This is a continuation of our article 2024 Trend: Memory and PC Rebound. 2024 Trend: Memory and PC Rebound.
Over the past year, the memory, smartphone, and PC markets have been experiencing inventory corrections. However, recent earnings commentary from major companies like Samsung, Microsoft, AMD, and Intel suggests that these markets are approaching a bottom.
This article provides insights into the specific stocks poised to benefit from the anticipated market rebound. First, we compared the sequential growth rates from Q3 to Q4 of last year with the projected growth rates for this year. The data reveals a remarkably positive outlook, with every company exhibiting sequential growth.
Micron stands out with the most significant improvement, transitioning from a (-39%) decline last year to an anticipated 14% growth this year. Silicon Motion, which experienced a (-20%) decline last year, is projected to rebound with 13% growth this year. Qualcomm, having faced a (-17%) decline last year, is forecast to experience 10% growth this year. The average growth rate has transformed from a sequential decline of (-7%) last year to an expected 11% growth this year.
Source: YCharts
Earnings Beats
Below, we look at companies that beat analyst consensus. Companies that consistently beat estimates have a higher probability of outperforming the market. Intel is the leading stock with a revenue beat of 4.1%, helped by the PC rebound. The company’s recent revenue declined by (-8%) YoY and up 9% QoQ to $14.2 billion. The company beat its own guidance by 5.7% and exceeded its guidance for all major segments.
Silicon Motion’s revenue exceeded analyst expectations by 4%. The company’s revenue was down (-31%) YoY and up 23% QoQ to $172.3 million. The sequential solid growth was helped by the normalization of inventory levels across most of its markets and from the pick-up of customer orders in the recent quarter.
Western Digital ranked third with a revenue beat of 3.3%. The company’s revenue was down (-26%) YoY and up 3% QoQ to $2.75 billion.
Source: YCharts
Intel’s adjusted EPS came in at $0.41 compared to $0.37 in the same period last year, with a beat of 87% on expected EPS. Rambus reported $0.56 compared to $0.45 in Q3 2022, with a beat of 37.5%, and FormFactor reported $0.22 compared to $0.24 in the same period last year, with a beat of 26.1%.
Source: YCharts
Bottom Line and Free Cash Flow
GAAP profitability is another crucial metric to monitor closely, especially with macroeconomic uncertainty. Apple leads with an operating margin of 30%. We have discussed in depth in our editorial how the services segment will further help the company’s margin expansion. The article highlighted that “FY21 was a breakout year for Apple’s gross margin, expanding from 38% to more than 42% because of that growth in Services. Apple is guiding for gross margin to expand further in fiscal Q1 next year, to the 45% to 46% range – an expansion of 200 to 300 bp YoY, with Services’ growth rate forecast to be in the high-teens again.”
Lam Research ranks second with an operating margin of 29%. We discussed Lam in our deep-dive analysis earlier this year. We had highlighted, “Over the past decade or so, Lam was considered lower risk because it was expected that memory manufacturers would continue to buy from Lam even during a low point in the cycle. This happened in 2015, when Lam was insulated from the last deep memory trough. However, due to the China ban, Lam did not escape the memory trough this time around.” Rambus ranks third with an operating margin of 17%.
Source: YCharts
Qualcomm has the highest free cash flow margin of 44%. It has improved from 7% in the same period last year and 28% in Q2. Rambus ranks second with a free cash flow margin of 41% and Silicon Motion ranks third with 28%.
Source: YCharts
Stock-Based Compensation
Stock-based compensation is a non-cash expense added back to adjusted earnings. However, in practice this is an expense as per GAAP rules. Warren Buffet said the following, which relates to the importance of GAAP earnings over adjusted earnings when stock-based compensation is involved. “If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And if expenses should not go into the calculation of earnings, where in the world should they go?”
The stocks in the list below have stock-based compensation of less than 10% of their revenues, which is ideal. Rambus has the highest percentage of stock-based compensation at 9.5%, followed by Qualcomm at 7%, and FormFactor at 6.3%. Often, having higher stock-based compensation will weigh on GAAP profits. In this case, the list below is GAAP profitable in the majority of cases, and so this is less of a concern.
Source: YCharts
Valuations
In the below chart, we ranked companies based on the forward P/S ratio. Rambus has the highest forward P/S ratio at 13.1, followed by AMD at 8.7 and Apple at 7.4.
Source: YCharts
FormFactor has the highest forward P/E ratio of 52.2, followed by AMD at 44.6, and Intel at 44.4.
Source: YCharts
Ranking based on revenue estimates change for next quarter
Micron’s revenue estimates for the next quarter have been revised up 5.3%, followed by Qualcomm at 3.1% and Western Digital Corporation at 1.9%. Western Digital also figured in the top three list of companies that beat the analyst revenue estimates in the recent quarter, as discussed earlier.
Source: YCharts
Ranking based on adjusted EPS estimates change for the next quarter
Qualcomm’s adjusted EPS estimates have been revised up 5.6%, followed by Silicon Motion at 1.3%, and Apple by 1.1%. Apple’s top line estimates have been revised down, yet the bottom line was revised up. We’ve discussed in detail here the increasing mix of Apple’s Services, which has helped improve the bottom line.
Source: YCharts
Highlights and Lowlights in Q3
Intel beats consensus estimates driven by PC rebound
Intel had an excellent revenue beat of 4.1% and an adjusted EPS beat of 87%. Analyst consensus is for QoQ growth of 7% in the next quarter compared to a QoQ decline of (8%) in the same period last year. The following comments from the management point to PC rebound optimism.
