We got a few updates on our Club semiconductor names Tuesday. In-line with our views, the reports served to support the notion that the more data-center exposure a chip-making company has, the safer its sales are in this difficult investing and economic environment.
Marvell Technology
JPMorgan said in a research note that the trends in cloud data-center capital expenditures "remain strong" and supportive of Marvell Technology (MRVL). While downwardly revising capex estimates for the back half of the year, JPMorgan analysts still expect spending will accelerate in the final six months of 2022, growing 22% versus the first half. Remember, data-center spending from major cloud providers is essentially revenue for Marvell.
When accounting for a potential recession, the analysts still believe that year-over-year capex growth will be realized in 2023 — roughly a low-to-high single digit percentage point advance. Their base case without a recession is for a 14% increase. As members know, Marvell has worked diligently to reduce its consumer exposure while investing aggressively in data center, 5G mobile networking, and automotive — all of which are secularly growing end markets.
While the analysts at JPMorgan didn't go into much detail on Advanced Micro Devices (AMD) or Nvidia (NVDA), also Club holdings, they did call out the former's "compute server processors" and the latter's "compute acceleration processors" as key beneficiaries of resilient cloud capex spending.
- Marvell, which has the most resilient sales of all our semiconductor names now trades at less than 20x forward earnings estimates.
Nvidia
Analysts at Citigroup reduced their price target on Nvidia to $285 per share from om $315 but kept their buy rating. The PT cut was largely the result of reduced video gaming estimates. The analysts said they were maintaining their "data center sales [estimates] as industry checks show hyperscalers remain server capacity constrained and [they] believe stock's multiple is supported by data center growth."
Analysts at KeyBanc chimed in as well, also lowering their gaming estimates. However, they noted that despite the near-term negatives posed by gaming (and crypto mining, which we think is of minimal importance to Nvidia), the analysts remained longer-term bullish thanks to Nvidia's machine learning and artificial intelligence exposure and its increasing focus on software and omniverse.
- Nvidia stands at about 28x estimates. While it is more expensive than Marvell despite some nearer-term issues such as gaming, it makes up for this with its longer-term software opportunity.
Advanced Micro Devices
Analysts at KeyBanc reduced their price target on AMD — calling out, similar to the dynamics for Nvidia, "excess GPU gaming inventory" and "slowing PC demand." That said, they remain overweight the stock (equivalent to a buy) as they "still see secular growth particularly in cloud and a clear line of sight to continued share gains over the next two years."
- As you may recall, thanks to phenomenal execution on management's part and consistent missteps over at competitor Intel (INTC) in recent years, AMD has been taking market share and it appears that trend will continue for the foreseeable future.
Qualcomm
As for Qualcomm (QCOM), while this is arguably the least resilient of our semiconductor holdings due to less data center exposure, the stock is also the cheapest at roughly 10x forward earnings estimates. In the near-term, the company stands to benefit from Apple's (AAPL) failure to create a 5G modem for the iPhone soon enough to use in the iPhone 15.
- To this point, KeyBanc analysts said they had previously expected Qualcomm to retain roughly 60% market share of the iPhone 15, they now expect Qualcomm's 5G modem to used in 100% of iPhone 15 models.
Bottom Line
While we acknowledge the near-term concerns for semiconductor-related stocks, we believe that most of them are priced in at current levels — and that longer-term, our investment theses on all of our chip holdings remain intact. For patient investors, we think all of our holdings represent an opportunity at current levels, as indicated by the 1 ratings maintained on all of these holdings.
If you don't have any semiconductor exposure, you might want to look to add some here. If you do have exposure and already taken the beating, it may have been wrong to hold these, but to sell now would be equally wrong when we are finally seeing real signs of a peak in inflation.
Longer-term, the world around us is becoming increasingly digitized and connected and semiconductors such as those produced by Marvell, Nvidia, AMD and Qualcomm are at the heart of all these long-term secular growth trends.
(Jim Cramer's Charitable Trust is long MRVL, NVDA, AMD, QCOM and AAPL. See here for a full list of the stocks.)
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