Semiconductor Shares This autumn Overview: AI Good points Warmth Up

Semiconductor shares are standout performers to this point in 2024, with investor urge for food for AI shares remaining elevated as AI chip chief Nvidia continues its streak of excessive development. Quite a few chipmaking gear and chip shares outperform the broader indices on a YTD foundation – sixteen have YTD positive aspects above 20%.

For years, the Tech Insider Community has printed on semiconductors being the leaders in tech because the constructing blocks and customary denominators for the last decade’s largest tech tendencies, most notably AI and high-performance computing, but additionally EVs, robotics, 5G, and IoT. Our premium analysis urged our members to look intently at semiconductors throughout these tendencies courting again to 2019.

These rising tendencies, coupled with robust demand for AI and HPC functions in the mean time, set semiconductors up as a really perfect funding, supported by robust free money circulate technology. Beneath, we replace our semiconductor sector evaluation to have a look at which firms have carried out nicely in the latest quarter, and in addition which firms stand out on a forward-basis with income development estimates, income, money flows and earnings surprises. We additionally look into key administration insights.

Prime Semiconductor Corporations with the Highest Quarterly Income Progress Charges

It ought to’ve been a simple guess that AI’s de facto chief Nvidia would sit atop the checklist right here, because it reported greater than 265% YoY income development to $22.1 billion in its fourth quarter. Nvidia CFO Colette Kress said that This autumn’s:

knowledge heart income of $18.4 billion was a report, up 27% sequentially and up 409% year-over-year, pushed by the NVIDIA Hopper GPU computing platform together with InfiniBand end-to-end networking. Compute income grew greater than 5x and networking income tripled from final 12 months.”

AI fueled gains outside of Nvidia as well – Micron is emerging as a big winner from surging AI demand. Micron’s recovery looks to be in full force as it reported nearly 58% revenue growth, driven by strong AI demand and increased pricing power stemming from a tighter supply environment.

However, we saw pockets of strength outside of AI – indie Semiconductor and Navitas Semiconductor both reported over 110% revenue growth, with primarily automotive and industrial end markets. ACM Research reported 57% revenue growth, and Qorvo followed with 45% revenue growth due to content gains at its single largest customer.

This autumn Income Shock

Cirrus Logic reported a significant 14.6%, or $79 million, revenue beat in the December quarter (its fiscal third quarter) as it posted a record $619 million in revenue on strong smartphone shipments. This represented 29% QoQ and 5% YoY growth. Management said the $619 million was:

Significantly above our guidance range, as sales of components shipping and smartphones exceeded our expectations, driven by strength in orders from our largest customer. Shipments stayed strong throughout the quarter, including the first holiday week, and we also benefited from an additional week of revenue in the quarter.”

This uptick in smartphone shipments additionally aided Qorvo, who beat estimates by 7.1%.

Three of the Avenue’s AI favorites – Micron, Arm, and Nvidia – all beat income estimates by 7.6% to eight.8%. Sturdy AI-fueled reminiscence chip demand aided Micron’s development within the quarter, whereas robust GPU shipments and still-dazzling knowledge heart income development served as a significant contributor to Nvidia’s $1.6 billion income beat. Arm’s $61 million income beat was pushed by report royalty income, with royalties for the latest v9 design underpinning the newest AI chips and different superior smartphone chips, double that of the v8.

Income Progress Estimates for Present Quarter

If it isn’t apparent which chip inventory would maintain the crown for the best estimated income development for Q1, then you definately’ve been dwelling in a cave.

Nvidia leads the sector with a blazing 237% estimated income development price for Q1, to an estimated $24.2 billion. Progress in Q1 is predicted to be pushed by sequential development in knowledge heart revenues, as Massive Tech firms proceed to shortly snap up GPUs. Nvidia has been on a streak of beating-and-raising by roughly $2 billion over the previous couple quarters, and will probably be trying to preserve this streak alive within the first quarter. Analysts have had an especially troublesome time pinpointing simply how quickly Nvidia’s GPU gross sales and income development shall be – six months in the past, in October 2023, analysts’ Q1 income estimate was pegged at $18.4 billion, and now, it is almost 32% greater. That is reflective of the unprecedented development materializing for Nvidia over the previous 12 months.

ACM Analysis is predicted to see over 105% YoY development in Q1, with administration anticipating a robust 2024 on mature node funding in China and product growth progress at a number of prospects. Nonetheless, regardless of the triple-digit headline development price, the $152 million income estimate would symbolize an ~(11%) sequential decline.

Micron’s development is poised to speed up from 58% YoY to just about 77% YoY, because it continues to reap the advantages of this unfolding restoration within the reminiscence market with robust pricing tailwinds. Administration said that:

AI server demand is driving fast development in HBM, DDR5 and knowledge heart SSDs, which is tightening modern provide availability for DRAM and NAND. That is leading to a optimistic ripple impact on pricing throughout all reminiscence and storage finish markets. We count on DRAM and NAND pricing ranges to extend additional all through calendar 12 months 2024 and count on report income and far improved profitability now in fiscal 12 months 2025.”

