Equity Research
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August 11, 2014 Equity Research Chip Weekly: Memory Capex Up--GPUs To Rise In Q3 • Last week Micron announced that its FY2015 capital expenditure (capex) plan is $3.6-4.0 billion, up from $2.80-3.2 billion in FY2014. Nvidia guided for 9% Semiconductors sequential sales growth for its October quarter, which we think could be a sign of improving consumer PC demand. Diodes reported 6% sequential sales growth for June and guided for 4% further growth in September. • Micron announced that its FY2015 capital expenditure (capex) plan is $3.6-4.0 billion, up from $2.80-3.2 billion in FY2014. This follows Samsung’s statement on its June quarter earnings call that its semiconductor capex in 2014 is expected to be KRW 14.5 trillion, up from KRW 12.6 trillion in 2013 and Samsung’s original expectation that its capex in 2014 would be flattish with 2014. • Nvidia’s July quarter performance and October outlook were solid, with Nvidia guiding for sales to grow about 9% sequentially in September. However, the bulk of the 13% year-over-year growth Nvidia achieved in the June quarter was associated with a rebound in Tegra, with the GPU segment up just 2% year over year. Nevertheless, Nvidia guided for 9% sequential sales growth for its October quarter, which we think could be a sign of improving consumer PC demand. • SunEdison Semiconductor achieved June quarter sequential sales growth of 4%, with gross margin rising to 9.5% from 4% in the prior quarter. We think that continuing growth in the semiconductor end markets will help the company grow it sales, improve capacity utilization and drive gross margin and operating margin, though we cut our EPS estimates substantially for the next few quarters as we reduced our projections for the rate of gross margin improvement in the near term. • Montage’s June sales were above the high end of guidance, driven by sequential growth in both memory interface and set top box products. The company is guiding for further growth in the September quarter. Montage’s shareholders have approved the pending acquisition by Shanghai Pudong, though the company noted that obtaining the necessary regulatory approvals for this acquisition could take some months. • Diodes reported June quarter revenue of $223.2 million (+6% sequentially and up 4% yr/yr) driven in particular by industrial products sold in North America and Europe. Strongest end markets in the quarter were industrial, communications and automotive. Diodes guided September quarter sales to the $228-238 million range (midpoint=+4% sequentially). • Atmel reported June quarter revenue of $355.5 million (+5% sequentially and +2% yr/yr) driven by stronger microcontroller and memory revenue. Atmel guided September quarter sales to the $364-382 million range (midpoint=+5% sequentially), which includes roughly $7 million woof acquisition-related sales. David Wong, CFA, PhD, Senior Analyst (212) 214-5007 / • In the coming week, we expect month of July Taiwanese data will show some [email protected] amount of seasonal softness, though we expect to see continued year-over-year Amit Chanda, Associate Analyst growth in our PC-related composites. Intel is conducting a webcast on which it (314) 875-2045 / will discuss its 14nm technology. [email protected] Parker Paulin, Associate Analyst (212) 214-5066 / [email protected] Charles E. Long, Associate Analyst (212) 214-8017 / [email protected] Please see page 13 for rating definitions, important disclosures and required analyst certifications All estimates/forecasts are as of 08/11/14 unless otherwise stated. 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. WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT Our View: First sign of consumer PC lift? Rising DRAM capex. While Nvidia’s July quarter earnings numbers and commentary suggest, we think, that consumer PC demand probably remained weak through July, we think that Nvidia’s October quarter outlook might be a first sign of some improvement in consumer PC demand. • Although Nvidia’s overall sales were up 13% year over year in the July quarter, this growth was driven by a particularly easy Tegra year/year comparison, since Tegra sales troughed in the July 2013 quarter. Nvidia’s GPU sales were up just 2% year over year in July. o Nvidia said year-over-year growth was driven by Tegra processor sales, GeForce GPUs for gaming, and Tesla and GRID for datacenter and cloud workloads. While GeForce GPUs are generally used in consumer PCs (consumer desktops and higher end large form factor consumer notebooks