Previously, we reported on a piece titled "The Chip Crash, All Trump's Fault." In that article, we mainly discussed the significant bearish impact on the chip industry due to Trump's policy of not being short-sighted. However, yesterday, due to the potential release of the latest policy in the United States, chip companies soared again, surging overnight.
Reuters reported that the government of U.S. President Joe Biden plans to announce a new rule next month that will expand the United States' power to prevent certain foreign countries from exporting semiconductor manufacturing equipment to Chinese chip manufacturers. However, sources who requested anonymity pointed out that the cargo of allies such as Japan, the Netherlands, and South Korea, which export key chip manufacturing equipment, will be excluded, thereby limiting the impact of the rule.
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It was this statement that ignited the chip companies' revelry last night.
The surge of equipment companies
As a lithography machine giant, ASML has been hit hard by relevant U.S. policies over the years. Therefore, after the aforementioned favorable information came out, this Dutch equipment giant took the lead in surging, with its stock price rising by 10% at one point. As of 3:59 a.m. Eastern U.S. time, the company's stock price had risen by about 7%.
From the market's perspective, July was a tough month for ASML. Although the company's performance exceeded expectations, its financial report released earlier this month showed a sharp drop in its stock price. One of the main reasons behind this is the concern over the Biden administration's restrictions on exporting chips to China, which has put pressure on the stock, and investors seem to be shifting from chip stocks to small-cap stocks. The Biden administration is planning to exclude ASML from the new export restrictions to China. This is good news for ASML, as nearly half of its sales come from China.
Last night, Barclays also upgraded ASML's rating from "hold" to "buy," saying that the previous sell-off of the stock was overdone. According to the earnings expectations for 2025, the company's price-to-earnings ratio is less than 30, as it is expected to enter a new round of growth cycle later this year, driven by the new extreme ultraviolet (EUV) lithography machine.
ASML has a significant competitive advantage because it is the only EUV manufacturer, and EUV can create complex patterns on silicon wafers required for microchips. Moreover, the company's stock appears very likely to achieve long-term growth, especially if the company is not subject to new export rules.
In addition to ASML, Japanese semiconductor equipment giant Tokyo Electron is also another company benefiting from this policy. After the Reuters news came out, their stock price surged by 7%. Over the past 12 months, the company's stock price has risen by 46%.
In May, they forecast that in the fiscal year ending next March, sales will grow by 20% to 2.2 trillion yen (14 billion U.S. dollars). Operating profit is expected to grow by 27.6% to 58.2 billion yen. This is mainly because global chip manufacturers continue to invest in advanced technology against the backdrop of the growing demand for generative artificial intelligence applications."We are seeing a recovery and expansion in investments related to advanced logic and memory chips," said Hiroshi Kawamoto, General Manager of the company's finance department, in an online press conference. This may reflect the ongoing demand for AI chips, as chip design companies such as U.S. Nvidia are experiencing strong product demand, which are seen as key components in developing generative artificial intelligence.
"Demand for cutting-edge logic chips for 2-nanometer pilot production lines or 3-nanometer mass production lines is picking up," a company representative said at the press conference.
Japanese tool manufacturers have also encountered unexpected demand from China for older chip technologies. Chinese chip manufacturers are investing in domestic supply chains as trade controls imposed by the United States have led to increasing difficulties in procuring chips and materials.
According to previous data, China accounts for about 40% of Tokyo Electron's total sales, but they said that this figure may decline in the coming years as sales related to advanced chip technology expand. However, with the relaxation of U.S. policies, Tokyo Electron has also ushered in a new round of favorable conditions.
In addition to the aforementioned equipment companies, other chip equipment stocks in Europe and Asia, including ASM International NV and Disco Corp., have also risen.
Amir Anvarzadeh, an analyst at Asymmetric Advisors, said that the only reason the United States would exclude semiconductor equipment produced by the Netherlands and Japan is that "these countries are likely to comply with their requirements to implement stricter export policies towards China, and the United States does not need to resort to foreign direct product rules." "The market may have mistakenly believed that companies in these countries can freely export chip manufacturing tools that the United States wants to restrict in China, thus driving up the prices of these stocks."
Chip Company Carnival
If the surge in equipment companies is achieved under the stimulus of favorable news, then the carnival of companies such as AMD and Nvidia is a real data-driven performance.
First, looking at AMD, the company's stock price rose by 5% at the opening, influenced by the dual benefits of U.S. favorable news and the company's performance, after the company announced its second-quarter financial report, with both revenue and profits exceeding expectations. AMD's data center business has grown strongly, thanks to the sales of graphics processing units (GPUs) used for training artificial intelligence models.
