Jahanara Nissar

After a hiatus of a few months, while we waited for frothiness in AI expectations to calm down (link), we are re-entering the semicap trade on the long side. On a near-term basis we expect LRCX/AMAT management presentations at the upcoming investor conferences to crystallize investor expectations into next year and act a positive catalyst. As a medium term catalyst for semicaps, we look to President Trump’s state visit to China in April 2026, a headline from last week that has gone under-appreciated on the Street.

Our reasons are differentiated vs. the recent upgrades on the Street. Street expectations may have once again gotten a little bit ahead of themselves, this time around, not due to frothy AI expectations but due to rising DRAM/NAND price. We expect DRAM suppliers to hold off on raising WFE just yet. They’d rather enjoy rising prices as long as they can. From a NAND perspective, despite shortage of eSSD supply, we suspect the major NAND players are not quite ready to raise NAND capex vs where it was a quarter ago. We expect Kioxia/SNDK and Hynix/Dalian to be the sole suppliers of eSSD for the foreseeable future. For this reason, we continue to like SNDK (link).

That leaves advanced foundry/packaging. And China. We think the incremental improvement in 2026 WFE comes from these two drivers, for now. We are raising our 2026 WFE estimate to $125bn from our previous $115bn (link). Of the two drivers, increment China WFE, in the range of $5bn-$7bn, may be a bigger needle mover than the Street appreciates. We see potential for pull-in into 1H. Incremental 3nm orders from TSM we think add $3bn-$5bn in additional WFE landing 2026 capex closer to $50bn. Upside to DRAM/NAND WFE to where they were a few months ago would be incremental to our current estimate.

We are raising our price target for LRCX to $175 from $150 on increased estimates. We had already raised AMAT’s PT to $270, going into its earnings two weeks ago, in a note titled “New urgency at TSM” (link). AMAT stock is up nicely since earnings, with more to go. Investors have been a bit unsure of LRCX of late. We expect LRCX to resume its upward trajectory as management provides color into next year.

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A thaw in the US-China relationship? Investors have been giving a lower valuation to China-based semicap earnings due to volatility in US export policy resulting in semicap companies unable to forecast their China business with confidence. Going forward though, investors may wish to keep an open mind. The US trade policy towards China as related to AI semis and semicaps may be changing. Driven by President Trump’s priorities, we suspect there is a thawing in the relationship. If so, such a thawing could be particularly beneficial for semicap names.

The Affiliates rule – an irritant to the relationship: As an outcome of President Trump’s Oct2025 meeting with his Chinese counterpart, the implementation of the Affiliates Rule has only been deferred but not scraped. A permanent scrapping of the Affiliate rule restrictions could be the starting point for a thaw at President Trump’s visit to Beijing. We note that very few proposals for trade restrictions by the US side seems to raise the ire of the Chinese negotiators as much as the Affiliates rule did.

The art of the deal: We suspect the Chinese negotiators care more about restraints in semicap exports vs US restraints in AI exports. Semicap exports are a valuable bargaining chip for the US side for securing in return a reliable supply of Rare Earth minerals from China. We think a ‘deal’ could be – a steady supply of US semiconductor capital equipment to China in return for a steady supply of China’s Rare Earth minerals.

Incremental China WFE: We expect China WFE in 2026 coming in the low to mid-30% range of overall WFE vs. Street expectations of mid-20s%, were the Affiliates rule be scrapped. This adds ~$5bn-$7bn to the overall WFE. We expect a slew of logic foundries to expedite orders into 1H.

Incremental TSM WFE: Going into the AMAT earnings report we called out that TSM had surprised the semicap industry by calling for urgent delivery of of 3nm equipment vs. previous TSM demand forecast of zero 3nm delivery in 2026. Some of this is due to NVDA’s Rubin orders and some due to Apple restarting iPhone17 orders. We estimate this raises TSM WFE by $3bn-$5bn next year, moving overall capex closer to $50bn vs. expectation of mid-$40s billion capex a few months ago.   

How about China fabs on the Entity list? Key fabs such as SMIC, YMTC and CXMT are on the US government’s Entity List. We believe these fabs are doing quite poorly due to lack of spare and services from US-based semicap names – poor yields at the current process node, unable to transition to the next advanced node. As part of a grand bargain, the China side could ask President Trump to scrap Biden-era Entity list restrictions. Although a tiny probability at the moment, as we get closer to the presidential visit next year, the Street may raise the odds, potentially driving up semicap valuation.

Financials and PT: Based on LRCX’s beat and raise quarter and our expectation of a 1CH heavy 2026 we are raising our CY26 earnings estimate to $24bn/$5.75, revenue up 17.5% vs our pre-earnings estimate of $22.9bn/$5.3, revenue up 15%. We model Fy27 at $25.7bn/$6.48, revenue up 15% vs. consensus estimate $23.5bn/$5.6, revenue up 10.6%. At a 27x multiple over our FY27 eps estimate, we derive a price target of $175, up from our previous $150. We are leaving our AMAT estimates and our $270 PT unchanged (link).

Net/Net: After a few months of going sideways, we expect the semicap sector to resume trending upwards as AI investments gain clarity. On top of the AI theme, we expect China WFE gains to be incrementally positive for the stock and likely to gain investor mindshare as President Trump’s state visit to China comes into view. On a near-term basis we expect management presentations at the upcoming investor conferences to crystallize investor expectations into next year and act a positive catalyst.

KC Rajkumar

Disclosures and Disclaimers

Lynx Equity Strategies, LLC is an independent equity research provider.  The Company is not a registered broker dealer or investment adviser. No employee or member of the Company, or immediate family member thereof, exercises investment discretion over securities of any issuer analyzed in this report two days prior and/or two days after this report is issued. It participates in “Alpha Capture Systems” that seeks investment or trading ideas from the sell-side and may pay for the participation based on relative performance

Limitations of Information

This report has been prepared for distribution to only qualified institutional or professional clients of Lynx Equity Strategies, LLC (the “Company”). The contents of this report represent the views, opinions, and analyses of its authors. The information contained herein does not constitute financial, legal, tax or any other advice. All third-party data presented herein were obtained from publicly available sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or update to, any such material or for any damage or lost opportunities resulting from use of this data. Nothing contained in this report or any distribution by the Company should be construed as any offer to sell, or any solicitation of an offer to buy, any security or investment. Any material received should not be construed as individualized investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a professional financial advisor, legal and tax advisor prior to making any investment decision. Lynx Equity Strategies, LLC shall not be liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising from any investment decisions based on information obtained from Lynx Equity Strategies, LLC. Reproduction and Distribution Strictly Prohibited. No user of this report may reproduce, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the report itself or any information contained therein. This report is not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local, state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any kind within such jurisdiction.

