In this piece, we will take a look at the technology stocks that Roth MKM is cautious about.
The technology industry has driven the stock market at a time when interest rates were at two-decade-high levels. At the heart of the surge is artificial intelligence which has pushed some stocks to record highs. To understand the impact of AI on the broader stock market and technology stocks in particular, consider the performance of the flagship S&P stock index, the wider NASDAQ index, and the mega cap-focused component of the NASDAQ. Since OpenAI announced ChatGPT for public use in November 2022, the three stock indexes have gained 49.5%, 64%, and 71%, respectively.
This index performance provides us with two key insights into what has driven the stock market’s performance over the past two years. Firstly, the difference between the performance of the tech-heavy stock index and the flagship S&P indicates that technology stocks have driven the market. To verify this assumption, consider the performance of the S&P’s banking and energy stock indexes. Over the same time period, these indexes have gained 22% and 5.7%, respectively. These two are amongst the largest non-tech stock market sectors and while tech has soared, their returns have lagged.
The second insight is the absolute dominance of mega-cap technology stocks. This insight comes through the performance of the mega-cap-focused NASDAQ index. It leads the broader, and already tech-heavy, NASDAQ index by seven percentage points and has been dominated by the performance of Wall Street’s favorite AI GPU designer whose shares have gained 749% since ChatGPT’s public release. As for the other Magnificent 7 stocks, shares of the EV maker are up 76%, those of the firm behind Windows have gained 62%, the search engine provider’s stock is up 75.8%, the social media company is up by 349%, the eCommerce retailer has gained 115%, and the iPhone-maker is up by 55%.
As a result, it’s clear that technology stocks are playing a large role in driving the stock market’s performance. So, it merits taking a deeper look at their performance, understanding what the future holds for them, and analyzing how they might be positioned to respond to fast-growing technology trends such as autonomous driving and artificial intelligence.
One firm that has worked closely with technology stocks and engaged in investment rounds for technology startups is the investment bank Roth MKM. The firm claims to have “raised over $60 billion for small-cap public companies since 1992,” through “services including IPOs, Follow-ons, Secondary Sales, Private Placements, ATMs and M&A Advisory.” The firm’s analysts have been busy sharing their thoughts on some of the biggest technology companies this year.
For instance, Roth analyst Rohit Kulkarni shared his thoughts on CNBC about Jeff Bezos’ eCommerce and cloud computing company in July. He outlined that the firm’s Amazon Web Services (AWS) CEO Matt Garman “at a spot where he needs to prove out that AWS, the leader in cloud, can maintain the leadership in AI, uh, in the next three to five years.” 2024 so far had seen the firm shift the narrative around AWS where investors were slowly warming up to the fact that it could lead in AI and the firm was “playing catch up,” outlined the Roth analyst. He went on to share the key watch-out points on investors’ minds as the year started and what they will evaluate moving forward.
According to Kulkarni, “there were two biggest questions coming into 24 for Amazon. Can they provide accelerating growth in AWS? Yes, they did. And second biggest question was can they demonstrate rising profitability in both North America and international retail? Yes they did. And we are approaching probably record high margins in retail in the next six to nine months. That’s what is, something that investors strongly believe who are bullish in Amazon that retail profitability is going to help it, help go beyond what we even saw in 2018, 19 levels. So that’s a fundamental restructuring of the business that Andy Jessy has kind of orchestrated and that is going to help the stock. While doing that, AWS narrative is slowly shifting in their favor. So both the pillars in Amazon’s growth engine are starting to fire while they are outperforming on advertising, while they are including new layers of growth. Like supply chain as a service, healthcare related new thing.” Consequently, the analyst concluded that we like the firm “over the next, not just six months, but probably into 25.”
