Month: February 2025

Himax Technologies: A Future Key Player in Silicon Photonics

Posted on by io-fund
  • Himax Technologies produces display imaging processing solutions, including display driver chips, timing controllers, CMOS image sensors, microdisplays and WiseEye AI chips and modules.
  • Himax Technologies is a leading provider of endpoint AI solutions, particularly through its ultra-low-power WiseEye ASIC AI processors and modules.
  • Himax Technologies could be a major player in silicon photonics, a revolutionary semiconductor technology that uses light (photons) instead of electricity (electrons) to transmit data within and between computer chips.
  • Silicon photonics enables faster, more efficient data transfer using less power, generating less heat with more data capacity, which is crucial for AI and HPC applications.
  • Taiwan Semiconductor Manufacturing Company is a leading innovator in silicon photonics with its COUPE (compact optical engine) technology enabling high-bandwidth and low-latency communications between chips, and Himax is rumored to be an exclusive key supplier of micro-lens arrays.

Himax Technologies (NASDAQ: HIMX) is a Taiwan-based semiconductor company specializing in display imaging processing technologies. The fabless company’s product portfolio encompasses display driver integrated circuits (DDIC), touch display driver integrated circuits (TDDI), timing controllers (Tcon), liquid crystal on silicon (LCoS) microdisplays and complementary metal-oxide semiconductors (CMOS) image sensors. Its products cater to a range of applications in laptops, tablets, TVs, monitors, smartphones, automobiles and augmented reality (AR) and virtual reality (VR) devices. 

Their main business is supplying display driver chips (DDIC and TDDI) to original equipment manufacturers (OEMs). DDICs are required in almost every electronic device with a screen and TDDI is required for every device that has a touch screen. Himax has a 50% market share of TDDI in the global automotive market. Himax’s end-user products are primarily used by consumers, which lends to the cyclical nature of its business.

WiseEye Ultralow Power AI Sensing and Applications

Himax’s WiseEye AI sensing technology brings computer vision AI to endpoint devices. Its CMOS image sensors include near-infrared (NIR) and RGB and ultralow power always-on sensor (AoS). Himax’s AI is tailored for endpoint devices. Endpoint AI is not to be mistaken for edge AI:

  • Endpoint AI focuses on implementing AI directly on end-user devices, such as smartphones, tablets, laptops, smart home devices, and wearables. It aims to enhance user interaction and provide personalized, localized experiences. In other words, AI models run on these devices, enabling features like voice assistants, facial recognition or smart recommendations without relying on cloud processing.
  • Edge AI, on the other hand, refers to AI that processes data on devices located near the data source in a network. These devices are typically at the "edge" of the network, such as sensors or cameras. The key idea is that data is processed locally on these devices without needing to be it to the cloud for analysis, which reduces latency and bandwidth usage.

Endpoint AI is designed for local image and AI smart sensing. These are used in devices like smart doorbells, smart home cameras, smart glasses, and fitness trackers for motion sensing, object recognition, activity tracking and gesture base controls. It’s also used in smartphones and tablets for facial recognition, gesture control and augmented reality. Its WiseEye AI chips enable real-time monitoring and image-based decision-making as AI tasks are performed locally and directly on the device.

Rather Than Diversification, Himax is Exposed to Consumers

While Himax's products span across many industries and applications, their diversification is limited because of their product's end-user, consumers. Unlike Amphenol, with balanced end market exposure and true diversification in short cycles (IT datacom, mobile devices, mobile networks) and longer cycle end markets like industrials, commercial aviation and defense, Himax's business is cyclical.

Endpoint AI is targeted at consumers, typically on personal devices. Edge AI is targeted at industries and enterprises, used in applications like automation, industrial systems and smart cities. It’s this end-user component that has made its results volatile, lumpy and cyclical. A weak consumer lends to weak results for Himax. Additionally, 75% of its revenues are derived from China, and a significant portion of its products are manufactured in China. However, there could be a major catalyst to offset the cyclicality of its business; which is silicon photonics.

The Next Frontier of AI Chip Development: Silicon Photonics

Silicon Photonics is a revolutionary technology that uses light (photons) instead of electricity (electrons) to transmit data within and between computer chips. This enables much faster and more efficient data transfer with less power, generating less heat. This technology is ideally suited for AI and high-performance computing (HPC) applications. There are many advantages to photonics, including:

  • Higher Bandwidth: Light can carry much more data than electrical signals thereby enabling faster transmission of data.
  • Lower Latency: There is reduced delay in the data transfers, which is crucial for real-time applications.
  • Improved Power Efficiency: Optical communications can be much more energy-efficient than electrical connections, especially over long distances (IE, optical fiber).
  • Smaller Size: Integrating optical components on silicon chips allows for smaller and even more compact devices.
  • Less Heat: Light doesn’t generate much heat compared to electricity.

Taiwan Semi and Nvidia Team Up on Silicon Photonics

TSMC is a leader in silicon photonics with its COUPE (Compact Universal Optical Photonics Engine) technology. COUPE combines optical interconnects with advanced packaging techniques, such as CoWoS (Chip-on-Wafer-on-Substrate), to facilitate high-bandwidth, low-latency communication between chips. Speculation is that TSMC has been working with Nvidia to develop a silicon photonic-based chip prototype. It’s rumored they’ve created one at the end of 2024. They are also working on optical packaging technologies to improve AI performance and usher in a new packaging architecture for optoelectronic chip integration.

