The benchmark PHLX Index (SOX) started at 3,365 this week. That’s down 2.50% for the week, and around 14% on a year-to-date basis.
After early gains on Monday, the index moved sharply lower amid broader market weakness on inflation and energy fears fed by the intensifying Ukraine crisis.
Pulling the lens back, global semiconductor shortages continue, with some reports indicating the chip shortage may extend past 2022.
According to a recent report from the U.S. Department of Commerce, “the semiconductor supply chain remains fragile. Demand continues to far outstrip supply.”
The Department launched a Request for Information on the semiconductor supply chain last fall that received more than 150 responses, including insight from almost all of the major semi-producers.
“The findings suggest we still have a long way to go before the shortage subsides, as median demand for chips highlighted by buyers was as much as 17% higher in 2021 than 2019, while buyers aren’t seeing large increases in the supply they receive,” wrote Sean Sechler on TheStreet.com. “Additionally, the median inventory of semiconductor products highlighted by buyers has fallen from 40 days in 2019 to less than five days in 2021.”
“This tells us that the margin of error is becoming exceedingly slim for chip producers and for the economy as a whole, which is certainly worth monitoring going forward,” Sechler added.
The Commerce Department report suggests that one of the main issues to resolve has to do with wafer production capacity, which could be a big positive for some of the top stocks in the industry.
“For example, companies like Lam Research Corporation (LRCX), Applied Materials (AMAT), and ASML Holding (ASML), which are all leaders in chip-making equipment, could be poised for another huge year as clients continue to expand their capacity to meet the exceedingly large demand,” Sechler stated.
“While there’s no end in sight for the chip shortage crisis, the bottom line is that it’s hard to argue against adding portfolio exposure to at least some cutting-edge companies at this time,” he added.
Meanwhile, TheStreet’s market experts are looking at these semiconductor stocks this week.
Onsemi (formerly ON Semiconductor ). $59.08. Five-day performance (-5.11%).
Onsemi (ON) released its fourth-quarter financial results on February 7.
The firm posted adjusted EPS of $1.09, and GAAP EPS of $0.96, on revenue of $1.85 billion over the three months ended December 31st. The report beat expectations and was good enough for year over year growth of 27.6%. Lastly, the revenue number was also good enough to be Onsemi's new all-time quarterly record.
“The firm set a few records,” noted RealMoney’s Stephen Guilfoyle. “Revenue for the full year 2021 of $6.74B, was a new record. Fourth quarter GAAP gross margin of 45.1%, adjusted gross margin of 45.2%, GAAP operating margin of 26%, and adjusted operating margin of 28.6%, were all good for quarterly records. Additionally, quarterly free cash flow increased 167% over 2020, reaching $457M, or 25% of revenue.”
Onsemi is a semiconductor supplier, engaged in providing solutions across the automotive, Industrial, Cloud, 5G & Enterprise, Internet of Things (IoT) and Mobile spaces. The firm reports sales across three segments, Guilfoyle noted.
--- PSG (Power Solutions Group) experienced 33% Q4 year over year sales growth to $953.4M. Sales increased 32% for the full year.
--- ASG (Advanced Solutions Group) experienced 24% Q4 year over year sales growth to $647.3M. Sales increased 26% for the full year.
--- ISG (Intelligent Sensing Group) experienced 18% Q4 year over year sales growth to $245.4M. Sales increased 22% for the full year.
Onsemi is guiding Q1 2022 revenue to a range of $1.85B to $1.95B, which is well above the $1.78B consensus view.
“The firm also sees adjusted EPS landing in between $0.98 and $1.10 that will include about $0.08 in special items,” Guilfoyle said. “Even accounting for that, and dropping GAAP EPS expectations to $0.90 to $1.02, these results would be comfortably ahead of the $0.82 that Wall Street has in mind. Gross margin is seen printing between 45.5% and 47.5%, adjusted or not.”
“It's hard not to like performances like this,” he added. “We know that semis currently have pricing power. Onsemi seems to be engaged in all the right business lines.”
Guilfoyle said he would not chase the shares too aggressively, but going long is hardly a mistake.
“In the meantime, an interested investor could go out two months and write $50 April puts for about $2.25,” he said. “If eventually tagged with the shares on April 14th, this investor would be long ON at a net basis of $47.75, which is below today's 200-day SMA of $48.43. If the shares never get that low, the investor pockets the premium.”
Advanced Micro Devices AMD $117.42. 5-day Performance (-)5.05%.
Guilfoyle is also taking a magnifying glass to AMD (AMD), which issued fourth-quarter earnings results in early February.
“The numbers were impressive,” Guilfoyle said. “Advanced Micro Devices posted adjusted EPS of $0.92, or GAAP EPS of $0.80. Either way, AMD easily beat Wall Street. Revenue generated over the three -month period totaled $4.826B, which was good for growth of 49%, as well as comfortably better than estimates.”
Sticking with adjusted metrics, AMD produced a gross margin of 50%, up from 45% a year ago, and 48% for the third quarter. Operating expenses increased 40%, while operating income increased 100% and operating margin increased to 27%, from 20% a year ago, and from 24% a quarter ago. Net income increased by a whopping 76.4%.
