This earnings season, it will be difficult for chip giants to replicate last year

In recent weeks, the Fed's interest rate cut expectations have been frustrated and U.S. stocks have drifted away from their highs, the earnings season has become more and more important for U.S. stocks, and the performance of semiconductor stocks is the key to determining the trend of U.S. stocks.

Recently, Citi analysts Christopher Danely and Kelsey Chia released a report saying that the performance and guidance of semiconductor stocks in the first quarter of 2024 will be more flat, unable to replicate the AI results in 2023, partly because the semiconductor bellwether AMD will not raise the revenue forecast of the AI part until the summer of this year, and the performance and guidance of analog chip companies will also be in line with expectations.

Citi believes that the stabilization of PC and mobile phone market demand is beneficial to Intel and AMD. The outlook for the data center business is mixed, with the advent of AI leading to a surge in data center spending, partially offsetting the weakness of traditional servers, and data center spending (accounting for 22% of total semiconductor demand) is expected to be affected by the replacement of traditional data center CPUs with GPUs.

Citi stressed that although the current valuation of semiconductor stocks is at a high level and the performance in the first quarter is relatively flat, there is still room for upside driven by AI demand, and it is not appropriate to sell semiconductor stocks based solely on valuation at this stage, and continue to be optimistic about the prospects of semiconductor stocks.

Citi expects semiconductor sales in 2024 to grow 11% year-on-year, driven by memory chips and AI, of which memory chip sales will increase by 66% year-on-year, and AI sales will increase from $40 billion in 2023 to $90 billion in 2024. In terms of memory chips, Micron is still the first choice, and it is also optimistic about AMD, Broadcom, Analog Devices, Microchip, etc.

AMD's earnings report may be relatively flat

Market analysts generally forecast that AMD is expected to achieve earnings of $0.61 per share and revenue of $5.45 billion, down 12% from the previous quarter.

Citi pointed out that the first quarter is the traditional off-season for the chip industry, and it is expected that the performance of the entire semiconductor industry in the first quarter will be relatively flat, and it will not return to seasonal growth until the second quarter. AMD, as one of the leading semiconductor companies, will also be affected by the industry's off-season, and investors are mainly worried about whether Microsoft will cut the deployment of AMD's next-generation AI/HPC accelerator MI300X:

We expect Q1 AMD2024 revenue of $5.4 billion (-12% sequentially), in line with consensus expectations. We expect Q1 2024 earnings per share of $0.39, below the consensus estimate of $0.40 due to higher taxes and fees.

We expect AMD to set its Q2 2024 revenue guidance of $6.0 billion (up 11% QoQ), higher than the consensus estimate of $5.64 billion (up 4% QoQ) due to higher gaming sales (27% of 2023 sales). We expect second-quarter 2024 earnings per share of $0.55, above the consensus of $0.50, due to higher sales and gross margin.

AMD's MI300 chips are in strong demand, and even if Microsoft reduces orders, it will be filled by other customers, but negative expectations in the market may still weigh on AMD in the first quarter.

Citi still has a "buy" rating on AMD and reiterates its price target of 192, saying that its server market share increase and MI300 chip ramp-up in the second half of the year will drive strong expectations.

Wells Fargo's team of analysts led by Aaron Rakers also pointed out in the report that their current focus is mainly on the upside of AMD's next-generation AI/HPC accelerator MI300X. Analysts are forecasting up to $8 billion in revenue from AMD's MI300 family of products, a significant improvement from previous forecasts.

Wells Fargo analysts believe that the market needs to focus on the partnership between AMD and Microsoft and the huge business value that the MI300X brings, while AMD has established a stable relationship with Samsung, giving an "overweight" rating and setting an AMD price target of $190.

