June 18, 2017 | Equity Research

Chip Weekly: Memory still strong

Semiconductors

 Last week, month of May Taiwanese electronics sales data showed strength in memory, but more mixed trends for chips outside memory. In month of May U.S. Industrial Production data, High Tech Industrial Production was flat mo/mo, but the multi-month trend suggests an upward lift in high-tech industrial production. At the E3 trade show, Intel highlighted its new Core X series processors for gaming. Qualcomm announced that the Taiwan Fair Trade Commission issued regulatory clearance for its acquisition of NXP.

 Last week we attended the Electronic Entertainment Expo (E3) at the Los Angeles Convention Center. Intel hosted the third annual PC gaming Show at E3 and announced that its new Core X series top-end processor for gaming is to be available for pre-order beginning June 19. Nvidia featured a booth showcasing new games on its graphics cards. Microsoft revealed its Xbox One X console (Project Scorpio), which uses an AMD semi-custom chip.

 In month of May Taiwanese electronics sales data, memory continued to show particular strength in yr/yr growth. However, outside memory, three of our other chip-related composites were flattish yr/yr, with our fabless chip company composite being down fairly substantially. As we have discussed in various notes and recently, while we expect semiconductor growth to continue through 2017 and perhaps in 2018, we think that yr/yr growth might have risen to a plateau. We remain cautious on a number of chip stocks that, in our view, have elevated valuations. All of our Taiwanese PC-related composites showed yr/yr and mo/mo growth, suggesting, we think, ongoing firmness in PC demand and builds, which we view to be positive for PC chip companies.

 In month of May U.S. Industrial Production (IP) data, High Tech Industrial Production was flat mo/mo, and aggregate Total Industrial Production remained flat, as well. However, the multi-month trend suggests an upward lift in high-tech industrial production.

 Qualcomm announced that the Taiwan Fair Trade Commission issued regulatory clearance for its pending acquisition of NXP Semiconductors. The clearance by the Taiwanese Fair Trade Commission follows similar antitrust clearance of the transaction by the U.S. Federal Trade Commission in April 2017.

 In the coming week, ADI is holding its analysts day, and AMD has scheduled a launch event for its new EPYC datacenter processors. David Wong, CFA, PhD, Senior Analyst

Senior Analyst|212-214-5007 [email protected] Amit Chanda, Associate Analyst Associate Analyst |314-875-2045 [email protected] Keith Kan, CPA, Associate Analyst Associate Analyst |212-214-5066 [email protected] Joy Zhang, Associate Analyst Associate Analyst |212-214-8017 [email protected]

Please see page 11 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 06/18/17 unless otherwise stated. 06/18/17 14:47:18 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 - Highlighting Intel and AMD for datacenter; some thoughts on accelerators

Over the next few weeks, AMD and Intel have several new datacenter product launches scheduled:  AMD is to be holding a launch event for its new EPYC (Zen) datacenter processors on June 20.  AMD expects to launch its Radeon Frontier accelerator for machine learnings on June 27.  Intel has scheduled a launch event for its next generation datacenter platform Purley (Skylake processors) on July 11.

Last week we issued a note in which we presented our thoughts on some of the key dynamics driving the datacenter accelerator market, and attempted to size the accelerator opportunity.

 We believe that many investors think that Nvidia’s strength in datacenter accelerators is cannibalistic to Intel’s datacenter processor sales. In our opinion, the reverse may be true, that Nvidia’s clear success in accelerators is probably enabling a major new emerging technology (artificial intelligence) that could benefit both Nvidia and Intel. o Intel’s datacenter sales have shown yr/yr growth even as Nvidia’s datacenter sales began to jump over the past two years (see Figure A). o Nvidia’s quarterly datacenter sales remain small compared to Intel’s sales, less than 10% in the March 2017/April 2017 quarter.

Figure A. Intel’s and Nvidia’s reported quarterly datacenter revenue 5000

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Nvidia Datacenter revs Intel Datacenter revs

*we have offset Nvidia’s reported quarterly revenue by a month to map the Nvidia data onto the closest calendar quarter in each case Source: Company reports and Wells Fargo Securities, LLC

 We think that the combined datacenter CPU+accelerator market could grow with a compound annual growth rate (CAGR) of about 16% to approximately $33 billion by 2020E. We provide our reasoning as to why we think that the market for stand-alone accelerators, addressed by Nvidia, might be about $4 billion by 2020E. In addition to stand-alone accelerators, we think companies like Intel and AMD might offer various forms of integrated accelerator solutions, where accelerator chips are co-packaged together with central processing units (CPU) or additional accelerator circuitry is integrated on the same die as the CPU. For example, Intel has noted that its next generation Skylake server processors on the Purley platform scheduled for launch next month on July 11 feature AVX-512 (Advanced Vector Extension) aceleration, which helps boost the performance of inference for machine learning workloads. o We recognize there is substantial uncertainty in our stand-alone accelerator market projection. If Nvidia were to maintain its datacenter growth momentum, there may well be upside potential to our estimate. On the other hand, we think there is also downside risk to our number. It is possible that accelerator growth is spiking in response to initial builds of new AI capability and that it may, in time, pull back as the first flush of activity moderates. It appears that accelerator growth in the high performance computing (HPC) market may well be leveling off already. We believe that in the April 2017 quarter, Nvidia’s HPC accelerator sales were in the $80-100 million range, compared to an

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Chip Weekly: Memory still strong Equity Research

average of $70 million per quarter for accelerator sales (which we think were essentially all for HPC applications) in FY15 (April 2014 to January 2015 quarters).

