Multi-Company Report
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October 8, 2017 | Equity Research Chip Weekly: Demand Firm Into Earnings Semiconductors Last week Brocade announced a further pushback in the expected closing of its acquisition by Broadcom, to the end of November. DRAM spot prices continued to jump upward. Intel’s first Coffee Lake Desktop processors are now available for purchase. Brocade announced Brocade and Broadcom Limited withdrew and re- filed their joint voluntary notice to Committee on Foreign Investment in the United States (CFIUS) to allow more time for review and discussion with CFIUS as it relates to the proposed acquisition of Brocade by Broadcom. Brocade and Broadcom now expect the acquisition to be completed by November 30, 2017 (previously expected to close by November 1, 2017). DRAM spot prices continue to jump upward. Last week the spot price for an 8Gb DDR4 chip increased to $8.84, compared to $8.40 at the end of the prior week. We are reiterating our Outperform rating on Micron (MU, $39.67, Outperform) AMD announced its new Embedded Radeon E9170 Series GPU, based on the Polaris architecture, for low-power embedded applications. The new processor represents AMD’s first Polaris-based embedded discrete GPU available in MCM (multi-chip module) format with integrated memory (for smaller, power-efficient custom designs), and PCI (Peripheral Component Interconnect) and MXM (Mobile PCI Express Module) formats (for standard form factor systems). Intel’s 8th Gen Core Desktop processors (Coffee Lake), announced on September 24, 2017, are now available for purchase. Intel also announced a new hardware and software platform solution enables users to quickly develop and deploy power-efficient FPGA-based acceleration of workloads, and introduced its new Intel Programmable Acceleration Card with Intel Arria 10 GX FPGA (Field Programmable Gate Array) enabled by the acceleration stack. Qualcomm announced its premium mobile platform is powering the Google Pixel 2 and Pixel 2 XL smartphones. The new Pixel 2 smartphone is powered by the Qualcomm Snapdragon 835 Mobile Platform, which is manufactured using 10nm FinFET technology. Google announced its latest Pixelbook, which features a selection of 7th Generation Intel Core i5 and i7 processors. In the coming week, we expect in month of September Taiwanese sales data from electronic companies that broad-based chip-related parameters such as Taiwanese chip foundries and Taiwanese packaging David Wong, CFA, PhD companies will show at best modest year/year growth in the month of Senior Analyst|212-214-5007 August, consistent with our view that chip industry growth may have [email protected] peaked. We are hopeful that the PC-related data will continue to show Amit Chanda robustness, and in particular we expect a continuation of strong Associate Analyst |314-875-2045 year/year notebook growth. [email protected] Keith Kan, CPA Associate Analyst|212-214-5066 [email protected] Joy Zhang Associate Analyst |212-214-8017 [email protected] Please see page 7 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 10/08/17 unless otherwise stated. 10/08/17 20:29:38 ET Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision. Semiconductors Equity Research Our View – Expecting earnings reports that are mostly in-line with expectations Heading into earnings season, there have been no significant revisions to guidance from major chip companies, either positively or negatively, that we are aware of. There have however been a small number of announcements from companies suggesting that the September quarter tracked roughly in line with, or at best slightly above, original expectations of most chip companies (except for memory chip companies that continue to benefit from memory pricing strength): Adding together TSMC’s month of September sales reported on 10/6/2017 to TSMC’s month of August and July sales monthly sales reported in prior months, we calculate TSMC’s September quarter sales totaled NT$252 billion, up from NT$214 billion reported in the June quarter. We calculate that this translates into about US$8.335 billion for the quarter, 2 percent above the midpoint of TSMC’s guidance for September quarter sales of US$8.12-$8.22 billion, though still up just 2% year/year in US dollar terms from US$8.19 billion TSMC reported for the year-ago September 2016 quarter. On 10/6/2017 Silicon Motion said that its preliminary data suggests that revenue for the quarter might be in the upper half of its original guidance range of $122-129 million given on 8/1/2017. On 9/5/2017 Microchip stated that the September quarter was tracking in line with its original expectations. In contrast, Micron reported August quarter sales of $6.138 billion (up 10% sequentially and 91% year/year), 4% above its original guidance midpoint of $5.9 billion. We expect that, with the possible exception of memory companies, over the next few weeks most chip companies that report September quarter earnings will have results that are roughly in line with, or at best slightly above, expectations. As discussed in more detail in our chip data report dated 10/2/2017, Semiconductor Industry Association (SIA) global chip sales data shows that semiconductor year/year growth remained strong, up 25% year/year in the month of August, held up by memory. We had expected to see deceleration in the overall growth number, but August growth was comparable to the 23% growth of July and 24% growth of June. This is largely because memory has been even stronger than we had assumed. Excluding memory, integrated circuit growth remained solid in the 10-11% percent yr/yr range, though below the 15% peak in May. This was roughly in line with our projections. We continue to expect solid year/year growth for chip companies through the rest of this year, and possibly through 2018, but we believe that this is already reflected in estimates and elevated valuations of many of the broader chip stocks. For this reason we think it is important to be selective in our chip stock picks, having downgraded the semiconductor sector to Market Weight at the end of July this year. The memory pricing dynamic remains very strong though, as can be seen from the SIA data, memory spot and contract pricing and Micron’s recent August quarter earnings report. We are reiterating our Outperform rating on Micron (MU, $39.33, Outperform). Through the remaining months of the year, We think that the new Intel Purley platform will help drive a refresh cycle in servers and improving yr/yr growth for Intel’s datacenter segment. We are reiterating our Outperform rating on Intel (INTC, $38.73, Outperform). We think the ramp-up of new Apple iPhone products will likely drive demand for chips used in iPhone. In our view, there are high expectations for iPhone chip companies, creating uncertainty, as well as opportunity for many of the handset component stocks. We are reiterating our Outperform rating on Skyworks (SWKS, $104.96, Outperform) while maintaining our Market Perform rating on Qorvo (QRVO, $72.69, Market Perform). A firming PC end market, continuing strength in PC gaming, and the launch of AMD’s new Vega graphics processor units (GPU) for gaming applications could help drive GPU demand for traditional PC applications. We think that demand for GPUs in cryptocurrency mining may well remain strong in the near term, though we continue to question what the longer term trend might be for this. We believe that demand for GPUs in datacenter acceleration will help drive GPU demand, but believe that this is already reflected in Nvidia’s stock price. Seasonal demand for chips used in game consoles, including Microsoft’s new Xbox Scorpio, could help drive AMD’s semi-custom chip business. We are reiterating our Outperform rating on AMD (AMD, $13.23, Outperform). We remain cautious on Nvidia (NVDA, $181.30, Underperform) as a stock for valuation reasons, though we expect continuing strength in Nvidia’s business. 2 | Wells Fargo Securities, LLC Chip Weekly: Demand Firm Into Earnings Equity Research I on Intel October 5, 2017. Intel 8th Gen Core Desktop Processors are now available for purchase. Intel’s 8th Gen Core Desktop processors, announced on September 24, 2017, are now available for purchase. Intel’s 8th Gen Core processors feature a range of performance options for consumers including the unlocked “K” processors; the new desktop processor features 8th Gen Intel Core i7 processor, first-ever 6- core Intel Core i5 desktop processor and 4-core Intel Core i3 desktop processor. According to Intel, its 8th Gen Core processors offer up to 25% frame rate improvement compared to prior generation. According to WCCFTech, New Intel Z370 chipset-based motherboards are also available from major motherboard manufacturers, including Gigabyte, ASUS, ASRock, MSI, EVGA, Elitegroup Computer Systems, Biostar, Supermicro and Maxsun. October 4, 2017. Intel Core Processors power Google’s latest Pixelbook. Google revealed its latest Pixelbook, which features a selection of 7th Generation Intel Core i5 and i7 processors. Pixelbook, measuring 10.3mm thin, is Google’s thinnest laptop, and weighs only 2.2 pounds. Pixelbook is the first laptop with Google Assistant built in and supports Google Play. Google also announced Pixelbook Pen. Google’s Pixelbook is now available for pre-order. October 3, 2017. Intel and Microsoft collaborate to bring Windows Mixed Reality Experience for 2018 Olympic Winter Games.