Here’s How Himax May Become a Key Player in Silicon Photonics

What Does This Have to Do with Himax? According to TF International Securities analyst Ming-Chi Kuo, Himax exclusively supplies their micro-lens arrays to TSMC for the first and second generations of COUPE FAUs. Himax exclusively supplies their micro-lens arrays to TSMC for the first and second generations of COUPE FAUs. FAUs are fiber array units, which are essential components of optical engines, helping them to focus and direct light for efficient data transmission. Since their components are vital for advanced packaging technology to enable high-performance computing for AI, they are a key upstream player in the AI ecosystem. 

Ming-Chi Kuo said via X, "Himax Emerging as a Key AI Upstream Winner in TSMC's COUPE (Silicon Photonics), Significantly Boosting Growth Visibility for 2026-2028." He further stated, "I previously shared my prediction that Himax might be a potential supplier for TSMC. My latest supply chain survey indicates that TSMC's COUPE (silicon photonics) development and ecosystem visibility have improved markedly. Furthermore, it's confirmed that Himax is the exclusive supplier of micro-lens arrays for the first and second generations of COUPE FAUs).” 

Kuo estimates Himax revenue will reach $1.16 billion vs consensus estimates of $1.11 billion in 2026, $1.42 billion in 2027 and $2.4 billion in 2028. Kuo estimates EPS of $1.00 vs consensus estimates of $0.80 for 2026, $1.60 in 2027 and $3.40 in 2028. Kuo also states that the first generation of COUPE is fully developed with mass production validation on the way and receiving the highest priority among TSMC’s developing technologies. Second-gen mass production validation is expected in the first half of 2026. Kuo believes Nvidia's Rubin GPUs could use COUPE upon mass production.

Himax’s WLO Technology is Key to Developing Silicon Photonics

Himax is involved with silicon photonics through its strategic partner Fiber Optic Communications Inc. (FOCI), a leading provider of optical communications solutions, which also owns a 5.3% equity stake. WLO technology is essential for manufacturing the miniature and precise optical components needed for silicon photonics like waveguides, diffraction gratings and lenses.

Wafer-level optics (WLO) is a key technology from Himax that’s being used in collaboration with FOCI to leverage their involvement in co-packaged optics (CPO), which involves packaging optical components directly onto semiconductors like CPUs and GPUs, reducing the distance that data needs to travel, improving bandwidth, latency and power efficiency. They also collaborate to develop laser-packaged optics (LPO), which uses lasers for even faster transmission. Himax and FOCI are collaborating to develop and manufacture CPO and LPO solutions, combining Himax's WLO expertise with FOCI's optical interconnect technology.

Himax, with its partnership with FOCI, could also be a key supplier of WLO components for TSMC's COUPE platform. These components would be essential for enabling the optical interconnects within CPO-based chips.

In its Q3 2024 earnings presentation, Himax listed WLO as a growth opportunity and noted, “Collaborating with the world's leading AI semiconductor and foundry partner in LPO/CPO, incorporating FOCI's proprietary LPO/CPO connector technology with Himax's nano-scale WLO to create an industry-leading optical transmission solution for Generative AI and HPC” The “foundry partner” is referring to TSMC.

Himax’s Three Subsidiaries

The Company operates three subsidiaries under the Himax umbrella. While each division operates with some degree of independence, they aren’t completely separate entities, and the Company doesn’t report revenues by division. These subsidiaries are:

  • Himax Technologies LTD: This is the main division that produces its display driver integrated circuits (DDIC), for which they have an 8% global market share. They produce thin-film transistor liquid crystal display (TFT-LCD), electrophoretic display (EPD), organic light-emitting diode (OLED), and LED display drivers. It provides technologies for touch sensor displays, including pure in-cell touch TDDI as well as 3D decoder processors, ASIC service and IP licensing, wafer level optics (WLO), power management chips, WiseEye AI processors and modules. They have in-house WLO fabs and color filter fabs. End markets include 4K/8K TVs, gaming monitors, smartphones, tablets, smart speakers and automobile infotainment systems.
  • Himax Display Inc.: This division focuses on microdisplay products. They produce the liquid crystal on display (LCoS) modules for head-mounted display, heads-up display (HUD) and pico projector applications. They have in-house LC and module display facilities.
  • Himax Imaging LTD: This division specializes in CMOS image sensors and ultralow power always-on sensors (AoS) CMOS image sensors. CMOS image sensors record light data to capture images and video, which are often used in digital cameras, webcams and scanners. Its end-user applications include monitors, smart TVs, ADAS, smart home devices, augmented reality (AR)/virtual reality (VR) headsets, digital cameras, webcams, facial recognition and advanced driver assistance systems (ADAS). This division also produces their micro-lens arrays.

Financials: Cyclical, But Still Beat Top and Bottom-Line Consensus

A weak consumer base, especially in China, and an inventory glut caused YoY sales to decline. Q3 2024 QoQ sales also declined due to the stronger Q2 2024 ramp-up from consumer shopping holidays in China. A surge in Q2 also comes from the highly publicized, overhyped run-up to the Chinese government’s stimulus efforts to bolster its fledging economy. Markets were propped up in anticipation of a major stimulus package, which was released at the end of September 2024 with monetary easing through interest rate cuts and easing of the reserve requirement ratio (RRR) for banks to inject liquidity into the economy.