 We think that there are likely to emerge several different classes of accelerator, of which Nvidia GPUs might fall into just one of these classes (general purpose programmable accelerators). Even within general purpose programmable accelerators, we believe that Nvidia’s chips are optimized for some specific types of applications (e.g., calculations required for graphics or image processing), and that other types of accelerators might offer strengths in different areas of computation. In addition, we think that field programmable gate arrays (FPGA) and application specific integrated circuits (ASIC) may emerge as other important classes of accelerators, especially for AI inference applications. Intel has products that address each of these classes of accelerator.

We are reiterating our Outperform ratings on Intel (INTC, $35.21) and AMD (AMD, $11.44). We remain cautious on Nvidia (NVDA, $151.62), with an Underperform rating.  We think that the use of accelerators is enabling new datacenter markets such as artificial intelligence, which should drive growth in Intel’s datacenter processor business, and that Intel’s broad range of accelerator products may well help Intel capture additional revenue, both within and outside the datacenter.  We think that AMD is differentiated by having x86 server processor and discrete graphics capability together with a semi-custom design organization.  We think that Nvidia has done very well in establishing itself as the dominant provider of stand- alone accelerator solutions for datacenter, but believe that this is already reflected in Nvidia’s stock value. Over time, we think additional providers of stand-alone accelerators might emerge, helping to drive growth in the stand-alone processor market, but reducing Nvidia’s market share in this market. We think that the emergence of integrated CPU/accelerator solutions might cut into the stand-alone accelerator market in the future.

For additional details, please see to our note dated June 14.

I on Intel

June 14, 2017. Intel makes 3 new capital investments in AI. Intel announced that it is working on accelerating artificial intelligence (AI) through 3 new Intel Capital investments: CognitiveScale (a provider of industry-specific machine intelligence software), AEye (a robotic vision pioneer), and Element AI (an artificial intelligence company that offers AI solution). According to Intel, Intel Capital currently has investments in more than 24 AI portfolio companies.

June 12, 2017. Intel announces Core X-series processors shipment dates. Intel announced that customers can pre-order its Core X-series processors (with 4-10 cores) beginning on June 19, and Intel is expected to ship these processors the following week. Intel noted that its 12-core Core i9-7920X X-series processor is expected to begin shipping in August; Core i9-7940X, Core i9-7960X, and 18-core Core i9- 7980X Extreme Edition processors are expected to begin shipping in October. Intel noted that its 18-core Core i9 Extreme Edition processor represent its first consumer desktop Central Processing Unit (CPU) with 18 cores and 36 threads.

June 12, 2017. Intel deepens partnership with ESL. Intel and ESL announced that they are expanding their 15-year partnership and that Intel’s technology is now to power all of ESL’s amateur and professional esports including studio and broadcasting operations. Intel noted that all tournament PCs are to now use Intel’s Core i7 processors and all of ESL’s production equipment is to feature a combination of Intel Core and Xeon processors. Intel also announced the launch of Intel Grand Slam, which features a bonus $1 million prize awarded to the first team, which wins four “Counter-Strike: Global Offense” competitions in a period of two months.

June 12, 2017. Intel announces Virtual Reality partnerships. At E3, Intel announced its partnership with Ready At Dawn Studios to release competitive multiplayer mode for “Lone Echo” called “Echo Arena” for Oculus Rift owners for three months beginning on July 20. Intel announced its partnership with ESL Gaming and Oculus to launch the VR Challenger League. According to Intel, the League series begins in July and features “The Unspoken” and “Echo Arena.” In addition, Linkin Park and Intel announced a new app called Linkin Park Destination (powered by Spatialand and Intel) that is expected to help Linkin Park extend social media engagement with fans via VR experience. The app is expected to be available in July.

