20 January 2023 - Our weekly market round-up with our public market team: Inge Heydorn, Partner; Jenny Hardy, Portfolio Manager; and Nejla-Selma Salkovic, Analyst. This week covers a market update, semicap equipment, Netflix results, and the gaming market. Subscribe to our Tech Thoughts Newsletter for weekly updates on our latest news and insights.
Demand for semi capital equipment spending is holding up well, with companies still seemingly looking to long-term demand drivers, despite the ongoing weakness and inventory correction in consumer semis.
Tech companies are continuing to reduce headcount after aggressive hiring in the pandemic, perhaps an early indicator of some softness of demand (though we’re largely in wait and see mode ahead of Q4 reporting)
Gaming demand continues to be weak.
We have not made any major changes in the portfolio holdings this week. We are now focused on building our estimates and upside/downside scenarios for 4Q and 2023 for our holdings.
Onto the details..
Semis – capacity utilisation falling in Q1 – timing and shape of inventory correction/recovery still uncertain
Davos this week. Not much for us in tech but a few CEOs out speaking: Intel CEO Pat Gelsinger talking of “just in case” supply chains and requiring more resilience and diversification (away from Taiwan) – “build the fabs where we want them”. It’s unsurprising and in line with Intel’s push to increase its own foundry business (and to try to reverse the quite striking share loss to TSMC over the past decade).
UMC (a Taiwanese foundry focused on more mature node manufacturing), reported its Q4 results (having already reported solid sales in the quarter in its monthly releases). In the details, there was impressive growth in its auto segment, which was up 82% yr/yr in 2022 and was guided to remain a long-term growth driver for the business (and bodes well for our holdings in Infineon and NXP). They acknowledged still high inventory levels, with 1st quarter capacity utilisation guided to 70% (even lower than we expected) – we think mainly related to the ongoing PC inventory issues – with the same hope as TSMC that this should improve in H2. While auto demand is still strong, we believe capacity can’t easily be switched from consumer, where the inventory correction may be even worse than we had thought.
Positively for the long-term return dynamics and visibility in the semis sector, management commented that long term agreements (relating to capacity and pricing) are becoming more commonplace in the sector.
Super Micro’s momentum continues. The company is raising its guidance for the December quarter on all levels. Sales now expected to total $1.8bn from earlier $1.75bn but the big swing is on the EPS side which has been lifted by 10% from earlier guidance to USD3.07-3.22. We expect the earnings lift was due to better supply of key components. Top line holding up is a small positive sign for the Cloud server market where there has been some concern of a slowdown. We think it’s benefitted from Genoa and Hopper releases.
Texas instruments CEO stepped down in a somewhat surprising move.
Semicap equipment showing still strong demand and China spending at trailing edge
In semicap equipment, ASMI positively profit warned which is good news for our holdings in the sector. ASMI positively updated their guide at the end of November on a lower impact from China restrictions, but actual Q4 results came in even better.
Orders were also very strong at EUR820m equating to a very good book to bill (well above 1). It’s good news because it means forward looking order metrics should look good across the board (while there are niches in semicap and memory players are likely to be a bit more vulnerable, it’s rare to see a huge divergence between players), and it means China likely did continue spending at pace through December (given the update was end of November) – which is positive for everyone.
Also worth noting strong demand on Silicon Carbide (as it relates to EV and Infineon)
Staying on semi capex, Hua Hong semi has reportedly had state backing or a $6.7bn fab specifically targeted at mature nodes, which is in line with what we’ve said previously thatChina is likely to want to build up critical supply in trailing edge nodes, which are not limited by US trade restrictions and which would put them in a strong strategic position in global semis (given this is still where the critical shortages in autos and industrials exist).
UMC guided to capex spend of $3bn in 2023 up from $2.7bn in 2022
Digitimes reported Disco (which provides wafer cutting tools at the back end of the semicap equipment chain) is increasing its production capacity by 40% – likely – as with ASMI – driven somewhat by its power semis exposure.
Employee cuts in tech continue, but a bullish message from ServiceNow at Davos.
