MS Cuts NVDA PT To 600 - Thoughts on Export Control Impact on NVDA, Semicapspdf
MS Cuts NVDA PT To 600 - Thoughts on Export Control Impact on NVDA, Semicapspdf
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  1. M UpdateMorgan Stanley & Co. LLCJoseph MooreEquity AnalystJoseph.Moore@morganstanley.com+1 212 761-7516Mason WayneResearch AssociateMason.Wayne@morganstanley.com+1 212 761-6012Shane BrettResearch AssociateShane.Brett@morganstanley.com+1 212 761-1022Ella TulchinskyGVAT StrategistElla.Tulchinsky@morganstanley.com+1 212 761-2222SemiconductorsNorth AmericaIndustry ViewIn-LineSemiconductor Capital EquipmentNorth AmericaIndustry ViewIn-LineSemiconductors | North AmericaThoughts on Export Control Impact on NVDA, SemicapsWhile AI export controls were expected, initial interpretation looks more draconian than our expectations; NVDA remains a Top Pick despite the setback here. Meanwhile, semicap impact appears benign.What’s ChangedNVIDIA Corp. (NVDA.O)FromToPrice Target$630.00$600.00What happened: On Tuesday, the US government released follow-on clarification of the export controls it issued last year. On the semiconductor equipment side, our immediate take is that it is a clarification of prior rules and a modest tightening that is likely to have minimal incremental impact - though it will likely take time to fully assess that. But on the compute side, the AI restrictions to regions such as China and Saudi Arabia are more specific, and at the margin more negative for revenues, then we would have initially thought. NVIDIA filed an 8K stating that 1) there is no near term impact (consistent with prior comments that there is enough unfulfilled demand that China is not a swing factor), 2) there will be a licensing requirement in the regions in question for a wide range of products, including high end gaming products (some of which appear to fall below the new performance thresholds suggested by the commerce department), and that there is no guarantee of how that licensing process will go, and 3) the ruling could be disruptive to longer term product development, to the ability to support customers even in unaffected regions, and could force the company to move some of its operations.Background: This is all a follow-on from the export controls announced last year (October 7, 2022) that limited semiconductor capital equipment and AI into multiple regions of interest of the commerce department, including China and Saudi Arabia. The AI rules last year impacted products above a threshold of compute performance (teraflops) and connectivity, which in practice only impacted one vendor, NVIDIA, since both A100 and H100 products were above the threshold. The company introduced variants of those products with slightly reduced compute and meaningfully reduced NVLink connectivity, branded the A800 and H800. From all appearances those solutions remained the AI solution of choice for China hyperscalers.NVIDIA has generally characterized China as 20-25% of data center revenues, remaining in that range in the most recent quarter.This week's ruling - effective in 30 days - changes the threshold. It maintains the teraflop limitation, but adds a new specification that they call "performance density Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.October 18, 2023 12:40 AM GMT
  2. M Update2"- effectively, gigaflops per square mm of silicon - that will be limited. Further, certain products that fall in a grey area below these thresholds - including some gaming products - are subject to an incremental licensing requirement.What is the impact? From what we can tell, A800 and H800 are well above the new "performance density" threshold. While NVIDIA mentioned those products as subject to a licensing requirement, if they are clearly above the threshold they are likely to be blocked.Products such as L40S - an NVIDIA product aimed at inference and refinement of pre-trained models, which may well be a viable alternative for those unable to buy higher end solutions - would appear to fall below the screens, by our interpretation, but NVIDIA appears to feel that it is above the performance threshold, per its statement.While export controls have been widely expected given recent press reports, this is at the more draconian end of expectations, in our view, and the selloff in the stock today seems warranted. We were expecting a tightening of specifications, but the broad based license requirements in the gray area create more material uncertainty for a region driving 20-25% of demand.That said, there are several mitigating factors around these concerns: 1) Our checks have indicated that in recent months the