SECTORUPDATEAugust 18, 2020

Truist Securities

William Stein, CFA212-319-3808William.Stein@truist.com

Elliott Smith, CFA212-303-4150Elliott.Smith@truist.com

Joseph Meares, CFA212-303-4135Joseph.Meares@truist.com

What's Inside

We update our Cloud capex model, andreview mixed datacenter data points

Tech, Semis, Components and Distributors

Semi CyclePath: Reviewing mixed datacenter datapoints ahead ofNVDA's CQ2

NVDA seems likely to post Q2 datacenter upside; digestion likely todrag on 2H

What's Incremental To Our View

In this note we update our Cloud capex model that continues to suggest 2Hwill be a digestion period. We review talking points among semi suppliers &webscale customers that reflect a lack of consistency. We also review initialthoughts from HotChips and feedback from our private industry contacts(buyers & sellers of electronic components) that reveal clues to NVIDIA's(NVDA, Buy) datacenter end market revenue in CQ2 (July) and its CQ3 (Oct.)outlook.

Please click through the link below to access our full PDF note.

SEE PAGE 14 FOR REQUIRED DISCLOSURE INFORMATION Page 1

Semi CyclePath: Reviewing mixed datacenter datapoints ahead of NVDA’s CQ2

Executive summary In this note we update our Cloud capex model that continues to suggest 2H will be a digestion

period for datacenter semi sales. We review talking points among semi suppliers & webscale

customers that reflect a lack of consistency, but an overall theme that continues to that 2H is

likely a digestion period. We also review initial thoughts from HotChips and feedback from our

private industry contacts (buyers & sellers of electronic components) that reveal clues to

NVDA's datacenter end market revenue in CQ2 (July) and its CQ3 (Oct.) outlook. Ultimately we

believe NVDA is likely to deliver upside to this important end market during Q2 (July) and, while

sequential growth into 2H is possible, the headwinds seem quite prevalent, establishing a setup

for NVDA that’s somewhat more challenging than it has been in the prior few quarters.

Cloud capex model says semis somewhat optimistic on Datacenter Consistent with our initial Cloud capex report published on 6/12, our updated cloud capex model

suggests that consensus expectations for Datacenter end market revenue at semiconductor

companies during 2H20 appear somewhat optimistic relative to demand signals.

In the following exhibits we demonstrate the relatively aligned growth trajectories of cloud capex

and datacenter semi sales. In Exhibit 1a, we show this relationship on an equal-weighted basis

that equalizes the influence on industry growth that outsized companies like GOOG and AMZN

on cloud capex, and like INTC on datacenter semi sales. In Exhibit 1b, we show this

relationship on a dollar-weighted basis that, while is the more traditional way to understand

industry growth, appears to align the two groups’ trajectories less effectively. The equal-

weighted analysis suggests that datacenter semi sales estimates for 2H20 may be over-

estimated relative to cloud capex expectations.

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Exhibit 1:a Cloud CapEx vs. Datacenter semi sales; equal weighted

Exhibit 1:b Cloud CapEx vs. Datacenter semi sales; dollar weighted

Source: Company Filings, FactSet and Truist Securities

Source: Company Filings, FactSet and Truist Securities

In the following exhibits we conduct the same analysis, only we remove datacenter end market

revenue for INTC from the study, but retain the effects of other companies in the study (NVDA,

historical influences of Mellanox, AMD, AVGO, and MRVL). Because of INTC’s outsized

influence on the semi group and the cautious 2H20 outlook INTC has provided, the remaining

semi companies appear to reflect Datacenter end market revenue expectations that are overly-

optimistic relative to cloud capex expectations.

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Exhibit 2:a Cloud CapEx vs. Datacenter semi sales; equal weighted ex-INTC

Exhibit 2:b Cloud CapEx vs. Datacenter semi sales; dollar weighted ex-INTC

Source: Company Filings, FactSet and Truist Securities

Source: Company Filings, FactSet and Truist Securities

The data do not provide a definitive view as to whether Datacenter semi sales expectations are

overly robust, but the separation between the (lower) cloud capex growth outlook and the

(higher) datacenter semi sales expectations is noteworthy and informative.

We believe the data suggest that datacenter semi sales expectations may be optimistic for

2H20. We note this analysis aligns with feedback from our industry contacts (buyers & sellers

of electronic components) that turned more cautious on this end market’s revenue growth

potential in 2H three months ago (first reported here in April 2020, reiterated after NDVA's May

GTC, and again after NVDA's CQ1 earnings). Recent follow-ups with our contacts continue to

reflect moderating growth in this end market in 2H20; however, we highlight that inventory

layers in the supply chain make this read-across somewhat more complicated than we initially

thought.