Microsoft’s CEO Satya Nadella announced in a letter to employees (And related 8-K) that it would lay off 10,000 employees, or 5% of its workforce, with a restructuring charge of $1.2bn. As we commented last week – this comes amongst a significant tally of tech companies over the past several months announcing cuts. Google this morning announcing 12,000 job losses.
In Davos, forever bullish ServiceNow CEO Bill McDermott said there was “not a chance” of a recession for IT spending… we’recautiously optimistic that areas of software (like ServiceNow and Workday) that have high ROI for customers, will be more resilient, while niche providers we think could see spend consolidation and will certainly have a tougher time attracting new enterprise customers.
In defence of his bullish position – last week we talked of very robust results coming out of the IT services businesses – we wait and see
Streaming – Netflix beats on subs but content costs likely to remain high for everyone
Netflix announced good results at the same time that its long-term founder and CEO stepped down (he’ll move to be exec chair) to be replaced with two co-CEOs.
Q4 2022 revenues / EPS were $7.85bn up 5% YoY (constant currency) / $0.12, below forecasts of $7.85bn / $0.5 but critically subscribers positively surprised, as did FCF which is guided for at least $3bn in 2023.
During Q4 2022, Netflix added 7.7m subscribers compared to the 4.5m that it had forecast and 5.5m for consensus due to a good slate of programming. 1Q sales are expected to grow 8% YoY on constant currency terms inline with expectations.
That likely shows its ad tier did bring in customers (likely late in the quarter given what we heard in terms of advertiser guarantees falling short, and with a lower immediate impact on the top line – that should come through and reflect the benefit of ads in time)
Subscriber adds is good news, but it does also show how reliant the industry is on high cost content – Harry and Meghan, Wednesday, Glass Onion – all brought in a good number of subs– that correlation between subs and hits means content costs are effectively more like a customer acquisition cost, and it also means that all of these streaming platforms are reliant on big hits (and big content costs) continuing to keep attracting new customers. It makes the dynamics quite different from the old cable world, and the potential problem is that it means content costs for all the players – all competing for the incremental new subscriber – are likely to continue to balloon, which make the long term returns in the sector hard to get to.
Gaming – demand still weak and big titles still dominating
Gaming – NPD numbers showed the US gaming market continued to struggle in December with gaming software down 1% yr/yr while hardware spending grew 16% driven by better availability of consoles. Nintendo Switch was the best selling in volumes while Sony Playstation was number one in terms of revenue.
Call of Duty: Modern Warfare II remained the best-selling game (in terms of revenue) in its third month on the market and is the best-selling game of 2022. Pokémon Scarlet and Violet was up one spot to second place in its second place, while God of War: Ragnarök dropped one spot to third place. Madden NFL 23 and FIFA 23 were both up one spot to fourth and fifth places, respectively.
Our conclusion –top seller Call of Duty did well in December and the quarter while for the rest it has really been a very tough quarter. Remember that Call of Duty last year was not selling well; the fact that this year it is, and the market is still down 1% means that the rest of the titles have clearly done much worse…
Apple new silicon launches after delays
Apple announced new products this week – most notably for us the new MacBookPro and Mac Mini lines, which – after a delay – have the new generation of chips from Apple – the M2 Pro and M2 Max processors – which effectively doubles the GPU capacity. This continues the push away from Intel (and, according to Apple, the performance gap – they’re advertising the M2 Pro as 2.5x faster at running PhotoShop than the fastest Intel based MacBook Pro), with the Mac Pro now the only Apple product using Intel chips (though the bulk of Mac users will still be on Intel-powered machines).
It continues Apple’s push for home grown components – something we commented on last week with Broadcom, Qualcomm and display tech. It’s worth saying though that this latest silicon release from Apple was well-delayed (in 2020 Apple said the transition from Intel would take 2 years), which is a long-term risk for Apple in tying together its hardware, silicon and software.. The advantage as Apple sees it is likely more flexibility in terms of performance (ie. the GPU heavy workloads) and – potentially form factors in the future.
The release schedule means we expect Mac unit sales to face pressure in Q1, but hopefully bounce back in Q2.
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