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Data Roundup

Taiwanese Tech May: Strength in memory, PCs showing growth. In month of May Taiwanese electronics sales data, memory continued to show particular strength in yr/yr growth. However, outside memory, three of our other chip-related composites were flattish yr/yr, with our fabless chip company composite being down fairly substantially (see Figure 1). As we have discussed in various notes and recently, while we expect semiconductor growth to continue through 2017 and perhaps in 2018, we think that yr/yr growth might have risen to a plateau. While all of our chip-related composites were flat to up mo/mo in May, four of our 5 composites were running at close to zero or down yr/yr in May. Memory growth remains strong, 24% yr/yr growth in May, up from 21% in April and also in March. We consider chip packaging to be a broad-based indicator of global chip demand. It appears that yr/yr growth in our chip packaging composite has been fading in recent months. The yr/yr comparisons for our chip packaging composite showed 1% year-over-year growth in May, following 4% year-over-year growth in April, 8% growth in March, and 7% growth in January+February combined. Taiwanese foundry sales fell 1% yr/yr in May, following an 11% yr/yr decline in the month of April after increases of 14-15% in the first three months of the year. Within system and subsystem-related composites, the PC-related composites are showing continuing firmness in PC demand. In the month of May, sales for all our Taiwanese PC-related composites showed yr/yr and mo/mo growth. Sales for Taiwanese notebook original device manufacturers (ODM) Compal, Quanta, Wistron, and Inventec increased 16% yr/yr in April and May, after increasing 9% y/yr in March and 16% yr/yr growth in January+February. Our computer/motherboard composite increased 12% yr/yr in May. Excluding Pegatron, which also makes iPhone, sales increased 3% yr/yr in May, following a decline of 5% yr/yr in April and a 6% yr/yr decline in March. Acer’s sales grew 4% yr/yr. (For additional details, please see our report dated April 12.)

Figure 1. Taiwanese Monthly Sales Growth In April ($NT In Thousands) Segment Mth/Mth May April May/Apr Year/Year Year/Year Chip-related composites Chip Foundries 24% (1%) (11%) Chip Packaging Companies 5% 1% 4% Memory Chip Companies Flat 24% 21% Taiwanese Fabless Chip Companies 2% (19%) (20%) Taiwanese Chip Distributors 3% 1% 4% Electronics sub-systems and system composites Handset Component/ODM Companies 12% 7% (5%) Notebook ODMs 8% 16% 16% Computer/Motherboard Companies 2% 12% 14% Computer/motherboard excl. Pegatron 14% 3% (5%) Acer 24% 4% 3% Hon Hai Precision (13%) (5%) Flat Source: Company reports and Wells Fargo Securities, LLC

U.S. Industrial Production May: High Tech Drifting Upward. On June 15, 2017, the Federal Reserve released U.S. Industrial Production (IP) data for May. Month over month, aggregate High Tech Industrial Production was flat and aggregate Total Industrial Production remained flat, as well. However, the multi- month trend suggests an upward lift in high-tech industrial production, and year over year, the High-Tech aggregate increased 7% (see Figure 2), and the overall aggregate increased 2.2%. Last month we observed that the high-tech industrial production numbers appeared to be leveling off, but the latest release included a revision in month of April numbers. We would be interested to see if the upward trend in overall technology production continues in the coming months. Within the High-Tech aggregate, the Semiconductor sub-segment declined 1.1% month over month in May after having increased 1.4% in April and having increased 0.9% in March. The Communications sub-segment increased 0.6% month over month in May after having increased 0.3% in April and having increased 0.4% in March. The Computer and Peripheral sub-segment increased 3.2% month over month in May after having increased 3.1% in April and having increased 1.3% in March. Production of materials for Computer and Other board assemblies and parts declined 1.6% month over month in May after having increased 8% in April and having increased 2.5% in March. Year over year, production in May increased 3.4% for the Semiconductor related sub-segment, increased 13.3% for the Communications sub-segment increased 10.2% for the Computer and Peripheral sub-segment and increased 6.6% for the production of materials for Computer, and other board assemblies and parts. Month over month, capacity utilization declined to 71.9% in May for the High-Technology aggregate, compared to 72.3% in April. For the Computer & Peripheral sub- segment, utilization increased to 83.5% from 80.6% in April, while Semiconductor & Related utilization declined to 67.5% from 68.8%, and Communications Equipment utilization increased to 76.3% from 76.1%. (For more details, please see our note dated June 15.)

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Chip Weekly: Memory still strong Equity Research

Figure 2: Industrial Production: Selected High-Tech Aggregate & Sub-Segments

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 High-Tech Agg. 129.2 129.5 130.5 131.0 132.7 134.7 135.6 136.3 135.9 135.4 136.5 138.3 138.3 MoM % Chg 0.6% 0.2% 0.8% 0.3% 1.3% 1.5% 0.7% 0.5% -0.2% -0.4% 0.8% 1.3% 0.0% YoY % Chg 2.8% 2.9% 4.1% 4.4% 5.6% 6.3% 8.5% 7.7% 6.3% 6.0% 6.3% 7.6% 7.0%

Comp & Periph. 116.2 116.6 116.7 117.6 119.4 121.2 118.5 119.2 120.0 118.9 120.4 124.2 128.1 MoM % Chg 3.1% 0.3% 0.1% 0.8% 1.6% 1.5% -2.3% 0.6% 0.6% -0.9% 1.3% 3.1% 3.2% YoY % Chg 3.7% 3.5% 1.6% 3.9% 7.6% 7.6% 19.5% 18.0% 5.9% 7.3% 6.7% 10.2% 10.2%

Comm Equip. 118.8 118.2 118.1 119.7 123.5 128.5 131.5 132.9 132.8 132.9 133.4 133.8 134.5 MoM % Chg -0.1% -0.5% -0.1% 1.3% 3.2% 4.1% 2.3% 1.1% -0.1% 0.1% 0.4% 0.3% 0.6% YoY % Chg 1.7% 1.8% 3.2% 5.9% 9.3% 12.7% 14.0% 14.2% 13.3% 12.7% 12.5% 12.5% 13.3%