Copyright, Trademarks, Intellectual Property

Unless otherwise indicated, all copyrights, trademarks, service marks, logos and other intellectual property included in this report are proprietary materials of Lynx Equity Strategies, LLC and the unauthorized use of such terms, marks, and logos is strictly prohibited. The Company reserves all rights, with respect to the intellectual property ownership of all materials in this report, and will enforce such rights to the full extent permissible by law.

Into the run-away enthusiasm for semicaps in recent weeks, we would be cautious heading into earnings season. Its not just that the new export restrictions may have more bite than imagined even a week ago, we think the Street may have become overly optimistic with regards to fundamentals. If investors are looking for the multi-year AI demand outlook from the likes of OpenAI, ORCL and a slew of neocloud companies to get reflected in material improvement in WFE commentary from semicap management, we think investors may be disappointed. Earnings calls may not be quite as boisterous as investors seem to expect. We are looking at 2026 WFE moving from ~$105bn three months ago to $110bn-$115bn range vs. Street consensus moving to ~$125bn.

The new bout of US-China trade wrangling is likely to puncture the AI momentum. The haircut AMAT provided for its current quarter due to the so-called Affiliates Rule from the US Commerce department may not be Applied’s last word. AMATs peers too are likely going to have to trim China outlook. The impact of the far more onerous Rare Earth Element (REE) rules released by China’s MOFCOM late last week, we think is likely have an even more material impact on the semicap sector.

Net/net: We expect the trade wrangling to last through the earnings season. We expect ASML to sound the alarm at their upcoming earnings call, China’s REE rules likely to hit ASML’s laser shipment especially hard. We think a degree of froth has crept into semicap names thanks to the multi-year expectations in the AI space. We think it prudent to step to the sidelines. We are leaving our $120PT for LRCX unchanged until we get further clarity on the call.

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Thots on LRCX: We have been positive on LRCX all year. We reiterated the call at the start of the phenomenal ramp in SNDK stock starting late August, early September (link) and rode the stock as Street analysts rushed to upgrade views. After a month of relentless melting up, we began to get queasy with the outsized, multi-year outlook from Samsung/Hynix in response to purported demand from OpenAI. Every new AI headline bumped up semicap stocks more. Street enthusiasm coming out of Semicon West found its way into another round of PT increases for semicap names.

Some improvement in outlook but not enough: Despite a month-long jamboree of head-spinning AI headlines, we think the tangible business outlook at semicap companies has barely budged. Their view may improve in the future, but we will not look for semicap captains to thump the table in the days and weeks to come. We think there has been modest improvement in 2026 WFE over the past three months. The outlook for 4Q may see modest improvement due to pull-in from 1H26, but not enough to justify the super strong gains of the past month. Having said that, the overall tendency has been towards pull-ins. Pull-ins are typically leading indicators of an eventual raise in annual outlook.

Key ideas: Change in 2026 WFE over the past three months

• There has been some improvement in DRAM prospects in 2026, but modest.
• Despite understandable bullishness in the storage market, NAND WFE into 2026 has not budged
• TSM capex into 2026 remains in the low 40s billions, unchanged from 3 months ago, a little bit of pull-in into 1H.
• Samsung/Taylor WFE has remained largely unchanged, but with the more pronounced pull-in into 1H

The return of geo-political uncertainty: China’s rare earth element (REE) rules released last week could have a substantial impact on the shipment of semicap companies worldwide, far worse than the impact from the US’s Affiliates rule. The REE retaliatory package specifically calls out the semicap industry. Rule 61 in the package requires license review for semicap companies for shipping equipment containing even tiny amounts of REE from China. Litho tools need lasers, which contain REE. Etch and dep tools need pumps, which contain REE. The retaliatory package has the potential to shut down large chunks of the semicap shipment and essentially grind semiconductor manufacturing worldwide to a complete halt. The only hope for the industry is for the US to convince China to lift the REE package. And in order to do that, the US may have to rescind its Affiliates rule.

Net/net: Our 2026 WFE goes from $105bn three months ago to $110bn-$115bn range vs. the Street bulls converging to ~$125bn. The upper end of our range depends on US-driven uncertainty around China exports. If China’s REE rules are not rescinded, there could be downside to the lower end.

The tendency on the Street is to buy the tariff dip. However, we note that the negotiations could drag on into November, thus jeopardizing the earnings season. On the AI front, we think the Street may be disappointed with little of the AI bullishness from downstream players percolating upstream to semicaps and foundries. We think the upstream players could take a conservative wait-and-watch approach. We would be taking profits in the semicap space ahead of earnings.

Disclosures and Disclaimers

Lynx Equity Strategies, LLC is an independent equity research provider.  The Company is not a registered broker dealer or investment adviser. No employee or member of the Company, or immediate family member thereof, exercises investment discretion over securities of any issuer analyzed in this report two days prior and/or two days after this report is issued. It participates in “Alpha Capture Systems” that seeks investment or trading ideas from the sell-side and may pay for the participation based on relative performance.

Limitations of Information

This report has been prepared for distribution to only qualified institutional or professional clients of Lynx Equity Strategies, LLC (the “Company”). The contents of this report represent the views, opinions, and analyses of its authors. The information contained herein does not constitute financial, legal, tax or any other advice. All third-party data presented herein were obtained from publicly available sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or update to, any such material or for any damage or lost opportunities resulting from use of this data. Nothing contained in this report or any distribution by the Company should be construed as any offer to sell, or any solicitation of an offer to buy, any security or investment. Any material received should not be construed as individualized investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a professional financial advisor, legal and tax advisor prior to making any investment decision. Lynx Equity Strategies, LLC shall not be liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising from any investment decisions based on information obtained from Lynx Equity Strategies, LLC. Reproduction and Distribution Strictly Prohibited. No user of this report may reproduce, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the report itself or any information contained therein. This report is not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local, state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any kind within such jurisdiction.

Copyright, Trademarks, Intellectual Property

Unless otherwise indicated, all copyrights, trademarks, service marks, logos and other intellectual property included in this report are proprietary materials of Lynx Equity Strategies, LLC and the unauthorized use of such terms, marks, and logos is strictly prohibited. The Company reserves all rights with respect to the intellectual property ownership of all materials in this report and will enforce such rights to the full extent permissible by law.

KC Rajkumar

The surge in investor interest this year in the HDD sector has been huge. Its lateral implications to semis and the AI space in general have been sizable enough for us to step in, suggest a few ideas and address a few myths.

Lead time for the high-capacity HDDs, especially for SKUs preferred by hyperscale CSPs are north of one year. Across the industry, there is no expectation of lead times coming down anytime soon. Large-capacity HDDs are on ~100% allocation to hyperscale CSPs. New drives are simply not available to enterprise customers. Enterprise customers have no choice but to go for drives in the secondary market. There is pent-up demand at enterprise customers for new HDDs

We expect the HDD names to continue to perform well, despite the more than doubling in STX and WDC since earlier this year. The recent sideways movement due to understandable fears of capacity increase, offers an opportunity to participate in further upside. There is a certain amount of demand ‘leakage’ to the SSD side of the storage business, in our view. Deliberate increase in HDD manufacturing capacity likely captures revenue currently lost to SSDs instead of putting downward pressure on HDD pricing power. We think on a relative basis, the HDD names may offer superior risk/reward to SSD names. We would be long into prints of STX and WDC.

Laterals: 1) MRVL should see positive demand pull as and when HDD vendors increase manufacturing capacity, raise their demand for drive heads. 2) MSFT and AMZN/AWS could be witnessing a powerful storage trend as they monetize the ongoing HDD upgrade cycle by selling high-value storage services to enterprise customers.

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Myth: The surge in storage demand, HDD and SSD, is due to insatiable demand from AI training and inference workloads from the present generation and future generations of AI data centers.

Reality: We think the current HDD cycle is driven by an upgrade cycle in the existing installed base of traditional storage at major hyperscale CPS. As such the demand could be much larger than if it were merely limited to the AI space.

SSD: While SSDs are linked to AI-related storage, SSDs too could be seeing demand pull from the traditional storage market. Due to extreme shortage of high capacity HDDs some CSPs may be willing to pay up for SSDs to satisfy storage needs. There may well be a level of ‘leakage’ of demand from HDD sector into SSDs despite the higher pricing per bit of the latter.

HDD – A real product cycle: The demand pull from an upgrade cycle of the massive installed capacity in the traditional storage space is at the core of this HDD cycle. Tier 1 storage providers are upgrading their installed base of storage infrastructure from tape drives and SMR-based HDD to large capacity drives based on the latest HAMR technology, which came out of extensive field testing just last year. There is an honest-to-goodness product cycle going on, which does not come too often in the HDD space.

32TB is the sweet spot: Major storage providers such as MSFT and AMZN/AWS we believe are transitioning their installed base of HDDs (28TB and older) to 32TB models, the first major SKU based on HAMR drive technology. HAMR drives went through extensive qualification at major CSPs last year. 2025 is the first year of mass adoption of HAMR-based drives. While the HDD companies offer HAMR drives at other densities too, the sweet spot appears to be 32TB. And for the 32TB drives the lead time is over a year. According to our checks the limited supply is allocated exclusively to the Tier 1 hyperscale CSPs.

Pent-up demand: Enterprises do not have allocation from the HDD suppliers. Enterprises too prefer the 32TB SKU. And they are willing to procure pre-owned 32TB HAMR drives in the secondary market. The pent-up demand at enterprises we expect will maintain elevated lead times for an extended period even after the demand pull from Tier 1 CSP slacken.

Manufacturing capacity increase – should investors be concerned? Under usual circumstances, investors should be indeed be concerned about capacity increase, but perhaps not in this case, in our view for three reasons:

• Nascent technology: The HAMR technology is still nascent enough and not fully understood. HDD suppliers are likely wary of expanding capacity too quickly less they be stuck with unoptimized yields. In the HDD industry, technology transitions are few and far between. Unlike the silicon industry, the drive process technology takes years to fully mature. HDD vendors are typically loathe to jump in and expand capacity before they fully optimize yields. And that could take years.
• Loss of business to SSDs: The HDD industry may be witnessing unmet demand for large capacity drives (>30TB) overflowing into large capacity SSD flash drives, thus leaving money on the table. Expanding manufacturing capacity, within limits, captures lost revenue without necessarily impacting pricing power
• Slow test time: Due to the slow speed of the read channel, the testing/partitioning phase can take up to one day for each drive. As a comparison we note that test time for a large capacity SSD is negligible due to the order of magnitude higher data bandwidth of the flash controller vs. the HDD read channel. The bandwidth of an SSD flash controller is typically ~13Gb/sec vs. a HDDs read channel ~0.5Gb/sec. Net/net: Even with expanded manufacturing capacity, the testing phase of HDD is agonizing slow compared to SSD testing, thus keeping HDDs volumes from surging in a short span of time.

HDD margins may have upside due to special circumstances: As nearly 100% of the supply of large capacity HAMR drives are on allocation of a handful of hyperscale CSPs, the HDD vendors do not need to use the typical distribution channels of OEMs and VARs. As such, the HDDs being supplied to the hyperscale CSPs may not be completely commoditized. We think to a certain extent the HDD suppliers could be making slight modifications to suit the specific needs of individual hyperscale customer, thereby extracting better value vs commoditized HDDs.

Key ideas: 1) Lead time for high capacity HAMR drives extend out to a year, 2) new supply on allocation to hyperscale CSPs, 3) pent-up demand at enterprises, 4) slow but deliberate increase in HDD supply captures revenue that is currently lost to SSD industry; downward pressure on pricing may be negligible, 5) capacity addition at HDD suppliers, as and when it occur, is likely to be slow compared to the pace typical of the semis industry.

Net/net: With lead times of key SKUs stretching out to a year and with no sign of lead times coming down, earnings multiples are likely to head upward, driving STX/WDC stocks higher. We will roll out our model and price targets after the earnings calls. We would be long into print.

Despite the ~60% rise in the stock over the past three months, despite having had a superior return than AMD/NVDA/AVGO over the quarter, Intel finds few takers on the Street. And for good reason. From a purely quant perspective the stock is un-investable. At the call today, there is no saying how far below long term target might land the overall corporate gross margin, IFS op profitability and free cash flow. The stock is not trading on the strength of its financials. It is trading on the declining probability of insolvency, it is trading on hopes pinned to the CEO’s strategic vision.

Of course, every incoming Intel CEO in the past has had a strategic vision. And every one of them failed. Investors are paying for ringside seats to see whether Mr. Tan succeeds. It is a high risk/reward play and may not be appropriate for many investors. But if Mr. Tan succeeds, the reward could be substantial. The outsized return investors experienced over the past few months may be just a taste of things to come. We like the stock as a strategy play.

We think the CEO is making moves to save core segments in the Intel Products group by revamping the product portfolio, by developing an exit plan from IFS and by migrating all advanced products, client as well as server CPUs, to TSM over the next 2-4 years. No company can sustain ~$10bn in operating losses indefinitely, as IFS has been printing in recent years. There is no way to ensure a return to operating profitability if IFS is continued to operate in its current form. The experiment to compete with TSM in foundry services has been tried; the lesson has been painful.

Investors suspect as much but simply cannot imagine a future where IFS is simply allowed to shrivel up. But there are no real alternatives, in our view. The search for a potential buyer and external customers at advanced nodes may have been exhausted. The CEO needs to consolidate the events over the quarter and convey his strategic direction to investors.

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On a near-term basis, we think the CCG segment should surprise to the upside. There has been a surprise bump up in PC demand, thanks in part to China’s domestic stimulus program. We have seen media reports of Intel raising price on Raptor Lake processors, which should be accretive to margin, given that the product runs on the fully depreciated Intel 7 process. Traditional servers too may see a bit of traction. Intel’s upcoming 192-core Diamond Rapids may have made inroads at AWS.  At the OCP Summit, Intel launched Cresent Island, a credible GPU for inference workloads, an interesting product as it claims to not need liquid-cooling or expensive HBM stacks.

