Memory Chip Frenzy Sends SK Hynix, Micron Intro $1 Trillion Club

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1:27Alexandra Semenova:Bloomberg Audio Studios. Podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's get back to tech stocks. semiconductor stocks in particular. They are just ripping. I mean, we've got million trillion dollar market caps for Micron technology. What's going on out there? I mean, there are not enough chips, I guess. I don't know. Let's turn to somebody who knows what's going on out there.

2:05Jake Silverman, semiconductor analyst for Bloomberg Intelligence. He joins us here in studio. Jake, what's going on with your world here today? Why are there not enough chips? Yeah. Just make more chips. I wish it was so simple, but then they wouldn't be getting those prices increases. Yeah. So really, I think, I guess, focusing in on the valuation, we're in a particularly strong upcycle. I think the argument around why the stock should be worth a trillion dollars is that Micron and the other memory makers are no longer really in a cyclical situation. It's possible what we're seeing is a structural change in the memory market, where the earnings may be more sustainable through the cycle over at least the next three to five years.

2:53And so if you argue that, what you're arguing for is that maybe the valuation multiple has to expand beyond what we're seeing today. I mean, we're already at around 10x, I guess a little bit below that, I think, forward earnings. And so maybe some people are thinking it could go up to 15x or more, and that's what they're betting on right now. Jake, it's really incredible to see these milestone numbers every day from this sector. And I think the segment is up something like 80 percent this year. And most people have pointed to the fact that the earnings have been parabolic, too. How much further do you think that we have to go before the market enthusiasm is starting to outpace earnings?

3:35Yeah, it's interesting. So I think one of the things you look at is, first of all, it's the earnings are very real. And so it's not like the SOX is just seeing tons and tons of multiple expansion purely out of speculation that earnings are going to eventually reach that point. What we're actually seeing is real earnings growth. And so the multiple, when you compare, say, the forward P multiple for the SOX index compared to the S &P 500, isn't as much of a gap as what we've seen in the past at the peak of the valuation for the SOX index. You typically see something like 7 to 8x in terms of a difference.

4:13Right now, I think we're on 5 or 6. So, you know, some of the exuberance is, you know, there's certain stocks maybe that are a little bit more stretched, but the earnings are real. We're seeing that with memory. You're seeing that with a lot of the AI stocks that do CPUs and GPUs and networking. So, yeah, there's a few gives and takes within that bucket. And the SOX is a broad bucket and includes a lot of names. So I've been pitched chip stocks for 40 years. And what I and that you guys say the same thing every time, which is makes sense to me. Hey, it's a cyclical business. You got to get the cycle right.

4:50OK. But now you're mentioning just earlier that may be changing. So when you talk to longtime tech investors, how do they get their head around rethinking the sector, maybe re-rating the sector as not so cyclical anymore? Yeah, it's so I still think we're probably going to see cycles and semiconductors. I think what we're really seeing is a structural tailwind. If you're betting on semiconductors today, for the most part, even the more boring analog names that you've seen, like analog devices and Texas instruments, they're all starting to catch these AI tailwinds. But I think what people are trying to really understand is what is the do we still see upward revisions and capex based on investor models?

5:37How long does the cycle continue? But when you think about memory, one of the things that makes it a little bit more different than some of the other semiconductor companies is because they are still integrated device manufacturers, IDMs. They still manufacture the chips that they then sell. So they're doing the design and the manufacturing. And one of the things is that in the past, we saw an underinvestment in the amount of capacity. And so now, as we have a structural tailwind, we need to actually expand the capacity. You're seeing this with TSMC, too. There's not enough capacity in their fabs to meet the demand that we're seeing.

6:14And so now we're looking at these long-term agreements because we've seen billions of dollars burned in prior down cycles for memory makers. And so they want reassurances that, look, if we're going to spend billions of dollars on these fabs, we want to get the ROI for them. And so these structural agreements potentially change the cyclicality in the future, but are also while allowing to get them some visibility and potentially reduce that risk that maybe this is potentially a little bit of a bubble. And even if it's not going to just burst like dot com at the same time, you know, maybe there are losses to be had in the future if they don't sign these agreements.

6:51Who do you see right now as the most formidable competitor to NVIDIA, or competitors, if there are any? Yeah, I think Broadcom is probably one of the best positions just because they have such a strong relationship with Google designing their TPU. But, you know, I think Marvell is definitely a company you shouldn't sleep on as well because they've worked with Tranium. They have several different deals. But, I mean, you know, even AMD is going to probably gain some share. And a lot of these hyperscalers and neoscalers that maybe want to design their own chips are probably thinking about how do we reduce the cost per gigawatt in our data centers.

7:25And so NVIDIA definitely has some competition, but it's always a situation where NVIDIA always evolves and adapts to meet the challenges, and it's hard to bet against them. Stay with us. More from Bloomberg Intelligence coming up after this.