Semis & Other Elec. 137.2 137.9 139.7 139.5 140.2 140.7 141.7 141.8 141.1 140.4 141.6 143.5 141.9 MoM % Chg 0.2% 0.5% 1.4% -0.2% 0.5% 0.4% 0.7% 0.1% -0.6% -0.5% 0.9% 1.4% -1.1% YoY % Chg 3.0% 3.2% 5.1% 3.9% 3.5% 3.3% 3.6% 2.5% 3.4% 2.7% 3.5% 4.8% 3.4%

Comp.&Other Materials 107.8 107.4 106.1 104.9 106.9 104.4 105.5 106.6 108.1 105.6 108.2 116.8 114.9 MoM % Chg -0.2% -0.4% -1.3% -1.1% 1.9% -2.4% 1.1% 1.0% 1.4% -2.3% 2.5% 8.0% -1.6% YoY % Chg 3.4% 1.4% -1.5% -2.6% 0.2% -4.0% 1.0% 1.5% 3.1% -0.7% -1.5% 8.1% 6.6%

Source: Federal Reserve Industrial Production Release, Wells Fargo Securities, LLC

Memory Pricing

Spot Market Last week, DRAM and NAND spot prices increased for the most part, according to DRAMeXchange (see Figure 3).  The spot price for an 8Gb DDR4 chip increased to $6.41, compared to $6.39 at the end of the prior week.  The 128Gb multi-level cell (MLC) NAND spot price increased to $6.90, compared to $6.82 at the end of the prior week.  The 256Gb MLC NAND spot price increased to $12.63, compared to $12.60 at the end of the prior week.

Contract Market

The contract price for an 8Gb DDR4 chip remained flat at $6.50 in the second half of May 2017, compared to the second half of April 2017, up from $5.81 in the second half of March 2017, $5.81 in the second half of February, and $5.69 in the second half of January.

The contract price for a 128Gb NAND chip increased to $5.52 in the second half of May 2017, compared to $5.51 in the second half of April 2017, $5.42 in the second half of March 2017, $4.76 in the second half of February, and $4.54 in the second half of January.

Current quarter bit growth expectations:  For the June quarter, Samsung expects DRAM market bit growth in the mid-single-digit area and Samsung’s bits to increase in the high-single-digit percent area. For the June quarter, Samsung expects NAND market bit growth in the mid-single-digit area and Samsung’s NAND bit growth to be in line with the market.  For the June quarter, SK Hynix expects its DRAM bit shipments to grow in the mid-single digits sequentially and its NAND bit shipments to be flat sequentially.

Figure 3. Memory Chip Prices 256Gb NAND 4Gb DDR4 8Gb DDR4 128Gb NAND MLC MLC

Date Spot Contract Spot Contract Spot Contract Spot 06/16/2017 $3.22 $6.41 $6.90 $12.63 06/09/2017 $3.22 $6.39 $6.82 $12.60 06/02/2017 $3.22 $6.39 $6.84 $12.60 05/26/2017 $3.22 $3.09 $6.39 $6.50 $6.92 $5.52 $12.60

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05/19/2017 $3.22 $6.39 $6.92 $12.60 05/12/2017 $3.23 $6.38 $6.86 $12.35 05/05/2017 $3.24 $6.37 $6.78 $12.25 04/28/2017 $3.26 $3.09 $6.40 $6.50 $6.55 $5.51 $12.15 4/21/2017 $3.34 $6.72 $6.44 $12.05 04/14/2017 $3.38 $6.83 $6.27 $11.95 04/07/2017 $3.38 $6.79 $6.17 $11.79 03/31/2017 $3.38 $2.75 $6.79 $5.81 $6.15 $5.42 $11.68 03/24/2017 $3.39 $6.83 $6.13 $11.65 03/17/2017 $3.43 $6.79 $5.92 $11.48 03/10/2017 $3.49 $6.89 $5.67 $11.24 03/03/2017 $3.44 $6.85 $5.47 $11.19 02/24/2017 $3.44 $2.75 $6.89 $5.81 $5.43 $4.76 $11.13 02/17/2017 $3.44 $6.93 $5.33 $10.43 02/10/2017 $3.44 $6.93 $5.21 $10.30 02/03/2017 $3.41 $6.85 $5.18 $10.24 01/26/2017 $3.33 $2.69 $6.76 $5.69 $5.16 $4.54 $10.24 01/20/2017 $3.23 $6.65 $5.16 $10.24 01/13/2017 $3.20 $6.30 $5.14 $10.20 01/06/2017 $3.04 $6.03 $5.12 $10.20 12/30/2016 $2.83 $1.94 $5.73 $4.19 $5.04 $4.22 $10.08 12/23/2016 $2.83 $5.66 $5.03 $10.08 12/16/2016 $2.81 $5.56 $5.03 $10.04 12/09/2016 $2.73 $5.43 $5.02 $10.00 12/02/2016 $2.61 $1.94 $5.28 $4.19 $5.06 $4.11 $10.00 Source: DRAMeXchange, Wells Fargo Securities, LLC