Another firm that has been in the news is Elon Musk’s car company. While its shares have been affected by the slow EV market in 2024, the outcome of the election injected fresh life into the stock. From the start of the year until the day of the election, the stock was down 2.2%. Now, it is up 36% year-to-date after having gained 39% since the election. Roth’s senior analyst Craig Irwin shared some insights for this firm recently. Along with being an EV company, the firm is also a key player in the autonomous driving industry. The autonomy potential, aided by copious amounts of data and training resources, is also baked into the stock. According to Irwin, the firm’s decision to rely on cameras instead of LiDAR sensors can prove to be tricky.
He believes “technologically, it’s possible, doable. But the economics don’t come together when you’re actually burning twice as much electricity to get from A to B. The compute, the cost of compute is high.” However, he is a “big believer in the future long-term of autonomous, but it’s not going to be an app update of the existing fleet. And these are going to be very different vehicles when they get out on the road.” Consequently, after factoring in error rates as well, the analyst is “a heavy skeptic” who believes that “if we do see, you know, a Waymo-like vehicle, it’ll be another five years.”
So, as Roth MKM keeps a close eye on the technology sector, we decided to look at which technology stocks the firm is wary of. In a recent note, the firm shared that “We are not downgrading Technology. In our view, downgrades call for immediate selling.” But it cautioned that it is “starting to see more charts losing upside momentum, but our work also shows many names have yet to reach their ‘stop loss’ levels on the chart. We are aware of the leadership this group has provided the market over the last two years but in the near term, we anticipate this sector performs in line with the overall market.”
A close-up shot of a stock ticker reflecting the performance of Indian equity markets.
Our Methodology
To make our list of Roth MKM’s technology stocks to be cautious about, we ranked stocks part of its recent report by the number of hedge funds that had bought the shares in Q3 2024 in descending order.
For these stocks, we also mentioned the number of hedge fund investors. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
15. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders In Q3 2024: 279
Microsoft Corporation (NASDAQ:MSFT) is the world’s biggest consumer operating system company which also has a foothold in the cloud computing industry. Its hypothesis is driven by enterprise cloud spending, and in the AI era, it means that the firm has to drive AI-generate profits in the business or risk bleeding valuation. Microsoft Corporation (NASDAQ:MSFT) has invested billions of dollars in OpenAI, which has made the need to generate AI profits indispensable to the firm’s hypothesis. In fact, investor worries about the firm’s ability to rapidly generate profits have driven the share price in 2024. From the start of the year to the start of July, Microsoft Corporation (NASDAQ:MSFT)’s shares had gained 26%. However, since then, the stock is down 11.5%, as the stock sank by 3.1% in after-market trading following the firm’s first fiscal quarter results. These saw Microsoft Corporation (NASDAQ:MSFT) guide midpoint Q2 cloud revenue growth at 31.5% which was lower than the 32.25% that analysts were expecting.
Baron Opportunity Fund mentioned Microsoft Corporation (NASDAQ:MSFT) in its Q3 2024 investor letter. Here is what the fund said:
“Microsoft was traditionally known for its Windows and Office products, but over the last five years it has built a $147 billion run-rate cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. Shares gave back some gains from strong performance over the first half of this year. For the fourth quarter of fiscal year 2024, Microsoft reported a strong quarter with total revenue growing 16%, in line with the Street; Microsoft Cloud up 22%; Azure up 30%; 43% operating income margins; and 36% free cash flow margins. Core Azure growth came in one point shy of expectations, however, due to a soft European market and continued constraints on AI compute capacity. In the same vein, while Microsoft reiterated its fiscal 2025 targets of double-digit top-line and operating income growth, quarterly guidance called for Azure growth to slow a bit before accelerating in the back half of the fiscal year, as capital expenditures increase, yielding an expansion of AI compute capacity. We believe this investment is a leading indicator for growth, with more than half of the spend related to durable land and data center build outs, which should monetize over the next 15-plus years. We remain confident that Microsoft is one of the best-positioned companies across the overlapping software, cloud computing, and AI landscapes, and we remain investors.”
14. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders In Q3 2024: 123
Adobe Inc. (NASDAQ:ADBE) is one of the biggest providers of productivity software in the world. Its products such as Photoshop and Reader are among the most widely used worldwide. Since it’s a software company, Adobe Inc. (NASDAQ:ADBE) relies to a large extent on subscription revenue to drive its hypothesis A software-centric business model enables the company to keep costs low and drive margins higher. The ability of AI to inject fresh life into the productivity software market has also meant that Adobe Inc. (NASDAQ:ADBE) has to deliver AI features to customers and drive revenue or lose share price momentum. Adobe Inc. (NASDAQ:ADBE)’s latest major share price movement, which took place in September, saw the stock tumble by 13% after the firm’s fourth-quarter guidance missed analyst estimates and made Wall Street trim down some of the AI optimism.
Polen Capital mentioned Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter. Here is what the fund said:
“With Adobe, in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
13. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Holders In Q3 2024: 107
Advanced Micro Devices, Inc. (NASDAQ:AMD) is an American chip designer that designs and sells CPUs, GPUs, custom chips, and other products used in the data center industry. It is the only chip designer in the world that serves the needs of both the CPU and GPU industries. Consequently, Advanced Micro Devices, Inc. (NASDAQ:AMD) enjoys a unique position in the AI-driven stock market due to its diverse product portfolio. However, on the flip side, it is a lagging player in both industries. Advanced Micro Devices, Inc. (NASDAQ:AMD) is second place to Intel in the CPU and NVIDIA in the GPU markets. While NVIDIA’s GPU products are the market leaders in performance, and Advanced Micro Devices, Inc. (NASDAQ:AMD) can benefit from the continued weakness faced by Intel in its CPU business. However, Advanced Micro Devices, Inc. (NASDAQ:AMD) might see tailwinds in the AI industry should companies start to prefer affordable AI accelerators.
Advanced Micro Devices, Inc. (NASDAQ:AMD)’s management shared details about its AI business during the Q3 2024 earnings call. Here is what they said:
“Turning to our Data Center AI business, Data Center GPU revenue ramped as MI300X adoption expanded with cloud, OEM and AI customers. Microsoft and Meta expanded their use of MI 300X accelerators to power their internal workloads in the quarter. Microsoft is now using MI 300X broadly for multiple co-pilot services powered by the family of GPT 4 models.
Meta announced they have optimized and broadly deployed MI 300X to power their inferencing infrastructure at scale, including using MI300X exclusively to serve all live traffic for the most demanding Llama 405B frontier model. We are also working closely with Meta to expand their Instinct deployments to other workloads where MI300X offers TCO advantages, including training. MI300X public cloud instance availability expanded in the quarter with Microsoft, Oracle Cloud and multiple AI specialized cloud providers now offering Instinct instances with leadership performance and TCO for many of the most widely used models. Instinct cloud instance adoption is strong with multiple start-ups and industry leaders adopting MI300 instances to power their models and services, including Essential AI, Fireworks AI, Luma AI and Databricks.”
12. Applied Materials, Inc. (NASDAQ:AMAT)
Number of Hedge Fund Holders In Q3 2024: 74
Applied Materials, Inc. (NASDAQ:AMAT) is a diversified semiconductor manufacturing equipment company that caters to the needs of integrated circuits manufacturing, displays, and other industries. As a result, the firm’s shares are up by a modest 13.71% year-to-date since Applied Materials, Inc. (NASDAQ:AMAT) depends on the broader semiconductor industry’s performance. For the nine months ending in September, 73% of the firm’s revenue came from its Semiconductor Systems business division. This means that a broader recovery in industries such as smartphones, personal computers, automotive electronics, and other sectors is key to generating tailwinds for Applied Materials, Inc. (NASDAQ:AMAT). Additionally, the firm also relies on China for its sales, and additional semiconductor industry tensions between the US and China could create trouble for the firm.
Parnassus Investments mentioned Applied Materials, Inc. (NASDAQ:AMAT) in its Q2 2024 investor letter. Here is what the fund said:
“Applied Materials is the world’s largest supplier of wafer fabrication technologies used in semiconductor manufacturing. The company reported solid earnings for the quarter, and investors believe Applied Materials should continue to benefit from accelerated industry spend due to AI and share gains.”
