We're experiencing a pullback in many (growth) stocks – which you're probably aware of. Although it's still not clear which direction we'll go next, I do think we have good buying opportunities right now (regardless). That's why I've been selectively buying some companies with strongest fundamentals, who have been hit the hardest. I'm confident they will outperform whenever we're out of the woods.
Among the hardest hit sectors within Technology is Semiconductors. Looking at any Semiconductor ETF – whether it be SOXX or SMH – we're well below the all-time highs. They are the most cyclical and volatile, so it just comes with the territory. They've had an incredible run based on macroeconomic demands and the chip "super-cycle" we're currently in. Unless we hit a major recession, the demand for semis will continue with the technological advances we have in almost every industry from phones to PCs to cars. But, for the purposes of this analysis, I'm assuming we won't enter a period of stagflation (i.e. inflationary pressures within a recessionary environment), because that would be pretty bad... 💀
We'll start our deep dive into the space with foundries.
In the microelectronics industry, a semiconductor fabrication plant (commonly called a fab; sometimes foundry) is a factory where devices such as integrated circuits are manufactured. – Wikipedia
In terms foundries, the conversation starts (and sometimes ends) with Taiwan Semiconductor Manufacturing Company (aka. TSMC or Taiwan Semi). They're the largest and most advanced foundry in the world.
In case you haven't figured it out yet (I really hope you have) they're headquartered in Taiwan, where most of their facilities are too. In my opinion, there's huge geopolitical risk for US-based companies and investors here... given the Taiwan-China military tensions. You can read more about it here and here. There's not much perceived risk, because China invading Taiwan would have serious ramifications... but if a risk is perceived, it's already priced in and too late (for stocks). So, (a) I'm not trying to get clarity on this; and (b) TSMC is not a cheap stock.
In terms of fair value, TSMC has a DCF of ~$130. At the time of writing, the stock is trading for $110 a share. So, there is a 15% upside or margin of safety from FV... not too bad. If we anticipate a CAGR of 18% until 2024, they'll get to US$93bn in revenues (ignoring FX). At a 35% net income margin, that's approximately $6.30 EPS. Historically they've trading at 18x P/E, which would mean a price per share of $113.00. I'd assign a 65/35 split between the FV and 2024 est. price, to get a price target of $125/share – a 14% upside from here. So, I wouldn't necessary call TSMC "expensive". I would say its fairly valued, but we'll probably experience valuation compression in the years ahead, making it a subpar investment. The stock has pretty much moved sideways this year, so we could definitely swing trade it from here... but I'm not necessarily attracted to a long-term play from here (but maybe if we see more of a pullback).
Intel is a long-term play... if that doesn't interest you then just skip this entire part, because you'd have to buy into the long-term vision here. It is, however, a value play with a growth story. Intel's fair value estimate is $70 per share – a 37% upside, or MOS, from where it's trading today. So, it's worth taking a deeper dive here imo.
Intel was once the king of semiconductor companies, and is still one of the largest. It pretty much dominates the PC and server processor markets. The problem, however, was that Intel became complacent after its x86 chips. It lost its business with Apple – who developed their own M1 chip, based on the ARM ecosystem. Intel faced significant manufacturing delays that caused it to lose market share to key competitors like AMD, and TSMC as well. They're very far behind in technological development, which is why they're unable to break into the smartphone market. This is especially concerning, considering mobile usage continues to cannibalize PC usage. CEO Pat Geisinger, who I think is a great leader for Intel, realizes all this and their making either calculated (or desperate) attempts to become a market leader once again.
Intel does have a significant server market share advantage, which is a great place to be given the growth in cloud computing... but, you can see AMD is starting to pick up some market share. Not to mention, the cloud computing giants – like Amazon and Microsoft – are also designing their own chips. That's a pretty concerning outlook for Intel. The rise of alternative solutions in the data center is cause for concern, with Nvidia's GPUs being leveraged to accelerate server workloads.
Intel does, however, have a detailed and ambitious roadmap to 2025. Along with better chips, it's also making a $20bn investment in two new fab facilities in Arizona. This will allow it to compete directly with TSMC, and build for customers like Amazon. The most important piece of this investment is that it will have full backing of the US, given the geopolitical risks of reliance on TSMC – which I mentioned earlier. There will be, in my opinion, significant government support for Intel. It's almost an unfair advantage, because Intel is literally the USA's only hope in remaining competitive here, and it's of national interest. Intel has also made a string of savvy acquisitions to build its Artificial Intelligence and automotive offerings, including Altera, Mobileye, Habana Labs, and Movidius.
