Brief Equities Bottom-Up: AMD. Our Opteron Thesis Is Intact & Reinforced After Q2 2018 Earnings and more

In this briefing:

1. AMD. Our Opteron Thesis Is Intact & Reinforced After Q2 2018 Earnings
2. Tesla Motors – Gaining Industrial Strength
3. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy
4. Shin-Etsu Reports Double-Digit Growth in Revenue and Operating Profit; Stock Is Clearly Undervalued
5. Facebook 4Q Results: An Easy Beat – Has Zuck Turned the Tanker?

1. AMD. Our Opteron Thesis Is Intact & Reinforced After Q2 2018 Earnings

Advanced Micro Devices reported earnings of $1.42 billion for fourth quarter 2018, up 6% YoY, narrowly missing consensus estimates by $20 million. For 2018 as a whole, AMD grew revenues by 23% to $6.48 billion. On the conference call, CEO Lisa Su claimed that the company exited the year having met its long-stated interim goal of 5% server market share. Furthermore, she reiterated her company’s intention to double that market share within four to six quarters.

On the earnings call, the company revealed that combined data center CPU and GPU sales for the quarter amounted to mid-teens percentage of overall revenue, roughly equally split between the two. This implies that data center GPU revenues were in the order of $105 million, amounting to ~20% of Nvidia‘s recently announced guidance miss for the quarter. 

Paradoxically, AMD’s ambitions in the data center will remain largely unthwarted by the current semiconductor downturn, their market share gains will come at the expense of Intel and NVIDIA. Our original Opteron thesis remains intact and reinforced by the unexpectedly strong data center GPU market share gains against NVIDIA. 

2. Tesla Motors – Gaining Industrial Strength

Tesla Motors (TSLA US) continues to power ahead of the competition in electric vehicles with an 80% market share of all electric vehicles sold in the United States in 2018.  With approximately 140,000 Model 3 cars sold in the U.S., Tesla outsold every marquee sedan brand. Model 3 outsold mid-size SUVs including BMW X3, Acura MDX, Audi Qs, Lexus RX and even the Mercedes C -Class. 

3. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy

Tesla’s 4Q results came in lower than consensus expectations.  While the 4Q results did not surprise us, it came as a negative surprise to street consensus that has taken the stock down by 4.7% in after hours trading at the time of this writing.  Here are some initial impressions:

• Deepak Ahuja steps down (again) as CFO but will remain as senior advisor going forward, and Senior Finance VP Zach Kirkhorn will step up to CFO. This may actually be a positive development from the perspective of management at this time.  Ahuja has always played a critical role in pulling Tesla through one existential crisis after another based on our historical observations, and the context under which he originally retired in 2015 coincided with management believing that it was safe at that time.  With the Model 3 production normalization and the company’s subsequent restructuring initiatives, management may be feeling safer about 2019 than 2018.
• We are less concerned with why the quarterly earnings miss took place.  Gross margins for automotive sales took a dive in 4Q but in our view that resulted primarily from a significant mix shift with the Model 3 taking 70% of the delivery mix, from 67% in 3Q18.  This mix shift is likely to continue to pressure Tesla’s overall margins in 2019.  However, given Automotive gross margins came to 24.3% in 4Q we think it is relatively easy for Tesla management to guide a target 25% range especially if that target is set for 4-6 quarters from now.
• Gigafactory 3 in Shanghai is projected to be completed by the end of 2019, with short range Model 3 and the Model Y (based on the Model 3 platform with 78% shared content) beginning production at that time, financed largely with local bank debt.  Battery cell supply will initially come from Nevada, Japan and some local suppliers but modules and packs will be made in-house.  Given the logistic layout of the Gigafactory 3 and labor cost gap, we think it is plausible for management to currently project that China margins by 2020 could be roughly on par with its U.S. manufacturing operations.  It remains to be seen whether this has been thought through well but the trust factor here will have to go to Deepak Ahuja’s deep industry knowledge given his prior auto industry experience before joining Tesla.
• Tesla’s cash on hand at the end of 4Q18 stood at $3.7bn.  While some investors may remain concerned about the $920m 0.25% Convertible Prefs that are due to mature on February 27, 2019 with a conversion price of $359.87 per share, there should be sufficient liquidity on the balance sheet to cover it in our view even if share price is below that price level on maturity.

We have historically said on this forum, despite a healthy dose of skepticism on the operational aspects of the company given a highly charismatic CEO with untested automotive industry credentials, that calling Tesla’s shares is tantamount to a market call (see, e.g., Tesla: Model 3 Production Rate Reaches 5,000/Week, but Shares Fall ).  The fact that share price performance in the past few months have focused more heavily on earnings, we highly suspect that as with many NASDAQ listed stocks, market confidence with Mr. Musk’s capital raising capabilities may not be a key driver for Tesla’s valuations over the next 12 months.

Tesla (TSLA): Consensus Estimates vs. Actual

4. Shin-Etsu Reports Double-Digit Growth in Revenue and Operating Profit; Stock Is Clearly Undervalued

Shin-Etsu reported its 3QFY03/19 results yesterday (29^th January 2019) which saw the company revenue growing at 13.4% YoY in 3QFY03/19 while its operating profit increased at a stellar 32.5% YoY during the quarter. Shin-Etsu has witnessed positive performance across all its segments while the Semiconductor Silicon segment reported the highest growth in revenue and operating profit. Further, the company beat consensus revenue and operating profit estimates by 1.5% and 6.4% respectively.

5. Facebook 4Q Results: An Easy Beat – Has Zuck Turned the Tanker?

When we wrote in 3Q18 that there were scope for *upgrades* to Facebook’s earnings, the sell-side remained cautious.  With the stock up 12% after-hours, we assess whether Facebook has further legs to the investment case. More details below.