To The Moon

The earnings season is nearing its end, and major semiconductor companies have disclosed their 2Q reports.

Overall, $Philadelphia Semiconductor Index(SOX)$ fell 31% in 2022, the largest decline since 2008.

Specifically, the upstream equipment factory $ASML Holding NV(ASML)$ fell 38% in the year, the design factory $NVIDIA Corp(NVDA)$ fell 47%, the storage giant $Micron Technology(MU)$ fell 41%, and the manufacturing factory $Taiwan Semiconductor Manufacturing(TSM)$ fell 31%, making the entire semiconductor industry very miserable in 2022.

But in this case, there are also survivors. For example, $ON Semiconductor(ON)$ stock price rose 1.6% this year against the trend. Considering the industry and the U.S. stock bear market, such an achievement is amazing.

This article will analyze companies according to the upstream, midstream and downstream of semiconductor, and hope to provide insights for all readers.

1. Upstream Equipment Factory - $ASML Holding NV(ASML)$ vs $Applied Materials(AMAT)$

(1). ASML - the dominant player in the field of photolithography

In the second quarter of this year, ASML reported revenue of 5.43 billion euros, exceeding the company's guidance ceiling of 5.3 billion and far better than the 5.26 billion expected by Bloomberg analysts.

However, ASML expects third-quarter guidance of 5.1-5.4 billion euros, less than the 6.48 billion expected by the market. At the same time, ASML lowered its 2022 revenue growth rate to 10% from the previous 20%.

The main reason for the downward revision of the earnings guidance is the supply chain shortage. ASML has chosen to shift the testing work to the chip factory in order to improve the speed of supply.

This move will cause a delay in revenue recognition 2023 from 1 billion euros to 2.8 billion euros of delayed revenue recognition. If the revenue of 1.8 billion is put to 2022, ASML's revenue growth is still 20%, in line with expectations.

(2) Applied Materials

The latest earnings report showed a revenue growth rate of 5.2%, and revenue growth for the next quarter is expected to be around 8.6%.

During the earnings call, the company's CEO said that Applied Materials' products are still in short supply and the backlog of orders continues to climb high, so increasing shipments will remain a priority.

However, the global economy is at risk of recession, coupled with the weakening of the consumer electronics market such as cell phones and computers, storage plant customers are beginning to postpone expansion plans, and capital expenditures in 2023 will be lower than in 2022.

(3) Summary

From this perspective, although the performance growth rate of semiconductor equipment factories in 2022 has been revised downward, the main reason comes from supply chain shortage, not a sharp decline in downstream customer demand.

However, the equipment factory performance will still be under pressure in 2023.

The 2 equipment maker tied.

2. Midstream - $Taiwan Semiconductor Manufacturing(TSM)$ vs$Micron Technology(MU)$

(1) King of global foundry - TSMC

TSMC's 2Q results were excellent, with revenue growth of 36.6% year-over-year.

3Q revenue is expected to be between $19.8-20.6 billion, with year-over-year growth of 33.1%-38.5%, far exceeding analysts' expectations of $18.44 billion.

Management again emphasized that revenue growth in 2022 will be around 30%. This is the fastest revenue growth rate for TSMC in the last 10 years.

TSMC's high growth performance is also very rare in the semiconductor sector.

In terms of valuation, TSMC is currently trading at a dynamic P/E ratio of 17x, close to the level seen in 2018 during the semiconductor down cycle.

(2) Storage giant -- Micron

$Micron Technology(MU)$ has been the strongest cyclical stock in the semiconductor sector. Performance is very volatile, with annual profits drifting as shown in the following chart.

According to Micron's earnings guidance, the company's revenue will turn from positive to negative in the next quarter, confirming that the semiconductor down cycle officially begins:

While PC and cell phone demand showed clear signs of decline, the data center business grew by double digits sequentially and by more than 50% year-over-year.

Following the pessimistic earnings report, Micron's stock price did not plunge, but instead rebounded. Perhaps because the pessimistic expectations have been reflected in the previous share price, and subsequently if the fundamentals do not deteriorate beyond expectations, Micron's worst time may have passed.