11. Intel Corporation (NASDAQ:INTC)
Number of Hedge Fund Holders In Q3 2024: 68
Intel Corporation (NASDAQ:INTC) is one of the biggest chip manufacturers in the world. Unlike other semiconductor companies which either operate on a foundry model and make chips for others or which design chips to have them manufactured by foundries, the firm is the only personal and enterprise computing company that designs and manufactures its chips. However, 2024 hasn’t been kind to Intel Corporation (NASDAQ:INTC)’s stock which is down 49.5% year-to-date. This is because the firm’s personal computing business has struggled in a weak consumer spending environment and it has failed to capture AI chip demand with its products. Intel Corporation (NASDAQ:INTC) is currently laser-focused on its 18A chip manufacturing process, and success or failure with the technology coupled with its contract manufacturing subsidiary being able to attract orders should drive the stock moving forward.
ClearBridge Investments mentioned Intel Corporation (NASDAQ:INTC) in its Q3 2024 investor letter. Here is what the fund said:
“While the market environment clearly was a headwind in the third quarter, several of our large positions also faced challenging conditions, which negatively impacted results. In the information technology (IT) sector, Intel Corporation (NASDAQ:INTC) has come under additional pressure due to continued softness in the company’s core PC and server markets as well as concerns on the company’s longer-term competitive position. While Intel’s turnaround is not happening overnight, we are constructive on the outlook into 2025: the company’s product positioning should be much improved and it should be positioned to gain market share in a cyclical upswing in which it has strong earnings power. A somewhat adverse spending environment due to AI myopia has weighed on shares, but we still think the market is undershipping PCs and general servers following a COVID normalization period that saw demand get pulled ahead and then languish as companies froze IT budgets. The installed base is now getting older, and we expect a strong refresh cycle into next year. The delay is actually beneficial to Intel, whose product positioning will be all the more improved. While our investment case is not predicated on an M&A transaction, and we believe one is unlikely, the expression of interest in the company speaks to the value of the assets, which we think still trade at a meaningful discount to fair value.”
10. Dell Technologies Inc. (NYSE:DELL)
Number of Hedge Fund Holders In Q3 2024: 60
Dell Technologies Inc. (NYSE:DELL) is a computer hardware company that sells laptops, server products, and other items in the personal and enterprise computing industries. The firm’s enterprise IT division provides it with unique exposure to the AI data center segment. As a result, Dell Technologies Inc. (NYSE:DELL)’s shares are up 82% year-to-date and have benefited particularly as key NVIDIA customer and server company Super Micro is facing troubles. On the flip side, since investors now expect Dell Technologies Inc. (NYSE:DELL) to benefit from AI-driven data center and IT infrastructure spending, any weakness in this industry could create headwinds for the stock. This dependence was clear in May when Dell Technologies Inc. (NYSE:DELL)’s shares dropped by 20% after the firm’s guidance missed analyst estimates by 13%.
Scout Investments mentioned Dell Technologies Inc. (NYSE:DELL) in its Q2 2024 investor letter. Here is what the fund said:
“Dell Technologies was a top contributor despite reporting disappointing first-quarter earnings results, because investors looked through the near-term disappointment and expected strong growth from AI-related servers and personal computers. We expect Dell to participate in the growth of artificial intelligence hardware, especially as enterprises invest more aggressively. We like the company’s depth and breadth of products and services, as well as its focus on keeping costs low.”
