Category Archives: semiconductor manufacturing

ARK Investment Management and its ETFs

October 13, 2014 By in Autos, cloud services, ETFs Vs. Mutual Funds, growth vs value, Industry Analysis, internet, Investment firms, robots, semiconductor manufacturing, software, Technology, Wireless Tags: , , , , , , , , Leave a comment

ARK

I was listening to Bloomberg Radio (again!?!) earlier this month and heard an interview of Cathie Wood, the CEO/CIO of recently formed ARK Investment Management.  I don’t know Ms. Wood, although we both worked at Jennison Associates, a growth-oriented equity manager with a very strong record, during different time periods.  Just before ARK, she had been CIO of Global Thematic Strategies for twelve years at value investor AllianceBernstein.  (As a portfolio manager I was a big fan of Bernstein’s equity research but I’m not familiar with her Bernstein output.)  She’s been  endorsed by Arthur Laffer of Laffer Curve fame, who sits on her board.

ARK is all about finding and benefiting from “disruptive innovation that will change the world.”

Ms. Wood was promoting two actively managed ETFs that ARK launched at the beginning of the month, one focused on industrial innovation (ARKQ) and another the internet (ARKW).  Two more are in the works, one for genomics (ARKG) and the last (ARKK) an umbrella innovation portfolio which will apparently hold what it considers the best of the other three portfolios.

What really caught my ear in the interview was Ms. Wood’s discussion of the domestic automobile market (summary research available on the ARK website).  Most cars lie around doing nothing during the day.  What happens if either ride-sharing services like Uber or the Google self-driven car, which make more constant use of autos, catch on as substitutes?  According to Ms. Wood, until these innovations reach 2.5% of total miles driven (based on the idea that on a per mile basis ride-sharing costs half what owning a car does), there’s little effect.  But at 5% penetration, the bottom falls out of the new car market.  New car sales get cut in half!

Who knows whether this is correct or whether it will happen or not   …but I find this a very interesting idea.

about the ETFs

The top holdings of ARKW are:  athenahealth, Apple, Facebook, Salesforce.com and Twitter.  These comprise just under 25% of the portfolio.

For ARKQ, the top five are:  Google, Autodesk, Tesla, Monsanto and Fanuc.  They make up just over 24% of the portfolio.

Both will likely be high β portfolios.  Both have performed roughly in line with the NASDAQ Composite since their debut.

The perennial question about thematic investors (I consider myself one) is whether the high-level concepts are backed up by meticulous company by company financial research.  This is essential.  In addition, it’s important, to me anyway, that the holdings be arranged so that they’re not all dependent on a single theme–the continuing success of the Apple ecosystem, for instance.

I’m not familiar with Ms. Wood’s work, so I can’t say one way or another (Fanuc and ABB strike me as kind of weird holding for ARKQ, though).  But I think her research is worth reading and her ETFs worth at least monitoring.  For us as investors, the ultimate question will be whether Ms. Wood can outperform an appropriate index.  The NASDAQ Composite would be my initial choice.

 

 

 

 

 

a closer look at Intel’s 2Q14

July 18, 2014 By in cloud services, earnings conference calls, internet, semiconductor manufacturing, software, Stock ideas, Technology Tags: , , , , , Leave a comment

2Q14 results

After the close of Tuesday, Intel (INTC) reported a strong 2Q14.   Revenue came in slightly higher than the company’s upwardly revised guidance from last month.  Earnings per share were $.55 vs. Wall Street analysts’ expectations of $.52 (expectations which were revised upward when INTC announced in mid-June that business was looking up).

INTC also revised up its full-year revenue guidance from basically flat year-on-year to +5% growth.  It said that its server business ($3.5 billion of the company’s $13.8 billion total during the quarter) continues to boom, with both unit volumes and unit prices rising.  That’s no surprise.  In addition, however, the PC business ($8.7 billion in 2Q14 sales) appears to have bottomed and to be bouncing back a bit.

The PC development has two aspects.  Corporate customers, who make up about 40% of the PC total, are buying again.  The simplest explanation for this is that their existing laptops and desktops have just gotten too old.  Buying may also be spurred by the fact the Microsoft is ending support for Windows XP, that corporations don’t regard tablets as a viable substitute for laptops, or simply that firms are flush with cash.  In any event, corporates are buying, and will easily continue to do so in increasing amounts into next year.

Consumers, 60% of the total PC market, may also be showing signs of life–although this is more OEM and distributor body language than actual orders.

Remember, too, that INTC’s sales are not to end users.  So it stands to benefit not only from increased final sales but also by manufacturer and distributors purchases to built up bare-bones inventories.

operating leverage

INTC has substantial operating leverage, both from the capital-intensive nature of its manufacturing and its very large R&D and SG&A budgets.  As a result, small changes in revenue can make a disproportionately large impact on the bottom line (in fact, they’re almost pure profit).  At the moment, the revenue changes in INTC’s two main businesses, PCs and servers, are both positive.

tax rate

INTC is saying it  expects its tax rate to remain at 28% for the rest of the year, implying that the growth it is seeing is mostly coming from the developed world, where tax levies are relatively high.

lines of business

As is always the case in securities analysis, the line of business table is where the real work is done.  For INTC, I’ve duplicated the relevant 2Q14 lines below:

PC Client Group :    revs = $8.667 billion, op income = $3.734 billion

Data Center Group :   revenues = $3.709 billion, op income = $1.807 billion

Mobile and Communications Group : revenues = $51 million, op income = ($1.154 billion).

