Baker Hughes stock
Oil stocks have risen broadly this year as global growth has accelerated and oil prices have risen, but Baker Hughes is up only 2% year to date. Baker Hughes should catch up to its peers in the months ahead, according to Goldman analyst Neil Mehta, who added the stock to the firm’s conviction buy list.
The note stated, “We believe that current share prices do not reflect the strong fundamental story embedded within Baker Hughes.” “Despite an improving oil macro for its traditional oil field services business, positive tailwinds from an increase in OPEC activity in 2H21, improving margins in OFS, industrial-like cash flows, and greater exposure to the energy transition amongst our broader coverage universe, BKR shares have underperformed the XLE (27 percent) so far this year.”
General Electric has been selling its stake in Baker Hughes, which has contributed to the company’s temporary underperformance, according to Goldman.
“We believe that a natural seller in the market has incentivized investors to prefer SLB and HAL over BKR, for exposure to the improving oil cycles in the International and North American markets,” according to the note, but Baker Hughes’ plan to buy back stock should offset this concern.
Goldman raised its price target to $28 per share from $26, representing a 31.6 percent increase from the stock’s closing price on Monday.
South Korea chipmakers
CLSA downgraded Samsung Electronics from a “buy” to a “underperform” rating, lowering its price target to 86,000 Korean won (roughly $73.82). That represents a 15.59 percent increase from Samsung’s closing price on Friday. Monday was a holiday in South Korea, so the markets were closed.
When analysts expect the stock price to fall, they generally lower their price targets. When an investment bank expects total return to be positive but less than market return, it rates stocks as “underperform.”
SK Hynix has also been downgraded from buy to underperform, with a revised price target of 123,000 won ($105.57), or about 21.18 percent higher than the stock’s Friday close.
“Given our view of an upcycle in 2023, we expect the valuation of these stocks to eventually normalize, but in the short term, with ASP (average selling price) declines and consensus downgrades looming, their shares are likely to underperform,” CLSA’s Sanjeev Rana and Harry Kim said.
CLSA’s predictions for DRAM and NAND chips
According to Rana and Kim in a note dated Aug. 9, investment bank CLSA expects a downturn in the memory chips space from the fourth quarter of this year through the end of 2022.
The average selling price of DRAM and NAND chips, which are used in devices ranging from laptops and smartphones to data centers, could fall as a result of the predicted downturn, they added.
According to the CLSA report, “recently finalized DRAM contract ASPs for 3Q clearly indicate that the pace of ASP growth has moderated and customers are pushing back against hikes.”
“As in previous downturns, customers may refrain from restocking unless the ASP outlook stabilizes, putting pressure on suppliers to flush out inventory at a reduced price,” they said.
Similar dynamics are observed in the NAND chip business, according to the analysts, who added that the average selling price is expected to fall throughout 2022.
During the Covid pandemic in 2020, demand for video games and computer-related devices increased as most people worked from home.
Morgan Stanley is short SK Hynix.
Meanwhile, Morgan Stanley analysts warned that as the global memory chip sector enters the late cycle, there is “more risk than reward,” with the DRAM business expected to remain “fundamentally oversupplied” in 2022.
The analysts stated that “cyclical conditions for DRAM have begun to roll over.” “While demand has remained strong on a relative basis, it has deteriorated in recent weeks, leading to a decrease in pricing expectations.”
Morgan Stanley currently rates SK Hynix as “underweight,” implying that the company’s total risk-adjusted returns will be lower than the relevant country MSCI index or the industry’s average total return over the next 12-18 months. The price target for SK Hynix, the world’s second largest memory chipmaker, is 80,000 Korean won, according to a US investment bank.
“While pricing continues to rise, the rate of change is approaching a nadir as supply catches up to demand,” the analysts said. “For the first time since 2019, our cycle indicator has shifted from ‘mid-cycle’ to ‘late-cycle,’ and this phase-change has historically signaled a challenging backdrop for forward returns.”
Morgan Stanley has lowered its price target for Samsung.
Despite remaining “overweight” on the stock, the firm reduced its price target for Samsung Electronics to 89,000 won per share. The bank’s overweight rating indicates that the stock’s total return is expected to outperform the MSCI Korea index, or the industry’s average total return, over the next 12-18 months.
“In previous corrections, Samsung has consistently outperformed the memory sector and, on occasion, the MSCI Asia benchmark, and we believe the business attributes are fundamentally more appealing in the current environment given cost/product leadership as well as the option to seize new addressable markets,” the analysts wrote.