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With Cloud Capex Correction Due, BofA Resets Chipmaker Expectations

The four largest U.S. cloud computing providers (Amazon, Google, Microsoft and Meta Platforms) are expected to spend around $150 billion this year on capital equipment. Including the three largest Chinese cloud providers (Alibaba, Tencent, Baidu) and Oracle, the top eight cloud providers will spend about $174 billion on capital equipment, a year-over-year increase of 20.3%.

Capital spending (capex) for the elite eight is expected to rise by just 10.5%, according to a recent research note from analyst Vivek Arya at Bank of America Global Research. That somewhat stunted growth projection for 2023 is “necessary in the required resetting of expectations at data center-exposed chipmakers.” That group includes Advanced Micro Devices Inc. (NASDAQ: AMD), Broadcom Inc. (NASDAQ: AVGO), Credo Technology Group Holding Ltd. (NASDAQ: CRDO),  Intel Corp. (NASDAQ: INTC), Marvell Technology inc. (NASDAQ: MRVL), and Nvidia Corp. (NASDAQ: NVDA).

Although growth is expected to be much slower in 2023, it could be revised even lower Arya said: “Many cloud vendors are exposed to cyclical factors (ad-spending, e-commerce) and could choose to sweat server/networking assets longer or delay upgrades.” He recalled that in the past two economic downturns, growth among the top seven chipmakers fell to around 4% to 5% before recovering to the historical annual growth rate of 25% to 30%. Over the longer term, BofA is bullish on the chipmakers and expects capex to return to its historical rate.

Here is a brief rundown of BofA’s current outlook for the six chipmakers.

AMD

AMD has a Buy rating from BofA and a price objective of $110. Since February, the analysts have twice cut their rating on the stock, from $190 to $160 in February and to $110 in June. BofA’s rating assumes a 2023 adjusted earnings per share (EPS) multiple of 24. At a recent price of around $80 a share, the upside potential at the BofA price objective is 37.5%.

Downside risks include integrating the Xilinx acquisition, stiff competition, “lumpy” consumer and enterprise spending, reliance on a single outsourced fab and a now-mature game console cycle.

Broadcom

Broadcom also gets a Buy rating from BofA, with a price objective of $625, which is down from $780 in a late June revision. The bank based its price objective on an estimated enterprise value to free cash flow multiple of 18 in 2023, noting as well the company’s best-in-class profitability, free cash flow generation and shareholder returns. At a recent price of around $491 per share, the upside potential based on BofA’s target is 27.3%.

Downside risks include chip cycle risks, high exposure to Apple and that company’s potential of designing its own chips, and recent moves into noncore software businesses.

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