Intel / Samsung Q4 21 – Two cities

Intel Q4 21 – Hard place.

• Intel reported reasonable results but pressure on gross margins revealed just how hard Intel is finding life at the moment as in a shortage, margins should be going up not down.
• Q4 21 revenues / Adj-EPS were $19.5bn / $1.09 compared to expectations of $18.4bn / $0.79.
• The cloud was the main driver of the better-than-expected revenues underpinning Microsoft’s commentary that it expects demand for Azure to reaccelerate in Q2 2022.
• However, gross margins remain under pressure falling to 53.6% compared to 56.8% 12 months ago.
• This is a sign of the difficulties that Intel is currently facing as in a time of shortages and high demand, margins should be going in the other direction.
• I suspect that this is mostly due to a resurgent AMD which has been out executing Intel for some time now which has put pressure on pricing.
• Apple demonstrating what is possible with 5nm and a well-engineered Arm processor has also not helped Intel’s ability to charge high prices for its products.
• This is slightly reminiscent of the 2000s when Lucent couldn’t make money in the middle of the internet boom.
• I don’t think that Intel is anything like that kind of trouble, but it is in a battle to establish its place in the world of next-generation computing.
• It has chosen the hard path (the right path) which is to go back to its manufacturing heritage and out-execute TSMC which is now the undisputed global leader in semiconductor manufacturing.
• Importantly, Intel knows how it is going to get there but it is going to be expensive and both TSMC and Samsung are substantially outspending Intel when it comes to investments in capacity.
• Furthermore, the question of the relevance of the x86 processor has yet to be answered but we should get an indication of when AMD’s first 5nm x86 processor makes it into the wild this year.
• Intel has been resilient in the current sell-off because the stock had already been clobbered and its valuation is one of the cheapest in the industry.
• I think that there may be more pain ahead before any turnaround is achieved meaning that $44 may once again be reached.
• That is the point I would be really interested in having another think about a position in Intel having chickened out the last time this opportunity was presented.

Samsung Q4 21 – Supercycle signals.

• Samsung on the other hand is in top form and is able to invest hard in its future as well as deliver growth and profitability.
• Q4 21 results were in line with guidance given earlier in the month but margins were lower than Q3 21 mostly as a result of bonuses paid to staff during the month of December.
• That being said, profitability remained very healthy at 18.1% EBIT with even Display Products managing to make some money.
• As expected, it was Semiconductors that made almost all of the running and this state of affairs is expected to persist for most of 2022.
• Samsung is doing particularly well in advanced memory products as well as the strong demand that continues to come from the data centre.
• However, capacity is being built for silicon chip manufacturing everywhere in the globe and plans are afoot for capacity to be built for geopolitical reasons rather than demand.
• This means that when China abandons its Zero COVID policy (as it eventually must), the supply situation will ease up just as a lot of new capacity comes online.
• This is what I think will signal the peak of this supercycle and the beginning of a downturn as the market absorbs the new manufacturing capacity.
• When this occurs, one does not want to be holding the highly valued end of the market but instead either exit the sector or look at the cheaper end.
• Here, Samsung, Intel and Qualcomm look defensive compared to AMD and Nvidia.