Overall, Intel has a compelling turnaround story. I, personally, don't like to buy into turnaround stories because there's a lot of execution risk involved; but, with the case of Intel I think that's priced in already. Yes, there quite behind the curve, but at an 11x P/E ratio, you're getting quite the discount.
Intel is definitely on my watchlist for stocks that I'd want to own. It seems to have just broken an upwards trendline from November '20, which makes me nervous to whether we will go down to the $44 level (another 15% lower). But, I'd definitely buy there if we see it. If there isn't much progress on the turnaround roadmap, I'd exit near the ATH of $65. But, if there is progress, we could see higher levels.
Advanced Micro Devices (AMD)
The biggest threat to Intel is Advanced Micro Devices (AMD). They're gunning for the dominant spot Intel has been enjoying with PC and Server CPUs. They also have fairly competitive GPUs, which are used in cryptocurrency mining, but not as leading-edge as Nvidia's. AMD is a much smaller company than both Intel and Nvidia, so its pricing power and R&D is naturally more limited. However it's completely fabless, meaning it doesn't have the high overhead costs of facilities which Intel is taking on. It's primary partner is TSMC – surprise, surprise.
AMD is worth a deep dive, because of the immense growth opportunity here. They report their business in two main segments – Computing and Graphics & Enterprise, Embedded and Semi-Custom.
As you would've guessed, the Enterprise segment – specifically with Cloud Computer Data Centers – is where they can make the most impact. That's what excites me, as they partner the likes of Microsoft Azure, Google Cloud and Amazon AWS.
After performing an analysis on revenues by segment – which I go into more detail in my YouTube video – I expect AMD's 2024 revenues and EPS to be $26.5bn and $4.37, respectively. Based on a DCF, I get a fair value of $80 per share – which excludes any upside from the Xilinx acquisition. My scenario is very conservative, and might even be bearish... only because there is a lot of uncertainty and cyclicality with this industry, so I have to be that way. Compressing other valuation ratios, I get a price target of $100 – which is where we are right now. In other words, AMD, although a great growth stock, is quite expensive and risky to buy here... but the upside to taking this risk can be huge, which you can see if we perform a sensitivity analysis for a bulllish scenario (watch YouTube). I would buy here, and I would definitely add in more pullback to the $74 level – where there is strong support. I would watch upcoming earnings very carefully.
Nvidia is unarguably the king of semis, and growth stocks, at the moment. If you've owned this stock in the past you've enjoyed some sweet returns... some juicy tendies! But, that doesn't mean an investor should buy here... because, as you can imagine, this thing is really expensive.
Nvida's primary sales comes from Gaming and Graphics Processing Units (GPUs). They are the dominant market player, and way ahead of any competitor... which is really just AMD. Along with gamers, their GPUs have also been used by cryptocurrency miners.
It's easy for Bears to argue that those categories won't have as much growth in years ahead. But Bulls would retaliate saying Nvidia is ahead of the curve with AI, deep learning, and autonomous driving. But, the truth is, there's not enough to say (with conviction) that Nvidia will be the dominant players in those emerging industries, as there is still a lot of R&D ahead... and a lot of competitors.
Based on my forecasts, I believe Nvidia will cross $40bn of sales in 2024 with a $5 EPS. There' no doubt that Nvidia's growth rate will slow in the coming years, which will result in a compression of their valuation. Considering all that, I get a fair value and price target of $175 per share — a 17% downside from where we are today. Does that mean Nvidia's stock will crash? No, but it is definitely risky and prices in a lot of growth which I can't fully buy into right now unfortunately.
There is a lot going for this stock, and a lot of hype. If we were to see a pullback, then I would definitely want to own this at key support levels. My forecasts are also not factoring in a possible ARM acquisition – a UK chip designer. This would be huge for Nvidia, and provide a lot of vertical integration and could determine the future of microchip design. ARM's ecosystem is only rivaled by RISC-V – who is potentially being acquired by Intel, who also developed the currently dominant x86 chips.
The part I do like about Nvidia however, is that it is diversified away from TSMC more recently into Samsung Foundry, whereas AMD is all-in with them after leaving GlobalFoundries in 2018. However, in summary, I would be patient with Nvidia at these levels.
Based on where prices are right now, my picks have been AMD, INTC, and ASML. Keep in mind, this is based on prices, price action, and fundamentals combined. If anything changes in these conditions, I would considering abandoning or adding to these positions, and consider adding other names like NVIDIA. I hope this helped, and I'll keep you posted on newer buys! Happy investing!
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