9. Lam Research Corporation (NASDAQ:LRCX)
Number of Hedge Fund Holders In Q3 2024: 58
Lam Research Corporation (NASDAQ:LRCX) is an American semiconductor manufacturing hardware provider. The firm’s equipment is used in several stages of the chip manufacturing supply chains such as etching. Consequently, Lam Research Corporation (NASDAQ:LRCX) is exposed to the broader semiconductor industry instead of simply being limited to the AI industry. This is also reflected in the stock as the shares are down 5.4% year-to-date. Lam Research Corporation (NASDAQ:LRCX)’s investors are also uncertain because of the firm’s exposure to China and its reliance on the memory industry. As an illustration, consider the fact that during the firm’s fiscal year 2024, 42% of its revenue was from China and $14.9 billion came from memory chips. Tensions between the US and China, particularly those surrounding semiconductor technology stand to restrict Lam Research Corporation (NASDAQ:LRCX)’s sales, and only the very high-end memory sector benefits from AI demand.
Artisan Partners mentioned Lam Research Corporation (NASDAQ:LRCX) in its Q2 2024 investor letter. Here is what the fund said:
“The top contributors to performance for the quarter were Alphabet, Lam Research Corporation (NASDAQ:LRCX) and Elevance. Lam Research shares rose 10% during the quarter and are up 67% over the past year, primarily due to optimism around the pending investment cycle in semiconductor capital expenditures. Lam is one of the largest equipment manufacturers used to make semiconductor chips. This equipment, commonly referred to as WFE (wafer fabrication equipment), is expected to experience significant growth due to a combination of a cyclical rebound in memory chips and growing demand for new AI-related chips. Lam’s product portfolio is particularly well positioned to benefit from both trends and should grow even faster than the overall market. Its shares now trade at ~30X prior peak earnings, which suggests this dynamic is well understood by the market and is mostly priced in.”
8. Texas Instruments Incorporated (NASDAQ:TXN)
Number of Hedge Fund Holders In Q3 2024: 57
Texas Instruments Incorporated (NASDAQ:TXN) is an American chip manufacturing company that is one of the oldest of its kind. The firm makes and sells chips such as signal processing and power management products. These items are crucial in the proper functioning of the consumer electronics and information technology industries – along with playing key roles in artificial intelligence data centers. Consequently, despite Texas Instruments Incorporated (NASDAQ:TXN)’s exposure to the broader non-AI industry, the shares are up 17% year-to-date. As of H1 2024, 76% of the firm’s revenue came from its Analog business division which also sells products to industrial firms. Therefore, the broader economic recovery is key for Texas Instruments Incorporated (NASDAQ:TXN)’s stock to generate sizable tailwinds despite the firm’s exposure to the AI and technology industry.
The London Company mentioned Texas Instruments Incorporated (NASDAQ:TXN) in its Q2 2024 investor letter. Here is what the fund said:
“Texas Instruments Incorporated (NASDAQ:TXN) – TXN rallied in 2Q despite declining revenue in its latest update. TXN is beginning to see some encouraging signs of destocking nearing an end and some sub segments of the market are experiencing improving demand. TXN continued to spend on capex and should begin to see positive benefits to cash flow next year from the CHIPS Act.”
7. Cadence Design Systems, Inc. (NASDAQ:CDNS)
Number of Hedge Fund Holders In Q3 2024: 53
Cadence Design Systems, Inc. (NASDAQ:CDNS) is an upstream semiconductor company that provides design blocks and other items used to design chips. This means that without its products and intellectual property, the semiconductor ecosystem can find it difficult to properly function. Yet, the critical role that Cadence Design Systems, Inc. (NASDAQ:CDNS) plays in the chip ecosystem also means that the firm has to rely on the broader chip industry to perform well. Subsequently, the fact that its stock has gained a modest 15% year-to-date is unsurprising. The weak share price performance has been driven by Cadence Design Systems, Inc. (NASDAQ:CDNS)’s midpoint revenue guidance for several quarters missing analyst guidance. For instance, the firm’s second and third-quarter guidance, given during the previous quarters’ earnings of $1.04 billion and $1.180 billion missed analyst estimates of $1.11 and $1.20 billion. Therefore, Cadence Design Systems, Inc. (NASDAQ:CDNS) has to wait for a broader semiconductor recovery before it generates tailwinds.