Although AMD is still far behind Nvidia in the field of AI chips, the latest financial report released by the company yesterday shows that its AI chip business is accelerating. It is reported that the company's Instinct MI300 chip, used for high-end servers supporting AI tasks, brought in more than $1 billion in revenue in the second quarter of 2024 alone, setting a historical high for the chip. The company has also increased its future forecasts. AMD CEO Lisa Su said that the company expects this year's AI chip sales to reach $4.5 billion, an increase of 11% from previous expectations.AMD's AI chips have helped the company achieve a record $2.8 billion in data center revenue, a 115% year-over-year increase. AMD's revenue for the quarter was $5.8 billion, a 9% increase year-over-year. Data center revenue accounts for nearly half of the company's total revenue, and this growth indicates that the company has secured a place in the AI boom, which investors had anticipated, as the company's stock price soared last year but has recently corrected.
In short, AMD's data center revenue results show that the company is not lacking customers in the AI field, and its chips for AI servers are more popular than ever. Investors took this as a good sign for AMD's future this morning. Of course, AMD still has a long way to go to replace Nvidia as the king of AI chips. But its second-quarter earnings report shows that the company is one of the emerging giants in the field.
Morgan Stanley analysts responded to AMD's report, saying that the company's revenue expectations for the third quarter reflect the strong momentum of the computing business. The bank wrote: "This is a good quarter in every respect. We were not expecting to raise expectations, so better performance guidance is a pleasant surprise."
Morgan Stanley said: "Given the management's enthusiasm for artificial intelligence in the second quarter, we had anticipated that the number might rise slightly, and it did - which also helps to improve the numbers." "We have emphasized the concern that people's expectations for artificial intelligence are too high, and as predicted, the sharp sell-off of AI-related stocks has alleviated this concern to some extent. Our numbers have only risen slightly - delaying the recovery of 70% gross margin Xilinx business, which puts pressure on gross profit and earnings per share - but the stock price should ease."
After AMD's good performance, Nvidia also rose with the tide.
According to CNBC, Nvidia's stock price rose by 13% at the close on Wednesday, after its largest customer, Microsoft, and competitor AMD, said that the construction of tens of billions of dollars in AI servers would not slow down. This indicates that the construction of AI servers based on GPUs will not slow down.
Microsoft CEO Satya Nadella and CFO Amy Hood said on Tuesday that the company plans to invest more money in infrastructure based on Nvidia next year. Microsoft's capital expenditure in the fourth quarter was $19 billion, with about 60% used for hardware. The tech giant also said that its investment in expensive GPU-based servers is paying off.
The company's remarks during the earnings call eased investors' concerns that the growth of Nvidia's artificial intelligence sales is related to an arms race among cloud providers, which may be slowing down. UBS analyst Karl Keirstead wrote in a report on Wednesday that Microsoft's earnings report "may encourage most Nvidia/semiconductor investors, as Microsoft's capital expenditure this quarter far exceeds expectations, reaching $19 billion."
Nvidia is a major beneficiary of the AI boom. So far in 2024, its stock price has doubled, and it has risen more than 500% since the release of ChatGPT in November 2022, sparking investors' strong interest in artificial intelligence technology.
Morgan Stanley analysts listed Nvidia as a "preferred" in a report on Wednesday, saying that concerns including competitive situation, export controls, and supply chain issues may "fade over time." Morgan Stanley analyst Joseph Moore wrote: "Our view is that the market is very pessimistic about some hyperscale comments, and customers obviously want to continue to invest resources to develop multimodal generative artificial intelligence."Moore also emphasized that Nvidia's chips are transitioning from the previous generation "Hopper" or H100 series chips to the new generation of Blackwell chips, which could stimulate more sales. "Our checks generally indicate that customers want to deploy GPUs as soon as possible, and the flexibility of Blackwell H100 has even been delivered to us within a few weeks, making these spending concerns seem premature," Moore wrote.
Goldman Sachs analysts said that the data from Microsoft and AMD contradict the growing concerns of investors who worry that a few cloud computing providers and large technology companies have invested too much money in Nvidia chips and built too much infrastructure too quickly.
Goldman Sachs analyst Toshiya Hari said in a report on Wednesday: "We believe that AMD's data center GPU business prospects are optimistic, and Microsoft's statement that capital expenditure will continue to increase in the fiscal year 2025 is a good omen for Nvidia."