While there was a short-term boost to China's stock market and some economic indicators, the longer-term effectiveness remains to be seen. Himax’s revenues are highly dependent on the Chinese economy as they derive 75% of their revenues from China. The recovery of their automotive market was a boon for their earnings as their higher margin automotive TDDI and in-cell touch displays got a boost, and its latest technology went into mass production in Q3. 

Himax reported Q3 2024 EPS of $0.07, beating the consensus estimate of $.06 by a penny. Revenues fell 6.75% YoY to $221.41 million but still beat the consensus analyst estimates for $219.96 by 1.11%.

Revenue Fell in Q3 Due to Softer Consumer Market

Q3 revenue fell (6.75%) YoY and (7.18%) QoQ to $222.41, beating consensus analyst estimates for $219.96 million by $2.45 million of 1.11%. The YoY revenue decline was attributed to the softer Chinese economy, but order momentum was strong in automotive, tablet and Tcon products.

Three Categories of Revenue Reported in Q3 2024  

While Himax has three subsidiaries, as mentioned earlier, they only report revenue based on three specific categories:

Large-sized display drivers: $30.7 million in revenues, down 21.2% QoQ due to weaker monitor and TV IC sales attributed to customers' de-stocking amid challenging market conditions following substantial Q2 replenishment for shopping festivals. 

Small and Medium-sized display drivers: $155.4 million in revenues, down 2.2% but beating guidance of being down in the low-teens attributed to stronger-than-expected automotive and tablets markets. Automotive drive sales, including TDDI and DDIC, had mid-single digit declines, which beat estimates of decline in the high teens.

Non-driver products: $36.3 million in revenues was a 13.1% QoQ decline, primarily from the double-digit sequential decline in Tcon sales. Again, due to customers pulling forward inventory purchases in the prior quarter in anticipation of strong sales during the shopping festivals.

This better-than-expected result was primarily fueled by rush orders from Chinese panel customers shortly after Himax's last earnings call on the backdrop of the Chinese government's renewed trade-in stimulus announcement made in mid-August as part of their efforts to boost automobile consumption further. Himax's automotive business, comprising drivers, Tcon, and OLED 3 sales, remained the largest revenue contributor in the third quarter, representing nearly half of total sales.

The small and medium-sized driver IC segment accounted for 69.9% of total sales for the quarter, compared to 66.3% in the previous quarter and 67.6% a year ago. Sequential declines were due to customers pulling forward their inventory purchases in the prior quarter, anticipating strong sales during shopping festivals.

EPS: Q3 EPS Beats After a Lumpy Pull-In Q2

Himax reported Q3 EPS of $0.07 vs $0.06 consensus estimates, a penny beat. The Company guided Q4 EPS between $0.93 to $0.11, mid-point $0.10. Q2 2024 had an unusual high EPS of $0.17 due to the extra inventory customers ordered in anticipation of Chinese shopping holidays including the “520 Festival” and “618 Shopping Festival”.

Margins: Consistent Gross Margins and Annual Bonuses Drop Operating Margins in Q3

Himax remained consistent on its gross margin, reporting 30% for Q3 2024. The operating margin dropped to 2.6% due to the annual spike in operating expenses. Operating expenses rose 28.4% QoQ to $60.8 million, again primarily due to employee awards and bonuses, which are paid out at the end of September each year. Himax grants annual bonuses at the end of September every year.

Cash and Debt Levels Drop Sequentially From Annual Bonuses

The sequential drop in cash from $253.8 million in Q2 to $205.5 million in Q3 2024 was primarily due to $50.7 million paid in annual dividends. The ($1.3 million) in operating cash flow was primarily due to the $30.1 million paid out in employee bonuses. Himax had $36 million in debt, of which $6 million was the current portion.

Conference Call: More Hints on Himax’s Future WLO Prospects

CEO Jordan Wu stated that the macro environment remains challenging. Their panel customers are reducing production to stabilize panel prices in response to current market conditions. End brands are simultaneously taking a cautious approach to procuring panels and are maintaining lower inventories. These factors have compressed chip demand, causing Himax to take a conservative outlook for Q4. The global economy is still uncertain, but they are confident in its business outlook for automotive, AI, wafer level optics (WLO) and organic light emitting diode (OLED), which are its key growth drivers. 

  • The automotive display market is its primary revenue contributor and continues to expand. New and cutting-edge technologies LCD, TDDI, OLEN and Tcon will continue to provide sustainable long-term growth. There have been significant fluctuations in the automotive market demand in the Chinese market, which accounts for over 30% of global vehicle sales.
  • WiseEye PalmVein provides high security and reliability with low false acceptance and rejection rates, using unique internal vein patterns to prevent replication or spoofing. With local identification processing to enhance privacy, Himax anticipates strong sales growth and expanding applications for the WiseEye PalmVein module starting next year.
  • Large-panel display driver chips are expected to have double-digit sales decreases in Q4 due to soft holiday shopping demand expectations and ongoing customer de-stocking since Q2. Panel makers are strategically reducing production.
  • CEO Wu commented on presumably TSMC and its WLO business, “Moreover, Himax and FOCI, along with world-leading AI semiconductor companies and foundry partners, have begun new technology development for future generation products. We believe this will create new revenue streams for Himax and make a significant contribution to our total revenue and profit in the coming years.”
  • AI PCs are prompting display upgrades for notebooks. Wu commented, “In the third quarter, our newly introduced in-cell touch TDDI successfully entered mass production for a prominent brand’s first AI PC. Several projects are also in progress with other brands for their upcoming notebook models.”
  • Himax, in collaboration with FOCI, is advancing through the small-scale production phase of their first-generation solution for laser-packaged optics (LPO) architecture and has begun developing next-generation technologies for more complex co-packaged optics (CPO) architectures. WLO and CPO revenue is not expected in Q4.
  • Himax has created nano-scale precision optical systems for LPO/CPO designed to meet the demands of high-speed computing and are key to the success of LPO/CPO optical solutions. Additionally, Himax's WLO expertise is gaining recognition, with increasing engineering collaborations in AR/VR and other applications, positioning WLO to contribute significantly to future revenue and profit.