Pat Gelsinger, CEO of Intel, said in the recent earnings call. “As we expected, customers completed their inventory burn in the first-half of the year, driving solid sequential growth, which we expect will continue into Q4. We expect full-year 2023 PC consumption to be in line with our Q1 expectations of approximately 270 million units.”As we expected, customers completed their inventory burn in the first-half of the year, driving solid sequential growth, which we expect will continue into Q4. We expect full-year 2023 PC consumption to be in line with our Q1 expectations of approximately 270 million units.”
David Zinsner, CFO of Intel, said in the recent earnings call. “Now turning to Q4 guidance. We expect fourth quarter revenue of $14.6 billion to $15.6 billion, delivering on our January commitment to grow revenue sequentially throughout 2023. In the client business, we're encouraged by the return of historical purchasing cycles as our channel checks, partner feedback and ASPs all point to healthy inventory levels and growing demand.”In the client business, we're encouraged by the return of historical purchasing cycles as our channel checks, partner feedback and ASPs all point to healthy inventory levels and growing demand.”
Silicon Motion sequential growth rebound
Silicon Motion, which experienced a (-20%) decline last year, is projected to rebound with 13% growth in Q4 this year. The company also beat consensus revenue estimates by 4% and adjusted EPS by 10.2%, which is very good. It has an operating margin of 9% and a solid free cash flow margin of 28%.
The management of Silicon Motion also echoed similar thoughts to Intel on the normalization of inventory levels.
Wallace Kou, CEO of the company, said in the recent earnings call. “With that, I will turn to our results for the third quarter. Our business continued to gain momentum with revenue growing 23% sequentially to $172 million and earnings per ADS growing 67% sequentially to $0.63. We saw inventory level begin to normalize across the majority of end markets and OEM order activity pick up in the third quarter leading to a strong revenue growth in the quarter.We saw inventory level begin to normalize across the majority of end markets and OEM order activity pick up in the third quarter leading to a strong revenue growth in the quarter.
We expect this trend to continue and are confident they will lead to strong sequential growth in the fourth quarter. While the first half of 2023 was challenging due to the global macro economy weakness and excess inventory in the channels the inventory level across our end market are normalizing and OEM demand continue to improve.
He further said, “By end market standpoint excess inventory in the PC and smartphone markets have plagued the industry since late 2022 when the global economy weakened and demand lowered. It has taken nearly a year, but we believe the inventory level in both the PC and smartphone markets are normalizing.”we believe the inventory level in both the PC and smartphone markets are normalizing.”
Micron benefitting from memory rebound
Micron beat the revenue estimate by 2.2% and adjusted EPS estimate by 9.2%. Micron stands out with the most significant sequential improvement in the next quarter, transitioning from a (-39%) decline last year to an anticipated 14% revenue growth this year. On the flip side, as seen in the earlier part of our analysis, the company ranks lower on the operating margin and cash flows from the list of PC and memory-related companies.
The company recently boosted guidance for next quarter. The company has increased its revenue guidance by 6.8% and expects its non-GAAP gross margin to approach break-even levels from the previous guidance of negative (4%).
In the recent UBS Technology conference, the management confirmed that the pricing is starting to increase. The company’s CEO, Sanjay Mehrotra said, “So last update that we had provided was at the time of our earnings call at the end of September in the Q4 earnings call. And in that update, we have said that, industry environment was improving, inventories were improving and that we were seeing pricing bottoming out. In fact, pricing is starting to increase.”And in that update, we have said that, industry environment was improving, inventories were improving and that we were seeing pricing bottoming out. In fact, pricing is starting to increase.”
Conclusion:
We are monitoring memory closely as the use of HBM3 and HBM3e becoming a central focus in the competition between AI accelerators in the data center. Per our write-up:
“If 2023 was the year AI accelerators made their importance known, then 2024 will be the year that memory and HBM3/HBM3E makes its importance known as the competition is going head-to-head at memory capacity and bandwidth per GPU rather than compute performance […] In fact, to drive the point further as to how important memory will be in the next generation of GPUs, the compute performance from the H100 to the H200 is not changing much. According to what the industry has seen so far from Nvidia’s GPU HGX 200 systems, there will be “32 PLOPS FP8” performance, which would be achieved through eight H100s with 3,958 teraflops of FP8 each. The translation is that Nvidia’s H200 upgrade is strategically focused on memory, which also translates to AMD having a strong sense of direction on design as it forced Nvidia to answer to the MI300X’s memory capacity and bandwidth.”then 2024 will be the year that memory and HBM3/HBM3E makes its importance known as the competition is going head-to-head at memory capacity and bandwidth per GPU rather than compute performance […] In fact, to drive the point further as to how important memory will be in the next generation of GPUs, the compute performance from the H100 to the H200 is not changing much. According to what the industry has seen so far from Nvidia’s GPU HGX 200 systems, there will be “32 PLOPS FP8” performance, which would be achieved through eight H100s with 3,958 teraflops of FP8 each. The translation is that Nvidia’s H200 upgrade is strategically focused on memory, which also translates to AMD having a strong sense of direction on design as it forced Nvidia to answer to the MI300X’s memory capacity and bandwidth.”
In addition to this, the AI-powered PC is going to be a massive trend, and may be the next domino in AI’s race toward a $15 trillion impact on GDP. Per the write-up on memory and PCs:
“AI-powered PCs will ultimately change the trajectory for AI, to where more people can access AI-powered applications, which in turn, will help AI developers be able to build a bigger ecosystem. There is a major bottleneck right now for AI applications to where client devices are not powerful enough or energy efficient enough to leverage AI capabilities.”
We are looking more closely at what stocks may benefit from the next leg up in AI, which is memory for AI accelerators and AI-enabled PCs. The goal is to line up the stocks we want to buy should semis see a pullback.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
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