Artisan Partners mentioned Cadence Design Systems, Inc. (NASDAQ:CDNS) in its Q3 2024 investor letter. Here is what the fund said:
“Bottom contributors to performance for the quarter included semiconductor design and simulation company Cadence Design Systems, Inc. (NASDAQ:CDNS). Cadence declined due to weaker-than-expected guidance, sensitivity to Cadence’s hardware product cycle in the near term, and uncertainty around China exposure.”
6. Synopsys, Inc. (NASDAQ:SNPS)
Number of Hedge Fund Holders In Q3 2024: 53
Synopsys, Inc. (NASDAQ:SNPS) is a semiconductor design products company. This has meant that the shares have been lackluster in 2024 and have gained a modest 9.35% year-to-date. While Synopsys, Inc. (NASDAQ:SNPS) from firms like NVIDIA designing their AI chips, it depends on the broader state of the semiconductor industry for its fortunes. At the same time, the key role that Synopsys, Inc. (NASDAQ:SNPS) plays in the chip industry means that it can see catalysts once the technology industry’s drive to replace NVIDIA’s chips with custom solutions picks up the pace. Greater chip design activity creates tailwinds for Synopsys, Inc. (NASDAQ:SNPS), and the firm also benefits from the fact that it has a close partnership with Intel, has signed an AI deal with TSMC, and is acquiring an engineering software firm to diversify its revenue base.
TimesSquare Capital Management mentioned Synopsys, Inc. (NASDAQ:SNPS) in its Q1 2024 investor letter. Here is what the firm said:
“We had been trimming Synopsys, Inc. as its market capitalization grew and it approached our price target. This quarter, Synopsys confirmed its plans to acquire ANSYS, Inc. Though the deal has long-term strategic benefits, in the near term we believe that will weigh on overall growth for Synopsys, add notable leverage to its balance sheet, and create more volatility for its shares. As a result, we sold our position.”
5. ON Semiconductor Corporation (NASDAQ:ON)
Number of Hedge Fund Holders In Q3 2024: 45
ON Semiconductor Corporation (NASDAQ:ON) is another diversified non-consumer and IT-focused semiconductor company. Naturally, this has meant that in today’s AI-driven stock market, the shares are down 17.4% year-to-date. The share price drop is unsurprising considering the firm’s income statement. As of H1 2024, automotive products accounted for 53% of the firm’s $3.6 billion revenue. During the same time period, the automotive revenue dropped by 6%, and ON Semiconductor Corporation (NASDAQ:ON)’s industrial and other business divisions also marked annual revenue drops. The firm is one of the world’s leading suppliers of silicon carbide chips that power vehicles. Therefore, the sluggish EV industry has also contributed to weakness in ON Semiconductor Corporation (NASDAQ:ON)’s stock. Looking ahead, with the Trump administration’s purported approach towards the EV industry, the firm might be in for some tough times.
Artisan Partners mentioned ON Semiconductor Corporation (NASDAQ:ON) in its Q1 2024 investor letter. Here is what the fund said:
“ON Semiconductor is a leading designer and manufacturer of chips for power management and image sensing. From a battery-electric vehicle (EV) standpoint, ON is a leading producer of silicon carbide chips. Shares have been under pressure as the company grapples with multiple quarters of inventory right-sizing across the entire auto supply chain and slower-than-expected growth of EV sales. However, ON is seeing smaller sales declines than peers due to market share gains, and we believe the company will be equally well positioned if automakers rebalance their efforts from full EVs toward hybrid vehicles. We remain patient.”
4. NXP Semiconductors N.V. (NASDAQ:NXPI)
Number of Hedge Fund Holders In Q3 2024: 44
NXP Semiconductors N.V. (NASDAQ:NXPI) is a Dutch semiconductor company that makes and sells chips such as microcontrollers, power amplifiers, communications processors, and others. Although semiconductor stocks have performed well in the artificial intelligence era, NXP Semiconductors N.V. (NASDAQ:NXPI)’s shares are down 0.36% year-to-date. This is because the firm relies heavily on the automotive industry for its revenue. As of H1 2024, 55.6% of the firm’s revenue came from the automotive industry and it marked a slight 4.4% annual drop as car manufacturers slowed down production due to sluggish global economic activity. NXP Semiconductors N.V. (NASDAQ:NXPI) is also hampered by the fact that it operates chip production facilities that require high utilization rates to reduce capital expenditure and spread costs. However, the firm’s industry position coupled with the fact that establishing fabs is a cost and technology-intensive process means that NXP Semiconductors N.V. (NASDAQ:NXPI) enjoys a competitive moat that can help the firm once the automotive industry recovers.
