly to NVDA, we believe AMD was exposed to crypto-mining-related GPU sales and would also be affected by Ethereum's switch to PoS. AMD has dropped around 49% YTD. We don't expect the stock to rebound in the near term.

The following graph outlines AMD's stock performance and our published ratings.

We also had sell ratings on Western Digital Corporation ( WDC ) and Intel Corporation ( INTC ).

WDC:

Western Digital Corp. is another sell that played out. WDC has dipped around 42% since we published our first sell rating. We cover WDC and its competitor Seagate Technology Holdings plc ( STX ) in the storage space. Our sell thesis is based on our belief that WDC will suffer from weakening consumer spending spilling into cloud segments. We see continued headwinds for WDC as we believe the demand for PCs will continue to normalize to about the 260-280M range, and smartphone shipments to remain flattish in 2023. The stock has dropped around 30% since our last published piece in August. We do not expect WDC to rebound meaningfully in the near term.

The following graph outlines WDC stock performance since our published ratings.

INTC:

While there is a lot of hype around INTC CEO Pat Gelsinger's IDM 2.0 strategy, we don't believe the company will become profitable before 2024. INTC is expanding its foundry business in the U.S. and heavily increasing spending. We recognize the company's turnaround efforts but believe INTC will need at least 2-3 years before offering a meaningful competitive offering in the Angstrom era to its foundry customers.

Aside from its heavy spending, INTC also suffers from the massive weakening demand in the post-pandemic PC market. Gartner expects worldwide PC shipments to decline 9.5% in 2022. INTC is also losing PC market share to AMD and other semis. Intel no longer holds the technological supremacy it once had. INTC has declined almost 38% since our last note on the company.

The following graph outlines INTC's performance since we published our rating.

Our Bullish Stocks:

Due to the current macroeconomic uncertainty and inflationary pressures, we were picky with our buy ratings. Despite this, we published several bullish pieces: Monolithic Power Systems, Inc. ( MPWR ), ASML Holding N.V. ( ASML ), and the EDA twins: Synopsys, Inc. ( SNPS ) and Cadence Design Systems, Inc. ( CDNS ).

MPWR:

MPWR is a favorite small-cap power company, and our buy rating took place before the stock rallied. Since our rating, the stock has dipped again, but we are not too concerned and remain optimistic about MPWR outperforming the peer group. The following graph outlines MPWR's stock performance YTD.

Semi-cap: LRCX, AMAT & ASML

Regarding the semi-cap names, Lam Research Corporation ( LRCX ), Applied Materials, Inc. ( AMAT ), and ASML, we have maintained our buy rating on these companies so far. However, we are open to the possibility of downgrading semi-cap giants in the near term as we expect memory and logic demand to weaken.

LRCX and AMAT operate in the etching and deposition industry. We believe LRCX is heavily exposed to NAND and memory markets. We believe the memory weakness is priced in, but we are watching the stock to see how logic/foundry exposure plays out. AMAT is less exposed to NAND and more exposed to logic/foundry. Between the two, we favor LRCX as a safer investment. We continue to monitor both stocks as we expect to see logic/foundry demand normalize.

We maintain our bullish sentiment on ASML as the company has a monopoly in the lithography sphere. We will continue monitoring memory and logic demand to see how it reflects on ASML's demand.

The following graph shows ASML's stock performance YTD and our rating date.

EDA Twins: SNPS and CDNS

Our bullish stance on the Electric Design Automation ("EDA") giants is playing out, for the most part. We believe the demand for EDA remains more or less solid even during market downturns because EDA is always necessary to ensure the best technology and chip design. Still, the companies are not immune to the current macroeconomic backdrop.

Timing is Everything: Where We Could've Done Better

Time plays a huge factor in our ratings, and we follow the buy low, sell high slogan to make our readers money and simultaneously save them money. Micron ( MU ) has been a favorite in the memory industry, yet we could have done better by publishing our sell rating on the stock sooner. We monitored MU after we were buy-rated on the stock in April. We had concerns over weakening consumer spending in PCs and smartphone markets and how this would affect MU's business. MU is highly exposed to PC and mobile markets, accounting for 38% of revenue. We published our sell rating on the stock during its major haircut in June, where we saw the stock drop around 22% over ten days. We believe MU's decline results from weakening consumer spending and building inflationary pressures.

The following graph outlines MU's stock performance and our ratings on the stock.

What We Recommend You Do to the Stocks:

Since we started covering the semi-space, we've maintained a non-consensus outlook on the industry and seen our predictions play out. We believe the semiconductor industry comes down to supply and demand trends. Through monitoring both ends, we have managed to predict the downside in NVDA, AMD, and WDC, among others. We've also maintained our bullish ratings. We will continuously revert to the future and review how our ratings materialized or failed. We believe the next few quarters won't be easy for the semis peer group, but we are excited to see what the October quarter offers.

For further details see: