T.W.I.T. #5: EPIC vs App Stores, Memory Cautious and Enterprise IT Hardware Demand Weakening

Performance Review

The S&P500 was up 0.7% for the week, ending up 6% on a year to date basis. From a sector standpoint, Semi outperformed; the SOX was up 1.7%. QNET Index was down 0.7%, pulled down by Netfix (FDN). Software (as measured by IGV) ended the week down 1.5%.

Now, moving on to specific Tech news.

Key Developments in Tech World Internet

EPIC vs Apple and Google. In the night of Thursday to Friday, EPIC filed a lawsuit against both Google and Apple. The complaints are well worth reading and can be found here for Apple and here for Google. The sequence of events suggests a well-orchestrated plan to force Apple and Google to remove Fortnite from their Appstores, and subsequently lodge a complaint. At the center of the dispute is the role Appstores play in distributing content, and the 30% levy Apple and Google take from the developers. With the antitrust scrutiny Big Tech is facing, the timing is excellent. If one needs to be further convinced that EPIC has prepared very well for this, the lawyers are heavyweights of Anti-trust (see Christine Varney). There are large economics implications for Apple, but more importantly large strategic ones too, as Gaming and the Metaverse capture an increasing share of consumption and time. In China, where superapps (Weixin/WeChat) dominate the mobile user experience, not Appstores, iOS and Apple hardware is far less differentiating than in the West. That might be where the West is heading. The battle lines are being drawn out, as Facebook and Microsoft have made public statements criticizing the Appstores too.

TikTok Ban. Speculation around potential interested parties continued this week, as press reports have emerged of potential bad practices at TikTok. This might represent the biggest risk for any acquirer; given how fast TikTok has grown, any acquirer might have to contend with a lot of “fixing”. Besides, it will be worth scrutinizing the impact of Instagram Reels on the app.

Semis

Applied Materials F3Q20 Results. Following on the steps of other Semicap Equipment vendors, Applied Materials reported better than expected results last week, and their guidance surprised positively, on the back of good order trends. Applied Materials mentioned WFE growth of 10–15% in CY20, from ~$51B in CY19, largely consistent with Lam “mid to high $50bn” and KLA “mid to high single digit growth, $55bn to high $50sbn”. Looking at it by end-market, AMAT highlighted strengths in foundry and logic spending. AMAT further indicated they expected the spending will be sustainable in 2021 and beyond.

Micron Cautious Comments. At the Keybanc conference on Thursday 13th, MU indicated that they are now expecting F4Q20 Revs in the $5.0B-5.2B range vs. prior expectations of $5.4B-$5.6B. They did no file any document with the SEC though. They commented that although hyperscale demand was holding up, it is beginning to see signs of potential inventory correction in Enterprise and SMB towards the end of CY20; that lies up with Cisco results this week and is a topic we have alluded too before as we think Software spending will get curtailed at a later stage.

Further NVDA/ARM deal speculation. This is far more interesting and would require a post of its own. The deal was first rumored in late July, for $32bn. Since then, TSMC and Foxconn have been rumored to be looking at it too. Last week, the press quoted Softbank seeking $40bn; that would validate the idea that you have multiple parties interested. With ARM introducing v9 sometime next year, its next major update since v8 was introduced in 2011, the timing is interesting. I confess I struggle to see the endgame for NVDA.

Intel 2020 Architecture Day. The company confirmed 10nm Tiger Lake for YE20 laptops and unveiled the Xe GPU family to compete with AMD/NVDA, with manufacturing for high-end solutions outsourced to TSMC/Samsung. Little was said on the 7nm roadmap.

Tech Hardware

CSCO delivers a disappointing outlook and guides October below expectations. Orders decelerated to -10% YoY from -5% last Q, despite benefiting from easier comps. This adds to the growing list of datapoints suggesting slowing Enterprise IT trends (Servers, Non-essential Software, Networking). Two other developments contributed to tilting sentiment negatively. First, a CFO resignation. Second a comment that despite elevated valuations they would be looking at M&A more than un the past; that perhaps suggests deteriorating organic trends.

Video Games

Besides the EPIC news above, two minor news this week. First, Microsoft announced it is delaying Halo Infinite to 2021, which is a positive development for the content year-end slate. Second, Microsoft Xbox S leaked again; this is the cheaper Xbox that should launch this month, codenamed Lockhart.

That’s all for T.W.I.T. #5, Week 33 2020.

Originally published at https://kinesisinvesting.com on August 16, 2020.