With much of America -- and the world -- working and studying from home under quarantine in the first half of 2020, there's been a boom in demand for semiconductors to power individual notebook PCs, and also the server farms that make possible those PCs' connection to the internet.
It's primarily for this reason that 5-star Nomura analyst David Wong recommended investors focus on semiconductor makers winning in business notebooks and "data centers" -- with success in game consoles and automotive computers being of only secondary concern.
Which stocks does Wong recommend most strongly? Chip giants Intel (INTC) and AMD (AMD). In contrast, the analyst suggests investors "reduce" their exposure to NVIDIA (NVDA).
As Wong explains, semiconductor sales within Intel's data center business grew 43% year over year in Q1 2020 -- and AMD enjoyed 50% sales growth. Believe it or not, NVIDIA actually grew faster than either of its rivals, with data center chip sales up 80% year over year.
The story in notebook PCs is only slightly less exciting. Intel's notebook processor unit shipments grew 22% year over year in Q1, and while the analyst lacked corresponding data from AMD, he noted that that company's "mobile revenue" sales were up "double digits."
The story's a bit different in gaming, where NVIDIA's sales grew 27% year over year, but were down 10% sequentially from Q4 2019. Moreover, Wong notes that NVIDIA's year over year growth was deceptively strong, inasmuch as the Q1 2019 quarter was depressed "by a large inventory correction" that did not repeat in Q1 2020. But for that charge, NVIDIA's growth would have looked even less impressive. The analyst further notes that AMD's graphics processing unit ("GPU" -- the type of chip most relevant to gaming consoles) declined "far more than" NVIDIA's quarter over quarter drop.
To an extent, this is all quite surprising as one might expect consoles to have sold briskly among homebound consumers during the Great Lockdown. But Wong explains that, in his view, "gaming GPUs are fundamentally a consumer discretionary item, and we think there remains a fair amount of uncertainty as to how the impact of COVID-19 on the global economy might" have affected sales in Q1 -- and how they might "affect gaming GPU demand in the coming months" as well.
In the sphere of automotive sales, chips sold through Intel's Mobileye division saw 22% growth in year over year sales, a performance superior to NVIDIA's automotive segment revenues, which came in at just $155 million. Overall, "the automotive end market is one of the weakest of the chip end markets," comments Wong. Really, servers and notebooks are where the action is.
Price target-wise, Wong has AMD stock at a "buy" rating and a $64 target price (18% above Thursday's close). The analyst rates Intel stock a "buy" as well, with a $74 target price (23% profit potential). Only NVIDIA does Wong give a less than enthusiastic rating -- "reduce" -- and the reason there being that while NVIDIA stock costs more than $369 a share, Wong thinks it's worth no more than $260. (To watch Wong's track record, click here)
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