The demand for AI chips and storage is hot

Citi believes that despite the already high valuation of the semiconductor industry, the semiconductor industry is still expected to continue to boom due to strong demand for artificial intelligence and memory chips, and the AI market is expected to achieve more than 100% growth in 2024, and DRAM memory chips will also increase by 68% year-on-year:

The Philadelphia Semiconductor Index (SOX) has risen more than 120% from its lows in late 2022, and its price-to-earnings ratio (NTM P/E) for the next 12 months has nearly doubled from 16x to 31x. Many investors are concerned that current valuations are unsustainable and excessive, but we believe AI-driven growth can justify an increase in valuation multiples.

Looking at data center demand (22% of total semiconductor demand), Citi said that traditional CPUs are being replaced by GPUs, which will affect Intel and AMD's server business. But in the long term, AI will transform data center spending.

We expect AMD's server business to decline by 8% in the first quarter of 2024 and Intel's traditional server business to decline by 14%.

AMD expects a seasonal decline in its server business, while Intel expects its server business to be at the low end of the seasonal decline. We expect AMD's data center business to grow 1% sequentially in Q1 2024, while Intel's data center business will decline 12%.

Citi said that AI and memory chips will account for a total of 15% of the semiconductor market and become the main driving force for the growth of the industry, Micron Technology is still the first choice, in addition to AMD, Broadcom, Analog Devices, Microchip, etc.:

GlobalFoundries: Q1 2024 revenue of $1.55 billion (-16% sequentially), slightly below the consensus of $1.52 billion (-18% sequentially) due to lower prices.

As the semiconductor industry adjusts and stabilizes, we expect GF to set its second-quarter 2024 revenue guidance of $1.6 billion (up 3% sequentially), above the consensus estimate of $1.57 billion (up 3% sequentially). We expect second-quarter 2024 earnings per share of $0.24, above the consensus of $0.17, due to higher sales and gross margin. We maintain a Neutral rating and a price target of $56.

Intel Corp: We expect Intel to report Q1 2024 revenue of $13 billion (down 16% sequentially), above the consensus estimate of $12.71 billion (down 18% sequentially) due to strong laptop CPU sales. We expect first-quarter 2024 earnings per share of $0.04, above the consensus estimate of a loss of $0.15, due to higher sales and gross margin.

We expect Intel to set its second-quarter 2024 revenue guidance of $13.5 billion (up 4% sequentially), below the consensus estimate of $13.64 billion (up 7% sequentially) due to lower data center and artificial intelligence (DCAI) revenue. We expect second-quarter 2024 earnings per share of $0.12, above the consensus of $0.08, due to improved gross margin. It has a "neutral" rating on Intel and a price target of $40, which is equivalent to 20 times its expected 2025 earnings per share.

Microchip Technology: Given its conservative guidance, we expect Microchip Technology to report fourth-quarter fiscal 2024 revenue of $1.35 billion (-24% sequentially), above guidance and consensus guidance of $1.33 billion (-25% sequentially). We expect Q4 fiscal 2024 earnings per share of $0.58, above the consensus of $0.52, due to higher sales and margins.

As we believe that Microchip's shipments have been well below demand and are expected to improve performance, we expect to set revenue guidance of $1.4 billion for the first quarter of fiscal 2025 (up 4% sequentially), above the consensus of $1.34 billion (up 1% sequentially). Due to higher sales, we expect Q1 FY2025 earnings per share of $0.62, above the consensus estimate of $0.56. We have a Buy rating and a price target of $100.

NXP Semiconductors NV: NXP is expected to report revenue of $3.15 billion in the first quarter of 2024 (-8% sequentially). This was broadly in line with the consensus estimate of $3.13 billion (down 8% sequentially). We expect first-quarter 2024 earnings per share of $2.73, in line with consensus expectations.

As we expect NXP's automotive business to adjust due to excess inventory, we expect to set its second-quarter 2024 sales guidance of $2.8 billion (-11% sequentially), below the consensus of $3.13 billion (flat). We expect second-quarter 2024 earnings per share of $1.81, below the consensus estimate of $2.67, due to lower sales and gross margin.

As we see expected downside risks, we have a "Sell" rating and a price target of $150 on NXP, which is equivalent to 17x 2025 EPS and below the peer average.

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