CEO Wu provided more elaboration on their technology roadmap with WLO. The company is working on next-generation technologies focused on increasing the number of optical fiber lines in advanced multi-chip modules to boost data transmission rates significantly. By bundling multiple chipsets into a single module, the goal is to improve bandwidth, utilizing optical fibers to replace traditional metal wiring for high-speed data transfer.

The Company is focused on packing more optical fiber lines into limited space to achieve higher bandwidth. It requires advancements in optical design and manufacturing, such as improved waveform integrity and precise coupling with photonic ICs. While the timeline is challenging, there is strong customer demand to accelerate the migration from first-generation LPO to more advanced CPO and prepare next-generation products to meet increasing data transmission needs.

CEO Wu concluded the Q&A with, “Without specifics, we believe the same existing capacity will generate substantially more revenue and profit for us as the products for LPO/CPO demand much more sophisticated optical design and manufacturing, compared to those used for our earlier products, which, as I mentioned, is for consumer electronics. So, I hope all address your questions regarding this WLO business.”

Conclusion: Himax has a stable yet cyclical business with its optical display driver chips and various products used by consumers. The Company has been consistent with its gross margins despite falling YoY revenues stemming from an uncertain macroeconomic climate, especially in China. The potential for its future WLO and silicon photonics business is what’s been keeping shares elevated.

Silicon photonics could be the next-generation technology essential for advancing semiconductors and continuing the progress of Moore's Law, particularly for AI and high-performance computing (HPC) applications. This could be the true growth driver that Himax needs to offset lumpiness with the rest of its business, which is overly concentrated in China.

They derive 75% of revenues from China and are highly dependent on their consumers. This poses geopolitical risks also especially with Trump's tariff threats, which are expected to start at 10% on Chinese imports to the U.S. on February 1, 2025. This could further hurt demand for Himax products. While most of their customer base is concentrated in China, a significant number of their OEMs are in China and presumably export their products to the United States.

The speculation that Himax is the exclusive supplier of micro-lens arrays to TSMC for their COUPE platform has added a 30% premium to shares, as it was trading around $6.50 before the December 12, 2024, TF International Securities analyst Ming-Cho Kuos’ blog post.

As for the future of the technology, CEO Wu stated, “We are certainly very excited about the prospect because, you know, if we look at our partners or customers’ projected capacity expansion as well as their projected growth of such high-end 2.5D modules or XPUs, even if we to fully utilize our existing capacity, we can only meet a small fraction of their projected demand.” Wu also clarified that WLO revenues would not be seen in Q4 2024.

The Company is profitable and has $206.5 million in cash with very little debt at $36 million. While cash flow has been decelerating, Q4 would have been the turning point at $27 million or 12% of revenue if backing out the annual worker’s bonus payouts. The stock trades at 10.99X forward earnings and has a 3% annual dividend yield. If the TSMC rumor turns out to be valid, then it may be the magic bullet to smooth out the cyclical nature of its current business model.

Welcome to the I/O Fund’s new Discovery Tier, where we cover a new stock idea on a weekly or bi-monthly basis. We are excited to bring you more coverage from the I/O Fund team geared toward new idea generation only.

I/O Fund Equity Analyst, Jea Yu, contributed to this analysis

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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AMD Q4 Earnings Preview: The Bottom May Be Near

Posted on by io-fund

AMD reports after the bell tomorrow. Analysts expect revenue to grow 22% YoY to $7.53 billion and adjusted EPS to grow 41.1% YoY to $1.09. The company’s data center and client segments have performed well in Q3, with the Data Center segment growing 122% and the Client segment growing by YoY. The gaming segment and embedded segments have been headwinds, yet in the recent Barclays Conference, management said that “they (headwinds) are behind us when we look ahead of 2025.”

Management’s AI revenue guide for 2024 is to exceed $5 billion, a $500 million increase announced during Q3 results. Investors will be looking for the 2025 AI revenue guide and commentary in the earnings call. The current consensus estimates for 2025 is about $9.5 billion in AI revenue.

AMD stock underperformed YTD till the news of DeepSeek came in, as analysts had reduced estimates due to the expected lukewarm response for the new MI325 chips. However, AMD fared better during the last Monday’s sell-off than other semiconductors. We’ve discussed key price levels in the Advanced webinars as of late, and right now, AMD is holding the support laid out months ago.

