There is much tension in the chip and semiconductor manufacturing industry today, as fierce competition boils due to the new sentiment towards artificial intelligence; geopolitical tensions and trends push firms to choose regions where they will invest and operate.
Following the blowout rally from NVIDIA (NASDAQ: NVDA) after it beat expectations within its A.I. departments, other firms now feel like they need to play catch up and announce new developments. The following breakdown of investments may give investors a sense of where the industry is placing its bets for the future.
Intel (NASDAQ: INTC) has announced that it plans to invest up to 4.2 billion Euros into a Polish fab as the European region is perceived to have picked up its pace of activity. Intel management has also landed a new alliance in the area, announcing a multi-generational partnership with United Kingdom-based Arm Core.
As Intel is also significantly expanding its United States presence by beginning to break ground on fabs across Ohio and Arizona, Micron Technology (NASDAQ: MU) has joined the party, backing a completely different set of sponsors with a nearly $2 billion check.
New Capital Deployment
Micron Technology announced earlier this morning that, as part of its new capacity expansion and supply chain diversification strategy, it is prepared to spend up to $1 billion in an Indian chip packaging factory. This region reacted negatively when Amazon.com (NASDAQ: AMZN) requested to invest in its presence expansion in the area.
Secondarily, and perhaps more controversial, Micron has announced a further $600 million investment in Shanghai, China, a country that not too long ago had banned the company's chips backed by the reasoning that there were significant cybersecurity concerns around the technology.
Fears of a recessionary environment may de-escalate after this news, as increased capital expenditures and any other such investments typically signal underlying bullish expectations for the underlying industry, if not the overall global economy. What is interesting for investors is the recent pivot between Micron and China, a power move by the red giant, and a capitulation strategy by Micron.
As the chip war escalated between the United States and China, the latter was losing significant ground to blockades placed by the former. Accepting each other's presence comes at a seemingly convenient time in the business cycle.
Earlier this week, the People's Bank of China (PBOC) announced a decrease in its short-term financing rates and a whole package of further stimulus to be employed into the economy, as inflation rates and other key economic indicators suggest lackluster activity in the underlying.
Likewise, Micron had announced a 53% annual decline in net sales due to an industry-wide slowdown in personal computer sales. Now that the United States and China pose a significant macro tailwind for the industry and Micron, it would make more sense why management chose the latter for its investment targets.
Relative Value
Micron analyst rating points to a relatively small 4.9% upside from today's prices. However, this view may be reflective of the latest earnings results. Second quarter 2023 earnings saw a 53% revenue decline and even worse by being thrown into negative territory towards a $1.91 loss per share. The quarter turned out so bad that management even had to suspend its share repurchase program because of insufficient free cash flow levels to finance buybacks. However, valuation multiples may be pointing to a different perspective.
Micron stock trades at a rich 46.1x price-to-earnings multiple, well above its historical 8.0x to 12.0x ranges. While the rise in this valuation may have come from a steep decline in earnings, it digs up the hidden sentiment expressed by a broader base of investors. These valuations can be taken as the market's willingness to pay a higher premium for the underlying business's current - and perceived future - earnings. Taking NVIDIA as an example, it was already 'expensive' during February of 2023, when the P/E ratio was hovering around the 50.0x range. A few weeks later, the stock rose by as much as 117% upon its earnings announcement.
Perhaps landing a deal within the Asian region can bring renewed sentiment towards the company and realize its potential to rally from today's valuation multiple's suggestions. Analysts are probably treading carefully considering the geopolitical risks; however, price targets will naturally follow as the skies clear up.
