Tech Stock Thoughts #5: Apple, Samsung, TSMC, IBM, Logitech

Apple’s Reported Mac and iPhone Plans Have a Pragmatic Streak to Them

Sources: Bloomberg (MacBook report, iMac report), 9to5 Mac, AppleInsider

• Ming-Chi Kuo and Bloomberg’s Mark Gurman both recently shared fresh scoops about Apple’s Mac and iPhone plans. Among the highlights:
• Apple reportedly plans to launch 14” and 16” MacBook Pros that feature an overhauled design, more I/O ports, brighter/high-contrast displays and support for MagSafe charging, and which are powered by an Apple processor more powerful than the M1. The MacBooks might also have physical function keys rather than Touch Bars (Kuo says this is planned, while Gurman just says it’s being considered).

1. Apple is also reportedly prepping thinner and sleeker-looking iMacs that are powered by its silicon, as well as both Intel and Apple-powered Mac Pros.
2. Apple’s 2021 iPhones might feature (in addition to Face ID) an in-screen fingerprint sensor. Also, Apple is reportedly testing the use of a vapor chamber-based cooling system for future iPhones.
3. Apple is doing early development work on foldable iPhones containing a “mostly invisible” hinge. However, the phones are said to be “likely years away” from launching.

• Several of Apple’s reportedly-planned moves — adding more I/O ports and a MagSafe connector to MacBooks, baking an in-screen fingerprint reader into iPhones, replacing the Touch Bar with function keys — have a very pragmatic bent to them, signaling a wish to add features customers have been asking for as opposed to remaining committed a matter of principle to certain technologies (e.g., the Touch Bar, Face ID, USB-C charging) or design ideals (e.g., thinness, minimalism).
• Arguably, such moves fit with a general trend in how Apple’s hardware designs have been changing in recent years, in the wake of Jony Ive’s departure. See also Apple’s replacement of its ultra-thin butterfly keyboard design with its Magic Keyboard, and its decision to pack larger batteries within the iPhone 11 Pro and Pro Max (thereby making the phones a little thicker and heavier, but also significantly boosting battery life).
• As for the reported foldable phone efforts, I would’ve been surprised if Apple wasn’t working on a foldable design or two. Foldables remain a niche market for now, for reasons ranging from price to production volumes to thickness/weight, so there’s no need for Apple to rush here. But given both the long-term trend towards greater smartphone screen real estate as well as the opportunities foldables open up (pardon the pun) for hardware innovation, one hopes foldable iPhones eventually arrive.

Samsung’s Galaxy S21 Line: A Pricing Strategy Contrast with Apple

Sources: Samsung (I, II), The Verge, CNET

• Apple kept pricing for its Pro and Pro Max iPhones unchanged in 2020 and gave the standard iPhone 12 an $829 starting price ($130 above the standard iPhone 11). Samsung, by contrast, gave the 6.2” Galaxy S21 and 6.7” S21+ starting prices $200 below those of the S20 and S20+ ($799 and $999 vs. $999 and $1,199). It’s also giving the 6.8” S21 Ultra a starting price $200 below that of the S20 Ultra, though that still leaves it at $1,199.
• The price cuts are accompanied by spec reductions in certain areas for the S21 and S21+. Curved OLED displays have been replaced with flat ones, display resolutions have been lowered and (surprisingly, given that Samsung’s phone unit sources its chip unit’s memory) RAM has been cut to 8GB from 12GB. Also, the standard S21 has a polycarbonate back rather than a glass one, and it doesn’t have a UWB radio.
• Arguably, only the tricked-out S21 Ultra (12GB-16GB of RAM, high-res display, 4 rear cameras with a 108MP wide-angle camera, S Pen support) truly qualifies as a flagship device. And interestingly, Samsung is making this strategy change at a time when smartphone demand is pretty strong, including (from all indications) for the iPhone 12 line.
• The simple explanation for why Samsung and Apple are adopting different pricing strategies: Apple’s phones — owing to iOS, complementary Apple services/platforms and the related ecosystem — are a lot more differentiated from the competition. While Huawei’s phone business has been crippled by sanctions, Samsung still has to contend with stiff competition from Chinese OEMs such as Oppo, Vivo, Xiaomi and OnePlus, as well as a measure of competition from the likes of LG, Sony and (though it’s now retreating from the high end) Google — all of which can bake the same Google software and services into their Android devices.
• Throw in the outsized share that the iPhone has among high-income consumers in the U.S. and elsewhere, and Apple looks well-positioned over the long run to price its high-end iPhones at a premium to most of the Android phones that they’re often compared with.

