AI frenzy, triggering a semiconductor storm in the cloud

Although the electronic semiconductor industry has shown signs of recovery in the first quarter, there is still a significant differentiation in the performance of various technology companies. For example, NVIDIA's performance has once again exploded, while Apple's quarterly performance has declined. In terms of stock prices, NVIDIA's stock price has repeatedly hit new highs, while Intel's stock price is still trending downward.

Dolphin Jun combines industry data and the financial reports of various companies to observe the current changes in the industry:

1) Industry Outlook: Servers > Smartphones > PC Industry (based on first-quarter industry growth rates). Driven by GPT, cloud service providers have increased capital expenditures, directly driving the demand for AI servers, making it the best-performing segment in the first quarter. While the smartphone and PC industries have seen some recovery from the bottom, sustained demand has not yet been observed;

2) Company Performance: AI empowerment is the main source of current growth, focusing on AI servers, AI PCs, and AI phones.

① AI Servers: Leading the way in volume under the promotion of GPT. Currently, orders from cloud service providers are mainly concentrated on $ NVIDIA(NVDA.US) , while surprisingly, Intel's data center and AI revenue have declined in the AI wave. Currently, NVIDIA accounts for nearly 80% of the revenue in the AI server core chip market, almost in a "winner takes all" situation;

② AI PCs and AI phones: These two segmented markets are just beginning and have not yet shown significant revenue performance, but they have injected new growth expectations into the market . Among them, $ Qualcomm(QCOM.US) has teamed up with Microsoft to focus on "Copilot+PC" and has entered the PC market; $ Apple(AAPL.US) , with its original "king of machines" status, is also expected to make further progress in AI phones, looking forward to the upcoming WWDC. Although the financial reports of both companies in the first quarter were average, the market is full of expectations for their AI businessesOverall, AI remains the most focused direction in the current electronic semiconductor industry. AI servers have already made significant contributions to performance, while AI PCs and AI phones are still in the early stages. In terms of individual stocks, although NVIDIA's stock price has exceeded a thousand, its performance can still support the current valuation. As for Apple and Qualcomm, although their traditional businesses have shown signs of recovery, their overall performance is mediocre. Rising stock prices still need impressive AI performance to meet market expectations.

For a detailed analysis of the electronic semiconductor industry by Dolphin Jun, please see below:

I. End Markets in the Electronic Industry: Slow Recovery with Differentiation

Smartphones and PCs are still the largest end markets in the electronic and semiconductor industry, and the performance of these two markets directly affects the overall cyclical situation of the semiconductor industry. Currently, the smartphone and PC industries have passed the market bottom, with shipment growth rates turning positive from negative, but the performance of various brand manufacturers is still differentiated.

1.1 Smartphone Market

In the first quarter of 2024, global smartphone shipments increased by 7.7% year-on-year. Although shipments have shown some signs of recovery year-on-year, they fell back to below 300 million units in the current quarter. Overall, while the smartphone market has rebounded from the bottom, sustained demand has not yet been evident.

Looking at the performance of top global brands, Apple and Samsung saw a year-on-year decline in shipments, while Xiaomi and Transsion showed significant growth. For Apple, the market response to the new iPhone models was average, and faced intensified competition in the Chinese market.

1) Apple: Global shipments decreased by around 5 million units year-on-year, with a decrease of about 700-800 thousand units in the Chinese market. Huawei (main competitor) increased by around 1.3 million units year-on-year in the Chinese market;

2) Xiaomi: Global shipments increased by around 10.3 million units year-on-year, with an increase of around 1 million units in the Chinese market. With a low base from last year, both domestic and overseas markets have shown significant recovery.

3) Transsion: Global shipments increased by around 15 million units year-on-year, mainly driven by overseas markets.

In summary, the smartphone market is still slowly recovering, with differences in the performance of individual brands. Xiaomi and Transsion have strong alpha, mainly capturing market share from OV and other brands; Apple, although still dominating the high-end market, has lost some market share.

1.2 PC Industry MarketIn the first quarter of 2024, the global PC shipment volume reached 59.7 million units, a year-on-year increase of 4.9%. The PC industry has shown signs of recovery, but has not yet stabilized at the quarterly shipment volume of 60 million units.

Looking at the performance of various brands, HP and Apple's shipment volumes have started to recover, while Dell and Lenovo remain relatively weak.

Overall, the market is still dominated by the Windows system, with Apple's market share being less than 1%. The PC industry as a whole has emerged from the bottom, but demand has not shown a significant increase yet, requiring product innovations like AI PCs to stimulate demand.