For the full year, still using the non-GAAP tables, Revenue increased 68%, producing gross profit that increased 82%. Gross margin for FY 2021 landed at 48%. Operating expenses increased 44%, but operating income increased 146%. Operating margin wound up at 25%. Net income for the year increased 118%. Just a stunningly fantastic quarter to top off an incredibly strong year.
Guilfoyle noted that segment performance was robust.
- Computing and Graphics. Revenue was up 32% over last year and 8% sequentially to $2.6B. The gains were driven by sales of both Ryzen and Radeon processors. Client processor average selling prices (ASP) increased due to a richer mix of Ryzen processor sales, while GPU ASP (Radeon) increased year over year, but decreased quarter over quarter. Operating income increased 34.8% to $566M.
- Enterprise, Embedded, and Semi-Custom. Revenue was up 75% over last year and 17% sequentially. These gains were driven by increased sales of EPYC and semi-custom processors. Operating income increased 214% to $762M.
"2021 was an outstanding year for AMD with record annual revenue and profitability,” said CEO Lisa Su in the earnings release. “Each of our businesses performed well, with data center revenue doubling year over year driven by growing adoption of AMD EPYC processors across cloud and enterprise customers. We expect another year of significant growth in 2022 as we ramp our current portfolio and launch our next generation of PC, gaming, and data center products."
"We've been working on the supply chain for the last four or five quarters, knowing the growth we have from a product standpoint,” Su added. “We've made significant investments in wafer capacity and substrate capacity and backend capacity. We feel very good about our ability to meet the guidance."
For the current quarter, AMD sees revenue of roughly $5B (+/- $100M) versus the $4.34B that Wall Street had in mind. That number would be good for year over year growth of 45%. For the full year 2022, AMD sees revenue of about $21.5B, which would be good for growth of 31% from full year 2021, and well above consensus view of $19.27B. Growth for the quarter and for the year is expected to be driven by growth across all businesses.
Guilfoyle likes what he sees on AMD, where upward price growth is just getting started.
“It appears that AMD is now snapping back smartly after suffering a 23% decline beyond a $130 downside pivot created by a double top reversal pattern,” he said. “The shares are now up significantly from a recent low of $99.35 and [are] moving upward.”
“In my opinion, AMD is still a long-term investment, and it certainly appears that AMD already is, and will continue to be, Nvidia's (NVDA) toughest competitor for the cutting edge of the high end of the semiconductor industry,” Guilfoyle said. “Intel (INTC) is not even in the same area code anymore.”
He’s setting a target price of $165 on AMD.
Ford F $17.58. 5-day performance (-1.84%).
For Ford (F), the news just keeps getting worse.
The auto manufacturer, which has lost nearly $30 billion in market value over the past three weeks, recently announced it would idle more plants as the global chip shortage continues to weigh on production.
A week ago, "the carmaker said it will halt production at eight North American factories, including one that produces the F-150 pickup, for at least the next week amid the ongoing shortage in semiconductor supplies,” TheStreet’s Martin Baccardax reported last week. (This was before Canadian anti-masking protestors blocked the Ambassador bridge linking Detroit and Windsor, Canada, further snarling parts deliveries for the auto industry.)
Earlier this month, Ford missed Street forecasts for its fourth-quarter earnings while cautioning that supply chain disruptions and surging input costs would linger in the new year. “Ford also warned customers that in late January that it would stop taking retail orders for the Maverick amid a production backlog for the newly-unveiled hybrid pickup,” Baccardax said.
The shutdowns will likely test investor patience for Ford's plans to deepen its investment in electric vehicle production and double its current output by 2023 as it takes on both market leader Tesla (TSLA) and larger OEM rival General Motors (GM).
Ford, which is deepening its investment in electric vehicle production and plans to double its current output by 2023, sees earnings growth this year of between 15% and 20%, but that failed to lift investors' spirits after a weaker-than-expected fourth quarter tally of 26 cents per share that was well shy of analysts' estimates.
"Supply chains limited what we could produce and what we could provide," CFO John Lawler told investors on a conference call late last week. "We see that easing into ’22, and you’ll see that flowing through our profits.”
"We expect supply constraints to remain fluid throughout the year, reflecting a variety of factors, including semiconductors and Covid," he added. "We expect commodity headwinds of about $1.5 billion to $2 billion (and) anticipate other inflationary pressures, which will impact a broad range of costs."
Ford shares have fallen 28.7% since passing the $100 billion market cap threshold on January 14.
"While Ford’s 4Q miss was disappointing, we believe the focus of the 4Q print should be a ’22 guide which shows Ford is continuing its path of improvement – with growth in the face of OEM peak earnings concerns," said Credit Suisse analyst Dan Levy, who carries an "outperform" rating with a $25 price target on the stock.
"2021 as a whole showed the significant turnaround underway at Ford, and one which has occurred within a short period of time, with Ford setting a new track record of financial outperformance, and showing that its transition to an EV/AV/digital world has sharply accelerated," he added. "Changing perception on both these fronts is critical, as near-term financial strength is supporting better funding of Ford’s long-term transition."
Ford is hardly alone among car manufacturers on the semiconductor shortage front.
Last week, General Motors (GM) said it will boost its overall capital spending on EV production by $35 billion over the next three years as it takes on rivals Ford and Tesla in the fastest-growing segment of the global car market.
“Semiconductor shortages, however, could both trim production capacity and profit margins well into the coming year,” Baccardax reported.