Something drastic: Into the June quarter earnings call our preview called for ‘something drastic needs to happen’ (link). Over the past three months the CEO ran through a series of dramatic moves 1) bolstering liquidity on the balance sheet by bringing in the US Government, NVDA and Softbank as stake holders and 2) consummating a critically important product development partnership with NVDA. What did not happen during the quarter – no new external customers for IFS. Our view – the fresh capital injected by new stake holders is not for use as IFS capex as is commonly assumed on the Street. We think it goes towards product development and for improving liquidity ratios for bond rating agencies. The dramatic part – we do not think Mr. Tan plans to resuscitate IFS. We think dramatic changes are headed IFS’ way.

Could Mr. Tan’s vision succeed? For one, he has developed lot more friends in high places. Between the 10% stake held by the USG and ~15+% held by NVDA, Softbank, Apollo and Brookfield, outside parties have an interest in not letting Intel fail. Obviously, that is not enough. The CEO must make a couple of very tough, historic decisions while maintaining the Board’s support. We think the CEO faces a ‘Sophie’s choice’ moment. Can he save both Intel Products and IFS? Or would he have to let one go? We think he has made his choice. We think his choice is buried in the product partnership he signed recently with NVDA.

INTC-NVDA custom x86 is headed for TSM: We have high conviction that the custom x86 CPU Intel is designing for NVDA is to run on TSM’s 3nm process. At its recent earnings call TSM’s CEO had a throw-away line when asked about Intel as a competitor. Mr. Wei said that Intel is not only an important customer of TSM (he meant Intel’s client products), but he also went on to say that ‘we are working with them for their most advanced product’. We think he means Intel’s custom x86 CPU for NVDA. We think porting this custom server CPU to TSM opens the flood gates for more server CPUs from Intel to migrate away from IFS and to TSM.

Future of IFS: We think the CEO needs to make a critically important decision regarding the future of IFS. We think the CEO may be leaning towards terminating R&D and capex at nodes beyond 18A and may instead choose to focus on expanding operations and external customer base at older nodes. TSM’s lead at advanced nodes may have become insurmountable. And with TSM agreeing to develop substantial wafer capacity at 3nm and beyond, the US government’s long sought goal of being self-sufficient at advanced nodes may be met without help from Intel. In the long run, we think there is simply no way to improve Intel’s operating profitability without letting go of the drag from IFS.

Drastic moves: Three months ago, we previewed the June quarter earnings by saying ‘something drastic needs to happen’. Over the course of the quarter something indeed did. Some of the elements we had suggested three months ago have been put into action by the CEO.

• A16 mothballed: In our June quarter preview, we called for cutting capex/R&D at advanced nodes, as we saw no scenario where Intel could have a competitive performance/cost advantage at TSM at advanced nodes. At the June earnings call, the CEO announced he was mothballing the A16 process development unless he could identify major external customers. We think the process node is as good as dead. Some investors hope NVDA could be an A16 customer given the recent partnership announcement. We think this is an erroneous assumption.
• Migration of server CPUs to TSMC: We called for migrating server chips to TSMC, an idea Intel had entertained in the past but never executed given the damage that would do to IFS profitability. We think the Intel-nVidia custom chip announced recently is the lead chip to migrate to TSM. Others are likely to follow.

A credible AI play at Intel? Intel’s Cresent Island GPU for inference workloads, launched with little fanfare at the OCP summit last week may be one of the more interesting products Intel has launched in a long time. We think internal teams simply dusted off the GPU architecture developed by Raja Koturi’s GPU team a few years ago. According to our industry checks, the design has power efficiency advantages over GPUs out of NVDA and AMD. The design claims to not need liquid cooling and not need HBM. Its claims to need just air cooling and traditional DRAM memory. However, developing the software stack could be a multi-year effort, the timeline for which is unclear to us. But at the very least, after sitting out the AI revolution all these years, we may be seeing nascent stirrings of renewed effort.

Net/net: We like the stock as a high risk/reward strategic play as the CEO makes tentative moves to bolster liquidity on the balance sheet and improve long-term profitability.

KC Rajkumar
Jahanara Nissar

Disclosures and Disclaimers

Lynx Equity Strategies, LLC is an independent equity research provider.  The Company is not a registered broker dealer or investment adviser. No employee or member of the Company, or immediate family member thereof, exercises investment discretion over securities of any issuer analyzed in this report two days prior and/or two days after this report is issued. It participates in “Alpha Capture Systems” that seeks investment or trading ideas from the sell-side and may pay for the participation based on relative performance

Limitations of Information

This report has been prepared for distribution to only qualified institutional or professional clients of Lynx Equity Strategies, LLC (the “Company”). The contents of this report represent the views, opinions, and analyses of its authors. The information contained herein does not constitute financial, legal, tax or any other advice. All third-party data presented herein were obtained from publicly available sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or update to, any such material or for any damage or lost opportunities resulting from use of this data. Nothing contained in this report or any distribution by the Company should be construed as any offer to sell, or any solicitation of an offer to buy, any security or investment. Any material received should not be construed as individualized investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a professional financial advisor, legal and tax advisor prior to making any investment decision. Lynx Equity Strategies, LLC shall not be liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising from any investment decisions based on information obtained from Lynx Equity Strategies, LLC. Reproduction and Distribution Strictly Prohibited. No user of this report may reproduce, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the report itself or any information contained therein. This report is not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local, state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any kind within such jurisdiction.

Copyright, Trademarks, Intellectual Property

Unless otherwise indicated, all copyrights, trademarks, service marks, logos and other intellectual property included in this report are proprietary materials of Lynx Equity Strategies, LLC and the unauthorized use of such terms, marks, and logos is strictly prohibited. The Company reserves all rights, with respect to the intellectual property ownership of all materials in this report, and will enforce such rights to the full extent permissible by law.

Does the loss of the China business fundamentally change the trajectory at NVDA? We do not believe so. That the China business was at risk should come as no surprise; there had been plenty of warning from the previous administration. The Trump administration, in this one instance, is merely carrying out the guidance provided by the outgoing Biden administration.

In the immediate aftermath of the announcement, the loss of a geography accounting for low-mid teens percentage of revenue will no doubt take its toll. The large size of the H20 write-down needs to be acknowledged. However, it is not as if the H20, at an appropriate discount, cannot find buyers here in the US, especially as US CSPs rollout DeepSeek. We note that DeepSeek is believed to have been trained on H20-type GPUs. After a pull-back, we expect the stock to get off the mat and find buyers.

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Texas to the rescue: We think it no coincidence that the announcement of NVDA/Foxconn building a new manufacturing campus in Texas preceded the China licensing filing. We think NVDA management expects investors to connect the dots. Over the next 12 months, we expect the Texas campus output to offset the loss of China business by speeding up deliveries to US customers.