News Items:

June 16, 2017. Clevo positive about its notebook business in 2017. According to Digitimes, Clevo is optimistic about the performance of its notebook business and expects for its notebook shipments to increase to 1.7 million units in 2017, up from 1.33 million units in 2016. The increase in demand was primarily driven by emerging markets including Russia and Brazil, while revenue and profit are also expected to increase, due to a new product mix with high-end products making up 50% of shipment and average selling prices (ASP) growing by double-digit percentages yr/yr. Currently, demand in North America is rising and shipments in emerging markets such as Southeast Asia are stable. Gaming notebook shipments are still growing strongly, and 2-in-1 devices and VR-ready notebooks are expected to become popular. Clevo is expecting worldwide notebook shipments to slip 1.8% yr/yr to reach 149 million units. Clevo is focusing its notebook business in Europe and emerging markets, though sales in those regions were negatively affected in 2016, due to exchange rates and low oil prices. However, these regions are seeing economic recoveries start from early 2017.

June 15, 2017. AMD’s EPYC 7000 Series Specifications. According to WCCFTech, AMD’s EPYC family is expected to be branded as the “EPYC 7000” series and includes 12 models, with only three models specifically designed to be compatible for single socket solutions (with the rest on 2P platform). According to WCCFTechn, AMD’s EPYC 7000 Series server lineup is expected to feature the following:  EPYC 7601 – 32 cores, 64 threads, 64MB (Megabyte) L3 (Level 3) cache, 2.2GHz base/3.2GHz boost, 180W (watt) TDP (Thermal Design Power), 2P Platform  EPYC 7551 – 32 cores, 64 threads, 64MB L3 cache, 2.0GHz base/3.0GHz boost, 180W TDP, 2P Platform  EPYC 7501 – 32 cores, 64 threads, 64MB L3 cache, 2.0GHz base/3.0GHz boost, 155/170W TDP, 2P Platform  EPYC 7451 – 24 cores, 48 threads, 48MB L3 cache, 2.3GHz base/3.2GHz boost, 180W TDP, 2P Platform

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Chip Weekly: Memory still strong Equity Research

 EPYC 7401 – 24 cores, 48 threads, 48MB L3 cache, 2.0GHz base/3.0GHz boost, 155W/170W TDP, 2P Platform  EPYC 7351 – 16 cores, 32 threads, 32Mb L3 cache, 2.4GHz base/2.9GHz boost, 155W/170W TDP, 2P Platform  EPYC 7301 – 16 cores, 32 threads, 32MB L3 cache, 2.2GHz base/2.7GHz boost, 155W/170W TDP, 2P Platform  EPYC 7281 – 16 cores, 32 threads, 32MB L3 cache, 2.1GHz base/2.7GHz boost, 155W/170W TDP, 2P Platform  EPYC 7251 – 8 cores, 16 threads, 16MB L3 cache, 2.1GHz base/2.9GHz boost, 120W TDP, 2P Platform  EPYC 7551P – 32 cores, 64 threads, 64MB L3 cache, 2.0GHz base/3.0GHz boost, 180W TDP, 1P Platform  EPYC 7401P – 24 cores, 48 threads, 48MB L3 cache, 2.0GHz base/3.0GHz boost, 155W/170W TDP, 1P Platform  EPYC 7351P – 16 cores, 32 threads, 32MB L3 cache, 2.4GHze base/2.9GHz boost, 155W/170W TDP, 1P Platform

June 15, 2017. AMD selected by Department of Energy’s ECP to accelerate supercomputing hardware technologies. In a press release, AMD announced that it has been selected by Department of Energy’s Exascale Computing Project to accelerate supercomputing hardware technologies. According to AMD, the new three-year PathForward program, which offers funding to drive advances of next generation supercomputing hardware technologies, places even more emphasis on co-design compared to prior exascale research efforts. The new PathForward program focuses on these four aspects of exascale computing: parallelism, memory and storage, reliability, and energy consumption; AMD is expected to work on CPU and GPU microarchitectures, memory systems, component integration, and high speed interconnects.

June 15, 2017. Qualcomm receives antitrust clearance by the Taiwan Fair Trade Commission for the acquisition of NXP Semiconductors. Qualcomm announced the Taiwan Fair Trade Commission issued regulatory clearance for its pending acquisition of NXP Semiconductors. The clearance by the Taiwanese Fair Trade Commission follows similar antitrust clearance of the transaction by the U.S. Federal Trade Commission in April 2017.

June 14, 2017. AMD Ryzen Threadripper CPUs and X399 Platform reported to launch in early August 2017. According to website kitguru.net, AMD is expected to launch its Ryzen Threadripper processors and High End Desktop (HEDT) X399 platform in early August 2017. AMD’s Ryzen Threadripper processors are expected to feature up to 16 cores and 32 threads. AMD’s X399 platform is expected to feature up to 64 Peripheral Component Interconnect express (PCIe) lanes, with 60 lanes being utilizable by discrete graphics. X399 platform is expected to feature Socket TR4 with 4094 pins; the socket is expected to be supported by a quad channel Dual In-line Memory Module (DIMM) surface that can support extreme capacities.

