This week, a number of leading semiconductor companies confirmed that spending on consumer electronics is going through a tough time. Nvidia (NASDAQ: NVDA) said demand for PCs and laptops was hurting its video game segment, and Micron Technology (NASDAQ: MU) said PC and smartphone sales are going to be sharply lower in the second half of 2022 as device makers work through accumulated inventory of certain components.
The market already knew trouble was brewing. Semiconductor inventories are down 25% so far in 2022, as measured by the iShares Semiconductor ETF (NASDAQ: SOXX). However, despite a deafening chorus lamenting the onset of a cyclical downturn in the chip industry, this ETF rebounded strongly from the highs. The reason? Although consumer spending is skidding, business spending on chips for the cloud, data centers, artificial intelligence (AI) and more is still strong.
Three Fool.com contributors think chip stocks are a buy right now for the long haul. Here’s why Nvidia, Micron Technology and Kulicke and Soffa Industries (NASDAQ: KLIC) top of their shopping lists right now.
Familiar territory for Nvidia shareholders
Nicholas Rossolillo (Nvidia): For long-time Nvidia owners, this week’s announcement by CEO Jensen Huang and company sounds like 2018 redux. The chip industry as a whole is slowing after a series of strong growths. There are demand issues in China. The cryptocurrency market (parts of which use GPUs like what Nvidia designs to “mine” crypto) has just taken a brutal beating. And Nvidia is gearing up to announce a new generation of gaming GPUs later this fall (meaning some gamers might delay purchases until the new hardware is released). As a result, Nvidia said its preliminary gaming segment sales were down 33% year-over-year in the second quarter of fiscal 2023.
The high-end video game graphics company has always been quite cyclical. Nvidia releases new GPUs that can handle more powerful video games, gamers upgrade laptops and PCs, sales boom then ebb, Nvidia announces another GPU refresh and the cycle repeats itself. While the 2022 downturn has its unique challenges, it is familiar territory for long-time shareholders.
A key difference this time, however, is that Nvidia is now a diversified company. In fact, based on its preliminary Q2 numbers, Nvidia’s data center business (where it powers AI and other high-performance computing for enterprises) is up 61% year on year. on the other. With sales of $3.81 billion, data centers are now Nvidia’s largest segment, accounting for 57% of total revenue.
At some point, the data center end market will also experience a cyclical downturn or downturn. But Nvidia now has a lot of irons in the fire (a cloud software licensing business, automotive and industrial equipment chips, new gaming chips). When Nvidia and the chip industry encountered these bumps in the road, I started buying during the recession waiting for the next cycle higher. At this point, I see no reason to treat this first semiconductor stock differently from times past.
This Advanced Packaging Leader Is Incredibly Inexpensive
Billy Duberstein (Kulicke and Soffa): One way to play the chip sector is semiconductor equipment stocks, the “pickaxes and shovels” to the industry. When people think of semi-hooded gear, they usually think of front-end gear manufacturers, who print huge numbers of tiny transistors on silicon chips. However, investors should not overlook advanced packaging companies.
Indeed, front-end scaling now comes up against the laws of physics. In response, the chip industry is applying more advanced packaging techniques to keep generating more power with less power. By bringing chips, memory, and accelerators closer together and connecting them more efficiently within devices, packaging can continue to improve overall system performance.
Many leading chipmakers have even begun designing “chiplets”, or smaller semiconductor units that perform specific functions, which can be rearranged with other chips to create “superchips”. personalized.
Kulicke and Soffa stand to benefit greatly from this trend, as a leader in traditional wire bonding and more modern advanced packaging techniques for general semiconductors, automobiles and advanced displays.
K&S’ flagship product is wire bonder, a legacy bonding product for which it has more than 60% market share, according to VLSI Research. However, since CEO Fusen Chen took office in 2016, K&S has done a great job of developing new products in advanced packaging, such as thermocompression bonding, and new product line in mini/assembly. microLED, both through internal R&D and tuck-in acquisitions.
