MorningWord 8/23/16: Big Gap Tech?

by Dan August 23, 2016 10:21 am • FREE ACCESS

On CNBC’s Fast Money last night, Carter Worth, Cornerstone Research’s star technician made the case for continued gains in large cap tech:

When asked which sector looked the best on the charts Carter highlighted semiconductor and semi-equipment stocks.  This makes perfect sense when you consider the upward pressure within the group over the last year resulting in a nearly $125 billion m&a binge since last Spring (some thoughts here from last month… MorningWord 7/27/16: Who’s got a Semi?), but here are the big ones:

Analog Devices (ADI) is making a near $15 billion offer to acquire Linear Technology (LLTC)

ARM Holdings (ARMH) of the U.K. agreed to be acquired by Japan’s Softbank for $32 billion.

Western Digital (WDC) paid $16 billion for NAND flash chip maker Sandisk (SNDK)

NXP Semiconductors (NXPI) made a nearly $12 billion bid for Freescale (FSL)

Avago Technologies (AVGO) paid $37 billion ($17b cash & $20b in stock) for Broadcom (BRCM)

Intel (INTC) bought Altera (ALTR) for $17 billion in all cash

On Monday, shares of Intersil (ISIL) were up 20% on media reports that Japanese competitor Renesas Electronics is considering a $3 billion bid for the analog semi producer to better compete with the newly merged behemoths listed above.  I would expect to see some of these sub $5 billion market caps to be gobbled up (Silicon Labs- SLAB, Skyworks Solutions – SWKS & Cypress Semi CY) as managements and boards will increasingly feel the pressure to diversify into buzzier industry segments such as Internet of Thins (IoT), Artificial Intelligence (AI) and Augmented / Virtual Reality (AR / VR).

Texas Instruments (TXN) and Qualcomm (QCOM) are likely acquirers given their balance sheets and size. Given Nvidia’s (NVDA) nearly 100% ytd gains, the company could use its stock as currency to be an acquirer, but given its nearly $6 billion in expected sales this year, the market values the company at only 5x sales (the premium paid for ARMH by Softbank valued the company at 20x its expected 2017 sales), acquirers might see them as one of the few ways to gain a foothold in the innards of machines powering advances in and adopting of AI/AR/VR.

And then there are the leftovers, Xilinx (XLNX) was Altera’s brother from another mother, or Maxim Integrated (MXIM) who was Linear Tech’s sister from another mister… and Microchip (MCHP). These would all be deals in the high teens billions.

So the simple take-away is this, massive secular shifts in technology, coupled with strong stock market performance, great balance sheets and easy money are coming together as the sort of perfect storm for sub-sectors in tech.  This means fewer and fewer public equities and greater concentration for large capital pools. The fix is in for now.

My response to Carter’s take was simple, while I am not a buyer for these reasons long term, I can see how the technical set up, coupled with continued m&a (and not just in Semis… Microsoft’s -MSFT recent $26.2 billion bid for LinkedIn-LNKD and Oracle’s- ORCL $9.3 billion bid for Netsuite-N) could continue to power tech stocks higher in the near term.

But one more thing… this sort of confluence of factors that make it easy for peeps like me who remain skeptical of the sustainability of the broad market rally, should scare the crap out of those committing new capital to equities at these levels. Just sayin.