NXP Semiconductors N.V. (NASDAQ:NXPI)’s management commented on the outlook of its different business divisions during the Q3 2024 earnings call. Here is what they said:
“Relative to our earlier expectations, we are taking a more conservative stance for quarter four, hence, we will also aim to hold channel inventory approximately flat sequentially at 1.9 months or about eight weeks.
This is because we began to see increasing weakness in the Industrial and IoT market already during quarter three, as well as an unexpected contraction in manufacturing PMI below 50 across all regions except China. Furthermore, we find ourselves exposed to a broad slowdown of European and North American automotive OEM outlooks for 2024, only partially compensated by the aforementioned strength in China automotive. This leads to more stringent inventory reductions at our Tier 1 customers below the natural end demand. So at the midpoint, we anticipate the following trends in our business during quarter four. Automotive is anticipated to be down in the high single-digit percent range versus quarter three, 2023. Excuse me, versus quarter four 2023 and down in the mid-single-digit percent range versus quarter three 2024.
Industrial and IoT is expected to be down by 20% versus quarter four 2023, and down in the mid-single-digit percent range sequentially. Mobile is expected to be down in the low single-digit percent range both versus quarter four of 2023 and sequentially. And finally, communication, infrastructure, and other is expected to be down in the mid-single-digit percent range both versus quarter four 2023 and sequentially. In summary, our guidance for the fourth quarter reflects broader macro weakness in Europe and North America, only partially compensated by strength in China. The cyclical rebound, which we had anticipated for the second half of 2024 has not materialized. The soft and uncertain demand environment appears to be causing the Tier 1 customers to take a very cautious stance on their inventory positions.”
3. Teradyne, Inc. (NASDAQ:TER)
Number of Hedge Fund Holders In Q3 2024: 43
Teradyne, Inc. (NASDAQ:TER) is an industrial products manufacturer that provides products used to test and verify semiconductors and other systems. This places it right at the heart of the chip industry as the firm is indispensable in manufacturing chips. Yet, the stock is down 0.16% year-to-date as the broader industry slowdown continues to drive down the demand for non-AI chips. This exposure is also at the heart of the stock’s 15.9% drop following Teradyne, Inc. (NASDAQ:TER)’s third-quarter earnings. While the firm’s third-quarter earnings of $737 million beat analyst estimates of $716 million, the fourth-quarter guidance was tepid as non-AI sectors such as industrial and automotive continued their weak performance. Consequently, a broader economic recovery fueling the non-AI sectors will drive Teradyne, Inc. (NASDAQ:TER)’s shares.
During the Q3 2024 earnings call, Teradyne, Inc. (NASDAQ:TER)’s management shared its outlook for the non-AI sectors. Here is what they said:
“Despite roughly flat quarter-on-quarter revenue, our Robotics business has delivered 8% year-to-date growth despite a worsening industrial macro backdrop. We see our industrial automation peers with year-over-year declines averaging more than 10%. While the basic demand drivers for advanced Robotics remain, low penetration rate, the demographics of an aging population, fewer young workers willing to do factory work, and the compellingly short ROI, the industrial market that we serve is inherently cyclical, and our customers have significantly cut back on capital investment plans. We believe a more appropriate short-term indicator of progress is to consider performance relative to the peer group rather than an absolute growth metric for this business.