No, that’s not a mistake.  INTC’s tablet and smartphone chip business had revenues of $51 million for the quarter …and an operating loss of $1.2 billion.

INTC is earning operating income of $22 billion – $25 billion a year from its traditional businesses and using a chunk of that to fund the massive losses it is incurring in trying to break into the mobile computing business.

The M&C Group figures need some interpretation.  The revenue figures are net of marketing or other incentives INTC gives to buyers of its mobile chips; the operating loss includes R&D and other expenditures that arguably have an enduring value.

Nevertheless, the line of business table does convey the essence of the INTC story for shareholders wiling to pay $30+ for a share of stock.  INTC is, in effect, two companies:

–one is a mature microprocessor maker earning $2.50 or so a share and growing at maybe +10% a year

–the other is a startup currently bleeding red ink at a $4 billion annual rate.

my take

The fact that INTC is incurring large near-term losses on its M&C Group says two things to me:

–it doesn’t yet have a set of products customers are willing to actually pay for, and

–INTC believes M&C is crucial to its long-term success.

I might be persuaded to pay 15x earnings for the traditional business, if I thought it would have stable-to-rising earnings.  That would mean a target price in the high $30 range.  However, INTC’s actions imply that top management doesn’t believe the business is viable without M&C.  So maybe the right price for the traditional business would be $30.

That leaves the question of the status of M&C still up in the air, though.

On the other hand, if INTC can create a profitable mobile business, that would mean–to pluck numbers out of the air–total INTC near-term earnings could be $3 a share, with a higher growth rate.  Worth $45 a share?  …probably so.

My bottom line:  news of a cyclical upturn in the PC and server businesses probably supports INTC shares for the time being.  Eventual downside to the high $20s (?) if/as it becomes clear the mobile chip business has no hope.  Upside to $40+ on signs that INTC is narrowing its M&C operating losses.

I find it hard to assign probabilities to either outcome.  For the time being I’m content to remain a holder of the stock.

 

 

 

 

 

 

 

 

 

Intel’s good 2Q14–and Wall Street’s strong reaction to it

July 17, 2014 By in Recent Market Action, semiconductor manufacturing, Stock ideas, Strategy, Technology Tags: , Leave a comment

Last month, Intel (INTC) announced to the market that its 2Q14 was shaping up better than the guidance it had given when it announced 1Q14 earnings.  Analysts covering INTC (a pretty pedestrian lot, in my view) dutifully raised their estimates to incorporate this news.  The new consensus was centered around $.52 a share in eps for the quarter.  The stock began a 15% move higher.

A week or so ago, research firms that follow the PC industry began to suggest that the personal computer market is beginning to bottom out after a long slide.  At the same time, these firms observed that the tablet market is starting to fall off.  Some put the two observations together into a story that the tablet market was waning because customers were either finding them inherently unsatisfactory or poor value in comparison with chrome- or ultrabooks.  AAPL appeared to confirm this analysis with its announcement of a partnership with IBM to sell iPads equipped with IBM software to corporations. 

INTC reported earnings of $.55 a share after the close on Tuesday (a full analysis in tomorrow’s post).  The company also raised its revenue guidance for full-year 2014 from flat to up 5% (corporate strength, the hope that consumer demand will rebound, plus the one-time positive of wholesalers beefing up their inventories a bit).  My take:  good news–not earthshattering, but good–and pretty much in line with data that had been coming into the market over the past while.

But no.  

Yesterday INTC was up by 9%+ on quadruple normal volume, in a flat market.  MSFT, the other member of the once-dominant “Wintel alliance,” gained almost 4% on more than double normal volume.

As a holder of INTC and MSFT, I’m happy to have the gain.  But I find the market action a bit excessive.  

I have two reactions:

–it may be that part of the rise has nothing much to do with Wintel but is the market rotating toward large-cap tech laggards.  If so, it would be a sign that the upward market momentum of the past nine months or so is in its final stages.

–for INTC, the “free lunch” stage is over.  On earnings of, say, $2.10 in 2014 and $2.25 in 2015 (figures that are higher than Wall Street’s current median, though admittedly some analysts may not have published post-earnings call adjustments), INTC is no longer stunningly cheap.  To continue to hold the stock, we have to believe that the PC business is at least stable and that INTC’s foray into tablet/smartphone chips will at least get to breakeven within a couple of years.

While I may trim my position further (as I’m writing this, I haven’t yet), I like what INTC is doing and am content to remain a holder.

More tomorrow.

