Roth Capital Partners analyst Arnab Chanda this morning lowered his rating on several chip stocks to “Hold” from “Buy,” citing the risk of a modest inventory build given high projeced margins and growth at Intel (INTC), Marvell (MRVL), Nvidia (NVDA).
“Overall, we’re getting the sense that lead times in the semi industry have gone up a lot. There may be orders that are ‘phantom,’ or double-orders,” Chanda told me in a phone conversation this morning.
“Second, the PC end markets are probably flat year over year, but look at Intel’s [projected Q4 revenue] growth of 23%, Marvell’s 50%, Nvidia’s 80% — that just seems like there’s some “exuberance” embedded in that,” says Chanda. He points out that Intel’s is guiding the Street to expect operating margins in the low 30’s, which is a little too close to the all-time high operating margin for Intel of 35%. “That seems like too much,” he says of Intel’s guidance. As for Marvell, “There was only one year they had a huge product cycle in hard drives and crossed 25% operating margin, and they’re almost there” with their current guidance. So, in general, margins, both gross and operating, have moved close to historical peaks, in Chanda’s view.
“There could be some inventory-related issues” in Q4 of this year and Q1 of next year, he observes, and “It seems a good time to take some money off the table.”
Valuations are not high, he concedes, but it’s hard to look at P/Es because they assume a high margin. If revenue goes down as a result of double-ordering, “that will hit the margins pretty hard,” argues Chanda. “In a strange way, when P/E is really low, that’s not necessarily a good sign,” for chip stocks.
Q4 and Q1 are potential disappointments, says Chanda, but the risk is probably for a mild inventory build, not a huge one, given that that demand is, in fact, going up.
The other stocks Chanda discusses in his note are (ATHR), Broadcom (BRCM), Cavium (CAVM), Monolithic Power (MPWR), Netlogic (NETL), Power Integration (POWI), Qualcomm (QCOM), Silicon Labs (SLAB), and Volterra (VLTR). However, he did not downgrade their shares.