'Fast Money' traders detail Intel's Q3 earnings, market competition

Key Concepts

• AI Business Growth: The discussion touches upon the growth of the AI business and its impact on stock valuations.
• PC Refresh Cycle: The potential demand for AI-enabled PCs and the role of major manufacturers like HP, Dell, and Lenovo are examined.
• On-Device AI: The absence of on-device AI capabilities in Apple's current offerings is noted.
• PC Margins and Lead Times: The low profit margins and long production cycles of PCs are highlighted as factors influencing upgrade decisions.
• Co-pilot Uptake: The slow adoption of Microsoft's Co-pilot software is mentioned as a reason for companies to delay hardware upgrades.
• Stock Valuation: The conversation centers on the current valuation of a specific stock (implied to be related to AI/semiconductors) and whether it's justified by fundamentals.
• Earnings Per Share (EPS) and Revenue Growth: The recent quarterly performance, specifically EPS and a modest 3% year-over-year revenue increase, is analyzed.
• Full-Year Guidance: The robustness of the company's future financial projections is questioned.
• Price-to-Earnings (P/E) Ratio: The P/E ratio is estimated to be around 45-50 for the stock in question.
• Debt and Equity Structure: The shift in the company's financial structure from a high-debt, low-equity profile to a more established one is discussed.
• Dell's Performance: Dell's stock performance is considered in relation to the broader AI/semiconductor trends.
• Unsustainable Valuation: Wed Bush's assessment of the stock's valuation as unsustainably high is reported.
• EV to Sales Ratio: This metric is used to analyze the company's valuation, comparing it to historical levels and future projections.
• Foundry Business: The impact of the foundry business on valuation is discussed, with a comparison to Intel.
• Intel's Financials: Intel's significant debt and cash burn are mentioned.
• Government Subsidies and Equity: The evolving nature of government funding (from non-debt/non-equity to equity) is noted.
• Semiconductor Downtrend: A four-year downtrend in a specific semiconductor stock is identified.
• Semiconductor Pricing: Reports of price increases for DRAM and NAND Flash by Samsung and SK Hynix are discussed.
• Demand for Memory Chips: Strong demand for memory chips is indicated by the price increases.
• US Investor Exposure to Samsung: The lack of direct investment opportunities for US investors in Samsung is highlighted.
• Cyclicality of the Semiconductor Sector: The inherent cyclical nature of the semiconductor industry is emphasized.
• Storage Space Companies: The strong performance of companies like Sandis (SNDK), Western Digital, Seagate, and Micron in the storage sector is observed.
• Hyperscalers and Nvidia: The shift in focus from hyperscalers and Nvidia to a broader range of semiconductor companies is suggested.
• Cyclical Stock Investment Strategy: The historical difficulty of buying cyclical stocks at their cheapest points is mentioned.

Stock Valuation and AI Business Dynamics

The discussion begins by examining the current stock run and valuation, particularly in the context of the AI business. While the AI business itself might be up a couple of percent, the demand for AI-enabled PCs is questioned. It's noted that major PC manufacturers like HP, Dell, and Lenovo constitute a significant portion of sales. The absence of on-device AI in Apple's current offerings is contrasted with the potential for AI integration in PCs.

A key argument is that PCs are not high-margin products and have long lead times. This suggests that companies might delay hardware upgrades, especially since the uptake of software like Microsoft's Co-pilot has been slow, as reported by Microsoft over the past few quarters.

Stock Performance and Fundamental Analysis

The conversation revisits a specific stock that was considered interesting at around $19, with a potential target of $36, but subsequently fell. The current price has surpassed this previous high. However, the focus shifts to fundamentals, with the quarterly EPS and revenue being described as "fine." Revenue growth is only 3% year-over-year, which is considered a modest figure. The full-year guidance, in light of recent discussions, is not deemed particularly robust.

The valuation of the stock at $40 is estimated to be approaching a P/E ratio of 45-50, based on annualizing the current quarter's earnings. The prospect of losing money in the next quarter is also mentioned. The earlier phase where the stock was considered an "option" due to high debt and low equity is noted as having passed. While progress is being made in a difficult endeavor, the speaker expresses an inability to "get on board" with the current valuation, preferring other investments.

Dell and Broader Market Trends

Dell's performance is brought up, with the expectation that the AI trend should be beneficial for the company. However, Dell's stock has only seen a slight increase. This leads to the sentiment of having "missed the boat" on this particular stock, with a prediction that buying it tomorrow would likely result in a price decrease.

Valuation Concerns and EV to Sales Ratio

Wed Bush's recent note is cited, stating that the current valuation is "unsustainably high." The EV to sales ratio is highlighted, with the observation that current levels haven't been seen since late 2023. Crucially, the current valuation is based on estimates for 2027 and 2028 revenues and gross margins, indicating that the stock is trading on future projections.

The discussion then delves into the complexities of the EV to sales ratio, particularly concerning Intel. Questions are raised about what constitutes true debt, strategic investment, equity, and subsidies. The evolving nature of government money, which was initially neither debt nor equity but is now considered equity, is pointed out. This is contrasted with the perception that while Intel has significant debt and cash burn, companies like SoftBank and Nvidia are associated with investment rather than debt.

Semiconductor Downtrend and Pricing Dynamics

A chart is referenced, showing a downtrend in place since December, with the current price point reaching the third instance of that downtrend line. Simultaneously, there's been a slight pickup in semiconductors, despite a downdraft day previously. Intel could potentially support this narrative.

However, a report from the Korea Economic Daily indicates that Samsung and SK Hynix, two major chipmakers, plan to increase DRAM and NAND Flash prices by approximately 30% in the fourth quarter. This suggests strong demand, even though major players are already implementing these price increases, contrary to some expectations from banks like Citi and Morgan Stanley.

Samsung and Memory Chip Market

The lack of direct investment in Samsung by many US investors is noted, as they may not know how to purchase it, although it is available in some global ETFs. Samsung is identified as the largest memory chip maker globally and a highly important tech company. The strong demand for its products is seen as a positive sign, reinforcing the cyclicality and apparent solidity of the semiconductor sector's cycle.

Storage Sector Performance

The performance of companies in the storage space is highlighted. Sandis (SNDK) is mentioned as being up 14% and trading at a new all-time high. Western Digital, Seagate, and Micron are also noted for their strong trading performance. The observation is made that it was easier to focus on hyperscalers and Nvidia a few years ago, but now a broader perspective is needed to identify companies exposed to this trade.

Investment Strategy for Cyclical Stocks

Western Digital is expected to report earnings soon. While its valuation is not considered "ridiculous," it is described as "highly cyclical." The question is posed whether these companies should be bought when they are cheap, with the historical observation that this is often the "wrong time to buy them."