2. Analysis of Leading Technology Companies: AI Leading the Way

By combining the financial reports of various leading technology companies, we can assess the current operating conditions of these companies and industries:

① Revenue Growth Rate: Nvidia > Micron > TSMC > Intel > AMD > Qualcomm > Apple > ASML;

② Gross Margin: Nvidia > Qualcomm > TSMC > ASML > AMD > Apple > Intel > Micron;

③ Inventory Turnover: Apple > Nvidia > TSMC > Qualcomm > AMD > Intel > Micron > ASML

Looking at the core indicators of each company, Nvidia's operating condition remains the best, with Micron also showing significant improvement in this quarter. Overall, the performance in the AI sector is significantly better than the smartphone and PC industries. Within the AI sector, Nvidia holds a relatively important position in the industry chain due to its product capabilities. AMD and Intel benefit relatively less, while TSMC and ASML are positioned upstream in the industry chain, with some lag in industry chain transmission.

2.1 Revenue Side

Nvidia and Micron have shown the best revenue growth rates and are the core companies in the current AI chain. Nvidia benefits from increased demand for the company's data center products from downstream customers, while Micron also benefits from price increases as the cycle bottoms out.

Apple and ASML are the only two companies this quarter with a year-on-year decline in revenue. The former is affected by the decline in iPhone shipments, while the latter is affected by the current lower capital expenditures of TSMC and Korean manufacturers. Although there is strong demand for AI chips, the overall semiconductor industry has not shown a significant recovery, and chip manufacturers' capital expenditure plans remain conservative.

Although AMD and Intel are also in the AI sector, their revenue growth rates are relatively low. This is mainly because: 1) PC revenue accounts for a high proportion, but the current industry growth rate remains low; 2) the performance of both companies' data center and AI businesses is relatively weak, and the competitiveness of their products is not as strong as Nvidia's

2.2 Gross Margin

NVIDIA's gross margin is also outstanding, already sitting firmly above 70%. Micron's gross margin has also seen a significant improvement, turning positive this quarter, mainly driven by the increase in storage prices.

Although Apple's revenue side is relatively weak, the gross margin continues to show an upward trend, mainly due to the increase in the proportion of high-priced models and the boost from internet services business.

The gross margins of other manufacturers have remained relatively stable, with no significant changes observed. When the semiconductor industry shifts towards an overall uptrend, there is a chance for all manufacturers to see a comprehensive increase in gross margins.

2.3 Inventory Situation

From the perspective of the industry chain, inventory data is also an important indicator of the current supply and demand relationship for the industry and companies.

Simply looking at the rise in inventory may not necessarily indicate weak demand and should be viewed in conjunction with revenue. For example, NVIDIA's inventory has been continuously increasing for 10 consecutive quarters, but due to the explosive growth in company revenue, the inventory/revenue ratio has actually dropped to a historic low. Even though stocking up is being tightened, there is still a situation of supply shortage.

Currently, the inventory of most technology companies remains relatively high, which also aligns with the continued sluggishness of the semiconductor cycle.

Looking closely at the situation of various technology companies, 1) Micron's inventory situation has shown significant improvement this quarter, mainly because the storage industry has started to see price increases; 2) ASML's inventory continues to rise, mainly because the company, despite being in the AI industry chain, is positioned at the upstream end, relatively later in the cycle (downstream customers' capital expenditures are relatively weak); 3) Although Apple's shipments are weak, Apple has strong supply chain management capabilities and has not shown significant inventory issues.

III. Key Players in the AI Track: NVIDIA Leads, Edge Players Enter

AI is still the best-performing field at present, roughly driving industry and industrial changes in both "vertical" and "horizontal" directions.

① Vertical - Industry Chain Direction: Terminal applications like GPT - Cloud service providers - Data centers and AI core chips - Semiconductor manufacturing and upstream. The explosive popularity of GPT drives cloud companies to increase capital expenditure, leading to the layout of data centers and chip procurement, thereby driving semiconductor manufacturing and upstream industries;②Horizontal - Industry Direction: AI Servers-AI PC-AI Phones. With the surge in demand for data centers and AI, the market is beginning to expand from the industry level to PC and mobile phone terminals, reaching a larger user base.

3.1 Capital Expenditure of Cloud Service Providers

Driven by GPT, the recent capital expenditure of US tech giants continues to rise, further boosting market expectations for the AI track. In the first quarter, Google, Microsoft, and Amazon further increased their capital expenditure. The total capital expenditure of the four US cloud providers (Google, Microsoft, Amazon, Meta) reached $47.6 billion, a year-on-year increase of 39%, and a consecutive increase on a quarterly basis.

3.2 Data Centers and AI Core Chips

Driven by the increase in capital expenditure of cloud service providers, the market size of data centers and AI core chips continues to rise. Dolphin Jun has aggregated the relevant revenues of major manufacturers (NVIDIA, AMD, and Intel). In the first quarter, the market for data centers and AI core chips grew to $28.3 billion, a year-on-year increase of 14.6%, mainly benefiting from chip purchases by cloud service providers.