AMD is at the forefront of integrating the DeepSeek-V3 model on Instinct MI300X GPUs and is optimized for AI inferencing, which is positive for the stock. It also supports our thesis that Nvidia owns training, while AMD will compete on inference by lowering costs for inference, specifically. Although DeepSeek is not a death knell for Nvidia, it foreshadows that eventually cost will be at the forefront of AI development and Nvidia’s pricing power will not sustain forever.

AMD’s management has been especially clear that the MI350 chips based on new CDNA-4 architecture is the release they are most excited about with a 35X increase in performance compared to CDNA-3. Again, AMD’s thesis is not about training models, it’s about running them at the edge where cost combined with speed will take the reins as opposed to Nvidia’s big compute muscles in the data center. Nvidia will compete on inference too, but it’ll be this market that matters most for AMD’s AI story.

The PC market is mired in concerns over tariffs, as the idea is PCs that source parts in China will need to pass the cost of tariffs onto consumers. AMD’s stock price has clearly been affected by these concerns. With that said, AMD is currently the leading AI PC company. Consider that last quarter, the Zen 5 Ryzen processors drove Client revenue up 29% YoY and up 26% QoQ to $1.88 billion while competitor Intel was flat. However, Nvidia’s Project Digits and RTX 5090 GPU laptops are set to defy all odds with an order of magnitude higher TOPS. Therefore, it comes down to costs and how much performance is needed (as will be the ongoing theme between these two competitors).

Similar to last quarter (and last half of the year), industry analysts are showing a decline in the mid to high single digits QoQ for PC data, yet MoM for December was stronger than expected due to seasonality in both the United States and Chinese New Year.

Our conclusion to the post-earnings last quarter called out tariffs as a primary reason for the weak price action. It’s not clear if the tariff story is already priced into AMD’s stock price, but it could already be priced in, so keep an eye out for that outcome. Notably, the question of when a stock bottoms is not an easy one to answer. However, we’ve been tracking this company quite closely and it’s our hope the stock has already bottomed or will bottom very soon. The price has acted accordingly by holding support in the $110 to $114 range. Therefore, how low is too low for AMD’s stock price, given 22% of its revenue is already from AI? This is a separate question than when will AMD effectively compete with Nvidia, on a path to 10% or more of the GPU market? The answer is that often price will bottom first.

Revenue

Management provided a soft Q4 revenue guide of $7.5 billion, representing a YoY growth of 21.6% at the midpoint due to headwinds in gaming and embedded segments. However, management had hinted during the recent Barclays Conference that these headwinds are now behind when we look into 2025.

  • Q3 revenue grew by 17.6% YoY to $6.82 billion. Data center drove Q3’s growth, while Client revenue rebounded significantly, offsetting continued weakness in gaming and embedded.
  • Analysts expect Q4 revenue to grow 22% YoY to $7.53 billion and accelerate to 28.2% and 28.6% in the subsequent two quarters. Analyst estimates have come down after the company’s soft guidance and also due to the expected lukewarm response for the MI325 chips.
  • Looking further out, revenue growth will accelerate from the expected 13.1% growth in 2024 to 25.6% growth to $32.2 billion in 2025 and 23.4% growth in 2026.

Segments

The company’s Data Center and Client segments showed strong growth in Q3. While Gaming and Embedded segments presented headwinds, management indicated at the recent Barclays Conference that these challenges are expected to be resolved as the company looks toward 2025.

Data Center

Q3 Data Center revenue grew by 122% YoY and 25% QoQ to $3.55 billion, driven by strong demand for AMD Instinct GPUs and EPYC server CPUs. Zen 5 Turin was launched in October 2024 and will help support data center sales in 2025. The MI325X chips were launched in October with increased memory capacity and bandwidth, with AMD stating it offers 20% higher inferencing than the H200.

Regarding the MI300 AI accelerators, Meta and Microsoft are large customers due to TCO advantages (total cost of ownership). Management also offered statements about RocM’s progress, stating that foundational support is growing and performance gains are improving by 2.4X.

The company’s launch of MI350 chips in the second half of 2025 should be a significant catalyst as the management believes that the chips have the largest generational increase in AI performance, they have ever produced. Management expects sequential growth in Data Center revenue in Q4 driven by the expected strong demand for Instinct, EPYC, and Ryzen processors.

Data Center operating margin improved to 29% compared to 19% in the same period last year.

Client Segment

Client segment revenue grew by 29% YoY and 26% QoQ to $1.88 billion in Q3, driven by strong demand for the Zen 5 Ryzen processors. Management expects client segment revenue to grow sequentially in Q4.

The PC market has been sluggish. AMD could fare better in the coming quarters due to its strong line of AI PCs. AMD said its chips will be used by Dell for the first time in PCs sold to businesses. AMD also unveiled its new Ryzen AI Max chips, offering up to 90% faster performance vs predecessors, delivering the highest level of performance available in premium thin and light notebooks. Further, it announced a new 9000 series of desktop computer processors that should also help to propel the revenue in 2025.

The client segment operating margin improved to 15% in Q3 from 10% in the same period last year.

The PC market has been sluggish. AMD could fare better in the coming quarters due to its strong line of AI PCs. Citi analyst said that the December notebook shipments increased 8% MoM due to a pull in demand ahead of Chinese New Year and potential tariffs. Notebook shipments were down (-7%) QoQ and were better than the company’s estimates of (-8%) decline, though below the normal season gain of 2%. Citi expects notebook shipments to decrease (-10%) sequentially in Q1, above the normal (-14%) decline.

