I/O Fund’s Semiconductor Q3 2021 Earnings Preview

Taiwan Semiconductor officially opened the sector’s earnings with a bang as it beat consensus estimates and also guided strong revenue in the fourth quarter. Specifically, the company’s Q3 YoY sales growth of 16% beat estimates by 0.5% while guidance for Q4 sales growth represents an acceleration to 23% YoY growth, which came in ahead of the consensus estimate by 1%.

The results are positive considering some of the recent bearish Wall Street reports on semiconductors that suggested lower revenue due to the chip shortage, China worries, and Covid-19 negative impact, mainly in Asia. There were similar worries in the last quarter and most companies were able to beat estimates. In this earnings preview, we review key semiconductor companies to get a pulse on what to expect.

In the analysis that follows, we give a brief overview of the semi-conductor sector and discuss key metrics that investors should be aware of heading into Q3 earnings.

Semiconductor Stocks: Top 10 EV/FWD Revenue Multiples

Below is a table of semiconductor stocks ranked by their EV/FWD sales multiples, along with their most recent YoY growth rate, gross and free cashflow (FCF) margins. Semiconductors have experienced strong demand in 2021 and the market has rewarded the outperformers with premium multiples.

Nvidia (NVDA) sports the highest multiple of the group at 20x, likely due to its dominate position with GPUs. SiTime (SITM) isn’t far behind NVDA at 18x. SITM’s premium multiple of 18x is likely a function of the firm’s strong 107% YoY growth rate as demand for its silicon timing solutions has increased in multiple different industries.

The I/O Fund recently covered Nvidia in a full length analysis on why Beth believes Nvidia will surpass Apple’s valuation over the next 5 years. In the analysis, we discuss how the A100 Ampere architecture is able to unify training and inference on a single chip, whereas in the past Nvidia’s GPUs were mainly used for training. The A100 is becoming the best-selling GPU of all time and these leaps in performance is partly why Nvidia has done so well against competitors.

Semiconductor Stocks: Top 10 Three-month Forward YoY Growth Rates

Looking forward, semi-conductors are expected to continue to grow strongly. Kulicke & Soffa (KLIC) is expected to grow over 100%, driven by increased demand for its solutions in the semiconductor, automotive and advanced display markets. Many other names are expected to grow over 50%+ in the upcoming quarter. Marvell (MRVL) is expected to grow 50%+ next quarter, but this growth is skewed by the firm’s acquisition of Inphi. Adjusting for the Inphi acquisition, MRVL’s organic growth next quarter is expected to grow 20%, which would represent an acceleration from the prior quarter organic rate of 17%.

Top 10 Weekly Share Price Movement

In the table below, we ranked the semiconductor stocks that saw the largest one week increase in their share price. Ambarella’s (AMBA) stock is one of the top performers this past week, as analyst anticipate 61% growth next quarter. AMD is also up 11% over the last week, and analyst expect the company to continue to capture market share going forward. We explore what analysts are saying about these stocks and a few others in more detail in our I/O Fund’s Preview of 7 Semiconductor Stocks Ahead of Q3 Earnings.

Top 10 Changes in sales growth estimates – last 90 days

The table below ranks the companies that have had the largest revisions to their growth outlook over the last 90 days. ADI completed its acquisition of MXIM, which largely explains the rise in forward growth expectations, and absent the acquisition management had initially guided for 17% YoY growth. AMD revenue estimates for Q3 have increased 10% over the last 90 as the company’s guide for Q3 sales came in above expectations.

Update on EV/Fwd revenue multiples:

Overall stats:

• Overall Semi-conductor forward median 5x
• Top 5 Semi-conductor forward median 18x
• Overall Semi-conductor forward average 6x

EV/FWD SALES:

Semiconductor valuations have trended up during the year as demand for semis has remained robust driven by a global chip shortage. The world may be entering a new normal where semiconductors are used in everything, reducing their cyclical nature and leading to a premium multiple being awarded to the group.

TOP 5 EV/FWD SALES:

The chart above highlights the large dispersion in valuations in the semi-conductor space, as market leaders such as NVDA and AMD have been awarded much higher multiples than the peer median. While median valuations have been mostly static the last two years, the top 5 group has seen its valuation drop from 20x in Q4 2020 down to 12x in Q1 2021 but has since recovered to 18x ahead of Q3 earnings season. If Q3 earnings come in strong, then the market may push valuations back up to their historic highs.

EV TO FWD SALES Semiconductor Universe:

We can further dissect the change in semi-conductor valuations by breaking up the group into high growth (>30%), mid growth (>15% and <30%) and low growth (<15%). The above chart shows that the high and mid-growth semiconductor stocks used to be valued much lower, while mid-growth semis have seen their valuations remain fairly static.

EV TO FWD SALES Semi-conductor UNIVERSE:

The above chart provides a more holistic view of the top 30 valued semiconductor stocks based on EV to FWD sales estimates. NVDA has the richest valuation and is valued nearly 400% higher than the peer median. As mentioned above, this is likely due to the firm’s dominate position in the GPU market.

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Growth adjusted EV/Fwd Revenue (EV/Fwd Rev/Fwd Growth)

The last chart is based on EV to FWD sales but also takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. A low value in the chart below means that a company is cheap relative to growth. Note that some names may be skewed due to acquisitions. DQ looks to be the cheapest based on this metric, however the company is based in China so the market may be discounting it due to political risks.

Finally, the last table we will be discussing includes aggregate semiconductor operating metrics. The above table shows that the group as a whole is performing well, as the average median growth rate in the most recent quarter was a robust 41% YoY rate. The group’s median FCF margin of 19% also highlights the strong position the group is in, as many semiconductor peers are cashflow positive and are also growing rapidly.

Strong growth and cashflows highlight the good health of the semiconductor sector, which makes sense considering the strong demand for chips in the current market. Find out which semiconductor stocks the I/O Fund will be watching heading into Q3 earnings in our I/O Fund’s Preview of 7 Semiconductor Stocks Ahead of Q3 Earnings.

The I/O Fund is a team of analysts that share their research publicly as they build a portfolio of 30 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.