(3) Summary

In general, the midstream manufacturing companies have been slightly weaker than the upstream companies.

TSMC has outperformed Micron with a very high revenue growth rate.

3. Downstream- $NVIDIA Corp(NVDA)$ vs $AMD(AMD)$ vs $Intel(INTC)$vs $ON Semiconductor(ON)$

(1) Nvidia goes into exile

Nvidia's second quarter results were very poor, with revenue of just $6.7 billion, well below market expectations of $8.1 billion.

3Q guidance is even more pessimistic, with revenue growth expected to be a negative 17%, well below the 50% growth rate seen at the beginning of the year.

Referring to the last down cycle, Nvidia's stock price rebounded after the decline in inventory.

During the industry downturn cycle, inventory data still deserves investors' attention:.

NVIDIA has fallen sharply, but old rival AMD still seems to be springing to life.

(2) AMD is alive

$AMD(AMD)$ 2Q revenue is $6.55 billion, up 70% year-on-year, slightly exceeding market expectations.

AMD expects revenue for the 3Q of 2022 to be about $6.7 billion, up or down $200 million.

AMD expects full-year 2022 revenue of approximately $26.3 billion, up or down $0.3 billion.

This is approximately 60% growth over 2021, driven by growth in the data center and embedded segments.

Compared to Nvidia's less-than-guidance results, AMD has maintained its full-year target of $26.3 billion unchanged since the beginning of the year.

AMD's another old rival, Intel, is having an even tougher time.

(3) Intel lags behind

$Intel(INTC)$ second-quarter revenue of $15.3 billion, down 17% year-on-year.

Intel adhere to the IDM model, that is, the chip design and manufacturing are completed by its own company.

When TSMC and Samsung's manufacturing process into the 3nm era, Intel is still stuck in the 10nm era, with its 7nm manufacturing process mass production repeatedly delayed.

Even Nvidia in the semiconductor down cycle, it is expected to begin another new round of up cycle.

But Intel has been sinking at the bottom for long enough that the market has lost patience and confidence.

(4) The strongest semiconductor company under this background- ON

$ON Semiconductor(ON)$ is the world's leading supplier of power semiconductors and the world's number one supplier of automotive image sensors.

As we all know, although consumer electronics demand fell sharply, the automotive and industrial markets remain strong, especially the rapid spread of new energy vehicles.

Another fist product of ON Semiconductor is the third-generation semiconductor material SiC.

ON Semiconductor said the company will achieve $4 billion in SiC revenue over the next three years, achieving more than $1 billion in revenue in 2023.

The unique automotive chip track has enabled ON Semiconductor to maintain strong growth, with revenue growth of 25% in the second quarter of this year and an expected growth rate of 18.8%-24.6% in the third quarter.

Compared to semiconductor peers such as Nvidia, it is considered a high growth rate.

ON Semiconductor's strong performance is not accompanied by a high valuation. Although the share price hit a record high, but the P/E ratio is still at the low level in recent years:

(5) Summary

In general, downstream semiconductor companies performed the worst due to lower demand.

ON Semiconductor's unique business structure and performance beated other companies.

Conclusion

The winner of semiconductor industry is $Taiwan Semiconductor Manufacturing(TSM)$ and $ON Semiconductor(ON)$ . 

Except for the tied upstream companies $ASML Holding NV(ASML)$ and $Applied Materials(AMAT)$ , other companies are all losers in this environment.

Based on semiconductor companies' Q2 reports and earnings guidance, this industry correction will continue, at least until the end of 2022. The next 2 quarters will continue to be dismal for semiconductor companies.

In the first half of 2023, the semiconductor industry is likely to bottom out.

Although it has low performance at the moment, pessimistic expectations will be priced in the stock price in advance, referring to the historical semiconductor adjustment time, often in about 4 quarters.

The future development potential of semiconductors is huge, and historically, the bull market is longer than the bear market. 2022's crash will be a rare semiconductor investment opportunity.