Daily Brief TMT/Internet: NVIDIA Corp, Softbank Group, Softcat PLC, SK Hynix, Impinj Inc, Sap Se Sponsored Adr, Taiwan Semiconductor (TSMC), Texas Instruments, Visa, Microsoft Corp and more

• Global Fund exposure in NVIDIA Corp (NVDA US) has moved to record levels after a doubling of the share price this year.
• New positions from UniNachhaltig Global, JP Morgan Global Focus  and BNY Mellon Global Equity (3.36%) were among a total of 14 funds who opened exposure to NVIDIA Corp in 2023.
• Growth and Aggressive Growth funds are at maximum levels of ownership, whilst Value managers are showing some hesitancy here.

• The SoftBank share price rally is, in our view, based on optimism around the Arm IPO, the Yen’s relative weakness and recovering share prices of public companies in the portfolio
• Nvidia’s emergence as a potential anchor investor in the Arm IPO has boosted SoftBank shares, yet there is still a big disparity between groups in terms of Arm’s potential valuation
• Aside from a recovery in public tech companies’ shares, Yen weakness has supported SoftBank’s asset values; monetary policy moves now indicate the prospect of a stronger Yen versus the USD

• UK Fund exposure in Softcat PLC has reached new highs.  The percentage of UK funds invested in Softcat now stands at a record 17.3% with average holding weights of 0.21%
• Softcat PLC moves to the 5th most widely held Technology stock in the UK, sharing similar ownership characteristics to Spirent Communications, Halma PLC and Oxford Instruments.
• With Softcat approaching the boundaries of FTSE 100 inclusion, it’s not hard to envisage investment levels moving higher from here.

SK Hynix has reported weak Q2/23 results as expected. While the Q2 results registered a recovery on account of an improvement in the memory semiconductor market, the recovery was from a very low base in Q1. Performance remained abysmal compared to last year, with revenue falling by half y-o-y and EBITDA plunging 92%. The financial risk profile continued to be very weak, with large negative FCF, fast-increasing debt and soft earnings.

We believe there is a high level of optimism in AI-related companies, including SK Hynix. Despite the weak results (with some signs of recovery from a low base), the company’s share price surged yesterday.

We maintain our forecasts. Considering the industry downturn, we expect FY 2023 EBITDA to decline c. 80-85% y-o-y, with significantly negative FCF. Moreover, debt should spike c. 50% to cover the negative FCF and fund the USD 2 bn payment for Solidigm. This will likely bring Debt/EBITDA to stressed levels (e.g. 7-8x) at year-end. That said, we expect improvement from FY 2024, on the back of an industry recovery.

We see a high likelihood of downgrades by the agencies in the next 1.5 years. SK Hynix is rated Baa2 (negative)/BBB- (negative)/BBB (stable) by Moody’s/S&P/Fitch. We expect the company to hit the negative rating triggers, given the industry decline and debt-funded acquisition of Solidigm.

• Impinj warned revenue would decline sequentially in the third quarter due to weaker than expected demand from retail apparel customers. The shortfall started  towards the end of the second quarter
• Impinj increased inventory in the first quarter and more so in the second quarter. Inventory within the channel has also increased compared to the first quarter
• Impinj’s stock continues to price the downward revenue scenario as a short-term event. Previous downturns have lasted more than one quarter

• SAP delivered a mixed set of results in its most recent result with revenues above Wall Street expectations but below-par earnings.
• RISE with SAP and GROW with SAP have been well-received offerings, driving significant cross and upsell opportunities across their portfolio.
• SAP’s approach with SAP Business AI is unmatched in the industry, delivering relevant, reliable, and responsible AI solutions to customers, with plans to introduce new premium RISE offerings and an uplift of up to 30% in the fall.

• Taiwan Semiconductor managed to exceed analyst expectations in terms of revenue as well as earnings.
• Despite the cyclical downturn, the company continued investing in R&D to support the development of its N3 and N2 technologies.
• We give Taiwan Semiconductor Manufacturing a ‘Hold’ rating with a revised target price.

• Texas Instruments delivered a positive result and managed an all-around beat last quarter.
• The decline in gross profit from the prior year was principally brought on by reduced revenue, higher capital expenses, and the shifting of LFAB-related costs to the cost of revenue.
• For the third quarter, Texas Instruments’ team anticipated the sale to be in the $4.36 billion to $4.74 billion range, with $1.68 to $1.92 earnings per share.

• Visa managed to exceed analyst expectations in terms of revenue as well as earnings.
• The quarterly payments volume in the U.S. increased mostly due to a slower inflation rate.
• With the introduction of Visa Business Credit for their 28 million client base, PagSeguro, a significant Brazilian fintech client, will expand in the commercial area.

• Microsoft delivered an all-around beat in the most recent quarterly result.
• Microsoft Cloud reached $110 billion in yearly revenue, with Azure accounting for more than 50% of the total.
• Customers are moving their current workloads to Azure and investing in new workloads, causing Azure to gain market share.