- ASML is the big winner from recent earnings results
- Intel continues to struggle
The semiconductor industry is a microcosm of the wider stock market, as artificial intelligence-driven earnings continue to rise and weakness remains at consumer-exposed companies.
Microsoft’s (US:MSFT) latest earnings report encapsulated this. In the three months to December, year-on-year revenue growth accelerated 18 per cent to $62bn (£49bn), up from 2 per cent last year. However, this performance was driven by growth in its cloud computing division, Microsoft Azure, which was up 30 per cent year on year. AI initiatives provided six percentage points of this growth.
Microsoft has got itself into this leading position by investing heavily in AI data centres. This has been to the benefit of its main graphics processing unit (GPU) supplier, Nvidia (US:NVDA). The chip designer saw its revenue increase 206 per cent year on year in the three months to October 2023, with FactSet broker consensus forecasting that revenue will jump another 11 per cent next quarter. Nvidia next reports on 21 February.
AMD tries to compete
The profits being generated by Nvidia means competitors are piling in to the sector. At the end of 2023, AMD (US:AMD) launched its MI300X chip, which it claimed is the “most advanced AI accelerator in the industry”. Chief executive Lisa Su forecast that revenue from the chip would exceed $2bn this year.
She has now upgraded this forecast to $3.5bn, and said this week that AMD’s GPU customers included Microsoft, Oracle (US:ORCL) and Meta (US:META).
Prior to this, AMD had already had success in taking market share from Intel in the data centre market. GPUs are in hot demand but data centres still need central processing units (CPUs) to function. Intel used to be the world leader in CPUs, but has been quickly losing market share to AMD.
In the three months to December, AMD’s revenue rose 10 per cent year on year to $6.2bn. This performance was driven by data centre revenue, which was up 38 per cent to $2.3bn for the quarter, which helped offset a 17 per cent decline in gaming revenue. Overall forecasts for the new quarter were below analyst estimates, which saw the shares pare recent gains on Wednesday, but the AI optimism stands in contrast to some rivals.
CPU decline
For comparison, in the same period Intel (US:INTC) saw its data centre revenue fall 10 per cent. Management also forecasts a double-digit drop again next quarter, meaning Q1 group revenue is expected to be around $12.7bn, 10 per cent below analyst expectations. Since Intel announced its results last week, its share price is down 13 per cent, halting a 50 per cent share price rise since October.
Texas Instruments (US:TXN) had similarly disappointing results as it suffered from weaker consumer demand. It forecast that revenue next quarter would be between $3.45bn and $3.75bn, around 12 per cent below the $4.09bn forecast. “During the quarter, we experienced increasing weakness across industrial and a sequential decline in automotive,” chief executive Haviv Ilan said.
ASML orders grow
This bifurcated market makes things tricky for the world’s leading semiconductor manufacturer, TSMC (TW:2330).
The Taiwan-based company manufactures both high-end chips for AI processing, such as Nvidia’s GPUs, as well as more basic chips for automotive and consumer electronics.
To stay ahead in advanced manufacturing, it needs to keep investing in the newest machinery, however last quarter revenue dropped 3 per cent year on year. This means that to keep spending more on capex it needs to sacrifice cash flow growth.
The problem is that high-performance chips including AI make up 43 per cent of revenue, so can’t completely offset the weak demand for consumer electronics and automotive. However, management was keen to stress AI’s potential as a growth driver. On a recent earnings call, chief executive CC Wei said AI’s current annual growth rate is around 50 per cent, and expects this to continue through to 2027, by which point advanced chips would make up over 50 per cent of revenue.
To maintain this growth in high-end chips, TSMC needs to keep investing. It is forecasting capex of between $28bn and $32bn this year, of which 80 per cent is being allocated to advanced processing technologies. Chief financial officer Wendell Huang explained that the spending is “in preparation to capture and harvest the growth opportunities from high-performance computing, AI and 5G”.
As the supplier of the advanced photolithography machines that a lot of TSMC’s billions are being spent on, Dutch company ASML (NL:ASML) has been the big winner from this recent set of earnings updates. Last week, it announced its order book as of December stood at €9.2bn (£7.9bn), more than treble the previous quarter. In the past month, its share price is up over 20 per cent.
It is a race to stay ahead in AI, and that race starts with the ASML’s machines.