June 14, 2017. Accelerators - Market Sizing and Dynamics. We published a note in which we presented our thoughts on some of the key dynamics driving the datacenter accelerator market, and attempted to size the accelerator opportunity. We think that the use of accelerators is enabling new datacenter markets such as artificial intelligence, which should drive growth in Intel’s datacenter processor business, and that Intel’s broad range of accelerator products may well help Intel capture additional revenue, both within and outside the datacenter. We think that AMD differentiates itself in having x86 server processor and discrete graphics capability together with a semi-custom design organization. We see Nvidia as the dominant provider of stand-alone accelerator solutions for datacenter, but believe that this is already reflected in Nvidia’s stock value. Over time, we think additional providers of stand-alone accelerators might emerge, helping drive growth in the stand-alone processor market, but reducing Nvidia’s market share. We think that the emergence of integrated CPU/accelerator solutions might cut into the stand-alone accelerator market in the future. We remain cautious on Nvidia’s stock. We think that the combined datacenter CPU+accelerator market could grow with a CAGR of about 16% to approximately $33 billion by 2020E. We provide our reasoning as to why we think that the market for stand-alone accelerators, addressed by Nvidia, might be about $4 billion by 2020E. In addition to stand-alone accelerators, we think companies like Intel and AMD might offer various forms of integrated accelerator solutions, where accelerator chips are co-packaged together with central processing units (CPU) or additional accelerator circuitry is integrated on the same die as the CPU. We believe that many investors think that Nvidia’s strength in datacenter accelerators is cannibalistic to Intel’s datacenter processor sales. In our opinion, the reverse may be true, that Nvidia’s clear success in accelerators is probably enabling a major new emerging technology (artificial intelligence) that could benefit both Nvidia and Intel. Intel’s

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datacenter sales have shown yr/yr growth even as Nvidia’s datacenter sales began to jump over the past two years. Nvidia’s quarterly datacenter sales remain small compared to Intel’s sales, less than 10% in the March 2017/April 2017 quarter. We think that there are likely to emerge several different classes of accelerator, of which Nvidia GPUs might fall into just one of these classes (general purpose programmable accelerators). Even within general purpose programmable accelerators, we believe that Nvidia’s chips are optimized for some specific types of applications (e.g., calculations required for graphics or image processing), and that other types of accelerators might offer strengths in different areas of computation. In addition, we think that field programmable gate arrays (FPGA) and application specific integrated circuits (ASIC) may emerge as other important classes of accelerators, especially for AI inference applications. Intel has products that address each of these classes of accelerator. (For additional details, please see to our note dated June 14.)

June 14. E3 Gaming Expo 2017. Last week we attended the Electronic Entertainment Expo (E3) at the Los Angeles Convention Center. Among the companies that we cover, Intel hosted the third annual PC gaming Show at E3 and announced that its new Core X-series top-end processor for gaming is to be available for pre-order beginning June 19. Nvidia featured a booth showcasing new games on its graphics cards. Microsoft revealed its Xbox One X console (Project Scorpio) which uses an AMD semi-custom chip. We are reiterating our Outperform ratings on Intel (INTC, $35.88) and AMD (AMD, $11.96). While Nvidia is very strongly positioned in graphics processor units (GPU) for gaming, in our view, this is already reflected in Nvidia’s stock price. Intel: Intel announced that its first Intel Core X-series processors (4-10 cores) is to be available for pre-order beginning June 19, and are expected to begin shipping the following week; 12-core Intel Core-i9-7920X X-series processors are expected to begin shipping in August, and the remaining (including the 18-core Intel Core i9 Extreme Edition) are expected to begin shipping in October. Intel also announced that its technology is now to power all of Electronic Sports League’s (ESL) amateur and professional esports. Nvidia: At E3, Nvidia, Activision, and Bungie announced that they are in a partnership to bring the Destiny franchise to PCs with the new action game Destiny 2. At its E3 booth, Nvidia showcased many games running on desktops powered by its GTX graphics cards. As far as we can tell, Nvidia did not announce any new products at E3. At this year’s E3, Microsoft revealed its Xbox One X console, formerly code-named “Project Scorpio,” and showcased 42 titles, including 22 with console exclusivity. Microsoft announced that its Xbox One X console is to retail for USD$499 and is expected to be available to all Xbox One markets beginning November 7, 2017. AMD has stated in the past that Project Scorpio uses by its semi-custom chip. (For additional details, please refer to our note dated June 14.)

June 14, 2017. Qualcomm brings premium sound quality to a broad range of audio devices with the release of next generation DDFA Audio amplifier technology. Qualcomm introduced its next generation Qualcomm DDFA audio amplifier technology for audio devices including wireless speakers, sound bars, networked audio, and headphone amplifiers. Next generation DDFA is to be available on the CSRA6620 system on a chip, a highly integrated platform that includes a DDFA controller with eight channel inputs, two channel outputs, a microcontroller, and a configurable audio processor.

