Steven Cohen (Trades, Portfolio) is the founder and CEO of Point72 Asset Management, an investment firm that reported close to $32 billion in U.S. common stock holdings in its latest 13F report for the first quarter of 2023.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
The firm operates with a long/short strategy that focuses on bottom up and top down research. In the first quarter of 2023, Point72 loaded up on a number of stocks in multiple industries from health care to technology. Some of the most interesting picks I want to highlight due to the resurgence of some parts of the tech sector are semiconductor stocks Nvidia (NVDA, Financial) and Intel (INTC, Financial).
1. Nvidia
Nvidia (NVDA, Financial) is the world's leading provider of high performance graphical processing units (GPUs). These are essential components of PC for gaming as well as vital components of the data center and, increasingly, artificial intelligence (AI) applications. Nvidia is a key supplier to the major cloud “hyperscalers” such as Microsoft (MSFT, Financial) Azure.
Point72 purchased 980,638 shares of Nvidia common stock in the first quarter of 2023. The stock's average price for the quarter was $216 per share, which is ~75% cheaper than where the stock trades at the time of writing.
Nvidia is continually innovating and recently launched its H100 chip, which offers 30 times greater performance in AI inference tasks and four times faster training of transformer models.
In addition, Nvidia recently announced its Grace Hopper “AI supercomputer” chip is in full production. This is the next level in accelerated computing and can be connected together via Nvidia’s NV Link switch in order to create an enormous 1 Exaflop Transformer Engine. Nvidia's CEO Jensen Huang announced that Alphabet (GOOG, Financial)(GOOGL, Financial), Meta (META, Financial) and Microsoft will be the first companies to get access to the chip.
Solid financials
Nvidia reported solid earnings results for the first quarter of fiscal 2024. Its revenue was $7.19 billion, which beat analyst estimates but was still down 13% year over year. This was mainly driven by the cyclical risks associated with Nvidia, after the major boom in spending by hyperscalers during 2020.
However, Nvidia's stock still exploded upwards by over 25% in a single day after the earnings report and the stock is up by over 164% since the start of January 2023. This was driven by the astronomical guidance management announced for its second quarter of fiscal 2024. The company expects revenue to be a record $11 billion, which would be up 55% compared to the $7.1 billion originally forecast by analysts. This is expected to be driven by the huge number of tailwinds in the AI industry.
Its automotive segment has also continued to grow at a blistering rate, with 114% year over year growth reported at $296 million in revenue in the first quarter. Nvidia has partnerships with many major automotive manufacturers. These manufacturers are now aiming to accelerate the adoption of technology in their vehicles and add self driving capabilities. Nvidia’s DRIVE Orin helps these companies achieve this. Given Tesla’s (TSLA, Financial) vast and independent focus on full self driving, it looks as though full self driving is likely to become table stakes for companies in the next decade.
Nvidia’s operating income still faced challenges as it was down 34% in the first quarter to $2.14 billion reported. This was driven by an oversupply (and lack of demand) in the semiconductor market, which causes channel partners to slash prices and reduce Nvidia’s margins.
A positive is Nvidia’s operating income has improved by a solid 70% quarter over quarter, which could be an indication of a possible turnaround. Either way its margins are still fantastic and its operating expenses have reduced by 3% year over year.
Valuation
Given Nvidia’s huge run up in stock price, the company trades at a forward price-sales ratio of 22, which is 41% higher than its five-year average.
The GF Value chart indicates a fair value of $254 per share and thus the stock is “significantly overvalued” at the time of writing.
Thus, it's not surprising that some traders have proclaimed to take profits on the stock, including long-term shareholder and CNBC trader Josh Brown, who admitted to slashing his position by 25% in May 2023.
2. Intel
Intel (INTC, Financial) is a blue chip stock many investors have forgotten about among the new age of exciting companies such as Nvidia, as well as the fact that it is losing market share to AMD (AMD, Financial) and seeing declining profitability. However, data from CPU Benchmark indicates Intel still has a 62.1% share of the CPU market, above AMD’s 35.7%. Therefore, the company is still the market leader, so it has plenty of turnaround potential if it can get its act together in my opinion.
Point72 purchased a staggering 10.4 million shares of Intel in the first quarter, during which shares traded at an average price of $28 each.
Intel’s stock price has been butchered by 61% between March 2021 and March 2023 amid nosediving profitability and market share losses. However, recently the stock has rallied by 25% from all-time lows.
CEO Pat Gelsinger was very blunt about the situation in a recent interview with the Wall Street Journal;
“We didn’t get into this mud hole because everything was going great... We had some serious issues in terms of leadership, people, methodology, et cetera that we needed to attack.”
The original decline was caused by delays in the production of Intel’s 7nm chip. In order to fix this issue, Intel has had to rely on former (and hopefully future) rival Taiwan Semiconductor Manufacturing (TSM, Financial).
Intel’s latest PC CPU Meteor Lake and data center CPU Granite Rapids are now expected to arrive by the third quarter of 2023. A positive is Intel has pioneered a new chip design process referred to as Foveros. This basically is a processor that can stack various compute tiles from different designers on top of one another. According to Gelsinger, “Foveros gives us the ability to mix and match various IPs while optimizing for performance and power efficiency.”
Basically, this means Intel can mix the IP of Samsung (XKRK:005930) with its Intel technology and Taiwan Semiconductor's manufacturing in order to produce a state of the art chip. This may be considered as a Frankenstein approach to chip making but it does offer the potential for Intel to catch up.
Financial challenges
Intel announced mixed financial results for the first quarter of 2023. Its revenue was $11.7 billion, which declined by 36% year over year. Its operating loss was reported at $1.4 billion, which was down substantially from the $3.3 billion operating profit reported in the year-ago quarter.
This was driven by the cyclical pullback in the semiconductor industry, as well as lower prices and production delays.
A positive for Intel is the $50 billion CHIPS Act, which aims to offer subsidies for chip makers to build more facilities on U.S. soil in order to compete with China and derisk supply chains from Taiwan. Intel has announced plans to spend a staggering $20 billion dollars in order to construct a new factory in Ohio.
Another positive is its Sapphire Rapids data center CPU has continued to ramp up production aggressively and is on track to deliver 1 million units by the third quarter of 2023.
Intel has a strong liquidity position with $27.5 billion in cash and short term investments compared to total debt of $50.27 billion. A positive is the vast majority of this debt (~$48 billion) is long term debt.
Valuation
Intel trades at a price-sales ratio of 2.3, which is 19% cheaper than its five-year average.
The GF Value chart indicates a fair value of ~$35 per share and thus the stock is “modestly undervalued” at the time of writing.
Final thoughts
Both Nvidia and Intel are two companies that are poised to benefit from the rapidly growing and ever-essential semiconductor industry. Nvidia is the gold standard for data center GPUs and is the backbone of the AI industry. However, given the market has already priced in a lot of the benefits, its valuation is now high. Intel is at the opposite end of the spectrum. It's a company that is struggling with many challenges and is having its market share eaten. But given the company has new chips on the horizon, government incentives and its valuation is cheap, I believe it could be a great contrarian investment in the long run.