To consider absolute growth, one needs to look over complete business cycle. Even in the adverse business environment, the Robotics team is seeing good progress in executing its growth strategy. Our highest priority in Robotics go-to-market transformation is the development of an OEM solutions channel for UR. This channel is highly valuable because customers purchasing cobot based solutions from these partners get into production more quickly and have fewer problems than customers that develop custom solutions. In the first three quarters of the year, OEM revenue at UR is up over 50% compared to 2023. Innovation-driven SAM expansion is central to outgrowing the market. The new heavy payload UR robots that began shipping late last year have lasted well in the market and represents 16% of UR units shipped year-to-date.”
2. Tyler Technologies, Inc. (NYSE:TYL)
Number of Hedge Fund Holders In Q3 2024: 40
Tyler Technologies, Inc. (NYSE:TYL) is a software company that allows public sector entities such as schools, courts, and governments to manage their payments, billings, record management, and other process functions. Subsequently, the firm enjoys the advantage of a stable revenue during turbulent economic times. This stability is also evident in Tyler Technologies, Inc. (NYSE:TYL)’s shares which are up 47% year-to-date. The shares have particularly benefited from the fact that the firm is one of the few software-as-a-service (SaaS) providers for the public sector. This means that Tyler Technologies, Inc. (NYSE:TYL) can help introduce AI into the massive government bureaucracies. At the same time, the incoming Trump administration’s focus on reducing government costs could create headwinds for the firm.
Conestoga Capital mentioned Tyler Technologies, Inc. (NYSE:TYL) in its Q3 2024 investor letter. Here is what the fund said:
“A software services company, Tyler Technologies, Inc. (NYSE:TYL) reported quarterly results that beat expectations as their conversion to a software-as-a-service (SaaS) provider gathered momentum and boosted earnings. TYL provides software to municipalities and other public government agencies that are used across a wide range of applications. Originally purchased by Conestoga in our Small Cap Growth portfolios in 2008, we added TYL to the Mid Cap Growth portfolios in 2016. TYL was sold from the Small Cap Growth strategy as its market capitalization rose above $13 billion. Our Mid Cap Growth portfolios have continued to hold TYL, and the company’s market capitalization was near $25 billion at the end of the third quarter.”
1. Microchip Technology Incorporated (NASDAQ:MCHP)
Number of Hedge Fund Holders In Q3 2024: 37
Microchip Technology Incorporated (NASDAQ:MCHP) is a computer hardware company that sells products such as signal processors and microcontrollers. These products provide it with exposure to the data center market, but despite this fact, the shares are down 33.7% year to date. This is because Microchip Technology Incorporated (NASDAQ:MCHP) serves the needs of the broader information technology industry Consequently, while demand for products used in AI data centers has soared, other IT sectors have lagged which has led to an inventory buildup. The buildup means that Microchip Technology Incorporated (NASDAQ:MCHP)’s fate depends on the rate at which its customers digest their inventory. Additionally, as of Q2 2024, 21.9% of the firm’s revenue came from Europe and marked a 51.3% annual drop due to the region’s persistent economic problems. These factors as a whole mean that Microchip Technology Incorporated (NASDAQ:MCHP) has to rely on several cylinders firing before it can create tailwinds.
Microchip Technology Incorporated (NASDAQ:MCHP)’s management commented on its inventory situation during the Q2 2025 earnings call. Here is what they said:
“At the midpoint of our December 2024 quarter guidance, we would expect both inventory dollars and days to increase. We also continue to invest in building inventory for long-lived high margin products whose manufacturing capacity is being end of life by our supply chain partners and these last time buys represented 18 days of inventory at the end of the September quarter. Inventory at our distributors in the September quarter was at 40 days, which was down three days from the prior quarter’s level. Distribution took their inventory holdings in the September quarter down as distribution sell-through was about $95 million higher than distribution sell-in. Our cash flow from operating activities was $43.6 million in the September quarter and was negatively impacted by the timing of interest and tax payments, including the transition tax payment that is paid annually and was part of the 2017 Tax Cuts and Jobs Act.”
MCHP is a tech stock Roth MKM is worried about. While we acknowledge the potential of MCHP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MCHP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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