This earnings season, it's difficult for chip giants to replicate last year

In recent weeks, as the Fed's rate cut expectations have been repeatedly frustrated and the US stock market has been moving further away from its highs, the earnings season has become increasingly important for US stocks, with semiconductor stocks playing a key role in determining the direction of the US stock market.

Recently, Citigroup analysts Christopher Danely and Kelsey Chia released a report stating that the first quarter of 2024 will see a more subdued performance and guidance for semiconductor stocks, unable to replicate the AI achievements of 2023. Part of the reason is that semiconductor bellwether AMD will not raise revenue expectations for the AI segment until this summer, and the performance and guidance of simulation chip companies will also meet expectations.

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

Citigroup emphasizes that although semiconductor stock valuations are currently high and first-quarter performance is relatively flat, there is still room for upside driven by AI demand. At this stage, it is not advisable to sell semiconductor stocks solely based on valuations, and the outlook for semiconductor stocks remains positive.

Citigroup forecasts that semiconductor sales in 2024 are expected to grow by 11% year-on-year, driven by memory chips and AI, with memory chip sales expected to grow by 66% year-on-year, and AI sales increasing from $40 billion in 2023 to $90 billion in 2024. In terms of memory chips, Micron remains the top choice, and other favorable options include AMD, Broadcom, NVIDIA, and MediaTek.

AMD's Earnings Report May Be Flat

Market analysts generally predict that in the upcoming new quarter earnings report, AMD is expected to achieve earnings per share of $0.61 and revenue of $5.45 billion, a decrease of 12% from the previous quarter.

Citigroup points out that the first quarter is traditionally a slow season for the chip industry, and the overall performance of the entire semiconductor industry in the first quarter is expected to be relatively flat, with a return to seasonal growth expected in the second quarter. As one of the leading companies in the semiconductor industry, AMD's performance will also be affected by the industry's slow season, and investors are mainly concerned about whether Microsoft will cut back on the deployment of AMD's new generation AI/HPC accelerator MI300X:

We expect AMD's Q1 2024 revenue to be $5.4 billion (down 12% QoQ), in line with market expectations. Due to higher taxes, we expect earnings per share for the first quarter of 2024 to be $0.39, slightly below the market consensus of $0.40.

With increased game sales (accounting for 27% of 2023 revenue), we expect AMD to guide second-quarter 2024 revenue to $6 billion (up 11% QoQ), higher than the market consensus of $5.64 billion (up 4% QoQ). Due to higher revenue and gross margins, we expect earnings per share for the second quarter of 2024 to be $0.55, higher than the market consensus of $0.50Citigroup still rates AMD as a "buy" and reiterates a target price of 192, stating that its market share in the server market in the second half of this year and the ramp-up of the MI300 chip will drive strong expectations.

The analyst team led by Aaron Rakers at Wells Fargo also pointed out in their report that their focus is mainly on the upside potential of AMD's new generation AI/HPC accelerator MI300X. Analysts predict that AMD will generate up to $8 billion in revenue from the MI300 series, a significant increase from previous forecasts.

Wells Fargo analysts believe that the market needs to focus on the cooperation between AMD and Microsoft and the significant commercial value brought by MI300X. Meanwhile, with a stable partnership established between AMD and Samsung, they have given a "hold" rating and set AMD's target price at $190.

Hot Demand for AI Chips and Storage

Citigroup believes that despite the high valuation of the semiconductor industry, the strong demand for AI and storage chips will continue to drive prosperity. It is expected that the AI market will achieve over 100% growth in 2024, and DRAM memory chips will also grow by 68% year-on-year:

The Philadelphia Semiconductor Index (SOX) has risen by over 120% from its low point at the end of 2022, and its forward 12-month price-to-earnings ratio (NTM P/E) has almost doubled from 16 times to close to 31 times. Many investors are concerned that the current valuation is unsustainable and too high, but we believe that AI-driven growth can prove that the increase in valuation multiples is reasonable.

Looking at data center demand (which accounts for 22% of total semiconductor demand), Citigroup states that traditional CPUs are being replaced by GPUs, which will impact Intel and AMD's server business. However, in the long term, AI will drive the transformation of 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 its server business to decline seasonally, while Intel expects its server business to be at the low end of seasonal decline. We expect AMD's data center business to grow by 1% quarter-on-quarter in the first quarter of 2024, while Intel's data center business will decline by 12%.

Citigroup states that AI and storage chips combined will account for 15% of the semiconductor market share and become the main driving force behind industry growth. Micron Technology remains the top pick, and they also have a positive outlook on AMD, Broadcom, NVIDIA, and MediaTekWith the semiconductor industry stabilizing, we expect that GeXin will guide its second-quarter revenue for 2024 to be $1.6 billion (a 3% increase from the previous quarter), higher than the market's general expectation of $1.57 billion (a 3% increase). Due to increased sales and gross margin, we anticipate earnings per share of $0.24 for the second quarter of 2024, higher than the market's general expectation of $0.17. We maintain a "neutral" rating on it with a target price of $56.

Intel Corp: Due to strong sales of laptop CPUs, we expect Intel to report first-quarter revenue of $13 billion in 2024 (a 16% decrease from the previous quarter), higher than the market's general expectation of $12.71 billion (an 18% decrease). Due to increased sales and gross margin, we anticipate earnings per share of $0.04 for the first quarter of 2024, higher than the market's general expectation of a loss of $0.15 per share.

Due to declining revenue from data centers and AI (DCAI), we expect Intel to guide its second-quarter revenue for 2024 to be $13.5 billion (a 4% increase from the previous quarter), lower than the market's general expectation of $13.64 billion (a 7% increase). With an improved gross margin, we anticipate earnings per share of $0.12 for the second quarter of 2024, higher than the market's general expectation of $0.08. We give Intel a "neutral" rating with a target price of $40, equivalent to 20 times the expected earnings per share in 2025.

Microchip Technology: Considering Microchip Technology's guidance is conservative, we expect it to report fourth-quarter revenue of $1.35 billion in 2024 (a 24% decrease from the previous quarter), higher than the guidance and the market's general expectation of $1.33 billion (a 25% decrease). With high sales and profit margins, we anticipate earnings per share of $0.58 for the fourth quarter of 2024, higher than the market's general expectation of $0.52.

As we believe that Microchip Technology's shipments have consistently been far below demand, potentially leading to some improvement in performance, we expect it to guide its first-quarter revenue for the 2025 fiscal year to be $1.4 billion (a 4% increase from the previous quarter), higher than the market's general expectation of $1.34 billion (a 1% increase). With high sales, we anticipate earnings per share of $0.62 for the first quarter of the 2025 fiscal year, higher than the market's general expectation of $0.56. We give it a "buy" rating, with a target price of $100.

NXP Semiconductors NV: It is expected that NXP will report first-quarter revenue of $3.15 billion in 2024 (an 8% decrease from the previous quarter), roughly in line with the market's general expectation of $3.13 billion (an 8% decrease) We expect earnings per share to be $2.73 in the first quarter of 2024, in line with market expectations.

Due to our anticipation of NXP Semiconductors' automotive business adjusting due to inventory excess, we project that they will guide second-quarter 2024 revenue to be $2.8 billion (down 11% QoQ), lower than the market's general expectation of $3.13 billion (flat). With the decrease in revenue and gross margin, we anticipate earnings per share of $1.81 in the second quarter of 2024, below the market's general expectation of $2.67.

Considering the anticipated downside risks, we rate NXP Semiconductors as "sell" with a target price of $150, equivalent to 17 times the expected earnings per share in 2025, below the industry average.