for gamin), Tesla and GRID are not. We conclude that Nvidia’s mobile GPU (used primarily in consumer notebooks) product revenues were weak, probably down year over year. o The segments of GPU strength Nvidia saw are higher-ASP GPU products, implying year-over-year growth in ASP (average selling price) and suggesting the GPU units were down year over year in the July quarter. • However, the midpoint of Nvidia’s October quarter guidance implies an expectation for 9% sequential sales growth. On the surface this appears similar to the 8% sequential growth guidance Nvidia gave a year ago for its September 2013 quarter. However, as noted above, Tegra was particularly weak in the July 2013 quarter and rebounded in the October 2013 quarter. The 8% sequential growth Nvidia actually achieved in the October 2013 quarter (in line with guidance) was driven by Tegra, with GPU sales up just 2% sequentially in the October 2013 quarter. o Tegra sales in the July 2014 quarter were $159 million, more than 3x the $52 million reported in the July 2013 quarter. From this higher base, we think it is unlikely that Tegra will be the main driver of growth in the October quarter. We conclude that the sequential growth outlook for GPUs is substantially better this year than last. o The main seasonal driver of sequential GPU strength in the October quarter is the consumer PC. For this reason we think that Nvidia’s solid October quarter outlook might be a first sign of a recovery in consumer PC demand. Both Intel and AMD have commented in recent weeks that consumer PC demand remains soft. We think that a pickup in consumer PC demand could be a source of upside potential to September and December quarter expectations for both companies. Nvidia’s October quarter outlook is a single data point which can be influenced by multiple factors, so we do not consider it to be conclusive evidence of a consumer PC recovery. Visibility on consumer PC demand tends to be relatively low in the month of August, but we are hopeful that there will be more signs of an improvement in consumer PC demand, perhaps beginning next month. We believe that the improvement in commercial PC demand in recent quarters has been driven primarily by the aging of the commercial PC installed base, and we think that similarly an aging consumer PC installed base, coupled with falling momentum in tablet demand, could spark a consumer PC demand recovery. We are reiterating our Outperform ratings on Intel and AMD. However we remain cautious on Nvidia with a Market Perform rating because we continue to think that there are long term secular growth challenges for Nvidia. • While arguably there is long-term secular growth uncertainty for AMD too, we think that AMD’s low valuation of approximately 0.5x price/sales creates a good investment opportunity in AMD’s stock. • For Intel, other potential positive catalysts for Intel’s stock and revenue growth in the near term include: o the launch of the Intel Grantley server platform (scheduled for September 8), o continuing market share gains in the tablet processor market in H2 2014 (Intel’s tablet processor shipments jumped from 5 million units in March 2014 to 10 million in June 2014), o continuing strength in commercial PC demand (overall Intel client group sales were up 6% year over year in the June 2014 quarter even with weakness in consumer PCs). Last week, in this weekly note, we discussed our concerns that many investors might have an unrealistic view of pricing trends in the DRAM industry. We stated our view that a rational goal for companies in a high fixed-cost technology-driven commodity business like DRAM is to assess potential return on capital as accurate a way as possible and increase spending when incremental return is above cost of capital. We believe that over the last two weeks comments from both Samsung and Micron on rising capex support our view. • Micron announced its 2015 capex plan of $3.6 to $4.0 billion, which represents an increase from the company’s 2014 capex plan of $2.8 to $3.2 billion. 2 WELLS FARGO SECURITIES, LLC Chip Weekly: Memory Capex Up--GPUs To Rise In Q3 EQUITY RESEARCH DEPARTMENT o A slide Micron presented at its Analysts’ Day event last week shows that Micron expects about half of its 2015 capex will be spend on DRAM and that DRAM spending will be about double NAND spending. • On its June quarter earnings call Samsung announced its KRW14.5 trillion (US$14.1 billion) 2014 semiconductor Capex plan. o Samsung noted that its capex increase is mainly due to memory as the company plans to equip its S3 line with DRAM capacity.