Booms and busts are familiar to any student of economics: they form the underlying models of long-term performance, for entire economies and for individual sectors. A recent report on the semiconductor chip industry helps show the pattern and sheds light on where and how investors can position themselves now to take full advantage.
To begin with, the report, based on global chip sales data, places the start of the current cycle in early 2020, at the onset of the pandemic crisis. While it was a major blow to economies overall, 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 home working, online schooling, and e-commerce shopping. An increase in purchases of smartphones and tablets has also helped fuel demand for chips. This momentum has held throughout the first half of 2022.
We are in the bankruptcy stage now and have been for at least six months. Sales numbers hit record highs in the first half of last year but plummeted in the second half. The question now is: have we bottomed out or are we nearing the bottom this cycle?
5-star analyst Vijay Rakesh, of Mizuho Securities, says we are approaching the bottom and predicts a positive turnaround in the near future.
“We see improving structural trends driving an accelerating path towards balancing supply and demand for memory,” Rakesh noted. q, and the price of memory is down 10% year-to-date; however, we are close to a cyclical low. Q1 of Q23 could see inventories peak and revenue trough, with fundamentals set to recover in Q2 of Q23/2024.
To prepare for this coming recovery, Rakesh 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 memory, and lines of semiconductor chips for USB drives. The company’s 1-beta DRAM chip is the most advanced on the market today, and the company recently announced updates to its range of data server memory.
While Micron has been proactive in keeping its chip lines at the cutting edge of technology, the company has seen its sales decline in recent months. In the most recently reported quarter, the first quarter of fiscal 2023, the quarter ending December 1, 2022, Micron reported revenue 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 positive despite declining sales, turned negative 4 cents a share in Q1 23 .
Unsurprisingly, the company’s share price has also declined over the past year. Over the past 12 months, MU stock is down 33%, more than double the NASDAQ’s 15% decline over the same period.
Checking in with Mizuho’s Rakesh, however, we find that the analyst is optimistic for the long term. As noted, he upgraded his stance on MU from Neutral to Buy, and in support of this, Rakesh writes: Deliver a multi-year low and a 2H bounce along with an improving MU investor sentiment position and we see a FebQ/low MayQ.”
Along with the Buy rating, Rakesh also gives MU shares a price target of $72, which implies about 20% upside for next year. (To see Rakesh’s track record, click here)
Major tech companies like Micron will always attract Wall Street’s attention, and this company has logged 23 recent analyst reviews. These include 16 buys, 5 holds and 2 sells, for a moderate buy consensus rating. (See Inventory forecasts in microns)
Western Digital (WDC)
Next up is Western Digital, a major player in the chip industry. Western, based in San Jose, California, is another computer memory specialist, but its focus is on hard drives and other primary data storage, as well as SSDs and flash drives. Western has built a strong position in the data center and cloud storage niches, and its product lines feature well-known brands including WD and SanDisk.
Western Digital exhibits the same revenue and earnings pattern that we saw above at Micron: a top-line decline starting in the second half of calendar year 2022, accompanied by a bottom-line decline that turns into negative earnings. In the most recently reported quarter, the second quarter of fiscal 2023 (the quarter corresponding to calendar 4Q22), Western had total revenue of $3.11 billion. While this was on the high end of previously issued guidance, it was still down nearly 17% from the previous quarter and 35% year over year.
Bottom line, Western reported a second-quarter fiscal earnings loss of 42 cents per share, according to non-GAAP measures. In GAAP terms, the quarterly EPS loss was $1.40. These figures were down from prior quarter profits, by 8 cents for GAAP measures and 20 cents for non-GAAP measures.
Despite the earnings/revenue losses, Western Digital still holds a strong position in its niche and is aiming to improve its position. The company recently probed talks with Japanese chip maker Kioxia about a potential merger. While this remains at the stage of rumors (neither company has confirmed anything), such a move would create a combined entity with control of more than a third of the NAND flash chip market.
In Mizuho’s Rakesh’s eyes, this lends support to the recently updated Buy rating on WDC stock. Rakesh writes, “We believe WDC is positioned for the upside in HDD [hard disk drive]and undervalued given a potential 2H23/24E NAND rebound and possible NAND strategic rotation with Elliot activism and possible Kioxia merger discussions… While near term we see some challenges in 1H23E with inventory corrections and weaker demand, we see improving HDD/NAND as vendors focus on capex reductions and supply growth to help normalize inventories, preparing for a better 2H23E/2024E recovery.”
Based on all of the above factors, Rakesh assigns WDC stock a $50 price target to support his buy rating. This figure implies an upside of around 16% from current levels.
Overall, there have been 14 analysts playing WDC lately, 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 latest chip stock we’re looking at is Seagate Technology, a longtime leader in hard disk drive (HDD) technology. Seagate developed the first 5.25-inch hard drives in the 1980s and has followed a successful path of growth through acquisitions over the years. Today, Seagate is a $14 billion player with a product line in three areas: Cloud & Data Center; Specialized drives; and personal storage.
Following the same pattern as Micron and Western Digital, Seagate has seen its highs and lows drop in recent months. The latest quarterly report was for fiscal 2Q23 (the quarter ended last December 30) and showed revenues of $1.89 billion. That’s down 7% sequentially and 39% year over year. Earnings fell to just 16 cents per share under non-GAAP measures; GAAP EPS reported a loss of 16 cents a share. Looking ahead, however, analysts expect third-quarter non-GAAP fiscal EPS to rise to 26 cents.
In this context, Mizuho’s Rakesh has one thing to say: don’t throw in the towel just yet. The analyst believes this company has solid prospects for exiting the doldrums sooner rather than later.
“STX managed a significant inventory reduction of approximately 25% QoQ with better positioned 2H demand and HAMR roadmap accreting margins in 2024E for drives with mass capacities greater than 30TB…We expect that HDD inventories will normalize after 1Q23E with potential for yield growth sooner than when inventories are depleted at major corporate customers, setting STX up for a strong 2HC23E,” Rakesh said.
This is another chip stock that Rakesh has upgraded to Buy, and his price target here, $82, indicates 15% upside potential this year.
All in all, this stock shows an almost even split among Street analysts; Of the 22 recent reviews on file, there are 11 Buys, 10 Holds, and a single Sell, resulting in a Moderate Buy consensus rating. (See Seagate stock forecast)
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Disclaimer: The views expressed in this article are solely those of the analysts featured. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.