The benchmark PHLX Index (SOX) began the holiday-shortened week at 3,384 before sliding on Tuesday after Russian dictator Vladimir Putin ordered troops into Ukraine.
“The alarming prospect of war on the European continent -- in what would be the largest scale conflict since the Yugoslav wars -- has roiled the markets,” wrote Real Money’s Kevin Curran recently. “Meanwhile, there’s been an overlooked potential casualty that would have come with a Russian invasion of Ukraine - semiconductor production.”
When it briefly looked like tensions were easing last week, “Nowhere was that sign more welcome than for those invested in the semiconductor sector, which was perhaps one of the most overlooked potential losers of the prospective war in Ukraine,” Curran noted. “Indeed, some of the sector's largest players like Nvidia (NVDA), Qualcomm (QCOM), and Taiwan Semiconductor (TSM) were seeing the biggest jumps on the news.”
Then the news turned sour, with reports of Russia massing troops on the border and a Friday prediction from U.S. President Biden that an attack was imminent. That alone was enough to push markets down, taking semiconductor stocks along with it.
No doubt, Pacific Rim countries like Taiwan are understandably critical to semiconductors and international supply chains at the foundry level. But Russia and Ukraine play a big role in chip development, too.
“According to research from market research firm Techcet, Russia and Ukraine are each pivotal in the high-tech trade,” Curran said. “Per their reporting, more than 90% of semiconductor-grade neon used in U.S. semiconductor manufacturing is supplied from Ukraine, while 35% of palladium necessary for the chips comes from Russia.”
As such, "the apparent White House plans to cut off Russia from the US chip industry were Moscow to approve an invasion of Ukraine could have cascading effects in both directions."
Indeed, “while war and loss of life are obviously top of mind for any and all onlookers, the apparent aversion of these industrial impacts is also worth highlighting,” Curran noted. “That’s not to mention Russia's now cozier than ever relationship with China after a joint statement at the Olympics, allying itself with another crucial nation in high-tech supply chains.”
He added, “suffice it to say, the current conflict is far from settled ... As such, investors, especially those in the sensitive semiconductor sector, should not be shocked if a deja-vu-driven dip hits their portfolios as more issues inevitably emerge between the acrimonious neighboring nations.”
With war looming and markets churning, here’s what semiconductor stocks TheStreet’s trading experts are probing this week.
Tower Semiconductor $46.98. 5-day performance 38.88%.
TSEM’s (TSEM) numbers are up after Intel Corp. (INTC) announced it will pay $5.4 billion for the Israel-based company, as INTC looks to expand its foundry business and challenge the likes of Samsung and TSMC.
“Intel will pay $53 per share for Israel-based Tower,” TheStreet’s Martin Baccardax reported. “Intel said the deal will help advance the group's expansion into foundry services -- the actual manufacturing of chips -- as it ramps-up its billions in investment over the next few years amid a surge in demand and a global shortage in semiconductor equipment.”
KeBanc Capital Markets analyst John Vinh said the deal would provide Intel with "an established customer base that could provide revenue synergies for potentially upselling to other services", but cautioned that with Tower being a specialty foundry, "it's unclear whether it will be able to help Intel scale to the same volumes and compete with Samsung and TSMC on mainstream process technologies."
"Also, while we think this acquisition clearly represents a step in the right direction, we still believe Intel's transition to a service foundry faces a very long learning curve that’s likely to take years to complete," Vinh added.
Intel $44.93. 5-day performance (-)5.44%.
Aside from the Tower deal, Intel has been facing some stiff market headwinds.
Intel shares hit a two-year low late last month after it cautioned that supply chain disruptions would keep a lid on near-term profit growth, clouding the impact of its record fourth quarter revenue haul.
“Intel said March quarter earnings would come in around 80 cents per share, around 6 cents shy of the Refinitiv forecast, after posting record revenues of $19.53 billion and an adjusted bottom line of $1.09 per share over the three months ending in December, both of which handily topped Street consensus forecasts,” Baccardax said.