 

 

Intel (INTC) revises up 2Q14 guidance

June 13, 2014 By in Current Market Thoughts, Industry Analysis, semiconductor manufacturing, Stock ideas, Strategy, Technology Tags: , , , , , , Leave a comment

rising guidance

I may have been a few days too early in my post suggesting trimming positions in INTC.  I still think the idea is right, but my timing now appears to have been less than optimal.  …oh, well.

How so?

After yesterday’s close, just before entering its quiet period on June 17th–where it won’t talk about near-term business prospects until releasing 2Q14 earnings on July 15th–INTC revised up its guidance for the quarter by a significant amount.

the details

Prior guidance was for 2Q14 revenue of $13.0 billion,  That figure rises to $13.7 billion, a +5% change.  It’s based on increased demand for business PCs.  The expected gross margin goes up by a percentage point, and expenses rise slightly, both because of increased unit volume.  The tax rate also increases from 27% to 28% for the remaining three quarters of the year.

Full year revenue expectations go from “flat” to “some” revenue growth.

significance?

For INTC, this is the first sign of life in its core PC operations for some time.  That’s probably more important than the fact that gross profits for the quarter are coming in about 7% higher than the company had expected.  The wording of INTC’s press release makes me think that this is a relatively recent development, and that the company is hopeful the increased sales are not a flash in the pan, but would prefer to wait at least another month before saying so.

The rising tax rate suggests to me that the new business is predominantly in the US.

If this sales increase is not just a blip, it has wider implications, as well.  It suggests that US corporations must be starting to feel pretty good about their business prospects.  Yes, there have been incredible advances in laptop performance and design over the past half-decade.  But during the recession and recovery, corporate PC upgrades have been low priority, “luxury” items–sort of like getting new office furniture.  A widespread move to get rid of  the old clunkers would imply a return to more normal spending patterns.

INTC shares are up by about 6% in pre-market trading.  It will be interesting to see if the strength lasts–and if the INTC press release sparks comments from PC makers.

 

 

thinking about Intel (INTC)

June 10, 2014 By in Recent Market Action, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , Leave a comment

I became interested in INTC in late 2011, when it was trading at under $20 a share and yielding well over 3%.  It was a good news/bad news story, where it seemed to me that only the bad news was reflected in the stock.  So, although I’m a growth investor (one might argue that because I’m a growth investor), I was attracted to the stock on value grounds.

The bad news then–and the continuing bad news today–was/is that INTC had missed the boat on processors for mobile devices.

The good news had two aspects:

–INTC had realized what a horrible blunder refusing Steve Jobs’ invitation to develop chips for the iPhone and was working to correct it.  In addition,

–INTC had a lead of a least a year, maybe two, over anyone else in cutting edge process technology (smaller, cooler, less power-hungry).  That advantage,INTC said, would quickly put it back into the mobile game–maybe as soon as 2012, certainly by 2013.

I reasoned that at 5x cash flow, 8x earnings, proprietary technology and a 3% yield, there was little downside.  So I bought some and began to write about the story.

The stock went to just above $28 a share within six months or so.  As the stock approached $25, however, I had to change my investment thesis to something more than “more bad stuff is unlikely, good things might happen, and I was being paid about a 30-year Treasury yield to wait.”

I thought $35 was a possibility if–as Paul Otellini the then-chairman said it would–INTC developed mobile customers quickly. At the same time, I recognized that if the company did not show mobile progress there was risk that the stock would reverse at least some of its gains.

Whoops!

A year later, the stock was at $19.10, below its year-earlier low.  Mr. Otellini, who by this time had announced that 2013 would join 2012 in the “nothing good to report” column, was out as CEO and the search was on for someone with a greater sense of urgency about INTC’s predicament.

déjå vu all over again

Brian Krzanich, a process engineer and a 30+-year INTC employee, is now the CEO.  The profit profile for this year and next–flat–hasn’t changed.   I can’t imagine the dividend being increased, although I can’t conceive of it being cut either over any reasonable investment horizon.  The next sea change in process technology is looking to be so expensive (triple the cost of the previous jump) that even INTC won’t go it alone–implying that INTC’s current edge in processing skill won’t last forever.

Nevertheless, INTC shares are trading above $28 again and flirting with the 2012 high.

Why?

Part of this is because the overall market is up sharply since 2012.  But INTC has been outperforming since shortly after Mr. Krzanich took the helm.  I think there’s good reason for this.  Mr.Krzanich is proving very nimble at using INTC’s technology to forge partnerships to get INTC the mobile knowhow and distribution it needs.

I think INTC is now in hands better suited to deal with INTC’s weakness in mobile. than it was in 2011, when I first bought the stock  There’s a considerable chance, I think, that INTC will make a successful transition to smartphone and tablet supplier, with profit increases to show for it in 2016.  $35 a share still sounds like a good price target to me.

Nevertheless, as was the case in early 2012, INTC is no longer the “no-brainer” it was in late 2012.  I’ve just sold about 20% of what I bought under $20 and I’ll likely trim a bit more.