We had anticipated: In a note published last week, we had anticipated the construction of the new US-based manufacturing facility (link). Our checks had shown Foxconn repurposing the old HP/Compaq campus in Houston. We had noticed component suppliers setting up labs near the Foxconn campus. While media articles reported the plant to ramp up production in the next 12-15 months, we wrote in our note that we expect the campus should start initial shipments of servers as early as 2CH25.

Net/Net: We expect the China loss of business to be more than offset by the Texas plant. Opening of the new facility in the US should help centralize manufacturing, speed up shipments and close the supply gap with demand from US customers.

Impact to TSM? While some level of turbulence is to be expected, we do not expect NVDA’s loss of China business to meaningfully slowdown its wafer starts at TSM.

Trading call: We would be buyers on weakness of NVDA and MU
KC Rajkumar

While the Street worries about stagnant momentum in the memory markets and expects modest print and guide, we think the highlight of the call today could well be about MU breaking out of NVDA’s grip. Going into the 3FQ24 earnings event in June, we called a near-term top to MU’s fundamentals (link) and cut our $150 price target shortly thereafter (link), before the mid-year sell-off in AI-related semis. Our reason was simple enough – with MU management claiming its HBM capacity was sold-out through 2025 and with little help from the traditional markets, we felt FTM earnings estimates had peaked.

Six month later, and with the stock stuck in neutral, we now see a way out. We think the XPU opportunity is ahead of MU and is yet to price in. As the XPU market heats up, the Street has begun to pay attention and is casting about for AI silicon opportunities outside of the two GPU incumbents. Just as with GPU accelerators, XPU accelerators too need HBM memory.

We suspect US-based hyperscale players may lean towards partnering with MU, instead of the Korea-based memory suppliers, as the HBM supplier for their XPUs. Our checks show that MU may have won the HBM socket at AWS’s Tranium3. Even though we expect this to be a 2026 opportunity, we think the Street has begun to pay attention to AI silicon beyond 2025, as seen in the market’s strong response to AVGO’s Fy27 outlook. Furthermore, we expect incremental HBM manufacturing capacity at MU to come online in Fy26, allowing MU to go beyond NVDA as its sole customer and to diversify into new customers.

We are cognizant of a few additional positives: 1) We think Samsung may no longer be a credible threat to MU’s HBM3e share, 2) the client market, while moribund at the present, is showing modest improvement in visibility into 2025 and 3) geo-political factors, a negative for most semis, nets out of positive for MU.

Going into the previous earnings (4FQ) call we set a tight PT of $110 based on Fy25 EPS (link). Despite significant upside to Nov guidance provided at the previous earnings call, the stock has not been able to break out of the $110 ceiling. With the introduction of XPUs potentially in the mix, we think the Street’s attention now shifts to FY26. As the company diversifies its customer base and expands manufacturing capacity, the potential for new vectors of growth provides avenue for earnings expansion. We are raising our PT to $125, based on 12x to our below-consensus Fy26 earnings estimate. If the XPU opportunities at the various hyperscale players really are of 1mn cluster size each, as AVGO management expects, MU could be looking at significant multi-year opportunities, not constrained by NVDA.

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The XPU wave is in its infancy: We expect MU management to ride the coat tails of AVGO and blast its way beyond the gravitational pull of NVDA’s GPU-centric ecosystem. That every one of the US-based hyperscale players has been working on internally designed AI accelerators is no secret. MSFT, GOOG and, most recently, AMZN/AWS have rolled out details and high-level road maps. The Street is also generally aware that META and potentially AAPL too are working on internal solutions. However, these efforts have not translated into stock valuations, we think, due to the lack of granularity of the roadmaps and unclear timing of production.

The AVGO earnings presentation last week took a stab at putting a timeline around the XPU opportunity. The surprisingly strong 3-year SAM opportunity that AVGO laid out was translated into significant expansion in market cap. The earnings presentation from MRVL the week earlier too took investors by surprise.

In essence, we think there is great interest in the investment community to learn more about the $value and the timing of AI opportunities outside of NVDA/AMD. Whereas GOOG’s TPU6 has gone into production, delivering revenue to AVGO, the XPUs at the other hyperscale companies are further out in design, let alone production. But the key is this – the Street has begun to put a valuation on the silicon suppliers involved in XPUs. And MU’s HBM is in the sweet spot.

XPUs at hyperscale companies: Just as the ASIC suppliers such as AVGO/MRVL work closely with hyperscale customers during the design phase, we believe memory suppliers get involved early in the XPU design project. This provides HBM suppliers with visibility into the revenue opportunity multiple years away. There are several internal programs ongoing at hyperscale players. MSFT’s 2^nd generation AI accelerators could go into pilot productions late 2025. META and AAPL have internal AI chips in the works, the timing of production though is unclear. AMZN/AWS recently unveiled the 3^rd generation of its internal AI chip.

MU lands AWS’s Trainium3 HBM socket: AMZN/AWS recently announced its roadmap for the 3rd generation XPU chip. We believe Trainium3 is a year away from tape-out. And yet, we believe AWS has already chosen its HBM vendor, due to the need for close collaboration. We believe the HBM contract has been awarded to MU.

We believe that while the previous generation Trainium2/Inferentia2 was a limited release effort to test out the various LLMs AWS has been experimenting with, Trainium3 could go into a wider release. We will not hazard a guess as to the revenue opportunity this socket presents, but it could be meaningful.

For its 3^rd generation, we believe AWS decided to roll out just one ASIC for both training and inferencing purposes. We believe AWS has settled on a limited number of LLMs it plans to take into full production. Trainium3 could become the AI workhorse at AWS in a couple of years. If MU lands this socket, as we think it has, we think MU could be looking as a large driver of growth.

Samsung’s HBM3e may no longer pose a threat to MU/Hynix: Stung by delays, Samsung may have decided to cut its losses and walk away from qualifying HBM3e. We think Samsung may have decided to re-allocate R&D resources elsewhere, such as in the development of HBM4. As such, we think Samsung’s HBM3e is no longer an overhang for MU.

Traditional markets could be stabilizing: The promises at MWC and Computex earlier this year failed to materialize in the AI smartphone and AI PC markets. Memory and flash build-up by suppliers earlier this year in anticipation, instead of selling through during holiday season, ended up in channel inventory. Having said that, the supply chain is setting modest goals for the smartphone/PC markets and adjusting supply accordingly.

Targets for AI smartphones for 2025 have been dialed into the supply chain, setting the stage for improved visibility. Starting off small, less than 20mn units of Android AI smartphone units, it gives a jumping off point for memory suppliers. Minimum requirements appear to be 8GB DRAM and 256GB flash storage. Samsung’s targets for overall smartphones next year too appear to be dialed in. Slightly lower in volume vs 2024 but offset by higher $content.