During the recent conference call, Chen noted that its new advanced packaging technology products exceeded expectations expressed at the company’s Investor Day a year ago by 35 percent.
The advanced displays segment also offers a lot of potential. MiniLED is a cutting-edge display technology, delivering deeper blacks and richer colors, and replacing OLED in many products such as high-end televisions. Apple (NASDAQ:AAPL) begins to integrate miniLED in several of its products. The new Pro versions of MacBooks and iPads will be equipped with miniLEDs.
K&S is a notoriously cyclical stock, and we are definitely entering a short-term downturn. Widespread setbacks from industry expansions have led management to forecast a 25% sequential drop in revenue next quarter and a drop in earnings per share of more than 50% from $1.99 last quarter to zero. $.93 in the next quarter.
So why is the stock a buy? Because it’s really cheap! K&S now trades in the mid-$40 range and also has a strong net cash position of around $12.50 per share. Even taking next-quarter earnings per share as a benchmark, that would equate to $3.60 per share in a downturn. If this marks the bottom of a cycle, it means the stock is trading at less than 10 times the earnings bottom, wiping out its excess cash. Meanwhile, during the “boom” of the past 12 months, K&S has earned $8.06 per share.
Even if short-term revenues and profits decline, growth in packaging intensity should allow for bigger ups and downs over time. Meanwhile, Chen noted that by 2024, many new advanced packaging and miniLED products that just qualified today will hit the markets. I suspect that K&S will still be profitable during a bear cycle and eventually hit highs higher than even the ‘boom year’ of 2021 at some point. Then today’s stock price will look even more like a bargain.
Temporary slowdown in sales, temporary inventory discounts, bold long-term plans
Anders Bylund (Micron Technology): Memory chip specialist Micron Technology almost always seems to be on sale. The stock rarely trades above 10x earnings except for a two-year rise above that line in 2020 and 2021.
Worries over 2022 inflation ended this hot streak, pushing Micron’s price-earnings ratio back below 7. The latest twist in this chart was a 3.5% discount on Tuesday, inspired by Micron’s lowered guidance for the fourth quarter. Customer demand for memory chips has cooled due to supply chain challenges and macroeconomic issues. Many companies that manufacture devices containing digital memory chips are digging through their warehouse inventory rather than ordering new stock at this time.
Micron is managing the expected near-term revenue slowdown by restraining chipmaking equipment installations over the next two quarters. However, I think it is a mistake to focus too much on this temporary issue, which will undoubtedly leave Micron with an explosive amount of pent-up demand and another surge in revenue in 2023 or 2024.
On the same day as this scary forecast cut, Micron also pledged to invest $40 billion in memory chip manufacturing facilities in the United States by 2030. This plan is backed by the newly signed Chips and Science Act, a government bill that includes $52 billion in funding for US chip designers and semiconductor manufacturers.
So Micron will more than double its chip manufacturing assets over the next seven years, creating about 40,000 jobs for Americans and a massive source of memory chip supplies. Today, most memory chips are made in Taiwan, China or Japan. In light of economy-wide supply chain issues that began with Asia’s semiconductor shortages, Micron’s domestic investment could be seen as a matter of national security.
You can invest in Micron’s sensible and patriotic long-term plans for the great price of just seven times the company’s earnings. I’m not concerned about declining short-term revenue, as Micron has a strong balance sheet and fantastic long-term plans.
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Anders Bylund holds positions in Micron Technology. Billy Duberstein has positions in Apple, Kulicke & Soffa Industries and Micron Technology and has the following options: short August 2022 $35 put options on Kulicke & Soffa Industries, short August 2022 $40 put options on Kulicke & Soffa Industries, short January 2023 $160 call options on Micron Technology, and short January 2023 calls at $210 on Apple. Its clients may hold the shares mentioned. Nicholas Rossolillo has positions at Apple, Micron Technology and Nvidia. Its clients may hold the shares mentioned. The Motley Fool holds posts and recommends Apple and Nvidia. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.