Western Digital Corp. is in advanced talks to merge with Japan’s Kioxia Holdings Corp., according to people familiar with the matter, in a deal that could be valued at more than $20 billion and further reorder the global chip industry.
Long-running discussions between the companies have heated up in the past few weeks and they could reach agreement on a deal as early as mid-September, the people said. Western Digital would pay for the deal with stock and the combined company would likely be run by its Chief Executive, David Goeckeler, the people said.
There’s no guarantee Western Digital, which had a market value of around $19 billion Wednesday afternoon, will seal an agreement, and Kioxia could still opt for an initial public offering it had been planning or another combination.
The Wall Street Journal reported in March that Western Digital and Micron Technology Inc. were examining potential deals with Kioxia, which makes NAND flash-memory chips used in smartphones, computer servers and other devices. Micron’s interest has since cooled and Kioxia has been focused on discussions with Western Digital, which already has deep existing ties with the Japanese company.
Any transaction would require the blessing of the Japanese government, given Kioxia’s significance there and the political sensitivities of transferring ownership of such key technology. Washington would also likely play a role, but a deal could fit with a push by the U.S. to boost its chipmaking capabilities and increase competitiveness with China.
Nvidia Corp. shares rallied Thursday as more than half the analysts who cover the chip maker hiked their price targets following the company’s record quarter and forecast for more new highs based on data-center gains.
Nvidia
NVDA,
+6.13%
shares rallied more than 7% in morning trading to hit an intraday high of $204.95, while the PHLX Semiconductor Index
SOX,
+1.20%
gained more than 1%, and the S&P 500 index
SPX,
+0.32%
gained 0.4%. Nvidia shares last closed at a split-adjusted record high of $206.99 back on July 6, and are up 68% over the past 12 months.
For more on today’s market action, see Market Snapshot
Nvidia forecast revenue of $6.66 billion to $6.94 billion Wednesday, above Wall Street estimates at the time, and said that the “lion’s share” of the $500 million increase will come from data-center sales. That follows new records for total, gaming and data-center revenues that Nvidia reported for the quarter.
What many analysts picked up on is that demand for graphics processing units (GPUs) for cryptocurrency mining didn’t factor that much into the outlook. That came as a relief to analysts, who noted a lower crypto risk compared with 2018 when a fall in cryptocurrency values prompted many miners to sell their gaming card-powered rigs, flooding the market with second-hand cards.
Full earnings coverage: Nvidia reports record data-center and gaming revenue, but supply constraints still a concern
Nvidia broke out sales of its Cryptocurrency Mining Processors, or CMPs, which are intended to divert mining demand away from GPUs made for gamers and not expected to be material in revenue gains.
Data-center sales took up much more of the attention from analysts, however. Bernstein analyst Stacy Rasgon, who has an outperform rating on the stock and raised his price target to a $230 from $180, said that while “the company is having absolutely no trouble continuing to crush gaming,” Nvidia’s data-center story “still feels like it has some room to run.”
“The data-center story is really coming into its own now, with a sizable inflection in the near term and with prospect for the segment to equal, and potentially exceed, gaming in the not-too-distant future,” Rasgon said.
For more: Nvidia’s ARM acquisition is stalled, and there’s a deadline with more than a billion dollars at stake
Evercore ISI analyst C.J. Muse, who has an outperform rating and a $250 price target, called data-center sales a “key for the stock.”
“Data Center revenues were guided to accelerate in 3Q off a very strong comp based on strength across hyperscale and vertical customers, training and inference applications, and compute and networking technologies – the democratization of AI workloads continues to be a front and center theme here, and one we see Nvidia driving and benefiting from over for the foreseeable future,” Muse said.
Cowen analyst Matthew Ramsay, who has an outperform rating and raised his price target to $220.00 from $176.25, said that the data-center acceleration was “the most important takeaway” from the earnings call.
“We expect sustainable data-center and gaming product cycles that should drive >50%+ organic growth for the company in F’2022,” Ramsay said.
Jefferies analyst Mark Lipacis, who has a buy rating and raised his price target to $223 from $214, addressed the lower risk of another crypto-mining debacle.
Read: Crypto is reshaping the world economy, 50 years after Nixon ended the dollar’s peg to gold. Here’s how some are playing it
“We think crypto-miners are 1/10th the gaming GPU sales vs 2018,” Lipacis said. “We continue to believe the risk of a crypto-driven gaming bust is low, and expect Nvidia’s ecosystem moat and increasing software revenues to lead to additional upside surprises.”
Of the 41 analysts who cover Nvidia, 34 have buy ratings, five have hold ratings, and two have sell ratings. Of those, at least 24 analysts hiked their price targets in response to the earnings and one lowered their target, according to FactSet. That resulted in an average price target of $219.23, up from a previous $204.24.
TOKYO—A fire at a factory of one of the world’s leading auto chip makers has added to the troubles of car makers that already have slashed production because of a semiconductor shortage.
The fire Friday left a swath of charred equipment in the factory owned by a subsidiary of Renesas Electronics Corp. in Hitachinaka, northeast of Tokyo. The company said it would take at least a month to restart the damaged operations.
Shares of Japan’s three leading car makers— Toyota Motor Corp. , Nissan Motor Co. and Honda Motor Co. —all fell by more than 3% on Monday, worse than the overall market, while Renesas shares were down 4.9%.
Renesas said heat from an electrical problem inside a single piece of equipment caused the fire and contaminated clean rooms needed to make semiconductors. It said two-thirds of the chips made at the fire-affected factory were automotive chips.
Renesas’s chief executive, Hidetoshi Shibata, said Sunday the impact on global chip supplies would be significant. Mariko Semetko, a credit analyst at Moody’s Japan, said the fire was likely to damp the recovery of global auto production this year, while auto makers said they were still assessing the impact.