PCs expectations have been dialed back to pre-pandemic levels. There is very little talk of AI PCs. The focus has returned to traditional metrics such as battery life. Intel is on record saying that its 3nm based Lunar Lake uses MU DRAM. At a recent investor conference, the CFO complained of the high price of MU’s product. We believe Lunar Lake is sole sourced to MU’s lpDDR5x module.

Geo-political factors net out in MU’s favor:

• BIS regulations targeting China data centers – no impact to MU: The Street expects another sets of BIS regulations to be released before end of year, placing restrictions on exports to China of, among other types of semis, HBM modules. We think MU is insulated from further downside due to existing restrictions coming for the Chinese side, regarding the import of MU’s memory products.
• CHIPS Act monies- a positive: MU is a beneficiary of a substantial grant from the US government for use in MU’s planned investment of fabs and packaging facilities in the US
• Political crisis in Korea is driving up cost of MU’s competitors: The Korean Won has dropped ~2.5% against the USD and the Chinese Yuan in the two weeks since the recent political crisis. Korean credit default spreads widened the most among sovereign bonds across the globe last month, second only to Brazil. As we wrote in a recent note, the price of NAND raw dies jumped 2%-3% overnight following the political event earlier this month (link). MU could be an accidental beneficiary of the unexpected price uptick of Korean memory output.

Financials and TP: We are model Fy25 at $38.1bn/$8.2 and with a gross margin on 41% vs. consensus estimate at $38.3bn/$8.96, with gross margin of 43.4%. We believe the Street is modeling gross margin too aggressively in the back half of Fy25. We model FY26 at 45.7bn/$10.47, gross margin 42% vs. consensus estimate of $47.4bn/$13.25, gross margin 48.8. Again, we believe the Street is too aggressive on margin assumptions. Based on a 12x multiple to our Fy26 EPS estimate, we derive a price target of $125. Our previous PT of $110 was based on our FY25 estimate.

Net/Net: We think the XPU opportunity is ahead of MU and is not priced into the stock. We believe MU management has an opportunity to break out of its dependence on NVDA and draw investor attention to new customers for its HBM products. With the Street concerned about near-term dynamics in the memory market, MU management has an opportunity to highlight HBM opportunities over a 2- to 3-year period in the XPU space. We believe there is upside to the stock. We are raising our PT from $110 to $125. KC Rajkumar

The Company filed an 8-k Friday after market close – the NASDAQ has granted its request for an extension for filing the necessary 10-K and 10-Q documents. The company has until 2/25/25 to file the documents and will remain listed on the exchange while it prepares the documents under the supervision of its newly appointed external auditor.

Does this 8-k bring down the curtain on a drama that started three months ago when the company announced a delay in filing its 10-K? Possibly. Three weeks ago, in the face of the Street giving high odds for a stock delisting event, we rolled out a $45 PT and opined that odds of delisting were not quite as high as many thought. Our view was based on belief that SMCI held a uniquely critical position in the all-important business of installing AI infrastructure (link). Delisting the stock would cut off access to capital and result in impaired progress in AI data center build out. We also opined that the odds of alternatives such as DELL picking up share from SMCI were not quite as high as many thought. We called for the run-up in DELL on investor expectation of significant gains in AI infrastructure to fade (link).

In the past few week SMCI picked up steam as positive headlines began to hit the tape. With the 8-k filing on Friday, the stock cut above our PT in after-hours action. We are now raising our PT from $45 to $60 based on the expectation that, with the NASDAQ decision in hand, many investors are likely to return. Some brokerages which dropped coverage are likely to reverse their decision.

Are there knotty legal issues involved with the delay in filing? We will not know until the agencies rule on the matter. There is no guarantee that the company will be able to file the documents by the appointed date to the satisfaction of the external auditor and the stock exchange. However, for the next 2+ months, until the filing deadline in February, the event-driven volatility is likely to wind down while investors turn their focus to company fundamentals. And that is reason enough to raise our PT.

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In the recent 3-month period of extreme volatility, investors had an opportunity to pick up the stock at deep discount. Many on the Street were doubtful whether the company could avoid de-listing. In anticipation of delisting, investors believed that AI infrastructure build-out could continue with the involvement of other players such as Dell and Foxconn. We note that SMCI has had nearly 100% share of the liquid-cooled GPU server market in the US.

Event-driven call: Three weeks ago, we made a call that SMCI’s role in the industry was central enough that the AI ecosystem would be forced to come together and find a solution to SMCI’s regulatory woes. Delisting would trigger potential loss of access to financing and incur inability to participate in the capital-intensive infrastructure business. We made a call that the regulatory authorities would give SMCI the benefit of the doubt and allow it to remain listed while the company prepared the 10-K/10-Q documents (link). With this in mind, and with the stock trading at ~$21, we rolled out a PT of $45 based on 15x to our below-consensus FY25 estimate of $21.7bn/$2.93. Soon thereafter, the company announced the appointment of an external auditor. We reiterated our $45PT call (link).

Fundamental call: Besides the event-driven call, we made a fundamental call as well. We called for the run-up in DELL into its earnings event to fade. Investors assumed that the revenue shortfall reported by SMCI at its Q1 earnings even would show up as gains at DELL. It didn’t. DELL too missed its Q4 revenue expectations by over a billion dollars, in part due to its inability to ramp Blackwell shipment. Dell management said Blackwell orders had gone into backlog. However, DELL’s backlog increased by less than a billion $s q/q, hardly enough to signal it had picked up the baton from SMCI. DELL sold off hard after earnings. HPE too, at its recent earnings call, did not indicate it was stepping in to fill a potential hole being left behind by SMCI.

Raising price target: We are raising our PT from $45 to $60 based on 20x to our unchanged FY25 eps estimate. With the prospect of delisting now fading further, we expect many funds to return to the stock and some of the brokerages to resume coverage. And secondly, the recent earnings results at DELL and HPE show that they are not likely to pick up the slack if SMCI were to fall by the wayside. We think it may have become apparent to investors that SMCI holds a unique position in the Gen AI infrastructure industry, in the business of setting up data centers with tens of thousands of liquid-cooled GPUs at scale.
KC Rajkumar

In a disappointing presentation at an investor conference yesterday, the CFO, newly appointed as interim co-CEO, missed an opportunity to wipe the slate clean and start afresh. If, at the very least, Q4 guidance was reiterated, that would have been progress. But the vague language leaves investors guessing. Progress on 18A? Looks like the schedule has slipped, thus confirming worries on the Street. External customers at 18A? No mention of. Concrete plans for use of the just-delivered monies from CHIPS Act? None provided. Vague promises of improving IFS margins next year, for which we suspect there are few takers on the Street. The icing on the cake for short sellers was the lowering of Product margin outlook.

Even though there is every reason for the stock to trade down from current levels, we suspect short sellers would be wary of headline risk. If the Board were to announce an acceptable permanent CEO, no one wants to be on the wrong side of a SBUX-type move. In case of INTC though, none of the candidates mentioned in the media seem all that exciting. And it is doubtful whether elevation of either one of the two interim co-CEOs would do the trick.