Gaming

Gaming revenue declined by (-69%) YoY and (-29%) QoQ to $462 million in Q3 as semi-custom sales declined due to reduced inventory by Microsoft and Sony. Management expects modest sequential growth in Q4.

Operating margin declined to 2% compared to 14% in the same period last year.

Embedded

Embedded revenue declined by (-25%) YoY and up 8% QoQ to $927 million. Management expects modest sequential growth in Q4. Operating margin declined to 40% compared to 49% in the same period last year.

AI Revenue

Management provided an AI revenue guide for 2024 that is to exceed $5 billion, a $500 million increase announced during Q3 results. Investors will be looking for the 2025 AI revenue guide and commentary in the earnings call. The current consensus estimate for 2025 is about $9.5 billion. Analysts have reduced estimates due to the expected lukewarm response for the new MI325 chips.

Wolfe Research estimates data center GPU revenue in the range of $1.5 billion to $2.0 billion for 4Q and $7 billion for CY2025, lower than the prior estimate of $10.8 billion. For Q1 2025 they estimate $1.75 billion and flat quarterly growth for the rest of the year. KeyBanc analyst also trims estimates and expects $10 billion revenue in 2025. Loop Capital has reduced estimates from $10 billion to $8 billion. HSBC has reduced to $8.1 billion from $12.3 billion. Management AI commentary is very crucial to soothe the markets, given that MI350 chips are expected to be released in the second half of 2025.

In December, AMD invested in Vultr, an enterprise Cloud infrastructure company and a competitor of DigitalOcean. Vultr uses AMD’s graphic processing units in its data centers.

Margins

As stated in the pre-earnings writeup, margins are an area where AMD and Nvidia offer quite a contrast. AMD’s data center margin is 29% with a company operating margin of 11% compared to Nvidia’s 60%.  The guide is for flat margins next quarter. The CFO was encouraging in terms of what to expect for 2025: “When we scale the company next year, you can see we're going to benefit from economies of scale to continue to drive our operational efficiency to improve gross margin.”

The company’s margins are improving with a higher mix of data center revenue and operational efficiencies. The company also announced in November that they are planning to reduce about 4% of its workforce to focus on better growth opportunities.

Margins are expected to improve in 2025. The growth in data center revenue is the largest driver for margin improvement, including both CPU and GPU business and the expansion of the enterprise server business also has a tailwind on the gross margins. The gradual improvement of the Embedded business will also improve margins. On the other hand, the client business expansion will be a headwind due to the higher concentration of consumer business, which has margins below the corporate average.

  • Q3 gross margin was 50% compared to 47% in the same period last year, driven by strong growth in Data Center revenue.
  • Adjusted gross margin was 54% compared to 51% in the same period last year. Management guide for Q4 is 54% compared to 51% in the same period last year.
  • The adjusted operating margin also improved to 25% compared to 22% in the same period last year, driven by operating leverage. Management guide for Q4 is 27% compared to 23% in the same period last year.
  • Q3 net income was $771 million or 11% of revenue compared to $299 million or 5% of revenue in the same period last year. Adjusted net income was $1.50 billion or 22% of revenue compared to $1.14 billion or 20% of revenue in the same period last year.

EPS

The company’s Q3 adjusted EPS grew by 31% YoY and 33% QoQ to $0.92, which was helped by higher data center revenue. Analysts expect strong growth in the coming quarters. However, estimates have been coming down as analysts are cautious due to the expected lukewarm response for MI325 chips.

  • Analysts expect adjusted EPS to grow 41.1% YoY to $1.09 in Q4 and accelerate to 53.3% growth to $0.95 for Q1.
  • Looking further out, analysts expect adjusted EPS to grow 49.8% YoY to $4.98 in 2025, accelerating from the expected 25.4% growth in 2024. For 2026, analysts expect adjusted EPS to grow 39.1% YoY to $6.92.

Cash Flows and Balance Sheet

Cash flows are improving and have room for further improvement due to the expected better bottom line in 2025.

  • Q3 operating cash flow was $628 million or 9% of revenue compared to 7% of revenue in the same period last year.
  • Q3 free cash flow was $496 million or 7% of revenue and 9% excluding certain nonrecurring payments compared to 5% in the same period last year.
  • The company had cash and short-term investments of $4.54 billion and debt of $1.72 billion compared to $5.34 billion and $1.72 billion in the same period last year. The company paid $548 million for the previously announced acquisition of Silo AI and repurchased shares worth $250 million in Q3.

Valuation

The company is trading at a P/E ratio of 105 and a forward P/E ratio of 23.5.

P/S ratio is 7.8 and a forward P/S ratio of 5.9 compared to the five-year average of 8.9.