June 14, 2017. Qualcomm announces multiple audio platforms to support new use cases for wireless speakers, headphones, and hearables. Qualcomm announced major additions to the company’s broad portfolio of audio system on chip platforms. CSRA68100, the company’s next generation high-performance single-chip Bluetooth audio flash programmable platform, is designed for premium wireless speakers and headphones. The QCC3XXX is a new family of entry-level, flash-programmable audio system on chip platforms at competitive price points for Bluetooth headsets and speakers. The QCC3XXX family includes eight system on chips, three of which support Bluetooth speaker applications and five of which support Bluetooth headset applications. Qualcomm plans to introduce its WHS9420 and WHS9410 single-chip USB audio system on chip platforms targeted for USB-C connected audio devices.

June 14, 2017. Alibaba Group reported shares data center technology with OCP. According to Digitmes, Alibaba Group announced plans to share its data center technology with Open Compute Project (OCP), which focuses on reduction of energy consumption and building of more eco-friendly data centers. Alibaba reportedly said it’s been developing green data center technology; the latest has been its immersion cooling, which can reduce energy consumption significantly and lower operation costs by 20%.

June 14, 2017. Broadcom delivers high-performance data plane programmability with new Trident 3 generation of 10/25/100G Ethernet Switches. Broadcom announced the availability of the first members of its breakthrough Trident 3 family of programmable switches for data center, enterprise, and service provider networks transitioning to high-density 10/25/100G Ethernet. Manufactured in 16nm and building on StrataXGS Trident and Tomahawk switch products, the new StrataXGS Trident 3 switch

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Chip Weekly: Memory still strong Equity Research

services offer fully programmable, line rate switching solutions ranging from hundreds of Gbps to multiple Tbps. Broadcom is sampling the first two members of the StrataXGS Trident 3 family, including the BCM56870 (3.2 Tbps) and BCM56873 (2.0 Tbps).

June 13, 2017. Biostar, ASRock, and Colorful see increasing demand in mining motherboards. According to Digitimes, Biostar, ASRock, and Colorful are seeing increasing shipments of their mining motherboards, due to the rising demand for mining cryptocurrencies. Biostar has recently launched its TB250-BTC Pro motherboard that can support up to 12 graphics cards simultaneously and it is priced at $124.00. Biostar said that orders for the motherboard are lined-up to the end of September and has increased its production to 24 hours in order to meet demand. ASRock is planning to release a motherboard that supports up to 13 graphics cards, but is currently behind Biostar by 2-3 months in technology since the motherboard is not yet in mass production. Colorful is also optimistic about the business opportunity in cryptocurrency.

June 13, 2017. GlobalFoundries announces availability of 7LP FinFET process technology. In a press release, GlobalFoundries announced the availability of its new 7LP (or 7-nanometer Leading- Performance) FinFET (Fin Field Effect Transistor) process technology. According to GlobalFoundries, the new process technology is expected to feature greater than 40% more processing power and twice the area scaling than its prior 14nm FinFET process technology. GlobalFoundries noted that design kits are now available, first customer products based on its new process technology are expected to launch in 1H2018, and volume production is expected to ramp up in 2H2018. GlobalFoundries is also adding the first two EUV lithography tools in the second half of 2017 to accelerate 7LP production ramp-up. Meanwhile, GlobalFoundries indicated that it is actively developing its next generation 5nm technology.

June 12, 2017. Microsoft reveals Xbox One X at E3. At its E3 press conference, Microsoft revealed its Xbox One X console, formerly code-named “Project Scorpio,” and noted that Xbox One X represents the most powerful and smallest Xbox console. Microsoft noted that its Xbox One X console is to retail for USD$499/449 pounds/499 euros/CAD$599/AUD$649.1, and is expected to be available to all Xbox One markets beginning November 7, 2017. Microsoft’s Xbox One X is expected to improve existing library of games with better textures, smoother frame rates, and faster load times. According to Microsoft, Xbox One X has 40% more power than any other console and features 4k gaming when paired with a 4k display. In addition, Xbox One X offers 4K Ultra HD for Blu-ray X and streamed content, High-Dynamic- Range (HDR) support for gaming and video, and Dolby Atmos support. Microsoft indicated that its new Xbox One X coexists with Xbox One and Xbox One S, and all Xbox One games and accessories are compatible with Xbox One X. Microsoft announced that it is to expand the Xbox One backward- compatibility library of close to 400 Xbox 360 games to include original Xbox classics. Microsoft also indicated that dozens of popular Xbox One games (such as “Gears of War 4” and “Final Fantasy 15”) are expected to receive free updates to benefit from the power of the new Xbox One X.

June 10, 2017. Alibaba Cloud announces two new data centers in India and Indonesia. At its Computing Conference in Shang Hai, Alibaba Cloud announced that it plans to build two new data centers in Mubai, India and Jakarta, Indonesia, and expects these two datacenters to open during its fiscal year ending on March 31, 2018. With its three new datacenters planned (India, Indonesia, and Malaysia), Alibaba Cloud plans to increase the total number of datacenter locations to 17.