Our cloud capex analysis aggregates cloud capex spend among 14 companies including large

US- and China-based technology companies, and datacenter end-market revenue among six

semiconductor companies. Our analysis enables us to evaluate both dollar and equal-weighted

growth, and allows users to easily exclude one or more of the companies we’ve included in the

study. Please call or email us or your STRH sales representative to receive a copy of this data.

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Datacenter industry talking points provide mixed view We attempted to extract datacenter-specific commentary from relevant semiconductor suppliers

and webscale customers. Commentary for each relevant company follows. We color code each

comment with a green, yellow, or red highlight depending on whether we believe it supports

higher, moderate, or lower datacenter industry growth outlook for 2H20 relative to 1H. We order

the companies based on their outlooks from most optimistic to most pessimistic as it relates to

2H growth for the sector.

The following comments are made by company management at the most recent earnings call.

Amazon (AMZN, Buy, Squali)

“We continue to invest meaningfully, including $9.4 billion in CapEx and finance leases

in Q2 alone, an increase of 65% year-over-year, primarily driven by investments in our

fulfillment and logistics footprint. Once these buildings open, they are a headwind to

profitability as they ramp up and we prepare for Q4 peak.”

Maxim (MXIM, Hold)

“We are starting to ramp shipments of new design wins in server power for a leading

hyperscale data center customer. We expect this ramp to be a tailwind for the business

in future quarters.”

“In the June quarter, we anticipate Comms and Data Center revenue to be up from the

prior quarter, primarily driven by increased demand for server power and optical

products for hyperscale data centers. Comms and Data Center is expected to be

strongly up from the same quarter last year”

“We expect power and optical for data center… to contribute to strong year-on-year

growth”

Facebook (FB, Buy, Squali)

“We expect capital expenditures to be approximately $16 billion at the high end of our

previous $15 billion to $16 billion range, as we have resumed data center construction

efforts earlier than expected.”

“However, a great deal of uncertainty remains in our outlook, and our full-year capital

expenditures will depend on how the pandemic impacts our ability to construct data

centers and refresh equipment.”

Microsoft (MSFT, NR)

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“…the way to think about it is you see the cloud revenue growth continuing. You see

strong consumption and usage growth. And you should expect cloud CapEx to follow in

pretty short order. The lead times there have gotten tighter over time. And so you can

generally think they'll be more correlated. But, obviously, there's some demand planning

that we would like to give ourselves ample room.”

“We invested in capacity for cloud infrastructure usage, free trial offers for critical remote

work scenarios, and …”

“We will continue to expand our cloud infrastructure to support the growing customer

usage and demand across our differentiated cloud offerings, and given our strong

execution and growing competitive advantage in high-growth areas, we remain

committed to investing against the long-term opportunity ahead of us.”

Advanced Micro Devices (AMD, NR)

“We also see data center growing from the second half to the first half.”

“And from our visibility, what I would say is that we have some customers that we see

demand increasing in the second half versus the first half. We have some customers

who are a little bit lower. The main thing for us, and I think you said it, it's about the

ramping of our platforms. And so I'm not sure I would point to a particular digestion

phenomena. I would say it's very customer-dependent and depending on how much they

built out in the first half and some customers will be up and some customers will be a

little bit down. But overall, we see an opportunity to grow in the second half.”

“When I look at enterprise, what I would say about enterprise is it's also different things

happening. I would say in terms of enterprise and HPC, we continue to see buildout. And

as I said, we have new platforms ramping that I mentioned in the prepared remarks.

There is a bit of softness in SMB or some of the transactional business. And again, we

were not very exposed to that portion of the market, so I don't see it as it's going down,

it's just perhaps not increasing as fast as we wanted it to. But overall, it really depends

on customer-specific stuff. And we don't see sort of this large-scale people slowing

down, I would say that way. I think there's a need for infrastructure and we see people

continuing to invest in infrastructure.”

Microchip (MCHP, Buy)

“Data Center and Computing continued to show strength from the shift to work-from-

home requirements. However, we anticipate that these segments may revert to more

normal demand patterns in the coming months as the search requirements start to

dissipate.”

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Monolithic Power (MPWR, Buy)

“I think the work-from-home phenomena is real and at some level, we are able to

quantify it, but I do think that it is a more front-end loaded cycle as we sort of offered an

earlier response. And the only thing to really add is that we're such a small player and

this is sort of our first opportunity to really experience accelerated revenue growth.

