By Tiernan Ray
[Corrects reference to ‘Tesla’ GPUs at bottom.]
Analysts at Pacific Crest this morning swapped ratings on shares of Nvidia (NVDA) and Skyworks Solutions (SWKS), cutting the former to Underweight from Sector Weight, and raising the latter to Overweight from Sector weight, as the looming prospect of Apple’s (AAPL) next iPhone, presumably the “iPhone 8,” should be better for mobile stocks than PCs and servers will be for Nvidia.
Pac Crest’s Michael McConnell, cutting Nvidia, argues that “desktop GPU market saturation” could hurt the company’s sales, along with lower profitability of sales of chips into Nintendo’s recently introduced “Switch” video game console, and also a “possible pause” of sales by Nvidia into the data center.
His colleague John Vinh is expecting “an accelerated ramp of the new iPhones in 2H17.”
Nvidia is facing a sharp slowdown in PC graphics sales, he writes, hampered by “difficult comparisons” with last year’s sales, and a “lack of compelling virtual reality (VR) apps”:
Desktop graphics card manufacturers are noting material demand deceleration in sell-through since February, with unit sales to China declining 30% to 40% q/q and to the United States declining 20% q/q in CQ1. GPU orders to NVIDIA are unlikely to meaningfully resume until July given high channel inventory of three months […] Demand creation from NVIDIA’s recent launch of the GeForce GTX 1080 Ti has been characterized as nominal, with many first-tier graphics card vendors noting saturation in the high-end gaming enthusiast market after a record sales year for NVIDIA’s gaming division (up 44% y/y) in F2017 (Jan.).
Sales of the Switch, meanwhile, may offset the PC market, but at the cost of lower profit margin for Nvidia:
Based on prior conversations with NVIDIA and AMD, we estimate Nintendo’s gross and operating margin profile to be approximately 30% and 15%, respectively, almost identical to current AMD margins from Sony’s Playstation and Microsoft’s Xbox game console revenue streams. While $400 million of incremental revenue from Nintendo will serve as an offset to flat desktop GPU sales at NVIDIA this fiscal year (in fact, we estimate only a ~$115 million hit to our gaming segment revenue estimate if these two scenarios indeed play out), we estimate that this sales mix change will lead to a 50 bps and 110 bps adverse impact to company gross and operating margin, respectively, resulting in a ($0.10) impact to EPS.
And as far as datacenter, McConnell takes a look at commentary about orders for the company’s “Tesla” GPUs by Nvidia customers, which he says show slackening of the wait time to get a GPU.
He thinks that means that there’s some softening of demand from cloud:
While growth in NVIDIA’s Datacenter business have been nothing short of impressive over the past year, supply-chain conversations indicate declines in quoted Tesla GPU lead times over the past month, which have now declined to four to five weeks from seven to eight weeks in F4Q16. While we fully acknowledge that secular drivers remain intact in the company’s Datacenter business over the long term, we also note that orders from cloud companies are notoriously lumpy and beset with digestion periods after quarters of outsized acceleration. In the case of NVIDIA, we believe that declining lead times for Tesla could be indicative of a possible sales pause in its Datacenter business segment by this summer.
Vinh’s commentary on Skyworks is in tandem with research by his colleague Andy Hargreaves, who raises his estimates for Apple based on “checks” that suggest “strong initial indications of component orders for the coming iPhone cycle.”
Hargreaves raises his iPhone estimates for the December quarter, presumably the first quarter with the new iPhone, to 80 million units from 78 million. He sees signs the newer model will be a larger yproportion of total iPhone sales this fall/winter:
Initial indications suggest that the highest-priced iPhone (iPhone 8/X) could account for half of the total high-end component volume. While this seems aggressive to us due to the likelihood for a high price, we are raising our estimate for mix of the highest-end iPhone through the cycle to approximately 30% of all high-end iPhones from 13%.
Vinh, picking up from that, writes Skyworks stands to gain share of chips in the new model:
We believe Skyworks remains well positioned to increase its content and gain share in the new iPhone, likely by single digits. We believe much of the share is at the expense of Murata, which continues to struggle without a power amplifier (PA) and believe share gains are likely to be reflected in a new enhanced diversity receive module given additional band combinations related to carrier aggregation.
Vinh also raised his rating on Cirrus Logic (CRUS), also a beneficiary of the iPhone. But, beyond the iPhone, he sees, “continued long-term growth opportunities associated with voice biometrics, with innovations with voice in handsets and increasing usage of personal assistants.”
Nvidia shares today are down $4.74, or 4.4%, at $103.64, while Skyworks stock is up $2.47, or 2.5%, at $100.19.
Correction: A prior version of this post mistakenly referred to Tesla Motors (TSLA) in conjunction with Nvidia’s GPU business. Tesla is, indeed, a customer of Nvidia’s, but Nvidia also has a line of GPUs named “Tesla,” and in this case, I mistook McConnell’s reference to those chips as a discussion about Tesla as a customer. My apologies for any confusion caused by the error.