TheStreet’s Stephen Guilfoyle, also looking at Intel stock, believes that INTC is here to stay - but it's a long way from competing effectively against either Nvidia or AMD, or even Taiwan Semiconductor.
“On the surface. it appears that Intel is at least moving in the right direction,” Guilfoyle said. “That said, the load is heavy, and the path is strewn with debris.”
In late January, Intel reported the firm's fourth-quarter financial performance. The firm put an adjusted EPS print of $1.09 on revenue of $19.53B. Both numbers beat Wall Street, despite the fact that sales had only grown 4% year over year.
“There was something to get positive about,” Guilfoyle stated. “The Data Center Group experienced revenue growth of 20% to $7.3B. Unfortunately, the firm is still heavily reliant upon the Client Computing Group, which accounted for revenue of $10.1B, a 7% decrease from the year-ago period.”
“The firm's smallest business unit, the Internet of Things Group (which includes spin-off candidate Mobileye) saw sales rise 36% to $1.1B,” he added. “Gross margin fell over 12 months from 56.8% to 53.6%.
Ahead of those earnings, Intel announced the firm would invest $20B in a massive new manufacturing facility near Columbus, Ohio.
“Intel will build out two fabs (fabrication plants) on a 1,000-acre site, with an option to expand the site to 2,000 acres, and the number of fabs up to eight,” Gilfoyle said. “Intel has also announced a $20B foundry building project in Arizona and the plan to build a smaller facility in New Mexico. Investors, if they are to stay investors, must accept that expenses are going to be high, and margin along with earnings will be pressured. Slowing PC sales are not going to help.”
Then there’s the Tower deal, which is expected to be immediately accretive to adjusted Intel earnings once it’s completed. “This deal has already been approved by the boards of both firms, but due to the regulatory process, as well as the need for approval by Tower shareholders, closing could be almost a year out,” Guilfoyle added.
Additionally, Guilfoyle recently spotted three sell-side analysts rated at five stars by TipRanks.
“The difference in opinion is stunning,” he said. “John Pitzer of Credit Suisse rates Intel a "buy" with a $70 price target. Timothy Arcuri of Credit Suisse maintains his "hold" on the name with a $53 target price. Lastly, Vivek Arya of BAC makes Intel an outright "sell" with no target price and stresses that notebook deliveries fell drastically in January.”
Right now, Intel is spending a ton of cash, and is probably going someplace that American chip companies should have gone a few years ago.
“The Tower deal is a year away from completion,” Guilfoyle noted. “The new foundries in Arizona and Ohio are at least a couple of years away. Meanwhile, the firm's bread and butter business is in decline, and the firm places behind its key competitors for the high businesses of 2022.”
Guilfoyle believes that Intel is here to stay, but the firm is a long way from competing effectively against either Nvidia NVDA or Advanced Micro Devices AMD for the market's sweet spot, or competing with Taiwan Semiconductor and becoming America's foundry.
“The day will come,” he noted. “You have time.”
He added, “If I were long the shares, which I am not, I would probably grab some $47.50 May puts for about $3.50, and sell a like number of May $40 puts for roughly $1.10 in order to reduce the expense,” Guilfoyle added. “In fact, I may try that without an underlying equity position.”
Nvidia Corp. $232.39. 5-day performance (-)1.28%.
Nvidia NVDA has been on a downward trend, with its share price falling by 19% on a year-to-date basis, and by 28% over the past 90 days.
But Guilfoyle says the chip giant turned in a stellar quarter, and anyone selling the stock based on its latest results does not understand financial statements.
Last week, the company released its fourth-quarter results. Nvidia posted adjusted earnings per share of $1.32 on revenue of $7.64 billion for the quarter. These numbers add up to earnings growth of 69% on sales growth of 53%, and needless to say, beat the street on both the top and bottom lines. GAAP EPS printed at $1.18, up 103% year over year.
