Semiconductors have had a great year, with the $Philadelphia Semiconductor Index(SOX)$ soaring 63% to a record high! $NVIDIA Corp(NVDA)$ has soared 237%, with a market cap of over US$1.2 trillion!
After the surge, where will semiconductors go next year?
From the fundamental perspective, AI demand remains robust.
Limited by production capacity, Nvidia's GPU remains in short supply. Analysts predict that the company's revenue growth for fiscal year 2025 (ending January 31, 2025) will still be as high as 56.4%.
$Advanced Micro Devices(AMD)$ expects its AI GPU revenue to reach US$2 billion in 2024, and Intel will also launch its AI chip Gaudi 3 to compete with Nvidia's H100.
Tech giants will certainly not put all on Nvidia. So it's expected that AMD and $Intel(INTC)$ will be able to grab a slice of the GPU market and contribute to new revenue growth.
Besides strong AI demand, the mainstream chip market - mobile phone and computer shipments - is also expected to rebound. On the one hand, the industry continues to de-stock in 2023, and combined with the third quarter reports of companies like $XIAOMI-W(01810)$ and Intel, it looks like the inventory de-stocking phase is nearing completion, and the industry will enter the re-stocking phase next year.
On the other hand, AI-enabled smartphones and AI PCs are entering the market stage, which is expected to increase chip unit prices and usage.
Intel and $Lenovo Group Ltd.(LNVGF)$ executives have expressed their strong optimism about AI PCs, predicting that they could usher in a new boom for the PC market.
In addition, $Qualcomm(QCOM)$ will also launch AI PC chips based on $ARM Holdings Ltd(ARM)$ architecture. Typically, Qualcomm's main market is in mobile phones, and ARM architecture is mainly used in mobile phones. The launch of ARM-based PC chips could potentially generate new revenue growth for both chipmakers.
The automotive chip market is still benefiting from the increasing adoption of new energy vehicles, while the industrial market is currently weak. However, considering that the chip industry is concentrated in the consumer segment, 2024 is expected to be a year of recovery and growth for the semiconductor industry as a whole!
Looking at the quarterly reports of chip giants, the performance of many companies has already reversed. For example, $Micron Technology(MU)$ 's FY24Q1 (ending November 30) revenue growth rate turned positive at 15.7%, and it is expected that the next quarter's revenue growth rate will be as high as 43.5%.
Qualcomm expects its FY24Q1 fiscal quarter (corresponding to the fourth quarter of this year) revenue growth rate to be around 0.4%, compared with a 24.3% year-on-year decline in the previous quarter:
The fundamental reversal is certain, but due to the long semiconductor supply chain, in the recovery process, chip design companies usually lead the reversal, followed by wafer manufacturing, and finally equipment companies.
Therefore, manufacturing and equipment companies have lagged behind the index this year, such as $Taiwan Semiconductor Manufacturing(TSM)$ 's year-to-date gain of only 29.77% and $ASML Holding NV(ASML)$ 's only 35.69%.
Judging from TSMC's monthly sales released this year, sales in November decreased by 7.5% year on year, and increased by 15.6% in October. Therefore, TSMC's recovery is relatively slow:
Although the recovery process has been different and long overdue, it has finally arrived. The performance of Nvidia, AMD, Intel, Qualcomm ushered in a reversal, and TSMC, which provides contract manufacturing services to them, will definitely benefit. As wafer foundry companies' performance returns to growth, it will drive the demand for ASML's lithography machines.
In terms of valuation, due to the obvious cyclical nature of the semiconductor industry, we do not use the P/E ratio to measure valuation levels. The P/B ratio is more appropriate. Currently, the SOX index is at 4.9 times, and there is still room for improvement.
Moreover, looking at the history since 2002, with the progress of semiconductor technology, the SOX valuation has been gradually increasing. If there is a new round of prosperity for semiconductors in 2024-2025, this time the valuation may exceed the previous high:
Both fundamentals and valuation have room for improvement, but for individual stocks, the rise and fall next year may diverge.
As for NVIDIA, this year's gain has been as high as 237%, and its valuation is also at a historical high. Considering investors' high expectations for NVIDIA next year, and facing competition from AMD and Intel, if AI demand slightly falls short of expectations, NVIDIA's earnings in 2024 may significantly decline.
On the contrary, for semi giants that have smaller gains this year or are the downstream of semiconductors, both their valuation and performance will have more opportunities in 2024.
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