Conclusion

If I were to use my crystal ball, I think AMD’s stock price will bottom well before the cloudy (murky) narrative from the Street clears. The company has 22% in GPU revenue today, and if analyst estimates are correct, then the company will end the year with 30% in GPU revenue. This does not include AI revenue from AI PC sales, which are growing steadily QoQ, and the $9.5 billion analyst estimates on AI don’t include any upward surprise impact from AMD’s upcoming new architecture for H2 2025. The new architecture will undoubtedly be aimed at speeding up real-time throughput as cheaply as possible as AMD gathers its strength against a far more capable competitor than Intel ever was. Yet, cheap is the keyword here, as AMD’s margins would likely expand based off its pricing, where Nvidia’s could contract when the inference market truly takes off (this is further off once inference overtakes the training market). This stuff is nuanced for AI investors, so be prepared to hear a lot more details from the I/O Fund as we go along.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Meta Blows Past Estimates in Q4, Guides for a Soft Q1

Posted on by io-fund

Meta reported some mind-boggling growth numbers for 2024 – 22% revenue growth, 48% operating income growth driving a 7 point margin expansion, and 60% EPS growth. As we had recently discussed in Big Tech AI Stocks to Showcase AI Gains, Capex in Q4 Reports, Meta’s decision to be “aggressively investing in compute and data center capacity as it continues developing its Llama family of models, fine-tuning its feed to boost engagement and increase time spent on apps, and optimizing ad delivery” is paying off.

Meta doubled down on its $60-65 billion capex for 2025, despite fears that DeepSeek’s breakthroughs would substantially alter the AI spending narrative. In fact, Meta CEO Mark Zuckerberg explained that Meta would be investing “hundreds of billions of dollars” towards AI infrastructure in the long run, while making multiple predictions for the path of AI and AI at Meta in 2025. Core AI is paying off as ad pricing growth is accelerating, aiding high revenue growth, while margins and cash flows remain very strong.

Despite the blowout Q4 report, Meta guided for a rather soft Q1, with the midpoint of its revenue guide below consensus, forcing Q1 growth to be revised nearly 1 point lower. EPS growth is also expected to become much more challenging in the back half of 2025, with consensus estimates pointing to growth of just 4.6% in Q3 and an unusual (2%) decline in Q4.

Financials

Meta reported quite a significant beat on EPS of 19%, while revenue also beat estimates, driven by increasing monetization. However, management guided for Q1 below consensus at midpoint, pointing to a sharp 7 point growth deceleration sequentially and the slowest growth since Q2 2023.

  • Revenue of $48.4 billion beat estimates by $1.4 billion, representing YoY growth of 20.6%.
  • For FY24, revenue rose 22% YoY to $164.5 billion.
  • For Q1, management guided for revenue of $39.5 billion to $41.8 billion, which at the $40.65 billion midpoint, was approximately $1 billion below estimates for $41.6 billion. The guide was impacted by a 3% FX headwind.

Management shared interesting commentary on how they are increasing monetization to drive improved revenue performance, via improving marketing performance for advertisers. Management explained that in the second half of the year, they introduced Andromeda, an ML system in partnership with Nvidia, which “enabled a 10,000 times increase in the complexity of models we use for ads retrieval.” This allowed Meta to “run far more sophisticated prediction models to better personalize which ads we show someone,” leading to “an 8% increase in the quality of ads that people see on objectives we’ve tested,” aiding ROI for advertisers. Automation tools made an appearance as well, with Meta noting that adoption of Advantage+ Shopping campaigns (tailored for e-commerce) surpassed a $20 billion annual run-rate while growing 70% YoY in Q4.

Margins and EPS

Meta’s focus on efficiency and margins in 2023 has translated into significant gains in 2024. Not only is operating margin now approaching 50%, but what was more impressive is the 50% EPS growth this quarter on top of a 201% growth comp.

Here’s how Meta’s operating margin expansion has looked since Q4 2022:

  • Operating margin rose 5.5 points sequentially and 7.4 points YoY to 48.3%. This is also more than double the 19.9% margin reported in Q4 2022.
  • For FY24, operating margin was 42.2%, up 7.7 points from 34.5% in 2023 as operating income rose 48% YoY.
  • Net margin was 43.1% in Q4, improving from 38.7% in Q3 and 35% a year ago. Two years ago, net margin was just 14.5%.

This substantial margin expansion has led to significant earnings growth. Meta’s EPS for 2024 rose 60% after increasing 73% in 2023.

  • Q4 EPS of $8.02 beat estimates by $1.28, and increased 50% YoY.
  • FY24 EPS of $23.86 increased 60% YoY.
  • For Q1, EPS is estimated to be $5.29, for growth of 12.3% YoY. 2025’s EPS growth is expected to become more challenged, with consensus pointing to growth of just 5.5% to $25.18, with single-digit to declining growth in the second half of the year.

Cash flows have been extremely strong as well – it’s quite absurd to see operating cash flow growing at 30% at nearly a >50% margin at this nearly $100 billion scale.

  • Operating cash flow was $28.0 billion in Q4, rising more than 44% YoY and representing a margin of 58%.
  • FY24 operating cash flow was $91.3 billion, up 28% YoY. OCF margin was 56%, improving from 53% in FY23.
  • Free cash flow was $13.2 billion, up 14% YoY as capex rose 90% YoY to $14.4 billion. FCF margin was 27%.
  • FY24 free cash flow was $52.1 billion, up 21% YoY for a 32% margin.
  • Cash, equivalents and marketable securities totaled $77.8 billion, while debt totaled $28.8 billion.

Key Metrics

  • Ad impressions grew 6% YoY, slowing from the 7% growth last quarter. Europe and Rest of World dragged on growth, with impressions rising 5% and 3% YoY respectively.
  • Ad pricing increased 14% YoY, accelerating from 11% growth last quarter. Europe and Rest of World drove this growth, at 16% and 23% YoY respectively.
  • Average revenue per person (ARPP) was $14.25, up 16% QoQ and 16% YoY, highlighting Meta’s improvements in monetization.