company has constrained builds of A800 and H800 products to focus on other regions; rather than leaning into customer desire to pull forward, they have focused on customers with a clearer longer term roadmap.2) Our industry contacts have expressed confidence that the general tenor of these restrictions have been understood for some time, and that China will seek lower performance alternatives if they are allowed to do so. We see products such as L40S as in the grey area below the threshold, and have talked to industry people that feel the same way, but Nvidia appears to feel otherwise - the interpretation will become clearer over time.3) Chinese models still need to be trained somewhere. The vast majority of China hyperscaler activity will be oriented around consumer business models in social media markets; if those companies cannot purchase hardware, we don’t see restrictions towards training those models in the cloud in other regions. It could curtail government investment - which has been quite large - but at least some of the shortfall in training products sold to China should drive upside in other regions that will ultimately be used to train China models.4) Some of the China demand will come from areas such as Mellanox, or inference, which clearly should not be directly impacted by these rules.Still, there will likely be some longer term impact, and this does likely pull forward the time frame when GPU lead times start to come down; the direct impact will become clearer as the licensing situation is clarified.This is a significant setback, but business is likely to continue to exceed expectations despite that - and NVIDIA continues to be our Top Pick in semis. We have viewed our estimates for CY24 as conservative, in part because these export
  3. M UpdateMorgan Stanley Research3controls were likely to be implemented, and we do view the tighter controls as a setback - some of the upside that we might have expected does come out of the model. However our industry contacts do not expect this situation to be overly disruptive as long as the new performance threshold - not the licensing - is the primary criterion.Checks indicate continued very substantial acceleration from the GPU supply chain, which should in theory alleviate the shortages - but the intensity of those shortages has not meaningfully abated. We expect that there are multiple strong quarters ahead of us. While the steepness of the supply chain ramp should allow for lead times to come down through CY24, the severe multiple compression since the large upward revision last quarter leaves NVIDIA trading at a lower multiple then other stocks with AI exposure. The strong product cycle dynamic - with GH200 early next year, and B100 late next year - should provide a strong answer to most competitive concerns.Having said that, we do see this as incrementally cautionary, and we are reducing our PT from $630 to $600. We aren't changing EPS targets, but we are lowering the multiple expectation from 42x to 40x MW ($15 EPS including stock compensation, or $16.84 non GAAP); we continue to see the EPS estimates as conservative even with these headwinds. Meanwhile, while it will take time to get a full assessment, semiconductor capital equipment implications appear benign. The restrictions remain on logic built on 14 nm and more advanced nodes, but there are equipment classifications that are more specific, and there is some tightening of "US persons" restrictions, which involves the ability of US citizens supporting manufacturing of advanced nodes. All of this seems consistent with the spirit of last year's rules.This is a positive outcome for equipment names, given anxiety that there could be incremental restrictions. We still retain a bias that there is some pull-forward of demand from China trailing edge logic vendors around fears of incremental export controls, so clarity around the rules could still be a modest headwind.Important note regarding export controls. This note references export controls maintained by the U.S. Department of Commerce Bureau of Industry and Security (BIS) and/or entities that may be subject to export control restrictions. These controls may restrict export, re-export or transfer (in-country) of certain items covered by the Export Administration Regulations (EAR). This disclaimer does not represent Morgan Stanley’s view as to whether or not the export, re-export or transfer (in-country) of any items is subject to export controls laws. Investors are solely responsible for ensuring that their investment activities in relation to any entities are carried out in compliance with applicable export controls laws.
