Historically, economic downturns have been terrible times to invest in semiconductor stocks. However, the current downturn may be an exception in which semiconductors actually hold up fairly well. While previous recessions have decreased consumer and business demand for electronic devices and technology investment, the current pandemic-fueled downturn is actually increasing demand in certain parts of the technology market to support work-from-home initiatives.
On its recent earnings release and conference call with analysts, memory-chip maker Micron Technology (MU 1.50%) confirmed what many may have already been thinking -- recent quarantines and changes in behavior have increased demand for both data center and gaming applications, not decreased it:
In China, lower consumer demand was offset by stronger data center demand due to increased gaming, e-commerce and remote-work activity... Looking to the third quarter, as these trends also take shape worldwide, data center demand in all regions looks strong and is leading to supply shortages. In addition, we are seeing a recent increase in demand for notebooks used in the commercial and educational segments to support work-from-home and virtual learning initiatives occurring in many parts of the world. We are also encouraged to see manufacturers in China increasingly returning to full production, and we have recently started to see China smartphone manufacturing volumes recover.
Micron sells memory chips across a very diverse array of businesses, and its view seems especially bullish for the following chip stocks.
Nvidia and Advanced Micro Devices
Two candidates primed to benefit from strength in gaming and data centers are the graphics processing unit (GPU) makers Nvidia (NVDA -0.86%) and Advanced Micro Devices (AMD -0.94%). Graphics chips are especially well-positioned for the current economic climate. Not only are they key to gaming applications, but GPUs are also exceptional at parallel processing for big data and artificial intelligence applications in data centers.
Nvidia has been the definitive leader in GPUs with its CUDA software platform, which allows developers to adapt GPUs to other processing applications besides graphics. Though 2019 was a down year for Nvidia chips, last quarter saw the beginnings of a strong recovery. Gaming revenue soared 56% and data center revenue grew 43% year over year. Meanwhile, gross margins greatly expanded from 56% to 65.4%. Nvidia is a clear leader in GPUs and its results showed the gaming and data center markets were already recovering even before the recent stay-at-home surge.
The other major GPU supplier is Advanced Micro Devices, which also makes central processing units (CPUs) that should benefit from these trends. Micron's bullish statements on laptop demand for education and telework purposes plays very well into AMD's hands, as AMD produces both Ryzen CPUs and Radeon GPUs for desktops and laptops, along with its new EPYC CPUs for data center applications.
AMD has been on a tear over the past two years as it's changed from a laggard in the CPU area to a leader, beating rival Intel (INTC 0.62%) in the race to produce leading-edge 7nm CPU chips. That's led to a very optimistic scenario in which AMD's tiny market shares in both notebooks and data centers seem poised to grow by leaps and bounds in the years ahead.
Last quarter, AMD posted 69% revenue growth its in computing and graphics chip segment for notebooks and desktops, and its successful new EPYC data center CPUs boosted AMD's enterprise, embedded, and custom segment profits. AMD doesn't break out EPYC sales growth separately from its semi-custom chips yet.
In 2020, even the semi-custom chip business, which was down last year, is expected to rebound strongly with the introduction of new Xbox and PlayStation gaming consoles later in the year. On top of the current surge in demand for gaming and data center applications, in general, new game consoles should add yet even more fuel to the fire for this high-octane growth story.
Even though AMD is set to gain share on CPU rival Intel, that doesn't mean Intel isn't a good buy, either. Intel still has a dominant share of the processor market and is making strides in getting its leading-edge production up to par. In addition, Intel is a solid value stock, with just an 11 price-to-earnings ratio and a 2.4% dividend yield that's well-covered by profits.
Last quarter, Intel's dominant but mature PC-centric CPU segment grew 2%, but its data center CPU group surged 19%. Moreover, that high-growth segment made up $7.2 billion in revenue, bringing it closer to the $10 billion in revenue from the mature PC segment. Over the past five years, Intel has transformed from a PC-centric company to not only the data center, but also into self-driving car software, with the acquisition of Mobileye in 2017, and programmable chips, with the acquisition of Altera in 2015.
While AMD is definitely a threat, Intel should still be able to gets its fair share of data center spending going forward as it catches up in leading-edge production and adjusts pricing accordingly.
The main point
The overriding theme here is all three of these companies were already seeing surging demand in gaming and data center segments even before the recent demand surge in teleworking, video games, and other data center activities in the first quarter due to coronavirus.
While these chip stocks haven't fallen as much as oil, travel, or financial sector stocks, they're still more than 20% off their recent all-time highs. Meanwhile, they seem to be much better bets to both weather the current storm and continue their long-term growth trajectories once the pandemic subsides.