TSMC’s Earnings: The Good Times Continue…and Are Apparently Expected to Last into 2022/2023

Sources: TSMC (earnings release, earnings slides), Unhedged (CC transcript)

• It’s been an open secret that TSMC is shipping just about every wafer it can fab right now, and so it wasn’t a shock that they guided Q1 soundly above consensus and forecast mid-teens 2021 revenue growth (Q4 sales, which were up 22% annually in dollars, were already known thanks to monthly sales reports).
• And it’s not just TSMC’s 5nm and 7nm nodes that are driving this growth, though they are seeing strong demand thanks to big orders from the likes of Apple, AMD, Qualcomm, and Mediatek. 37% of Q4 revenue came from trailing-edge processes (28nm and below). Also, TSMC noted on its call that its current wafer supply constraints are mostly related to mature processes, thanks partly to a surge in orders for automotive chips relying on them.

TSMC’s Q4 sales by end-market. Source: TSMC.

• That brings us to the matter of TSMC’s eye-popping 2021 capex budget of $25B-$28B: It’s far above reported 2020 capex of $17.2B and more than twice its 2018 capex of $10.5B. On its call, TSMC said 80% of this spending will be related to advanced nodes, and that this 80% will “primarily” be used for capacity arriving in 2022 and beyond. Moreover (much to the approval of investors in chip equipment makers), TSMC signaled that its capex will remain elevated beyond 2021.
• Though expected future demand from its current advanced-node clients is doubtlessly a factor here, the magnitude of TSMC’s 2021 capex surge, together with some of its earnings call commentary, makes me think there’s a strong possibility that the company is also preparing for large advanced-node orders from Intel, which has been reported to be holding talks with TSMC and Samsung about potentially fabbing advanced CPU designs.
• Some more grist for the mill was provided on Friday. Taiwan’s Digitimes, which seems to have good sources within TSMC, reported that more than $15B of TSMC’s 2021 capex will be related to its 3nm node, which enters volume production in 2H22. In addition, The Oregonian reported that Pat Gelsinger told Intel employees during an all-hands meeting that he wants Intel to “deliver better products to the PC ecosystem than any possible thing” made by Apple (amusingly referred to by Gelsinger as “a lifestyle company in Cupertino”). Given Intel’s 7nm setback and the performance-per-watt bar just set by Apple’s M1 SoC, this is a goal that Intel might be hard-pressed to deliver in 2022 without TSMC and/or Samsung’s help.
• One final thought: If expectations of big Intel orders have something to do with TSMC’s capex plans, Intel’s own capex (guided to be at $14B-$14.5B in 2020) could dip meaningfully in 2021 and 2022. As someone who has been bullish on chip equipment makers for a while, I think investors in the space should stay mindful of that risk as Intel gets set to post its Q4 report (likely to feature its 2021 capex guidance) on Thursday — particularly with many chip equipment names having surged to new highs following TSMC’s report.

Chip Shortages Spark Auto Plant Shutdowns, 6 Month-Plus Lead Times

Source: The Wall Street Journal

• While it was already pretty well-known that the chip industry is seeing widespread shortages (particularly for chips made using mature or specialty processes) amid huge demand across several major end-markets, some of the details shared in a Jan. 14 WSJ story were still pretty remarkable Among them:

1. With many automakers currently forced to idle plants due to chip shortages, GM has asked suppliers to stockpile a year’s worth of chips.
2. Multiple industry contacts talking with the WSJ said they’re seeing 6 month-or-greater order lead times. And Microchip Technology has reported seeing 40 week-plus lead times for some products.
3. The CEO of a South Korean broker of used chip manufacturing gear said most foundries using “older-generation silicon wafers” (presumably a reference to 200mm wafers) were fully booked through year’s end.

