The chip industry faces challenges in the short term, but represents an investment opportunity in the long term, according to the Credit Suisse investment bank economists. The chip sector was not a very successful investment in the last year, and according to the data of the American investment company Fidelity, which is based on the S&P sectoral indices, it lost 35.4% in the past year (for comparison, the Nasdaq index fell during this period by 30.5% and the S&P 500 index lost approx. 15.7%).
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The chip companies, which at the height of the corona enjoyed high demand when the market suffered from a shortage of chips, are currently suffering from a decrease in demand due to a combination of inflation and slowdown. Last month, with the publication of the quarterly reports, some of the sector’s shares traded in sharp declines. At the same time, it was reported that there was a cut in the manpower level at Intel.
Another factor that shocks chip companies is the fight between the US and China over this industry. The Chinese are investing heavily in building an advanced local industry, and the US recently expanded restrictions on exporting technologies in this field to China.
In a review of the industry, Credit Suisse writes that they see strong long-term growth trends. Among other things, according to them, in contrast to the last 15 years, when growth came from the sale of personal computers and end devices to the final consumer, today chip companies enjoy growth with a broad base in a very large number of markets: data center for supercomputers, artificial intelligence, automotive, industry and the fifth generation in cellular.
On top of that, they note that the industry has gone through a significant process of consolidation, which has allowed chip companies to raise prices in response to supply chain conditions.
Despite these positive trends, Credit Suisse estimates that at this point in the cycle of the chip world, “We do not need to convince investors that the chip business is strong. Investors know that this is an attractive group for investment, once we reach the bottom of the cycle. The important questions to ask now are – to what extent There is an additional downside risk, and which stocks are the best to own.”
The approach of the bank’s economists is to look for the companies or segments where there was a major correction, which limits the additional downside, and also to look for the companies with the higher long-term growth potential, so that the downside can be “ignored” in the short term.
The bank divides the recommendations for the chip stocks into two types of investors. For investors who want to minimize short-term risks, they recommend focusing on the memory and phone segments, two areas where they say there has been a significant correction.
The relevant stocks according to them are Micron, Qualcomm, Skyworks, Qorvo and GlobalFoundries. In their estimation, although Micron will present low data in the upcoming quarter’s reports, the stock has already reached close to the bottom, and although the timing of the recovery is unknown, historically, a correction in the memory sector has always been followed by a recovery. About Qualcomm they write that the stock has dropped significantly (33% since the beginning of the year) and its multiples are low.
A second type of investor is the longer-term investors, who are willing to take short-term risk. These investors are recommended by Credit Suisse for stocks that they believe have the highest growth prospects in the next two to three years, so they estimate that they can feel comfortable with their short-term risks.
The recommended stocks in this case are Nvidia, AMD and Marvel. Nvidia is the most recommended for them, although they estimate that in the upcoming reports it will present a conservative forecast, and mention its leading position in artificial intelligence chips.
In their estimation, the impact of the restrictions imposed by the US on China in the field of chips, in the context of Nvidia and AMD shares, is minor.
“The consensus regarding Intel is caution”
Another stock, about which the bank’s economists are more cautious, is Intel. “Be cautious about Intel is the consensus,” they write. “However, we believe that this is a clear result of the slowdown in the PC market and Intel’s need to aggressively increase capital expenditures (CAPEX) in order to achieve its technological roadmap. It is likely that this will consume all of its free cash flow in the coming years, even if market conditions improve.” .
Recall that Intel announced the purchase of the Israeli Tower according to an activity value of 5.4 billion dollars per tower, which is expected, if there are no delays, to close in February 2023.
In the bank’s estimation, in the longer term Intel will continue to lose market shares until it reaches almost parity with TSMC and AMD. “With such attractive valuations in other companies in the field, we do not think it makes sense to invest in Intel before recovery”, they write, but still estimate that the downside is limited, and their recommendation is “neutral”.