This edition of Market Factors first covers some interesting undervalued peripheral plays in the tech space and moves on to detail some surprising, and somewhat unwelcome, valuation facts. The diversion describes one of my favourite pods and there’s quick hits as always.
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AI
Top beneficiaries from data centre buildout
Believers in the AI expansion investment story will be hard pressed to find a more actionable research report than BofA Securities’ “Big potential in SMid Caps: top 5 picks levered to AI, chip complexity, aerospace and defense”. The report attempts to identify undervalued stocks in the market’s hottest themes.
Credo Technology Group Holding Ltd. (CRDO-Q) produces connectivity solutions for data centres, notably Active Electric Cables (AECs) that combine electronics and copper wires. BofA analyst Vivek Arya estimates the AI connectivity market will jump from US$15-billion in 2025 to US$62-billion by 2030.
Mr. Arya expects AECs to make up 45-55 per cent of data centre cable connectivity. He forecasts a ridiculous 45 per cent annual profit growth rate to 2030. The analyst has a US$200 price target on Credo compared with the current price of US$134.
MKS Inc. (MKSI-Q) sells the instruments and measuring equipment necessary to control and power the semiconductor manufacturing environment. BofA just raised its price target by US$40 to US$255. MKS is exposed to 85 per cent of semiconductor manufacturing with profit growth exceeding the sector by 2.5 percentage points.
Pick number three, Advanced Energy (AEIS-Q), specializes in complex power delivery for semiconductor manufacturing and industrial applications. Its acquisition of Artesyn Embedded Power gave it more direct exposure to data centre operations. Mr. Arya expects a 25-30 per cent revenue increase in the company’s data centre computing business and 35 per cent growth in cloud computing.
Advanced Energy’s revenue from medical, industrial and telecommunications businesses applications is at a cyclical low, according to the analyst, and he sees the potential for a recovery throughout this calendar year. The price target was recently raised to US$300 from US$260, well above the current price near US$258.
Teradyne Inc. (TER-Q) is stock pick number four. The company combines a semiconductor testing facility in addition to robotics and industrial automation businesses. The increasing complexity of semiconductors means that growth for testing equipment makers can grow more quickly than semiconductor manufacturing overall. Testing for high bandwidth memory chips is currently Teradyne’s fastest growing business.
The robotics business remains small but there is potential to grow through a relationship with Amazon.com, according to BofA.
The final pick is analog semiconductor provider Macom Technology Solutions Holdings Inc. (MTSI-Q) The company serves data centre, defence and telecommunications businesses. Macom is a big winner from the increasing speed (technical term is data throughput) of data between components of a data centre.
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Valuations
Tech turnaround to benefit hyperscalers
Evercore ISI strategist Julian Emanuel published some surprising observations about U.S. stock valuations in his latest research report, called Tech’s Test. He noted skeptical sentiment in the tech space that had driven Magnificent Seven relative forward PE ratios (next 12 months PE divided by the S&P 500’s forward PE ratio) to its lowest level since the pandemic.
The forward PE for the Magnificent Seven is now at its post-pandemic average. The more surprising part is the average forward PE ratio of the other 493 members of the S&P 500 is bumping up against all-time highs near 20 times. Value investors are having to dig deep to find opportunities.
Mr. Emanuel, backed by Evercore analyst expectations, expects that a reversal in tech sentiment will drive Microsoft Corp., Meta Platforms Inc. and Apple Inc. significantly higher. Nvidia Corp. earnings on Feb. 25 were cited as the trigger for a potential upside move.
Diversions
Your favourite bands, explained
I listen to podcasts while I work, almost continually. Sports and television are the main topics. I must know every detail about my beloved yet maddening Detroit Lions and The Watch is probably my single favourite pod.
Bandsplain is another of my top picks – I’m actually listening to an episode about Portishead while I’m writing this. Host Yasi Salek investigates major bands of the past so compulsively that podcasts often reach extraordinary lengths. The career of Robert Smith and The Cure was recorded in two parts - the first is four and a half hours and the second is two hours and 50 minutes. I heard the whole thing.
Ms. Salek describes her style as “cringe but free”. She wields vocal fry like a weapon which usually I’d hate but her version is somehow endearing. Watching her house burn down during the Los Angeles fires last year did little to dent her clear passion for music, particularly alternative rock.
Five years of podcasts are available so very few people will be unable to find one of their favourite bands. They are perfect for long car rides, contemplative weekend afternoons or writing investing newsletters.
The essentials
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The Rundown
David Berman believes this stock will benefit as Chinese-made EVs start coming to Canada
An even larger majority of economists are now expecting the Bank of Canada to keep rates steady through all of this year
Technical analysts warn a big pullback looms for skyrocketing silver
There are some early signs that the AI-driven productivity boom emerging in the U.S. is going global, reports Jamie McGeever
Quick hits
Morgan Stanley believes re-education will be a big theme in an AI-run world and recommends stocks of worker training companies. I suspect though that individual companies will do the employee education themselves.
Every new valuation technique includes data that’s impossible to get. I suspect this is by design – if everyone could apply it there would be no way for the inventor to monetize. (A better CAPE ratio, FT)
I mentioned before that technology is getting too technical for even intelligent laypeople to invest in. Here’s a sentence from a research report that backs my point: “As leading-edge process cadence accelerates and AI compute/networking plus memory devices become more power/pin/data-rate intensive, test requirements and tester capex could rise faster than underlying silicon units, creating a path for test TAM to ‘catch up’ after lagging WFE (test TAM +3.5% CAGR CY22-25 vs. WFE +7.4% despite a 0.77x historical correlation)”
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