Valuation and Risks

Despite shares rising 72% over the past year, Meta is trading as one of the cheapest stocks among the Mag 7, at 27x forward EPS. Alphabet is the only of the 7 to be cheaper on a bottom-line basis at 22x forward EPS, with Nvidia at 28x following this week’s selloff.

2025’s earnings growth forecast raises some red flags, as EPS is expected to grow just 5% for the full year, with growth decelerating significantly. Meta’s rally had gained steam as it reported consecutive triple-digit growth quarters, and this 38 point growth deceleration and risk of slipping into declining growth presents a headwind to shares, as it suggests AI monetization efforts are not translating into consistent EPS growth quarter after quarter.

On a top-line basis, Meta is trading for 11.5x revenue, and 9.4x forward revenue. This is the highest level it has traded at since 2018, and more than 50% higher than its five-year average of 7.5x revenue. Cash-flow based valuations offer a bit more room to the upside, with Meta trading at 21.8x operating cash flow, below its peaks of 24-26x in 2020 and 2021; for FCF, Meta is trading at 34x, below peaks of 43x.

One other risk presents itself from Q1’s below consensus guide, as revenue growth estimates have already come down. Prior to earnings, Meta was expected to see growth of ~14.5% to 14.6% in each quarter of 2025, though Q1 is now expected to see growth of 13.8%.

Capex Commentary – Implications for Nvidia and Broadcom

Though there were fears that DeepSeek would impact the trajectory of AI spending this year, Meta doubled down on its planned capex of $60 to $65 billion in 2025. Management explained that the increase would be driven by investments supporting genAI and core businesses, though the majority would be directed towards core, where Meta is seeing the most AI growth arise. CEO Mark Zuckerberg also discussed the “hundreds of billions of dollars that we will invest in AI infrastructure over the long-term,” as it brings 1 GW of capacity online this year while working on a 2 GW data center.

For 2025, CFO Susan Li provided a breakdown of where capex will go, saying data center spend will rise to support build outs of large-scale training clusters and higher power density facilities entering primary construction phases. Networking spend is expected to rise as higher-capacity networks get established to support both core AI and gen AI traffic.

However, perhaps the most important part of the call was Li’s discussion on AI accelerators, as it has implications for both Broadcom and Nvidia. Li explained that Meta would be “pursuing cost efficiencies by deploying our custom MTIA silicon in areas where we can achieve a lower cost of compute by optimizing the chip to our unique workloads. In 2024 we started deploying MTIA to our ranking and recommendation inference workloads for ads and organic content. We expect to further ramp adoption of MTIA for these use cases throughout 2025 before extending our custom silicon efforts to training workloads for ranking and recommendations next year.”

Management still emphasized that they are “planning to significantly ramp up deployment of GPUs in 2025, and we'll continue to engage with our vendors and invest in our own silicon to meet those needs,” though they did not comment on whether they are supply constrained like Microsoft.

Analyst Q&A

Analysts questioned Meta about the MTIA accelerator ramp, growth drivers moving forward, and most importantly, the impact of DeepSeek.

Q, Brian Nowak (Morgan Stanley): “How should we think about the main gating factors as to how quickly you'd be able to move a higher percentage of your engagement to your custom silicon?”

A, Susan Li (Meta): “We're also very invested in developing our own custom silicon for unique workloads, where off-the-shelf silicon isn't necessarily optimal and specifically, because we're able to optimize the full stack to achieve greater compute efficiency and performance per cost and power because our workloads might require a different mix of memory versus network, bandwidth versus compute and so we can optimize that really to the specific needs of our different types of workloads.

Right now, the in-house MTIA program is focused on supporting our core ranking and recommendation inference workloads. … We'll continue ramping adoption for those workloads over the course of 2025 as we use it for both incremental capacity and to replace some GPU-based servers when they reach the end of their useful lives. Next year, we're hoping to expand MTIA to support some of our core AI training workloads and over time, some of our Gen AI use cases.”

Reading between the lines here suggests that ramping MTIA is not necessarily coming at the expense of lost share to Nvidia; rather, Meta is working to replace old GPUs with custom chips to increase capacity and power workloads with more efficient chips, supplementing GPU purchases from Nvidia.

JP Morgan’s Douglas Anmuth asked about the impact of DeepSeek and other models that “potentially leverage Llama or others to train faster and cheaper,” and what impact this has.

Zuckerberg said that it is “probably too early to really have a strong opinion on what this means for the trajectory around infrastructure and CapEx,” though the mix shift between compute and inference as reasoning models arise was already something that Meta had been experimenting with.

He went on to explain, “Of all the compute that we're using, that the largest pieces aren't necessarily going to go towards pre-training. But that doesn't mean that you need less compute, because one of the new properties that's emerged is the ability to apply more compute at inference time in order to generate a higher level of intelligence and a higher quality of service, which means that as a company that has a strong business model to support this, I think that's generally an advantage that we're now going to be able to provide a higher quality of service than others.”

Conclusion

Meta’s Q4 was indeed a strong report, though Q1’s weak guide was a bit questionable given the strength of the recent report. Execution has been pristine since 2023, with operating margin more than doubling with significant cash flow and EPS growth. ROI from investments in core AI is becoming more evident as ad pricing growth is accelerating, offsetting decelerating growth in ad impressions.

Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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