Shares of Advanced Micro Devices (AMD - Free Report) , Intel (INTC - Free Report) , Nvidia (NVDA - Free Report) , and Micron (MU - Free Report) all surged Wednesday after Nomura Instinet analysts initiated bullish coverage on two of the chip firms amid concerns that the historically cyclical semiconductor industry is in the midst of a downturn. With that said, let’s look at some of the reasons for the positivity and what investors should expect from the chip giants this year and next in terms of top and bottom-line movement.
Analyst Coverage & TSM Report
Nomura Instinet opened coverage on AMD with a “buy” rating and a $33 a share price target. The target marks roughly 19% upside to Tuesday’s closing price. The firm pointed to strong revenue expansion and improving profitability to help justify AMD’s a high P/E. “We think a return to sustainable profitability will help drive Advanced Micro Device's stock value,” analyst David Wong wrote in a note to clients.
“We forecast AMD's reported GAAP EPS will climb through 2019 and rise meaningfully in subsequent years from roughly breakeven in the March 2019 quarter.”
The same analysts began coverage of Intel with a $65 per share price target and a “buy” rating. This marked over 16% upside to INTC’s closing price on Tuesday. The positivity seems to stem from longer-term optimism for the chip giant that Nomura dubbed the “world leader in processors for artificial intelligence and autonomous driving.”
Meanwhile, a report from DigiTimes suggests that Taiwan Semiconductor Manufacturing Company (TSM - Free Report) , which is one of the world's biggest chipmakers, is set to up its 7 nanometer production rates on the back of strengthening Android device orders.
Shares of AMD soared over 9% through morning trading, while Intel jumped 2.5% and NVDA popped 3.5%. At the same time, Micron climbed 4%, with Applied Materials (AMAT - Free Report) , Western Digital (WDC - Free Report) , Lam Research (LRCX - Free Report) , and other semiconductor stocks all up big. Even Apple (AAPL - Free Report) stock popped on broader industry optimism.
As we have touched on already, the broader semiconductor market is cyclical, with companies beholden to their customers’ product cycles, capital investments, and more. Plus, demand can track end-market demand, which means everyone from giants like Intel to small firms, can suffer when PC or cell phone sales lag. On top of that, chip oversupply can hurt pricing power.
Despite all of the positivity, even the Nomura Instinet analysts who helped spark Wednesday’s moves noted that the larger chip market is likely to remain in a downturn for now. Falling memory chip prices seem ready to hut Micron and others. Meanwhile, Nvidia and AMD, who have both suffered based on slowing demand from cryptocurrency miners, among other negative factors, look ready to experience some more negativity.
Looking ahead, our current Zacks Consensus Estimate calls for AMD’s adjusted current quarter earnings to tumble 55% on the back of a roughly 24% decline in revenue. Despite the near-term downturn, AMD is projected to see its full-year earnings surge 39% on 4.8% revenue growth, with 54% bottom-line growth expected in the following year on nearly 20% revenue expansion.
AMD’s outlook seems to track with Nomura Instinet’s positivity. With that said, Micron’s fiscal 2019 earnings are projected to fall 46% on 22.7% lower revenue. On top of that, the company’s 2020 earnings are projected to come in 25% lower than our current estimate and 8% worse revenues.
Nvidia’s current full-year revenues are projected to slip 4.5%, which is expected to help cause a nearly 20% decline in earnings. Like AMD, the gaming-focused GPU giant is projected to return to impressive double-digit top and bottom-line growth next year.
Intel’s current full-year earnings are projected to dip 1.75% on the back of a small year over year revenue decline. Peeking further ahead, the company’s fiscal 2020 EPS figure is projected to come in 4.9% above our current year estimate on 3.6% higher sales.
It is unclear how long the current 2019 rally in chip stocks will last, with AMD, NVDA, and MU all up over 40% this year. In the end, however, the broader semiconductor market is set to help drive the larger technological revolution, from cloud computing to artificial intelligence, which means a return to growth is likely on the horizon for the industry as a whole, even if some face rough near-term outlooks.
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