That $7.64 billion number represents an all-time record quarter for Nvidia, while full-year revenue of $26.91 billion represents a record year for the company. For the quarter, GAAP gross margin of 65.4% and adjusted gross margin of 67% were 230 basis points and 150 basis points higher than a year ago, respectively. GAAP operating income grew 97%, while adjusted operating income increased 76%. Operating expenses increased 22% (adjusted), or 23% (GAAP).
“For the current quarter, Nvidia sees revenue generation of $8.1billion (+/-2%), which is well above the $7.3 billion that Wall Street was seeking,” Guilfoyle said. “Nvidia expects adjusted gross margin to remain at 67%, which is at the high end of the 66.5% to 67% consensus. Nvidia also expects GAAP operating expenses to total $3.55 billion, which includes a $1.36 billion write-off covering the failed attempt to acquire Arm Holdings. Adjusted operating expenses are seen printing around $1.6 billion.”
Here's what Guilfoyle sees with Nvidia’s business units in mid-February.
--Gaming: Revenue printed at a record $3.42 billion, up 37% as Nvidia launched the GeForce RTX 3050 desktop GPU as well as the GeForce RTX 3080 Ti and GeForce RTX 3070 laptop GPUs.
“Nvidia also announced more than 30 new RTX games and titles shipped in the quarter and added over 65 games to the GeForce NOW library, bringing the total to over 1,200,” Guilfoyle said.
--Data Center: Revenue also printed at a record for this unit, at $3.26 billion, up 71%. Nvidia announced the general release of Nvidia AI Enterprise with updates that include production support for containerized AI with Nvidia software.
“It also announced during the quarter that Meta Platforms FBis building its AI Research SuperCluster with Nvidia DGX A100 systems,” he added. “In addition, back in December, Nvidia announced that partners such as Dell Technologies DELL and Microsoft MSFT Azure set records across eight popular AI workloads, according to the latest MLPerf training results.”
--Professional Visualization: Revenue is at a record $643 million, which was up 109%. “This quarter, Nvidia launched the Nvidia Omniverse for Creators, while also launching the Omniverse Universal Scene Description connector for Blender, the world's most popular open-source 3D creative application,” Guilfoyle noted.
--Automotive and Robotics: Revenue decreased 14% to (not a record) $125 million.
“Here, Nvidia did form a multi-year partnership with Jaguar Land Rover to deliver next-generation automated driving systems, plus AI-enabled services and experiences. It also announced that NIO Inc.'s NIO ET% sedan and Xpeng Inc.'s XPEV G9 SUV are using Nvidia DRIVE Orin,” he added.
Nvidia CEO Jensen Huang, who Guilfoyle believes is one of the top two CEOs, along with Advanced Micro Devices' AMD Lisa Su, at any company, offered these comments:
"We’re seeing exceptional demand for Nvidia computing platforms. Nvidia is propelling advances in AI, digital biology, climate sciences, gaming, creative design, autonomous vehicles and robotics -- some of today's most impactful fields."
Currently, Nvidia has a number of businesses growing like a weed and operating at a very high level. “The firm has wonderful-looking fundamentals,” Guilfoyle noted. “You’re not going to find a lot of quarterly reports better than this is in a long career.”
So why did the stock sell off late last week?
“The valuation - that's all the sellers have,” Guilfoyle said. “That and the Russian Army on Ukraine's borders. Anyone selling NVDA on concerns over the stock trading at 53x forward earnings must be asked why they waited for earnings. Anyone selling the stock based on these earnings does not understand financial statements.”
Guilfoyle is long NVDA and will remain long.
“I am absolutely fine adding on this weakness, and adding all the way back down to the 200-day line at $229,” he said. “It's not there yet, but I would not be surprised to see an ascending triangle (which would be bullish) develop beneath resistance at $270.”
“Look at the price by volume to the upside... not a ton of it,” he added. “I think this is a $325 stock, and my view pretty much makes me the low trader on the street.”
