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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 4500 4000 3500 3000 2500 2000 1500 Datacenter Revenue ($millions) 1000 500 0 Jun-15 Jun-14 Jun-16 Sep-15 Sep-14 Sep-16 Dec-14 Dec-15 Dec-16 Mar-15 Mar-16 Mar-17 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 2 | Wells Fargo Securities, LLC 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.