Upcoming Events

June 20, 2017. ADI Analysts’ Day. ADI is holding its analysts’ day at its headquarters in Norwood. We believe that ADI’s presentations will provide updates on its Linear acquisition, recent product development, and product demonstrations.

June 20, 2017. AMD launching EPYC datacenter processors. AMD is holding a launch event in Austin for its next generation datacenter processor family, EPYC. We believe that AMD will highlight capabilities of its new processor family and perhaps identify some customers that are to be using the processors.

July 11, 2017. Intel Purley launch event. Intel has announced that it is to be holding a launch event for its next generation Purley server platform on July 11, 2017, in Brooklyn, New York. At the event, Navin Shenoy, Intel’s new head of Data Center Group, and Lisa Spelman, DCG’s VP of Marketing, are to discuss Intel’s latest technology advancements for the datacenter and its partnerships.

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Mergers and Acquisitions

The following is a list of what we consider to be some of the more significant mergers and acquisitions in the chip space that have been announced over the past 1-3 years.

Table A: Recent M&A transactions Transaction Date first Date Value Announced Closed Acquirer Target (US$MM) 3/13/2017 Pending Intel Mobileye ~15,300 12/21/2016 05/18/2017 TDK Invensense ~1,300 11/21/2016 01/26/2017 MACOM Technology Applied Micro Circuits 770 11/02/2016 Pending Broadcom Limited Brocade ~5,900 10/27/2016 Pending Qualcomm NXP Semiconductor ~47,000 9/12/2016 02/24/17 Renesas Electronics Intersil ~3,200 8/17/2016 12/02/16 GlobalWafers SunEdison Semiconductor ~$683 6/27/2016 03/10/2017 Analog Devices Linear Technology ~14,800 07/17/2016 09/05/2016 SoftBank ARM Holdings ~32,000 12/14/2015 12/06/2016 Micron Inotera ~3,200 11/18/2015 9/19/16 ON Semiconductor Fairchild ~2,400 10/21/2015 5/12/16 Western Digital SanDisk ~19,000 10/21/2015 Terminated 10/5/16 LAM Research KLA-Tencor ~11,000 10/05/2015 01/15/16 Microsemi PMC-Sierra ~2,500 09/20/2015 04/04/16 Microchip Atmel ~4,600 09/07/2015 3/16 MediaTek RichTek ~900 06/01/2015 12/28/15 Intel Altera 15,359 05/28/2015 2/1/2016 Avago Broadcom ~34,000 05/07/2015 08/03/15 Microchip Micrel 702 03/18/2015 04/28/15 Microsemi Vitesse 348.6 03/08/2015 12/7/15 NXP Freescale 15,945 10/20/2014 07/01/15 GlobalFoundries IBM Semiconductor (1,500)* 08/20/2014 01/13/15 Infineon International Rectifier 2,255 06/09/2014 07/22/14 Analog Devices Hittite Microwave 2,500 02/24/2014 01/02/15 RF Micro Devices TriQuint Semi 1,646 12/16/2013 05/06/14 Avago LSI 6,600 09/24/2013 Terminated 04/26/15 Applied Materials Tokyo Electron ~29,000 *IBM paid $1.5 billion to GlobalFoundries Source: FactSet, Company Reports and Wells Fargo Securities, LLC

Our Coverage

The following are the stocks we cover.

Table A: Stocks we cover/Dividend monitor: Annualized Price Annual Dividend Company Name Ticker 6/16/17 Dividend Yield Rating Advanced Micro Devices AMD $11.44 - - Outperform Analog Devices ADI $80.04 $1.80 2.2% Market Perform Broadcom Limited AVGO $236.25 $4.08 1.7% Market Perform Intel INTC $35.21 $1.09 3.1% Outperform Maxim Integrated Products MXIM $46.25 $1.32 2.9% Market Perform Micron Technology MU $29.86 - - Outperform Microsemi MSCC $48.03 - - Outperform Monolithic Power Systems MPWR $97.19 $0.80 0.8% Market Perform Nvidia Corporation NVDA $151.62 $0.56 0.4% Underperform Qualcomm QCOM $56.82 $2.28 4.0% Outperform Qorvo QRVO $71.72 - - Market Perform Skyworks Solutions SWKS $101.90 $1.12 1.1% Outperform Texas Instruments TXN $79.70 $2.00 2.5% Market Perform Xilinx XLNX $64.74 $1.40 2.2% Market Perform Source: FactSet, Wells Fargo Securities, LLC estimates

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Chip Weekly: Memory still strong Equity Research

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42% of companies covered by Wells Fargo Securities, LLC Equity Wells Fargo Securities, LLC has provided investment banking Research are rated Outperform. services for 46% of its Equity Research Outperform-rated companies. 56% of companies covered by Wells Fargo Securities, LLC Equity Wells Fargo Securities, LLC has provided investment banking Research are rated Market Perform. services for 33% of its Equity Research Market Perform-rated companies. 2% of companies covered by Wells Fargo Securities, LLC Equity Wells Fargo Securities, LLC has provided investment banking Research are rated Underperform. services for 28% of its Equity Research Underperform-rated companies.

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