ASML, Nvidia preferred to semiconductors

Amid the recent stock market volatility, some semiconductor and industrial OEMs have fallen significantly and now look attractive compared to our fair value estimates.

Despite the continuing shortage of chips, we believe investors should worry about slowing demand in large end markets such as PCs and smartphones.

We expect many chipmakers to continue to deliver strong results in 2022, but expect a slowdown in 2023 as demand declines and new offers come online.

Therefore, we are more positive on companies with broad and undervalued bulwark competition that we believe are most exposed to secular trends such as artificial intelligence, cloud computing, automotive chips, 5G and other promising growth vectors.

Our top selection of equipment manufacturers is ASML (“Wide Moat”).

We believe that the highest demand for ASML’s Extreme Ultra Violet (EUV) lithography equipment will prove to be relatively resilient to a potential collapse in the semiconductor market.

Sa TSMC (“Wide Moat”), Intel (“Wide Moat”) and Samsung Electronics (“Wide Moat”) which are all vying for leadership in the most advanced manufacturing processes, we expect ASML to be the main beneficiary thanks to its dominance in EUV technology.

In its first quarter, ASML recorded € 7 billion in system reservations, including € 2.5 billion of EUV systems.

The ASML backlog is now at € 29 billion, giving us confidence in our revenue growth assumptions (12% CAGR to 2026).

ASML trades in 5-star territory and at an attractive discount to our fair value of 696 euros per share ($ 800).

We consider Nvidia (“Wide Moat”) favored by fabless chip designers, due to its accelerated computing efficiency and graphics processing unit (GPU) market dominance in PC gaming and data center.

Nvidia shares are now trading at a slight discount to our fair value estimate of $ 200 per share.

Although there are no factory peers like Qualcomm (“Narrow Moat”) and AMD (“Narrow Moat”) is trading at a deeper discount, we believe that Nvidia’s business is more structurally aligned with the aforementioned secular trends (especially accelerated computing in data centers).

We see no signs of slowing in Nvidia’s data center business, where Metaverse, AI and other cloud investments are expected to remain high.

Nvidia reports its results in the first quarter on May 25, and we expect strong results and good outlook from the company’s latest Hopper H100 GPU for data centers to launch later this year.

We estimate that the data center segment will grow at least 40% in fiscal year 2023 as customers such as Microsoft, Amazon and Alphabet invest in data center GPUs to handle internal workloads and external such as natural language processing and recommendation engines.

That said, we expect Nvidia to face demand headwinds in its gaming segment in the coming quarters as economic conditions worsen.

We believe consumer -oriented end markets are at greater downside risk.

Although falling cryptocurrency prices caused problems for Nvidia in late 2018 and early 2019, we don’t expect the recent crypto volatility to have such a big impact on the company, as the mix The company’s revenue is now shifting more towards the data center.

Also recently, the company increased its six -year automotive design win pipeline to $ 11 billion from $ 8 billion.

Automotive is still small business for Nvidia, but its Drive PX systems will be used by Mercedes Benz and Jaguar Land Rover for vehicles to launch in 2025 and later.

© Morningstar, 2022-The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be construed as an invitation or inducement to buy or sell the listed securities. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information in this document should not be the only resource for making an investment decision. Be sure to contact a financial adviser or finance professional before making any investment decision.

Leave a Comment