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8:25Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM. You need to make a huge presentation in an hour. Adobe Acrobat uses AI to take all your documents and generate a presentation with a single click. Build slides quickly and streamline the process. Need a last-minute pitch deck? Do that with Acrobat. Need to level up your presentation design? Do that with Acrobat. You have 30-plus documents that need to be simplified into a proposal. Do that. Do that. Do that with Acrobat.

9:03Alexandra Semenova:Learn more at adobe.com slash do that with Acrobat. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Big day for Boeing here, I think. Boeing wins FAA approval to increase 737 max production rate, which is big news because that's the cash cow for this company. I mean, that's kind of been, if you pick one thing you want to see Boeing get right, it's a 737 MAX production there. So that's a good thing. Sid Phillip joins us.

9:42He covers all that stuff for Bloomberg News. Talk to us about Boeing. What's going on there? So for Boeing, this is a very important step because ramping up 737 MAX production has been the key target since the FACAP production back in 2024. So they've been talking about raising production from 38 to 42 last fall. Now they're looking at raising to 47 this summer and then getting to 52. And so as Boeing ramps up production, they can sort of deliver more planes and generate more cash for themselves. And that's sort of key to paying down their huge debt and also generating free cash flow for the company.

10:21And so this is one of the key steps for the company as it looks to sort of transition from its last few years of crisis to sort of a more cash generating profitable enterprise. Sid, Boeing has had so many victories since President Trump returned to the White House. This, you know, completion with the FAA. You also mentioned in your story all of the orders that it's gotten from trade agreements. How much of this has to do with the fact that they have a favorable relationship with the administration? So Boeing has increasingly sort of, I mean, Boeing famously gave President Trump a salesman of the decade, the century award.

10:58and they basically sort of said that he's been key to unlocking lots of agreements and lots of sales and Boeing has sort of won including last week when they went to China when President Trump went to China and Boeing won that 200 plane commitment it is smaller than what analysts were expecting I mean analysts were expecting over 500 planes but the CEO today talked about how that the 200 plane order is a key step towards getting those bigger plane orders, because China's market is the world's second largest market and Boeing has been shut out of it for the last decade. And so this is a sort of key step towards unlocking that market and getting that back again.

11:40Boeing CEO Kelly Ortberg, he's speaking at a Bernstein Strategic Decision Conference in New York. He says he met with President Trump on the need to ramp up weapons output calling the demand for weapons system, quote, through the roof. Talk to us about, because we don't talk about the military side, the defense side of Boeing. Talk to us about that business for them. So Boeing has been focused on a number of, there's a number of pieces to it, including the F-15 jet, the F-47, which is the new generation fighter jet, the KC-46 tankers. And so Boeing has been sort of trying to move away from those fixed price contracts that they was sort of famous for, to sort of more, the bigger sort of contracts that are more sort of freewheeling and allowing them to sort of ramp up costs if they sort of, the costs go up.

12:30The company's also sort of poised to gain from their replenishment of munitions and maintenance because of the war in Iran. So essentially, the longer the war goes on, the more munitions they will sort of get, stand to gain from, as well as the aircraft that are being deployed will have to go through maintenance cycles and other sort of overhauls, and that will also unlock some cash. So for Boeing, the defense business, the CEO today talked about low, basically single digit margins and going back to those levels. And so that's, again, a key turnaround for that defense unit. Boeing had been struggling with its reputation after a series of fatal crashes.

13:11Do you think that at this point, you know, people have kind of moved on from this in terms of public perception? Have they done enough to mitigate that? I mean, obviously, Boeing still has to deal with the PR from those fatal crashes. At the same time, I mean, airlines have been ordering planes. I mean, Boeing today talked about how the backlog for the commercial aircraft stretches well into the next decade. So airlines seem to have moved on from that. Airlines are ordering lots of Boeing planes and are looking to get those Boeing planes. and the FAA has given more authority to Boeing. And so that's a sign that the FAA trusts the company more.

13:52And we look to see if that sort of continues, if that momentum continues. I mean, some crucial things we're looking out for is a certification of the smallest and the largest variants of the 737, so the MAX 7 and the MAX 10, which are still uncertified, they're long delayed. The company today talked about how we're in the final stages of certification of that jet and we will see deliveries to customers next year. And that, again, is a key step towards unlocking those orders because the MAX 10 competes against the A321neo, which is basically Airbus's most profitable, best-selling plane. And so that will give Boeing another sort of quiver in its arrow, like an arrow in its quiver to be able to sort of take on that challenge and take some more sort of market share from Airbus.

14:38Stay with us. More from Bloomberg Intelligence coming up after this.

