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By
Tiernan Ray
Here are some things going on today in the world of tech: It's a big day for chip ratings, with Intel (INTC) getting a downgrade and an initiation note, and new coverage of Nvidia (NVDA). Intel’s Structural Cracks Stacy Rasgon with Bernstein cut his rating on Intel to Underperform from Market Perform, and lowered his price target to $42 from $54, asking the question, “Does the hole at the top go all the way through?” referring to last week’s abrupt departure of Chief Executive Brian Krzanich for violating a no-fraternization policy. Rasgon confesses to regretting upgrading the stock to Market Perform after the last earnings call, writing, “We typically don't like to jerk our ratings around, but we admittedly did tactically upgrade the stock following their last earnings on a belief that strong datacenter growth would likely continue for now.” That may still be true, he believes, but a search for a replacement for Krzanich, which he imagines could take six months or longer, is likely more and more to expose “structural” problems at Intel: “It is becoming increasingly apparent that investors are starting to open their eyes to the structural issues we have been promulgating for years, especially with the official disclosure of 10nm process issues that virtually guarantee the company's vaunted ‘process leadership’ (in theory the fundament of the bull case) has all but vanished.” Rasgon thinks that as the structural issues grind on, “increasing attention on the 10nm issues and potential consequences, coupled with a likely much more challenging datacenter environment next year, increasing competition, other structural issues, and now leadership uncertainty is likely to at least put a ceiling on the stock for now (and limit upside risk) with downside possible as structural issues move from the theoretical to the potentially real.” Intel shares today are down 51 cents, or 1%, to $50.20. Another Negative Vote for Intel Meanwhile, Mike Burton with The Benchmark Company starts coverage of Intel along with Advanced Micro Devices (AMD) and Nvidia, giving both Intel and AMD a Hold rating and starting Nvidia at Buy. For Intel, Burton has a raft of concerns, including the server business, where “growth is currently in a sweet spot with a robust spending environment” seeing a slowdown in the second half of this year as it faces “less favorable comps.” He points out Krzanich has “reportedly admitted that it expects to lose share to AMD in 2H18, making the question 'how much,’ rather than 'if’.” “Also, we believe ARM-based processors from companies like Cavium could chip away at INTC's dominant market share in servers.” Then there's the rising competition from “accelerator” chips, in particular Nvidia’s GPUs. Similar to Rasgon, Burton thinks the stumbles Intel has had with its chip-production issues are a long-term worry: “INTC has twice slipped on the roll out of its 10nm solutions, and investors are increasingly concerned about Taiwan Semiconductor Manufacturing pushing through to 7nm (its equivalent node). “Near term, we see little evidence that this may cause serious harm to the Client, Data Center, or Programmable business segment results, but it is concerning because the INTC model is built around its core competency as the semiconductor manufacturing process leader.” Holding Off on AMD As for AMD, Burton thinks the company has “great opportunities ahead,” especially if Krzanich is right and the company is going to steal server-market share with its “Epyc” chips. But he thinks much of that is already baked into the share price: “While Ryzen and EPYC tailwinds should more than offset potential crypto headwinds, we are concerned that Street estimates already reflect much of this growth, and that valuation appears inflated beyond the levels that we are comfortable with.” Regarding that valuation, he notes the stock fetches “a non-GAAP forward EV/EBIT of 21.8x and a P/E of 30.1x Street estimates vs. its semiconductor peers, which trade at a non-GAAP median forward EV/EBIT of 14.3x and a P/E of 16.1x.” The company’s “above average growth opportunities” and the leadership of CEO Lisa Su “deserve a premium,” he concedes, and I expect he may “get more positive” if there's a market correction. AMD shares today are up 29 cents, or almost 2%, to $15.40. Praise for Nvidia As for Nvidia, whose stock is also pricey, Burton is willing to go with it, assigning a $280 price target, as the company is “in the middle of many of the hottest computing trends.” “While a lofty valuation gives us some pause, we expect the Company to deliver upside to estimates with demand driven by sustainable growth in its core markets in the data center and the upcoming Volta product cycle for consumer GPUs (which we expect in 2H18).” Again, the valuation is above the median for the group, at a forward multiple of almost 30 times projected GAAP EBIT, writes Burton. But he sees a decent valuation when looking out further in time: “Our $280 price target for NVDA is based on a GAAP EV/EBIT of 22.6x our FY21(CY20) estimates in line with the current 22.6x multiple on our FY20 (CY19) estimates. “On a P/E basis, our $280 price target represents a 28.4x GAAP P/E on our FY21 (CY20 equivalent) EPS estimate of $9.87. “We note that this is a discount to NVDA’s 6-month, 1-year, 2-year, and 3-year median P/E multiples of 37.6x, 43.5x, 38.2x, and 35.2x respectively.” Also upbeat about Nvidia today is Shebly Seyrafi of FBN Securities, who starts the stock at Outperform, with a $300 price target. Nvidia is no longer a “GPU” company, it's a “platform company,” he writes. “NVDA's story as a best of breed gaming company, a major play on AI/CSP/HPC, and a great play on autonomous, stands on its own,” writes Burton. The company is “one of the few plays on artificial intelligence and machine learning, key trends which are beginning to take off,” he observes, and he thinks sales of the chips for machine learning will rise by another 57% this year after 133% last year, and who'll come to make up 28% of revenue in fiscal 2021, up from only 12% a year ago. “This mix shift has positive implications for the company's gross-margin percentage, as well,” he muses, “as we estimate that datacenter GM%s are ~75%+, much higher than the corporate GM% of 60.2% in F2018 (and 64.7% in FQ1 2019).” “We project that the mix shift to datacenter...should help increase NVDA's corporate GM% from 60% in F2018 to 64% in F2021.” Nvidia stock today is up $4.54, or 2%, at $243.66. Sign up to Review & Preview, a new daily email from Barron’s. Every evening we’ll review the news that moved markets during the day and look ahead to what it means for your portfolio in the morning.
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