Since founding his eponymous hedge fund in 2001, Dmitry Balyasny has earned a reputation as a risk taker. He chair’s Balyasny Asset Management’s (BAM) investment committee, and oversees the delivery of consistent, alpha-driven returns. In its Q3 13F filing, BAM reported over $14.5 billion in managed securities – and had made some interesting moves in the semiconductor industry. Interesting because Balyasny has built his strategy on outperforming the broader market indexes, but the chip stocks have underperformed of late. The question raised is, does BAM see something the rest of us do not?
We used TipRanks databases to get an idea. The three chip stocks in which BAM invested heavily during the last quarter are AMD, Micron, and Nvidia. All three lost heavily in 2H18, saw volatility in 1H19, and have only recently begun to regain their losses and see share prices stabilize. The TipRanks data can show what the analysts think of these stocks. As we’ll see below, when we look at the analyst reports in detail, all three companies were hit by common factors in varying combinations. The results, for them and by extension the broader chip industry, are not pretty, but may also explain what Balyasny saw, and why he moved $100 million into semiconductors last quarter.
Advanced Micro Devices (AMD)
At $6.5 billion in annual revenue, AMD is a mid-size player in the chip industry, but it does rival sector leader Intel in the production of x86 chips, and with Nvidia (below) shares dominance of the GPU market.
Like the rest of the chip industry, AMD was hit hard by the intensification of US-China trade pressures. The ‘trade war’ hurt the company – and its peers – both at importation of raw materials and the export of finished products from and to China.
The company may be past its China troubles, however, as it has just reported its best quarter since 2005. Q3 2019 showed $1.8 billion in revenue, up 8.8% year-over-year and an even more impressive 17.5% sequentially. Gross margin, at 43%, was the best result since 2012, and net income for the quarter reached $120 million. EPS, at 11 cents, was 22% improved from Q3 2018. This quarter showed increased volume and average sales price for the new Ryzen desktop processor, and was a successful full first quarter of sales for the new 7nm Zen 2. Overall, the company’s computing and graphics segment was up 79% year-over-year.
Balyasny's fund picked up 885,255 shares of AMD in Q3 for ~$25.7 million. Those shares are now worth more than $34 million.
Hedge funds, however, invest for the long haul, so let’s check in with the analysts to see what AMD’s prospects are like. Here, things get a little cloudier.
Ross Seymore, 5-star analyst with Deutsche Bank, looks at the company’s current situation and writes, “We remain impressed by the magnitude of growth and share gains AMD in delivering within its PC CPU business and early traction within 7nm Server CPUs. However, we fear that AMD's share gain assumptions in each of these markets for 4Q19 and 2020 appear to largely ignore competitive responses from peers, nor do they consider the normalization of CPU shortages.” Seymore believes that AMD’s recent success has pushed the stock above its sustainable price. He puts a Hold on AMD, with a price target of $29, suggesting a serious downside of 24%. (To watch Seymore's track record, click here)
According to TipRanks, the consensus on Wall Street is that AMD stock is a “moderate buy” for investors. But TipRanks might as well have said “sell” — because analysts, on average, think the stock, currently at $40.37, could fall about 9% to $36.68. (See AMD stock analysis on TipRanks)
Micron Technology (MU)
Micron took a heavy hit in late September after reporting mixed Q4 results. Fiscal 2018 revenue came in at $31.8 billion, with net profits of $5.09 billion. Shares slumped on worries about NAND and DRAM growth forward, especially as the company lowered its forward guidance. Micron expects that flat demand to improve by year’s end and going into 2020, however, and predicts gaining market share in non-volatile memory and SSD sales. Any gain in market share, however, will likely come in a smaller market unless demand improves.
MU was upbeat about the prospects for 5G chips in the automotive AI market. Micron’s graphics processors are popular in AI applications, and is poised to take advantage of increased demand as automakers make headway in autonomous vehicles – with concomitant demand for high-end chips in AI systems.
Balyasny made his largest chip-stock maneuver with MU, adding over 900,000 shares to his fund’s existing holding. BAM now holds 1,056,939 shares of MU, with a current market value exceeding $50 million. This is an 11% increase from when the firm bought the shares. Again, BAM’s move on MU has been justified in the short term, but Wall Street analysts see longer-term clouds on the stock.
Piper Jaffray analyst Harsh Kumar took issue with Micron’s upbeat outlook on future chip market conditions in his recent review of MU. He wrote, in setting a Hold on the stocks, “Despite the company calling for a better demand environment in the second half of the year, we believe market oversupply will continue to act as a headwind to significant pricing growth. In addition, we view the company’s gross margin guidance as concerning, particularly in the uncertain macro and geopolitical environment. In our view, we see earnings below $1 on a quarterly basis over the next several quarters.” (To watch Kumar's track record, click here)
Kumar’s 46 price target on MU is a bit bearish, suggesting a downside of 3.5%. He is more pessimistic on the stock than his peers on Wall Street, however. The consensus rating on MU is a Moderate Buy, based on 16 Buy ratings, 8 Holds, and 2 Sells. The average price target is $55.26, indicating room for a 17% upside from current levels. (See Micron stock analysis on TipRanks)
At $12.9 billion in sales for fiscal 2018, Nvidia stood as the tenth largest semiconductor company in the world. The company focuses on GPUs for professional and gaming markets, in which it competes directly with AMD above. Nvidia is moving into the mobile computing niche, and like AMD, markets its chips to the automotive AI markets. The company’s products also have a strong presence in data centers.
In its recent Q3 2020 report, NVDA showed revenue down 5% from the year-ago quarter, a reflection of the industry’s headwinds, but also beat the forecasts on both revenues and earnings. In better news, the company’s revised Q4 guidance was up 34%. Analysts, however, had expected a higher revision, and NVDA share slipped $5 after the report.
NVDA is up 52% year-to-date, and has been performing strongly since June. The shares were gaining when Balyasny’s firm increased its initial holding by 167,259 shares. That purchase brought the full holding up to 172,759 shares, now worth over $35 million – a gain of $5 million since the initial purchase. Once again, BAM made a chip move that brought short-term profits.
Not all of Wall Street’s analysts, however, are so sure about the chip stock. Writing from Needham just last week, 5-star analyst Rajvindra Gill says, “Although we are encouraged by increased hyperscaler visibility and strength coupled with strong gaming sales, we remain cautious regarding the competitive dynamics in the data center market, specifically in the training segment… we maintain our underperform.” Gill declined to set a specific price target with his Sell rating. (To watch Gill's track record, click here)
Nvidia still has a Moderate Buy consensus rating, based on 29 recent reviews. The reviews include 21 Buys, 6 Holds, and 2 Sells. Shares are selling at a premium price of $204, and the average price target of $228 suggests an upside of 11%. (See Nvidia stock analysis on TipRanks)