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16:50Alexandra Semenova:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, we got earnings coming out of the retailers, Abercrombie & Fitch. One of them, better than feared results, I guess, is the way to think about it. Mary Ross Gilbert joins us, senior equity analyst covering the retail space for Bloomberg Intelligence. She's based out there in L.A. Mary, thanks for joining us here. Talk to us about Abercrombie & Fitch.

17:21What did they do? What's going on? I see the stock trading higher today. Yes. So, Paul, what's going on with Abercrombie and Fitch? I think that's probably a good tagline, better than feared. I mean, look, they missed on the sales line. Comps were down 1%. And when you look at, and the estimate was for a slight increase, almost flat for the quarter, but they did have a couple of things going on. One, they had the implementation or the upgrade of their ERP system, that cost them about 50 basis points in the top line. But I don't think that really affected the comp because it was really third-party sales there.

18:00So think about sales that are made to Nordstrom, you know, for their Abercrombie brand as an example. And then what we saw with Hollister, so Hollister comps were down 2%, but they were also impacted mainly in the Middle East, where we saw a weakness there, and other parts of Europe. They didn't get into specifics on those other parts except highlighting their largest market in the UK, which they indicated had strong sales. So we're still seeing, I think, when you look at the guidance for the second quarter, maintaining guidance for the full year. So guidance for the second quarter is at the high end of consensus estimates for about a 4 % growth.

18:43And there's likely upside to that. And so I think seeing overall strength, you know, strong sell through of their collaboration with Sperry in the quarter and their styles, you know, how they're broadening their categories, going after more categories. And that's what the consumer wants. And I think those are all very, very encouraging for the brand. And that's the reason why you're seeing strength, we think, there in the shares. Mary, we're hearing time and time again, consumers becoming more selective, trading down to cheaper items. But Abercrombie has been kind of a standout. What are they doing to outperform peers?

19:21And are any of the markdowns and promotions that they're putting out kind of starting to pressure margins at all? Yeah, we're not seeing the pressure. I think what's happening is they're raising prices to help mitigate the impact from tariffs. And so some of those are coming through. But we did notice, and I think other analysts noticed as well, there were more promotions this year, or I should say not necessarily more, but the magnitude of the promotions were a little bit higher, meaning the discount was higher than it was, let's say, a year ago. Though the company indicated that their promo activities were absolutely on plan for the quarter.

20:00But that doesn't mean that, you know, it definitely seemed higher than the rate of discounts for the first quarter. But generally, I think they're seeing some real resilience. And when you look at their cohort, so for the Abercrombie & Fitch brand, that's the millennial customer. But they're a higher income customer. So they tend to earn over$100 ,000, probably, you know, 100 to 200. And then when you look at the Hollister brand, and that's a little more value oriented, and there they did have some discounting going on there. But that is really hits the Gen Z. So kind of think about your high school age consumer.

20:42So I think that they're really hitting the mark on styles, collaborations, and their marketing campaigns. And that's something they plan to invest more. That's where you're sitting, seeing the hit on margin is really the marketing investment and then also the effect of tariffs. And then they're concerned, of course, that on the back half, they will have a freight headwind. But in the first quarter, it was a tailwind. And there is going to be a small tailwind, I think, that they expect in the second quarter. So, Mary, what are your companies, the retail companies you follow, what are they saying about inflation, particularly for their consumers that are paying more at the gas pump and how that may be impacting spending?

21:24Paul Sweeney, that is a great question. And what we've seen so far looking at off price is that they are definitely drawing in more consumers. And when you really go after the business like Ross did, then you get a huge beat. I mean, the comp sales that they reported, double digit was just, wow, off the chart at 17%. But they were very aggressive, transitioning to spring much faster and really going after that demand. And I think they are getting trade down. They're also bringing in more higher-end brands. For example, Marc Jacobs. And that is drawing more of a higher-end consumer that you usually see at TJX.

22:07So I think we're going to get more from the value side. when American Eagle reports on Thursday and also from Gap. And we think that Old Navy, you know, should also have some good results there on the value side because they just continue to innovate with great styles, new categories, performance, you know, with their athletic wear, and they're just getting great traction. Stay with us. More from Bloomberg Intelligence coming up after this. Sending a file is easy. Making sure your clients understand the file is the hard part. But with PDF spaces in Adobe Acrobat, you can give your clients the full picture with custom intros, audio summaries, and a helpful AI assistant to your docs.

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23:34Big League reliability for any business. That's genius. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins or the S &P 500 minus high debt companies. Chances are there isn't an ETF that fits your exact criteria.

24:13But on public, you just type in a prompt and their AI screens thousands of stocks and builds a one-of-a-kind index. You can even backtest it against the S &P 500. Then you can invest in a few clicks. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. And paid for by public Holdings. Brokered services by Public Investing, member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. Sample prompts are for illustrative purposes only, not investment advice. All investing involves risk of loss.