Investors who bet against stocks are targeting special-purpose acquisition companies, one of the hottest growth areas on Wall Street. The dollar value of bearish bets against shares of SPACs has more than tripled to about $2.7 billion from $724 million at the start of the year, according to data from S3 Partners.
Some of the stocks under attack belong to large SPACs that surged in recent months, in part because they were backed by high-profile financiers. A blank-check company created by venture capitalist
Chamath Palihapitiya
that plans to merge with lending startup Social Finance Inc. is a popular target, with 19% of its shares outstanding sold short, according to data from S&P Global Market Intelligence. The short interest in
Churchill Capital Corp. IV,
a SPAC created by former investment banker
Michael Klein
that is merging with electric-vehicle startup Lucid, more than doubled in March to about 5%.
Others are wagering against companies after they combine with SPACs. Muddy Waters Capital LLC announced last week it was betting against
XL Fleet Corp.
, a fleet electrification company that went public in December after merging with a SPAC. XL has since said Muddy Waters’s report, which alleged XL inflated its sales pipeline and made misleading claims about its technology among other issues, had “numerous inaccuracies.”
XL’s stock price dropped the day Muddy Waters released its report by about 13%, to $13.86, from its prior close on March 2. Shares closed Friday at $12.79.
Shares of
Lordstown Motors Corp.
fell nearly 17% Friday after Hindenburg Research released a report saying the electric-truck startup had misled investors on its orders and production. The company, which merged with a SPAC in October, said the report contained half-truths and lies. The short interest in Lordstown shares rose to 5% from 3.4% in the week before the report’s publication, according to data from S&P.
“SPACs are an area of focus,” said Muddy Waters’s
Carson Block.
The veteran short seller said SPACs largely make up the universe of companies he views as both “abysmal” and relatively free from technical challenges, such as high short interest, which can make betting against them difficult.
SPACs are shell firms that raise capital by issuing stock with the sole purpose of buying or merging with a private company to take it public. They are dominating the market for new stock issues, becoming a status symbol for celebrities while pumping the value of acquisitions, like betting company
DraftKings Inc.,
into the tens of billions of dollars.
Hedge funds that buy into SPACs early see them as a way to make lofty returns without much risk. Individual investors are attracted by the chance to get positions in newly public companies that they could rarely purchase through traditional IPOs. The Securities and Exchange Commission issued a statement on Wednesday warning that it “is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it.”
A monthslong rally in the stocks lost steam recently amid a broad selloff in technology and high-growth companies. An index of SPAC stocks operated by Indxx fell about 17% from mid-February to March 10, while the Nasdaq Composite Index declined about 7.3% over the same period.
“These are all momentum stocks, and a lot of people want to short them,” said
Matthew Tuttle,
whose firm Tuttle Tactical Management runs an exchange-traded fund that allows investors to hold a portfolio of SPAC stocks. Mr. Tuttle is preparing to launch an ETF that bets against “de-SPAC” stocks of companies that have merged with a SPAC—like electric-truck manufacturer
Nikola Corp.
and baked-goods maker
Hostess Brands Inc.
—and a separate fund that invests in the stocks.
Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ
Postmerger companies are particularly attractive to short because they have larger market capitalizations, making their shares easier to borrow, and because early investors in the SPACs are eager to sell shares to lock in profits, analysts and fund managers said.
Short sellers borrow stocks they believe are overvalued and immediately sell them, hoping to repurchase the shares for a lower price when they need to be returned and to pocket the difference. The strategy proved dangerous in recent months when individual investors organized on social media to push up stocks like GameStop Corp., forcing short sellers to buy shares and cap their losses, helping to drive prices still higher.
Continued strong investor demand for SPACs could catch short sellers in a similar squeeze. Shorting SPACs can also be risky because their shares have a natural floor at $10, the price at which they can be redeemed before a merger, and because they are prone to sharp price moves, analysts said.
Still, the portion of shares sold short in SPACs and their acquisitions is climbing.
A blank-check company created by venture capitalist Chamath Palihapitiya that plans to merge with lending startup Social Finance Inc. is a popular target.
Photo:
Brendan McDermid/Reuters
Some are betting against stocks they believe rose too fast, to unsustainable valuations. The price of bioplastics company
Danimer Scientific Inc.
nearly tripled to $64 in the first six weeks of the year after it was bought by a SPAC. The short interest in Danimer stock has climbed to 8.5% from around 1% in January, and its share price has traded down to about $42, according to data from S&P.
Others are making bearish bets to hedge against potential losses in SPAC stocks they own.
Veteran short seller
Eduardo Marques
cited SPACs and their boosting the number of U.S.-listed stocks as a short-selling opportunity, according to a pitch for a stock-picking hedge fund called Pertento he plans to launch this year. America’s roster of public companies had shrunk from the mid-1990s onward, but that trend has recently reversed, partly because of SPACs.
Their popularity has helped spark new Wall Street offerings.
Goldman Sachs Group Inc.
this year started offering clients set baskets of similar stocks to short, pitching them as a way to hedge SPAC exposure, people who have seen the offering said. Clients typically customize the baskets Goldman offers, which are thematic and sector-focused, such as on bitcoin and electric vehicles.
Kerrisdale Capital founder
Sahm Adrangi
started shorting postmerger SPAC companies earlier than most, with a public bet in November against the stock of frozen-food maker
Tattooed Chef Inc.,
which still trades above its price at that time. But the stock has fallen about 13% during the recent market slump.
“We saw these stocks go up a lot and now that people are de-risking, these highflying SPACs are coming down to earth,” Mr. Adrangi said.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
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Write to Matt Wirz at matthieu.wirz@wsj.com and Juliet Chung at juliet.chung@wsj.com