Again, our visibility and predictability is a little bit low for us right now.”

IBM (IBM, NR)

“The CapEx increase was driven by the build-out of our cloud infrastructure and …”

“While clients remain focused on near-term priorities, running mission-critical processes,

operational stability and cash preservation, as Arvind mentioned, the last few months

also highlighted the need for clients to accelerate their digital transformations, leveraging

hybrid cloud and AI.”

Xilinx (XLNX, Hold)

“Data Center Group sales are expected to be flat to slightly down from a record quarter

in Q1 as customers digest SmartNIC deployments.”

“As we have stated in the past, we expect our DCG business to continue to have

quarterly revenue fluctuations, driven by large customer order cycles.”

“Now in terms of Fiscal Q2... we did say that in certain areas, there’ll be a little bit of a

digestion of that. But for the most part, I don’t think it’s really that meaningful.”

“But I think in general, right, like when we have deployments in the data center, usually,

yes, they do a buy and then they use that for a while, they don’t continuously buy. That’s

just the nature of most of the purchases. And then as we said in the past as we’re

scaling this business quarter-to-quarter things do vary a bit. So this flat – flattish to

slightly down off of a record quarter, I don’t think you should read too much into this, a

tremendous amount of digestion going on, right, so that’s one part of the question I

guess.”

Alphabet (GOOGL, Buy, Squali)

“Turning to CapEx, we continue to expect a modest decrease in the level of total CapEx

in 2020 compared with last year. This is particularly due to our decision to slow the pace

at which we acquire office buildings in the near term as we focus on reimagining the

optimal work environment. This also reflects the slower pace of ground up construction

for both our office facilities and data centers due to COVID-19.”

“In terms of technical infrastructure as we discussed last quarter, we anticipate

investment to remain at roughly the same level as in 2019 with relatively more spend on

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servers than on data center construction and benefiting from our ongoing focus on

server efficiency.”

Intel (INTC, Hold)

“While y-over-y comparisons for DCG benefited from a weaker Q2 2019, revenue in the

quarter came in at the second highest level ever for DCG and the highest revenue ever

in our cloud business.”

“What we’re seeing in the DCG side is we think we peaked on cloud in Q2 and it was an

all-time record, so not a bad peak. We’ve probably peaked back in Q4 of 2019 on

enterprise and government, and while it was reasonably strong in Q1, you can see it

coming down over the next few quarters. It may have, it often has a little bit of a bounce

in Q4. We’ll have to see. And our comms provider, I would say we expect Q2 to have

been a peak there, and that’ll start rolling off from there. So everything on the DCG side

has got a step down from a very strong Q2 and probably continues down on cloud and

comms is our current outlook.”

“Moving now to our third quarter outlook, based on demand signals from our customers,

we expect continued strength in cloud and comms infrastructure… but we expect that

the weak economic environment will … drive lower demand for the enterprise and

government segment in DCG and in IOTG and Mobileye.”

Contemplating NVDA’s CQ2 (July) quarter & CQ3 (Oct) outlook

Long-term bullish thesis based on NVDA’s dominance in parallel compute

for AI

Our constructive long-term thesis on NVDA remains: that the company is a unique structural

growth asset in semis that should provide strong investment returns in the long-run. Internal

R&D, recently supplemented with Mellanox and Cumulus Networks, contribute to the company’s

dominance in parallel compute. We believe such dominance is owing less to the company’s

semiconductor devices themselves, and more to the company’s software investments, culture of

innovation, and ecosystem of incumbency. NVDA’s parallel compute capabilities form the

foundation of NVDA's superior positioning in some of the most exciting and rapid-growth areas

of technology, including gaming, server acceleration, AI training & inference, and (eventually)

autonomous driving . We estimate that collectively these markets afford NVDA a 20%+ growth

opportunity over the next few years, and form a ~$100B TAM by the mid to late 2020s.

Notwithstanding our constructive long-term thesis, we have highlighted in recent notes an event

path that could become somewhat more challenging for the stock in 2H20. We explore those

topics below.

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Significant run in shares makes the set-up much more challenging than in

recent quarters

Starting about a quarter ago we highlighted that our private industry contacts suggested NVDA's

datacenter segment faced an event path that included flattish growth in the CQ3 (Oct.) and CQ4

(Jan ’21) quarters. Nevertheless, since the company’s CQ1 (April) results on 5/21, NVDA has

delivered a 38% return.

A superficial and sector-focused read on this move suggests the stock has significant beat &

raise expectations embedded today. A deeper and cross-sector focus read reveals another

dynamic: significant outperformance of semis, and of large cap growth relative to other styles.

