Booms and busts are familiar to any student of economics – they form the underlying patterns of long-term performance, for whole economies and for individual sectors. A recent report on the semiconductor chip industry helps to show the pattern – and sheds some light on where and how investors can position themselves now for maximum advantage.
To begin with, the report, based on global chip sales data, places the start of the current cycle in early 2020, at the beginning of the pandemic crisis. While a hard blow to economies generally, this period also saw the start of a boom in chip sales; demand increased as office workers moved to remote connections, and as consumers upgraded home computer systems to meet the burden of increased work-from-home, online school, and e-commerce shopping. A surge in smartphone and tablet purchases also helped fuel demand for chips. That momentum held through the first half of 2022.
We’re in the bust phase now, and have been for at least half a year. Sales numbers reached record high levels in the first half of last year, but tumbled in the second half. The question now is, have we hit bottom, or are nearing the bottom, in this cycle?
5-star analyst Vijay Rakesh, of Mizuho Securities, says that we are approaching a bottom, and he predicts a turn for the better in the near future.
“We see improving structural trends driving an accelerated path to supply/demand balance for Memory,” Rakesh noted. “Near-term headwinds remain with high inventories and 1Q23E PCs/ Handsets/Servers expected down 20%/20%/10% q/q, and Memory pricing down 10% YTD; however, we are close to a cyclical bottom. 1Q23 could see the peak in inventories and a trough in revenue, with fundamentals set to recover in 2H23E/2024E.”
To prepare for that coming upturn, Rakesh has upgraded three chip stocks from Neutral to Buy. Using TipRanks’ database, we wanted to see if other Wall Street analysts agree with Rakesh’s calls. Here’s what we found out.
Micron Technology, Inc. (MU)
The first chip giant on our radar is Micron Technology, a $65 billion player in the memory chip segment. Micron is well known for its data storage products, including DRAM, flash storage, and USB drive semiconductor chip lines. The company’s 1-beta DRAM chip is most advanced currently on the market, and the firm has recently announced upgrades to its data server memory portfolio line-up.
While Micron has been active in keeping its chip lines at the forefront technology, the company has seen its sales decline in recent months. In the most recent reported quarter, Q1 of fiscal year 2023 – the quarter ending on December 1, 2022 – Micron showed a top line of $4.09 billion. This was down sharply from the $6.64 billion reported in 4Q22, and down from the $7.69 billion reported in 1Q22. The company’s earnings, which had been running positive despite the sales decline, turned to a negative 4-cents per share in 1Q23.
Unsurprisingly, the company’s share price has also been declining over the past year. Over the last 12 months, MU stock has fallen 33%, more than double the 15% drop in the NASDAQ over the same period.
Checking in with Mizuho’s Rakesh, however, we find that the analyst is upbeat for the long term. As noted, he has upgraded his stance on MU from Neutral to Buy, and backing that, Rakesh writes: “While we could continue to see some near-term weakness with inventory digestion at PC/smartphone/data center, we believe capex cuts, supply a multi-year low, and 2H rebound along with improving investor sentiment position MU well as we see a FebQ/MayQ trough.”
Along with the Buy rating, Rakesh also gives MU stock a $72 price target, implying ~20% upside for the coming year. (To watch Rakesh’s track record, click here)
Leading tech firms like Micron will always pick up attention from Wall Street, and this company has 23 recent analyst reviews on record. These include 16 Buys, 5 Holds, and 2 Sells, for a Moderate Buy consensus rating. (See Micron stock forecast)
Western Digital (WDC)
Next up is Western Digital, a major player in the chip industry. Western, based in San Jose, California, is another specialist in computer memory – but its focus is on hard disk drives and other primary data storage, as well as SSDs and flash drives. Western has built a solid position in the data center and cloud storage niches, and its product lines feature well-known brand names including WD and SanDisk.
Western Digital shows the same pattern in revenue and earnings that we saw above in Micron: a top line decline starting in the latter half of calendar year 2022, accompanied by a dropoff at the bottom line turning to negative earnings. The most recent reported quarter, Q2 of fiscal year 2023 (the quarter corresponding to calendar 4Q22), Western reported $3.11 billion in total revenue. While this was at the high end of the previously published guidance, it was still down almost 17% from the previous quarter, and was down 35% year-over-year.
On the bottom line, Western reported a fiscal Q2 earnings loss of 42 cents per share, by non-GAAP measures. In GAAP terms, the quarterly EPS loss was $1.40. These figures were down from profits in the previous quarter, of 8 cents by GAAP measures and 20 cents by non-GAAP.
Despite the losses in earnings/revenue, Western Digital still holds a strong position in its niche – and is aiming to improve its standing. The company has recently been sounding out talks with Japanese chip maker Kioxia on a potential merger. While this remains at the rumor stage (neither company has confirmed anything), such a move would create a combined entity with control over one-third of the market for NAND flash chips.
In the eyes of Mizuho’s Rakesh, this gives support to the recently upgraded Buy rating on WDC stock. Rakesh writes: “We believe WDC is positioned for upside in HDD [hard disk drive], and undervalued given a potential 2H23/24E NAND rebound and a possible strategic NAND spin with Elliot activism and possible Kioxia merger talks… While near-term we see some challenges in 1H23E with inventory corrections and softer demand, we see an improving HDD/NAND market as suppliers focus on lowering capex and supply growth to help normalize inventories, setting up for a better 2H23E/2024E recovery.”
Based on all of the above factors, Rakesh gives WDC shares a $50 price target to back his Buy rating. That figure implies ~16% upside from current levels.
Overall, there have been 14 analysts sounding off lately on WDC, and their reviews include 7 Buys, 6 Holds, and 1 Sell, for a Moderate Buy consensus rating. (See WDC stock forecast)
Seagate Technology (STX)
The last chip stock we’re looking at is Seagate Technology, long a leader in hard disk drive (HDD) tech. Seagate developed the first 5.25-inch hard drives back in the 80s, and over the years has followed a successful course of growth through acquisition. Today, Seagate is a $14 billion player with a line of products in three areas: Cloud & Data Center; Specialized Drives; and Personal Storage.
Following the same pattern like Micron and Western Digital, Seagate has seen its top and bottom lines fall off over the past several months. It’s last quarterly report was for fiscal 2Q23 (the quarter ending this past December 30), and showed revenues of $1.89 billion. This was down 7% sequentially – and 39% year-over-year. Earnings have fallen to a just 16 cents per share by non-GAAP measures; the GAAP EPS came in at a loss of 16 cents per share. Looking forward, however, analysts are forecasting a fiscal 3Q non-GAAP EPS increase to 26 cents.
Against this backdrop, Mizuho’s Rakesh got one thing to say: don’t throw the towel just yet. The analyst believes this company has sound prospects for getting out of the doldrums sooner rather than later.
“STX has managed significant ~25% q/q inventory reduction with 2H demand positioned better, and a margin accretive HAMR roadmap into 2024E for 30TB+ mass capacity drives… We see HDD inventories normalizing post-1Q23E with potential for a return growth earlier than as inventories are flushed out at key enterprise customers, setting STX up for a strong 2HC23E,” Rakesh opined.
This is another chip stock that Rakesh has upgraded to Buy, and his price target here, $82, indicates potential for a 15% upside over the course of this year.
All in, all, this stock shows an almost-even split among the Street’s analysts; of the 22 recent reviews on file, there are 11 Buys, 10 Holds, and a single Sell, for a Moderate Buy consensus rating. (See Seagate stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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