Even if a credible CEO were to be named, given the daunting challenges faced by the company and the sore disappointment the initial excitement around the appointment of the previous CEO turned into, we think an initial pop in the stock would only encourage short sellers.

Despite the dysfunction in the C-suite, the company still accounts for ~70+% of PC and server unit sales. Despite the challenge from AMD and ARM, we think it safe to say Intel is likely to retain majority share of global PCs and server CPU into the foreseeable future. There is value in that. But few investors can step in as the slide in financial metrics continues. And so, the stock remains stuck in purgatory, somewhere between book value and tangible book value.

But hope springs eternal. The new CEO appointment may turn out to be a clearing event after all, and with it, new investment from private sources to follow. To the growing list of potential CEO candidates out there, allow us to throw another one – Jim Keller of Tenstorrent. Intel is one of the last remaining repositories of silicon engineering talent in Silicon Valley. There is value in retaining that talent under one roof. We suspect that talent pool is deeply demoralized. It would take a technology leader with impeccable credentials to re-invigorate the workforce. More cost cutting just isn’t going to do it.

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Q4 guidance update– wishy-washy: The CFO’s comment ‘we stand by the guidance we gave at earnings’ simply does not cut it, in our view. If the idea was to reiterate guidance, then it would have been appropriate to include a statement in the 8-k filed two days ago announcing the departure of the previous CEO. Or at the very least we would have expected the CFO to say something along the lines of ‘the quarter is tracking to our expectations’. In the absence of such a statement investors could assume the quarter is likely tracking BELOW expectations.

Intel 18A update – further delay: Four months ago, at the Q2 earnings call, 18A schedule was set to volume ramp in 1H25. A month ago, at the Q3 earnings call, there was a slide in the language; 18A was simply characterized as ‘progressing well’. Yesterday at the investor conference, the goal post was moved yet again – volume ramp is now expected only in 2H25. This means that Intel’s 18A products, Diamond Rapids for servers and Panther Lake for PCs have slipped by an additional six months at the very least.

IFS external customers – slim pickings: The Ops Chief’s comments seem to confirm what investors had come to suspect – there are no major external customers at 18A. And no real commitments for the next generation 14A either. Pat’s dream of Intel offering foundry services to fabless companies now seems to slip further away. And if IFS has no credible external customers, what would be the justification in spinning IFS out as a separate company?

Product division – slipping margin: The CFO appeared to talk down 2025 margin expectation of the 3nm-based client product Lunar Lake. While reason given was high memory costs, we suspect the real reason is the wafer price increase out of TSM. Next generation client product Panther Lake, based on 18A is expected to improve product margin as more chiplets are insourced. However, with 18A production ramp now apparently slipping by from 1H25 to 2H25, we suppose the ramp of Panther Lake in IFS slips from 2H25 to 1H26, thereby delaying margin improvement.

While the above is a 2025/26 narrative, more worrisome is the CFO’s comment on margin slippage over a multi-year basis, from the low 50s to ‘something with a four handle on it’. With IFS margin deeply in the negative territory, Pat’s hopes of margin recovery back into the 60s territory now seems further away.

Capex – feels like a cut: In his role as co-CEO, the CFO says he has committed to the BOD for extracting incremental ROIC from investments already made. It feels like he is making a cut to the 2025 capex outlook he had provided at the Q2 and Q3 earnings calls – gross and net capex of $20bn-$23bn and $12bn-$14bn respectively. With 18A likely delayed by six months, there is justification for pushing out capex ramp for 18A capacity.

Taiwan supply chain partners – left wondering: In the final month of his tenure Pat had made well-publicized trips to Asia, we suppose to re-establish relationships with supply chain partners in light of the soon-to-be consummated CHIPS Act grant approval. His abrupt exit we think may have rendered those relationships in disarray. Price commitments and payment terms he may have worked out with key Asia partners may be scrapped. Make no mistake, there is a cost to Pat’s abrupt exit. We doubt if either of the two co-CEOs would be able to fill his shoes.

Net/Net: Even though there is every reason for the stock to trade down from current levels, we suspect short sellers would be wary of headline risk. If the Board were to announce an acceptable permanent CEO, no one wants to be on the wrong side of a SBUX-type move.

Performance and financial metrics appear to have deteriorated further. Pat’s abrupt exit weighs on company morale and supply chain partner relationships. We expect the stock to remain in purgatory awaiting announcement of a new CEO.
KC Rajkumar

South Korea casts an outsized shadow on the global electronics supply chain. The shocking series of events in S Korea over the past 24 hours, a country known for its political stability, is sending shivers down the supply chain in Asia, already on edge due to the trade uncertainty radiating from the US. MU may be an accidental beneficiary.

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The Won lost: The Korean Won was down as much as 2.8% overnight after the surprise declaring of martial law by the President. Over the next 24 hours as the lawmakers of both parties voted down the President’s declaration and after the President lifted martial law, the Won recovered to down 1% from its pre-martial law level. We note that forex shocks on the order of 100bps is hugely problematic for global supply chains.

Cost of imports: Even if Korean politics return to status quo, the damage to the credibility of the nation’s currency may linger. Overnight, the Japanese Yen strengthened against the Korean Won. The Japanese Yen may matter more directly to the Korean economy than the USD. Cost of imports from Japan, a major supplier of raw materials to Korea’s silicon fabs, is likely to spike up. And as a result, the price of silicon chip exports out of Korea too is likely to move up.

Feedback from the Taiwan supply chain suggests that there is marked concern. The prices of commodity memory products in Taiwan reacted almost immediately. While it may take days for prices to settle down, we are hearing commodity NAND flash prices jumped 2%-3% overnight. The abrupt jump in flash price is an added burden to PC ODMs, whose margins run typically below 10% and are faced with a weak demand environment.

MU – an accidental beneficiary: Upward movement in Korean memory prices could be a positive for MU, especially as its USD denominated input prices are relatively insulated from the Won volatility. On the flip side, currency fluctuation could have knock-on effect of suppressing end demand for consumer goods, which may reduce the demand for MU’s memory products.

Trading call: A stabilization in falling memory prices could be positive for MU. And WDC. We maintain our $110 PT for MU.
KC Rajkumar

NVDA stock traded up ~20% since early October when the CEO started a media/Street campaign to message that Blackwell demand is ‘insane’ and that ‘everything’s on track’. With the stock close to its all-time high, we detect investor nervousness given that the valuation is leveraged to Blackwell, a future product cycle that has had trouble getting off the starting block due to well-known heating issues. We will wait for an update from management regarding the progress with the fix it claimed to have accomplished.  

Having said that, the fact remains that NVDA is the only game in town. Going into the recent AMD AI event, we said we see little out there which makes us believe AMD could make a dent (link). At hyperscale players, we do not expect their internal silicon to make a dent for the next couple of years. An exception is Google’s TPU program. Even though Google Gemini could be a price spoiler, Google’s AI strategy is yet to emerge. Nevertheless, inference token cost seems to be coming down on its accord, without much pressure from Google, and with it, the pricing of Hopper GPUs.