Specifically since 5/21, NVDA has delivered 38% returns, the SOX has delivered 24%, the R3K

has delivered 16% and the R1K growth has delivered 19%.

Exhibit 3: Indexed returns since 5/21/20

Source: FactSet and Truist Securities

Because of the dynamic favoring semis and favoring large cap growth over other styles, we

believe only a portion of NVDA’s significant run in the last quarter represent expectations of a

beat and raise quarter. Still, it does seem clear to us that expectations are elevated.

Public & private data points suggest strong CQ2 beat

For over a year our private industry contacts have reflected very strong and improving demand

for the datacenter end market, including into 2Q20. We first noted this dynamic in August 2019,

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and we reiterated that view many times including in September 2019 and in November 2019

and more recently in February 2020. Similarly, as we note above in the Datacenter Industry

Talking Points section above, public data points reflect strong datacenter end market trends

during 2Q20. As a result we believe investors should expect upside pressure to NVDA’s Q2

original guidance and our datacenter end market published estimate of $1,726m, which is based

on 7.5% organic sequential growth plus $500m in contribution from MLNX.

To frame a realistic expectation for upside in the quarter, we consider the overall predictability of

the company’s performance in this end market. As we show in the following exhibit, results vs.

expectations one week prior for this end market have varied significantly over the last four

years. When the company has posted upside it has averaged 8% upside vs. consensus. We

believe that is a reasonable upside expectation for 2Q20.

Exhibit 4: Consensus vs Actual for Datacenter End Market

Source: FactSet and Truist Securities

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One area of potentially meaningful upside is the nascent trend for datacenters to deploy GPU-

oriented systems (those based from the ground up with high GPU attach rates, like the AGX-

100 computer) rather than CPU-oriented systems (those based on CPUs and low GPU attach

rates). Specifically we have two sources of information suggesting NVDA is benefitting from this

shift. First, at HotChips, NVDA made an in-depth presentation of scale-out computing in which

the company noted its deployment of DGX SperPods and similar systems at customers.

Second, our industry contacts have confirmed that NVDA is winning hardware “bake-offs” (vs.

traditional hardware companies) at certain webscale customers.

Public & private data points continue to be much less certain on the 2H

outlook

For the last quarter or so we have highlighted that our private industry data points across semi

and components suppliers have suggested that 2H20 would be a time of inventory/capacity

digestion for the industry generally and likely NVDA specifically. We note, and we show in the

following exhibit, that NVDA’s performance in this end market has reflected rapid, but still

somewhat cyclical, growth.

Exhibit 5: Datacenter End Market Organic Revenue Growth

Source: FactSet and Truist Securities

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In fact our industry contacts have become more mixed on 2H20 demand in the last quarter, with

some becoming more constructive and others becoming more negative. At the same time we

have begun to recognize that inventory (at NVDA and downstream) may be more responsible

for the volatility that we see in our contacts’ demand trends, and 2H may still be able to deliver

sequential growth – it’s just not clear to us.

Likewise as we note above in section Datacenter Industry Talking Points, the public data points

are very mixed on this topic as well. For example, some companies such as Amazon,

Facebook, and Maxim, note that datacenter spending and revenue will continue to remain

elevated through 2H20. Contrarily, companies such as Intel, Xilinx, and Google believe

spending and revenue in the end market will experience a digestion period in 2H20. Finally,

companies such as MPWR, AMD, and MCHP, predict a stronger 2H outlook that appears more

dependent on specific company exposure.

NVDA’s robust valuation isn’t so difficult to justify

From a valuation perspective, we analyzed NVDA vs. a group of compute & high-growth semis.

While superficially NVDA’s valuation appears stretched, the levels on P/E and arguably

EV/Sales are not unreasonable in the context of NVDA’s superior growth (approximately 2x the

peer group). We demonstrate these calculations in the following exhibit.

Exhibit 6: NVDA vs. Compute & high-growth semis

Source: FactSet and Truist Securities

Turning from a cross-sectional to a time-series valuation approach, in the following two exhibits,

we show NVDA’s current valuation (on P/E, and then on EV/Sales) vs. the peer set over the last

five years. On this basis while EV/Sales may be at an historical peak, P/E is reasonably aligned

with mid-2017 levels. The difference is that today NVDA’s growth prospects seem much more

secure than they did in 2017, in our opinion.