• Such a demand backdrop pretty much guarantees a very strong earnings season for the chip industry, particularly with a number of suppliers hiking prices as demand far outpaces supply. Though a lot of this might be priced in following the massive rally the sector has seen since early November, look for Q1 outlooks to be above consensus nearly across the board, as well as for any Q2 commentary that’s shared to be largely positive.
• With that said, there’s some risk that a supply/demand environment like the current one leads many buyers to double-order in an attempt to play it safe (consider how GM’s request to its suppliers might lead some of them to act). And that could lead to inventory corrections if the demand environment worsens in the back half of the year — say, because consumer spending sees a major shift from goods to services as COVID vaccines become more widely available. This isn’t guaranteed to happen, but is definitely something to watch out for, given how much chip stocks have rallied and how markets tend to start pricing in the end of a cycle well before the end has clearly arrived.

IBM’s C-Suite Decision-Making Is Starting to Get Better

• I’ve lost track of how many critical columns I’ve written about IBM over the last four years, and I stand by a lot of the critiques made in these pieces — whether about the secular pressures placed on various IBM businesses by cloud adoption, the nuts-and-bolts execution issues that have contributed to share losses, or the gradual deterioration in Big Blue’s earnings quality/FCF conversion. And ahead of Thursday afternoon’s Q4 report, IBM’s segment-level Q3 growth rates make it clear that quite a lot of work needs to be done to right the ship.

IBM’s Q3 growth rates by business. Source: IBM.

• But with all this said, IBM’s high-level decision-making has arguably improved some over the last 9 months, following a management shakeup that led Cloud and Cognitive Software SVP Arvind Krishna to be named CEO and Red Hat chief Jim Whitehurst to be named President. IBM’s Managed Infrastructure Services unit — a relatively low-margin business facing long-term headwinds from IaaS adoption — is being spun off, and (following many years of very mixed results for M&A transactions) the company’s M&A activity has gotten a little shrewder.
• By and large, the IBM acquisitions made since the shakeup have involved either the purchase of software firms possessing technology assets that strengthen IBM’s competitiveness within high-growth software segments, or IT consulting firms well-exposed to growing end-markets. Notable examples include Nordcloud (a European cloud consultancy), 7Summits (a Salesforce consultancy), WDG (a robotic process automation software firm), Instana (an app performance monitoring/observability software firm) and StackRox (a container security startup being folded into Red Hat).
• Most of these M&A deals were inked over the last two months. There’s still probably quite a lot more that IBM needs to do in order for its organic software and services growth rates to simply match global IT software and services growth rates, never mind exceed them, but it is now taking a step or two in the right direction. And its stock is pricing in little to no organic growth for the foreseeable future.

Logitech’s Knocks the Cover Off the Ball — Some Positive Read-Through for PCs, Tablets, Gaming Hardware

Source: Logitech (earnings release, earnings slides, prepared remarks)

• Logitech topped its December quarter revenue consensus by $430M (35%), with annual growth accelerating to 85% from the September quarter’s already-torrid 75%. Product sell-through rose 62%. And these segment sales figures speak for themselves:

Logitech’s December quarter sales by segment. Source: Logitech.

• Logitech did caution that it doesn’t view its current education-related tablet accessories sales to be sustainable. On the other hand, it said PC webcam supplies and inventory remain constrained, which is pretty remarkable given how much webcam sales rose last quarter.
• With sell-in well above sell-through in the December quarter, Logitech is guiding for “just” 40%-50% March quarter constant-currency revenue growth. But given how comfortably it has topped estimates the last two quarters, that outlook might be conservative.
• Logitech’s growth rates will probably look very different during the back half of 2021, as comps get tougher and reopenings perhaps lead demand within some major end-markets to cool. But its numbers do suggest that the hardware demand surge caused by COVID’s impact on remote work/learning and gaming activity is far from over. And that probably bodes well for the numbers that other PC, tablet and gaming hardware and chip suppliers will report in January and February.