Revenue Growth Estimates for Current Year

There should be no surprises here, with Nvidia and Micron leading the way with 82.7% and 58.1% estimated revenue growth for the current fiscal year. Navitas’ strong growth in Q4 and expected growth in Q1 are projected to translate to a solid year with nearly 43% growth, while Rambus is expected to record more than 32% growth.

Data center will be the main driver of Nvidia’s growth this fiscal year, with the H200 shipping at the end of the second quarter and the new B200 Blackwell GPUs commencing late in the year. Put in dollar terms, Nvidia is estimated to generate $50 billion in revenue growth this year – assuming data center drives ~90% of that growth, that could represent more than 1 million additional GPUs shipped this year.

What you may have noticed is that the estimated 83% growth for Nvidia is a far cry from the 237% estimated growth for Q1. It’s not that revenue growth will slow on a dollar basis – Nvidia is estimated to see ~$2 billion in sequential growth each quarter this year, but rather it will start to face tough comps in the back half of the fiscal year, when it comes head-to-head with $14.5 billion and $18.4 billion data center revenue prints. This is what will drag on YoY revenue growth rates, from the 237% to an estimated 40% by fiscal Q4.

We’re seeing thematic similarities in the chip companies making the list of fastest revenue growth expectations for the current fiscal year. Nvidia is capitalizing on data center AI demand, and TSMC and Arm are seeing tailwinds from this growth. Micron is seeing rising DRAM and NAND prices aid AI strength, while Rambus and Camtek are both poised to capture growth on this memory upswing. Rambus is seeing the data center drive more than 75% of its chip and silicon IP revenue with outlets in DDR5 and HBM, and Camtek is benefiting from increased metrology equipment demand from HBM and AI chiplet customers.

Prime-Line Valuation

Despite popular belief, Nvidia is not the most expensive semiconductor stock on a top-line (and even bottom-line) valuation. On a top-line, forward PS valuation, Arm is the most expensive semiconductor stock by a wide margin, trading at 32.4x forward sales despite having a forward revenue growth rate of just 18.7%. We discussed Arm’s extreme valuation and how it poses risks to investors to our free newsletter readers last month in the analysis “Arm Stock: AI Chip Favorite is Overpriced.“

Nvidia trades at 19.8x forward sales and arguably deserves this premium valuation due to its unrivaled position on GPUs and the raw earnings power this is driving; in addition, this 19.8x multiple surprisingly is a slight discount to the 21.7x average PS multiple Nvidia has traded at over the past 5 years.

Semiconductors with the highest exposure levels to the unfolding AI megatrends are predominantly among the sector’s most expensive stocks. For example, Monolithic Power is the fourth most expensive at 15.6x forward sales, while ASML and Marvell also feature on the list. Monolithic has seen strong growth in its Enterprise Data segment as a primary power management supplier for Nvidia’s H100 GPU, though it is also recording >20% growth in automotive and ADAS markets.

Working Margin

Despite some of the blazing growth rates we are seeing emerge across the sector, only a handful of companies with the highest operating margins are seeing growth translate into increased operating leverage.

Due to the sheer pricing power of its H100 GPUs, Nvidia has seen its operating margin rise to nearly 62% in the most recent quarter, compared to a TTM operating margin of under 52%. This suggests that Nvidia will still feel these positive margin tailwinds over the next few quarters, assuming it can maintain a 60%+ quarterly operating margin as it scales its next-generation GPUs.

Smartphone strengths drove improvements in margins for Qualcomm and Cirrus Logic, while strong royalty revenue growth aided in Rambus’ margin improvement. TSMC is facing some margin headwinds, primarily due to its positioning in the ramp cycle of its 3nm node, which is still in the early stages.

Free Money Circulation Margin

Strong free cash flow generation and high FCF margins are a core factor in the chip sector’s attractiveness to investors – not only does strong FCF generation allow companies to reinvest rather heavily in R&D and remain on the leading edge of innovation, but it provides an extra safety net when the macroenvironment sours.

Skyworks led the sector with a 62% free money circulate margin as the corporate reported report quarterly money circulate metrics. CEO Liam Griffin said the corporate “continues to execute nicely and generate sturdy profitability in mild of ongoing macroeconomic volatility” and “delivered report quarterly free money circulate of $753 million, which displays robust working capital administration and moderating capex depth.”

Taking a broader view of the entire sector, 18 semiconductor stocks reported quarterly FCF margins above 30%, with 9 having a 30% or higher free cash flow margin on a TTM basis. Skyworks reported a 62% FCF margin in Q4, followed by Nvidia at 51% and Cirrus Logic at 49%.

Conclusion

Nvidia has quickly become the market’s most-followed AI stock due to its ‘hockey stick’ data center revenue growth, and it also became the first semiconductor stock to break both $1 trillion and $2 trillion in market cap. However, it’s not the only one putting up strong growth numbers, with Micron expected to see 58% revenue growth this year, and Navitas projected to record over 40% growth.

Strong free cash flow generation has been a hallmark of some of the sector’s top performers. As building blocks for AI and other developing megatrends, semiconductors remain a vital sector to track for tech investors, due to their position at the forefront of AI, strong margins, and strong free cash flow generation.

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