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  5. M UpdateMorgan Stanley Research5Risk Reward - NVIDIA Corp. (NVDA.O)$600.0040xourMWCY24EPSestimateof$15,apremiumtopeers,reflectingtheexpansioninallnamesaswellasourhigherconvictioninestimatesgivenNVIDIA’shigherAIexposure.WebelievethatNVIDIAshouldtradeatapremiumgivenitshigherprobabilityofupwardrevisionsinthenearterm.MeanMorgan Stanley EstimatesConsensus Price Target Distribution$439.00$1,100.00Source:Refinitiv,MorganStanleyResearMS Rating▪WeexpectNVDA'sDataCenterbusinesstodrivemuchofthegrowthoverthenext5years,asenthusiasmforgenerativeAIhascreatedastrongenvironmentforAI/MLhardwaresolutions-NVDA'sbeingoneofthemostimportant.IncrementalopportunitiesinAI/MLsoftware&services,networking,andADAScandrivegrowthevenhigher.▪Aschannelinventoryclearsoutand40-seriesgamingproductattractsnewdemand,wedoseesomeupsidetoconservativegamingnumbersandexpectareturntomorestableandsustainable+10%growthingaminglong-term.Consensus Rating Distribution96%Overweight4%Equal-weight0%UnderweightSource:Refinitiv,MorganStanleyResearRisk Reward ThemesDisruption:PositiveNewDataEra:PositiveSecularGrowth:PositiveView descriptionsofRiskRewardsThemeshere$800.0045xbullcaseMWCY24EPSof$20BullcasehasDC revenuescontinuingtogrowwellinto2024.Upsidefromnetworking,gracehopperbasedsystems,andsoftwarecreatepotentialforafullstackAIcomputingcompanyworthyofanevengreatervaluationpremium-HighermargindatacenterandAI-focusedsoftwareandservicesgrowthaccelerates-40-seriesproductadoptionreacceleratesgaminggrowthsimilartopriorcycles-Automotiveopportunitytakesoff,allowingthecompanytoearnrecurring,per-carlicensingrevenue$600.0040xourMWCY24EPSof$1540xvaluationisapremiumtopeers,reflectingtheexpansioninallAInamesaswellasourhigherconvictioninestimatgivenNVIDIA’shigherAIexposure.WebelievethatNVIDIAshouldtradeatapremiumgivenitshigherprobabilityofupwardrevisionsinthenearterm.-Revenuegrowsby103%in2023and53.3%in2024-Datacentercontinuestogrowthroughthefirsthalfof2024assupplyremaiconstrained-Gamingcontinuestoreboundas40-seriesadoptionpicksupinmasstiers$350.0035xbearcaseMWCY24EPSof$10.00Twokeydebatesbothgothewrongdirection,causinginvestorstoquestionfutureprospectsforgrowth-GrowthinDC slowssubstantiallyassupplycatchesuptodemandfasterthananticipated-AIdevelopmentcostscomedownmaterially,astrongcompetitorentersthemarkettotakemarketshare,orcustomersbegininsourcingcustomhardwaresolutions-GreaterthanexpectedimpactfromexportcontrolsRiskReward–NVIDIACorp.(NVDA.O)Top PickOWaslarge language modelenthusiasmistransformingcloudcapexPRICETARGETMS PT$634.17RISKREWARDCHARTANDOPTIONSIMPLIEDPROBABILITIES(12M)Key: Historical Stock Performance Current Stock Price Price TargetSource:Refinitiv,MorganStanleyResearch,MorganStanleyInstitutionalEquitiesDivision.TheprobabilitiesofourBulBase,andBearcasescenariosplayingoutwereestimatedwithimpliedvolatilitydatafromtheoptionsmarketasof{{date}}17Oct,2023.Allfiguresareapproximaterisk-neutralprobabilitiesofthestockreachingbeyondthescenarpriceineitherthree-months’orone-years’time.View explanationofOptionsProbabilitiesmethodologyhere$439.38$800.00(+8822.0.07%7%))Prob(>800.00)~1.2%$350.00(-2200.3.344%%))Prob(<350.00)~33.6%$600.00(+3366.5.566%%))Prob(>600.00)~15.9%OCT'22APR'23OCT'23OCT'240200400600800USDOVERWEIGHTTHESISBULLCASEBASECASEBEARCASE