NVDA management is tasked with having to convince investors that it has visibility for Blackwell demand at least into 1FH26. Colorful phrases may not be enough. Phrases such as ‘demand is outstripping supply’ may not mean much if supply is constrained due to yield issues. Are customers willing to plunk down ~$1bn-$2bn in upfront hardware cost for a 20K GPU datacenter without first gaining conviction that the problems associated with the initial delay in launch have been resolved? We do not think so.

Then there is the matter of demand for Hopper. At the previous earnings call management set the expectation that Hopper growth was to continue, even as Blackwell ramped in 4FQ25. Going into this call, there is some worry on the Street that Hopper growth is in question. Falling price of Hopper server rental and token cost are now being noted on the Street. We focused on this issue three months ago in our July quarter preview (link). Besides, could it be possible that the giant miss of print/guide at SMCI was in part related to falling demand for Hopper? We think so.

Going into the previous earnings event, with the stock trading at an all-time high, we suggested that investors may step aside and look for a better point of entry. After the earnings call, the stock dropped ~20% before finding its footing. We are cautious going into this earnings event as well – step aside and look for a better entry point.

As the Gen AI cycle matures, the initial excitement wears off, and hyperscale customers put more focus on ROI metrics, investors need to anticipate growth rates inflecting down. Even a year from now, consensus estimate for data center revenue growth in Oct 2025 is 50% y/y. Is that realistic? We do not think so.

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Blackwell’s lead customer – NVDA itself? According to AWS blog and media reports, the Ceiba project at AWS is a joint development effort with NVDA. The project is based on a purpose-built liquid-cooled GPU datacenter large enough to house 20K GPUs and is expected to be among the first large customers of Blackwell GB200. NVDA’s Blackwell revenue in the Jan quarter we suspect will largely be derived from AWS/Ceiba. We believe Foxconn is the ODM chosen for this project. We expect the 20K shipment to complete in 4FQ/1FQ.

The anchor customer of the data center may be NVDA itself! We believe the shell construction may be externally financed. The hardware infrastructure too is probably financed by third parties. As such, we believe AWS’s capex exposure and risk of underutilization could be minimal. We believe subsequent customers of Blackwell could hold off orders for Blackwell until NVDA delivers performance metrics from the AWS/Ceiba data center.

When does Blackwell order from MSFT kick in? Microsoft runs some of the largest LLMs in the nascent AI industry. We expect Microsoft to be a key customer of NVDA’s Blackwell, given the inferencing needs of GPT-4 class of models and the training/fine-tuning needs of Orion class of models. As such it is surprising to us that MSFT does not appear to be the lead customer of Blackwell. We wonder if MSFT is waiting for performance data from AWS/Ceiba before committing to Blackwell for its data centers.

Sovereign AI? Beyond AWS/Ceiba delivery in 4FQ/1FQ, and perhaps Microsoft in 1FH26, it is not clear to us where would Blackwell go. NVDA management often points to potential demand from sovereign customers – India, the Middle East etc. The timing of delivery is not clear to us. And are these even credible customers? Their business cases are less than obvious, the timing of orders tied to political dynamics, especially as the US government gets more stringent with export rules.

SMCI earnings disappointment – a view into Hopper demand? At its recent earnings call SMCI provided preliminary Sept quarter revenue at ~$6bn vs. the original guidance of $6bn-$7bn, a $0.5bn miss at midpoint. The company guided December quarter revenue to a $5.5bn-$6.1bn vs. consensus of $6.9bn, a $1.0+bn miss at midpoint.

Management explained their giant miss as due to non-availability of Blackwell. However, this explanation is inconsistent with management expectations set three months ago at the June quarter earnings call. At the June quarter event Management explicitly stated that it expected no revenue from Blackwell in the September quarter and very little in the December quarter. It seems to us that management’s explanation set forth at the September quarter earnings call lacks credibility.

Investors seem to take the view that the miss to both quarters was due to end customers re-directing orders away from a company that appeared to be on its way to getting delisted. We can understand customers trimming order pipeline in out-quarters, say in March/June quarters. But why would customers cancel firm orders for delivery in September and December, as the company appears to be well capitalized to handle working capital requirements. If the demand for Hopper is as strong as NVDA management says it is, why would data center customers cancel orders?

Our view: While there may be many factors that may have gone into the mix, it seems to us that softening in demand for Hopper could be a key reason for the SMCI miss, either due to lack of end demand from customers of data centers, or due to non-availability of liquid-cooled data center shell space. Reduced demand for Hopper at SMCI naturally implies reduced demand for Hopper and networking gear at NVDA.

With Blackwell expected by NVDA management to amount to ‘several billions’ in its Jan quarter, the overwhelming majority of the ~$37bn worth of Jan quarter revenue consensus expectation comes from Hopper. Any softening of Hopper revenue could have meaningful impact to NVDA’s Jan quarter guidance.

Demand centers in Asia: In the 6-month period ending in July 2024, NVDA reported the revenue exposure to Taiwan, Singapore and China geographies at 46%, just as large as the exposure to the US. However, Taiwan and Singapore do not have giant data centers. Are GPUs shipped to these two countries finding a home in Europe? If not where? With the US government clamping down on shipment to China via third nations, sales into Asia geography, especially Singapore (11% revenue exposure) could come under regulatory scrutiny.

Taiwan ODMs may absorb surplus H100: Media reports of H100 being made available to Tier 2 ODMs such as Asus, ASRock and Gigabyte implies demand shortfall in the US vs expanded supply, in our view. We are not clear who could be the end customers of these ODMs. We do not think they are supplying customers in the US or Europe. We are not aware of any meaningful data centers in Asia outside of China.

Outside of Foxconn, none of the Taiwan ODMs have expressed an expertise in liquid-cooling technology. Given the advantages posed by liquid cooled racks, going forward why would data centers invest in air-cooled GPU racks? It appears to us that Tier 2 ODMs may simply act as holders of channel inventory, rather than active suppliers into working data centers. As such, sale into Tier 2 ODMs could obfuscate true end demand.

Net/Net: We are cautious into print due to our view 1) demand for air-cooled H100 could be softening, 2) the uncertainty surrounding the performance of Blackwell could put the brakes on demand after the initial rush of orders and 3) limited availability of liquid-cooled data centers could crimp GPU demand.  

On a longer-term basis, as the Gen AI cycle matures, the initial excitement wears off, and hyperscale customers put more focus on ROI metrics, investors need to anticipate growth rates inflecting down. Even a year out into Oct 2025, consensus estimate for data center revenue growth stands at 50% y/y growth. Is that realistic? We do not think so, if not for any other reason but for the well-known issues with power/water considerations. We think growth expectations must reset for the stock to find a firmer footing.

KC Rajkumar