In addition to these two giants, many chip companies have also achieved good performance.
For example, according to data from S&P Global Market Intelligence, as of 11:45 AM Eastern US time, Broadcom's stock price rose by 10.2%. Samsung's stock price rose by 3.58% at the close in South Korea. Competitor SK Hynix's stock price also closed up 3%. The stock price of TSMC, a major wafer foundry, also rose by more than 4%.
Joy and sorrow are not the same
Although many US chip companies performed well last night, like most market developments in the world, the joys and sorrows of the entire chip market are not the same. For example, as the main supporter behind the chips, Arm fell by 11% last night.
According to Reuters, Arm's conservative revenue forecast triggered a sell-off of the British chip company's stock on Wednesday, as investors worried that the return on investment from the artificial intelligence computing spending boom would be slower than that of chip manufacturers such as Nvidia. As a result, Arm Holdings' stock fell by 11% after the market closed, and if the decline continues on Thursday, the company's market value will shrink by about $20 billion.
Relevant data shows that Arm CEO Rene Haas said in a conference call after the report was released that it might take several years (about four years for AI server chips) to reap unexpected gains from the designs authorized this year. Haas said: "Thinking about all these increased licensing activities can well predict the growth of future royalty fees."
Michael Schulman, Chief Investment Officer of Running Point Capital, also pointed out: "Although Arm Holdings' earnings performance is impressive, their cautious (lackluster) full-year forecast has dampened people's morale." "Arm still benefits from the surge in artificial intelligence spending, but the weakness in other markets (possibly due to excess inventory) has led the management to lower overly high expectations." Michael Schulman said.Despite this, the company's revenue in the first quarter still increased by 39% to $939 million, exceeding analysts' expectations of $902.7 million. Arm's Chief Financial Officer, Jason Child, said in an interview with Reuters that the revenue growth was mainly due to the company signing "several" important licensing agreements, although its royalty income was affected by several weak terminal markets.
It is worth mentioning that, according to Reuters, Arm's revenue in the Chinese market has dropped to about 13% of total sales, while this proportion usually accounts for 20% or more of the total quarterly sales. The Royalty fees in the Chinese market have increased by 114%, but its licensing business shrank by 68% in this quarter. The sharp increase in China's Royalty fees means that the number of mobile phones using chips from companies such as Qualcomm and Apple has decreased.
Qualcomm, another major chip manufacturer, predicted on Wednesday that its fourth-quarter revenue will be higher than Wall Street's expectations, betting on strong demand for high-end Android devices and the need for more chips in smartphones undergoing AI upgrades. Its stock price rose by more than 5% in after-hours trading, but then the company narrowed the increase and fell by 1.4%, due to the United States revoking an export license for the sanctioned Chinese telecommunications company Huawei, which affected its revenue.
Reuters said that the increasingly strict export restrictions on sharing high-end chip technology with China, as well as the intensification of Sino-US trade tensions, have hindered chip manufacturers from serving one of the largest semiconductor markets. Qualcomm's Chief Financial Officer, Akash Palkhiwala, said after the earnings call: "This change will affect our revenue in this quarter and the first quarter of fiscal year 2025," but did not elaborate on the impact.
However, Alex Rogers, President of Qualcomm's licensing division, said the company will continue to negotiate with Huawei.
MediaTek is also not optimistic about the prospects. The company's legal institutions believe that the future operation will be a "short bear long bull" good situation, as the short-term continues to be affected by the adjustment of mobile phone 5G SoC inventory, the third quarter financial forecast is conservative, the revenue quarter increase is between -3% and +4%, and there is a possibility of a recession, the short-term peak season is not prosperous.
At the same time, wafer foundries World Advanced and UMC are also not optimistic about the future outlook.
After World Advanced was not optimistic about the second half of the year and the future, UMC Co-General Manager Wang Shi also said yesterday that the second half of the year will face some profit pressure. "In the second half of the year, customers in the fields of communications, consumer electronics, and computers will return to the past seasonal level of inventory, and it will reach a healthy level at the end of the year. However, the demand for automotive terminals continues to be weak, and the expected inventory adjustment time will be extended, and it is expected to return to a healthy level in the first quarter of next year." Wang Shi analyzed.
In fact, before this, we also revealed some of the current situation of the chip industry in an article titled "Is the chip industry, is it good?" Especially referring to mature chips. The pen also thinks that apart from AI and Nvidia, the entire semiconductor market is actually still in a difficult situation.
What do you think about the second half of the year?
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