Although the overall market demand is increasing, not all three companies are benefiting equally, with a noticeable "temperature difference" among them. NVIDIA received the majority of chip orders, Intel's revenue declined instead of rising, reflecting NVIDIA's leading product strength .

First-quarter revenue performance of data center and AI businesses: ①NVIDIA revenue $22.6 billion, a year-on-year increase of 426.7%; ②AMD revenue $2.3 billion, a year-on-year increase of 80.5%; ③Intel revenue $3.4 billion, a year-on-year decline of 9.1% .

Considering the industry and inventory situation, NVIDIA's current products are still in short supply. While the industry has a growth beta, NVIDIA demonstrates a stronger alpha performance.

3.3 Semiconductor Manufacturing and Upstream

In the AI industry chain, as NVIDIA currently possesses a strong alpha, being a supplier to NVIDIA will also benefit relatively. Among US tech stocks, NVIDIA is an important customer of TSMC and Micron.

TSMC: Although the new Apple devices did not sell well, affecting the revenue increase of the 3nm process, the demand for AI chips brought by NVIDIA filled the capacity of advanced processes below 7nm .The company's revenue from high-performance computing reached a new high this quarter, reaching USD 8.68 billion, with a revenue share of 46%. Driven by NVIDIA's shipments, the company's performance in the first quarter improved year-on-year, but was still affected by other downstream application markets.

Micron: Currently, AI servers require HBM (High Bandwidth Memory), which saves surface area and enables faster data transfer. Micron has become one of the main suppliers of HBM3E for NVIDIA, and the growth in NVIDIA shipments has helped improve the company's performance. With the bottoming out and recovery of the storage cycle, coupled with HBM shipments, Micron's performance has turned around from a loss to a profit in the first quarter.

3.4 AI PC & AI phone

With GPT driving the growth of cloud services, AI's focus is shifting to the end sides of PCs and smartphones. For AI PCs and AI phones, the biggest changes lie in stronger AI capabilities and faster speeds, with the key point being the need to add NPU or GPU in the processor.

Some tech giants have already entered the game:

1) Qualcomm: Recently, Microsoft launched Copilot+PC, which is equipped with Qualcomm's Snapdragon X Elite chip. Qualcomm, originally rooted in the mobile chip market, is taking the lead in this AI PC segment, which is expected to bring the company another growth opportunity.

2) NVIDIA: The company announced that Copilot+ will not be limited to mobile PCs with NPU, but will also land on laptops equipped with RTX 40 series graphics cards. In the future, the company is also expected to introduce chips that combine Arm Cortex CPU cores with its Blackwell GPU cores, further targeting the AI PC market.

3) Apple: Although the company has not released any new AI products, market expectations are high for the upcoming WWDC24, anticipating new AI developments from the company. Apple is expected to incorporate multiple AI features in the newly released iOS18, further evolving the iPhone and Mac towards AI phones and AI PCs.

Retrospective on Dolphin Research Industry Articles:

March 8, 2024 " Continued Soaring of NVIDIA and AMD, Is There a Bubble?"

December 7, 2023 " Consumer Electronics 'Climbing Out of the Pit': Xiaomi's Recovery, Apple's Toughness"

March 7, 2023 " NVIDIA: After the Magical Performance, Will There Really Be a Big Turnaround?"2022 December 29th "Semiconductor Avalanche? True Elasticity Only After the Most Brutal Decline" (https://longportapp.com/en/topics/3805995)"

2022 June 24th "Cancel Orders, Cancel Orders, Cancel Orders, Is the Semiconductor Industry Really Going to 'Change Its Fate'?" (https://longbridgeapp.com/topics/2971045)"

2022 June 17th "Consumer Electronics 'Mature', Apple Stands Firm, Xiaomi Struggles" (https://longbridgeapp.com/topics/2917540)"

2022 June 6th "Major Shake-up in US Stocks, Were Apple, Tesla, and NVIDIA Wrongly Killed?" (https://longbridgeapp.com/topics/2758465)"

Recent Financial Reports of Industry Chain Companies

2024 May 23rd "NVIDIA: The Strongest Stock in the 'Universe', Non-stop Gift Packages" (https://longportapp.cn/zh-CN/topics/21312080?app_id=longbridge)"

2024 May 23rd "NVIDIA: Sovereign AI Will Bring in Billions in Revenue (FY25Q1 Earnings Call)" (https://longportapp.cn/topics/21312783?app_id=longbridge)"

2024 March 21st "Micron: Mass Production of HBM3E, Supplying NVIDIA (2QFY2024 Earnings Call Summary)" (https://longportapp.cn/zh-CN/topics/20087214)"

2024 March 21st "Micron: Storage Prices Soar, Unveiling the HBM3E Battle" (https://longportapp.cn/zh-CN/topics/20043651)"

Risk Disclosure and Statement of this Article: "Dolphin Investment Research Disclaimer and General Disclosure" (https://support.longbridge.global/topics/misc/dolphin-disclaimer)"