  6. M Update6Drivers20232024e2025e2026eGAAP Revenue ($, mm)26,97454,79583,99491,631MW Gross Margin (%)58.771.571.071.2MW EPS ($)2.619.8815.1416.04Inventory ($, mm)5,1595,3286,9507,742DOI159.9119.0100.8103.65/5BEST24 MonthHorizon5/5MOST3 MonthHorizonSlateofraytracingandDLSS-enabledvideogamesNextgenTuringgamingGPUsDatacentercontinuestobeamajorfocusaskeycloudcustomersfocuson"deeplearning"PotentialinflectioninAutorevenueasADlevel3-5vehiclesgointoproduction0-10%Europe ex UK0-10%Japan0-10%Latin America0-10%UK10-20%APAC, ex Japan, MainlandChina and India10-20%North America40-50%Mainland ChinaSource:MorganStanleyResearchEstimateView explanationofregionalhierarchieshereSource:Refinitiv,FactSet,MorganStanleyResearch;1thehighestfavoredQuintileand5istheleastfavoredQuintileInst. Owners, % Active56.9%HF Sector Long/Short Ratio2.5xHF Sector Net Exposure27.4%Refinitiv;MSPBContent.IncludescertainhedgefuexposuresheldwithMSPB.Informationmaybeinconsistentwithormaynotreflectbroadermarktrends.Long/ShortRatio=LongExposure/Shortexposure.Sector%ofTotalNetExposure=(Foraparticularsector:LongExposure-ShortExposure)/(Acrossallsectors:LongExposure–ShortExposure).GrowthinDGXanddeeplearningtrainingandinferencepropeldatacenterrevenueGamingsalesreboundfollowinglastyear'scryptodigestionTractioninnewconversationalAIworkloadsSignificantinvestmentinnewbutunprovopportunitiesContinuationofsluggishPCmarketAMDreemergesasaviableGPUcompetitorCloudcustomersareabletodevelopcompetitivecustomhardwareMeanMorgan Stanley EstimatesSource:Refinitiv,MorganStanleyResearFY Jan 2024eSales /Revenue($,mm)53,20058,511EBITDA($,mm)30,61934,288Net income($,mm)24,02729,672EPS($)10.1011.87RiskReward–NVIDIACorp.(NVDA.O)KEYEARNINGSINPUTSINVESTMENTDRIVERSGLOBALREVENUEEXPOSUREMSALPHAMODELSRISKSTOPT/RATINGRISKS TO UPSIDERISKS TO DOWNSIDEOWNERSHIPPOSITIONINGMSESTIMATESVS.CONSENSUS54,79554,71233,34932,29127,30126,79510.9410.79
  7. M UpdateMorgan Stanley Research7
  8. M Update8Risk Reward Reference links 1. View explanation of Options Probabilities methodology - Options_Probabilities_Exhibit_Link.pdf 2. View descriptions of Risk Rewards Themes - RR_Themes_Exhibit_Link.pdf 3. View explanation of regional hierarchies - Microsoft PowerPoint - Exhibit Links.pptx 4. View explanation of 'Indicator of Change' methodology - ESG_Indicator_of_Change_External_Link.pdf 5. View explanation of Theme/Exposure methodology - ESG_Sustainable_Solutions_External_Link.pdf 6. View explanation of HERS methodology - ESG_HERS_External_Link.pdf
  9. M UpdateMorgan Stanley Research9Disclosure SectionThe information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. 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  10. M Update10(as of September 30, 2023)The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm.For disclosure purposes only (in accordance with FINRA requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.Coverage UniverseInvestment Banking Clients (IBC)Other Material Investment Services Clients (MISC)Stock Rating CategoryCount% of TotalCount% of Total IBC% of Rating CategoryCount% of Total Other MISCOverweight/Buy135037%28143%21%60839%Equal-weight/Hold167346%30346%18%70946%Not-Rated/Hold30%00%0%10%Underweight/Sell60817%6810%11%22515%Total3,6346521543Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent.Analyst Stock RatingsOverweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.Stock Price, Price Target and Rating History (See Rating Definitions)
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