Compute & high-growth semis

Ticker Company Price Mkt Cap EV Sales ($m) EPS P/E EV/Sales EPS CAGR Sales CAGR

($m) ($m) 2021E 2021E 2021E 2021E 2017-2021E 2017-2021E

NVDA NVIDIA Corporation (Current estimates) $494.53 284,474 295,508 16,997 9.37$ 52.8x 17.4x 21.8% 15.7%

NVDA NVIDIA Corporation (w / upside) $494.53 284,474 295,508 17,627 9.85$ 50.2x 16.8x 21.7% 16.5%

INTC Intel Corporation $49.14 207,929 221,843 73,650 4.73$ 10.4x 3.0x 8.1% 4.1%

QCOM QUALCOMM Incorporated $112.50 128,329 132,591 28,265 6.51$ 17.3x 4.7x 12.0% 5.2%

TXN Texas Instruments Incorporated $138.73 125,805 128,951 14,414 5.40$ 25.7x 8.9x 5.5% -0.9%

AVGO Broadcom Inc. $331.04 131,844 170,471 25,250 24.38$ 13.6x 6.8x 9.7% 8.5%

AMD Advanced Micro Devices, Inc. $82.60 95,451 95,905 10,782 1.64$ 50.5x 8.9x 76.2% 19.3%

MPWR Monolithic Power Systems, Inc. $281.99 12,390 12,074 870 5.23$ 54.0x 13.9x 15.6% 16.6%

MTSI MACOM Technology Solutions Holdings, Inc. $38.95 2,568 3,067 610 1.54$ 25.3x 5.0x -4.7% -2.3%

MXL MaxLinear inc $26.73 1,889 2,062 672 1.43$ 18.7x 3.1x -0.3% 12.5%

NXPI NXP Semiconductors NV $124.53 34,356 41,288 9,019 6.79$ 18.3x 4.6x 0.3% -0.6%

Peer group avg 26.0x 6.5x 13.6% 6.9%

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Exhibit 7:a P/E multiple comparison Exhibit 7:b EV/Sales multiple comparison

Source: Company Filings, FactSet and Truist Securities

Source: Company Filings, FactSet and Truist Securities

NVDA’s opportunities and challenges in owning ARM

In light of the recent press reports noting that NVDA is in talks with Softbank to acquire ARM,

we briefly consider the opportunities and challenges that might arise from such a combination.

We believe the key opportunity for NVDA is to nurture and accelerate the development of ARM

based CPUs for the datacenter. We believe NVDA’s idea would be to provide higher-

performance and lower-cost CPU solutions for the company’s datacenter customers, We expect

the market result would include diminishing the benefits of incumbency afforded to INTC and

AMD owing to the well-established X86 ecosystem. We could see this move as playing well to

NVDA’s hope or expectation to drive the market to a GPU-centric, or accelerated compute-

centric architecture in the datacenter, further realizing NVDA’s growth opportunity in this market.

Nevertheless, we see meaningful hurdles to such an acquisition. Aside from anti-competitive

concerns that INTC and AMD would almost certainly assert, we think it’s also likely that the

ARM-based CPU proponents like QCOM and MRVL may assert similar concerns. ARM’s

technology is so widely licensed, it takes some creativity to imagine that NVDA would be willing

& able to continue to develop IP for a wide variety of markets that have little to do with its core

business. Furthermore, regulatory approval (and the political components that we believe will

go along with it) seem like large hurdles that distract NVDA from its already massive growth

opportunity.

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Companies Mentioned in This NoteAmazon.com, Inc. (AMZN, $3,182.41, Buy, Youssef Squali)Broadcom Limited (AVGO, $330.32, Buy, William Stein)Facebook, Inc. (FB, $261.16, Buy, Youssef Squali)Alphabet Inc. (GOOGL, $1,516.24, Buy, Youssef Squali)Intel Corporation (INTC, $48.93, Hold, William Stein)Microchip Technology Incorporated (MCHP, $103.36, Buy, William Stein)Monolithic Power Systems, Inc. (MPWR, $281.38, Buy, William Stein)Maxim Integrated Products, Inc. (MXIM, $68.97, Hold, William Stein)NVIDIA Corporation (NVDA, $493.48, Buy, William Stein)Xilinx, Inc. (XLNX, $104.64, Hold, William Stein)Advanced Micro Devices (AMD, NR)IBM (IBM, NR)Marvell (MRVL, NR)Microsoft (MSFT, NR)Softbank (9984-JP, NR)

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Rating Count Percent Rating Count Percent

Buy 450 63.74% Buy 155 34.44%Hold 240 33.99% Hold 61 25.42%Sell 16 2.27% Sell 3 18.75%

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