Memory and PC Stocks Review

Posted on December 6, 2023June 30, 2026 by io-fund

This is a continuation of our article 2024 Trend: Memory and PC Rebound. 2024 Trend: Memory and PC Rebound.

Over the past year, the memory, smartphone, and PC markets have been experiencing inventory corrections. However, recent earnings commentary from major companies like Samsung, Microsoft, AMD, and Intel suggests that these markets are approaching a bottom.

This article provides insights into the specific stocks poised to benefit from the anticipated market rebound. First, we compared the sequential growth rates from Q3 to Q4 of last year with the projected growth rates for this year. The data reveals a remarkably positive outlook, with every company exhibiting sequential growth.

Micron stands out with the most significant improvement, transitioning from a (-39%) decline last year to an anticipated 14% growth this year. Silicon Motion, which experienced a (-20%) decline last year, is projected to rebound with 13% growth this year. Qualcomm, having faced a (-17%) decline last year, is forecast to experience 10% growth this year. The average growth rate has transformed from a sequential decline of (-7%) last year to an expected 11% growth this year.

Source: YCharts

Earnings Beats

Below, we look at companies that beat analyst consensus. Companies that consistently beat estimates have a higher probability of outperforming the market. Intel is the leading stock with a revenue beat of 4.1%, helped by the PC rebound. The company’s recent revenue declined by (-8%) YoY and up 9% QoQ to $14.2 billion. The company beat its own guidance by 5.7% and exceeded its guidance for all major segments.

Silicon Motion’s revenue exceeded analyst expectations by 4%. The company’s revenue was down (-31%) YoY and up 23% QoQ to $172.3 million. The sequential solid growth was helped by the normalization of inventory levels across most of its markets and from the pick-up of customer orders in the recent quarter.

Western Digital ranked third with a revenue beat of 3.3%. The company’s revenue was down (-26%) YoY and up 3% QoQ to $2.75 billion.

Source: YCharts

Intel’s adjusted EPS came in at $0.41 compared to $0.37 in the same period last year, with a beat of 87% on expected EPS. Rambus reported $0.56 compared to $0.45 in Q3 2022, with a beat of 37.5%, and FormFactor reported $0.22 compared to $0.24 in the same period last year, with a beat of 26.1%.

Source: YCharts

Bottom Line and Free Cash Flow

GAAP profitability is another crucial metric to monitor closely, especially with macroeconomic uncertainty. Apple leads with an operating margin of 30%. We have discussed in depth in our editorial how the services segment will further help the company’s margin expansion. The article highlighted that “FY21 was a breakout year for Apple’s gross margin, expanding from 38% to more than 42% because of that growth in Services. Apple is guiding for gross margin to expand further in fiscal Q1 next year, to the 45% to 46% range – an expansion of 200 to 300 bp YoY, with Services’ growth rate forecast to be in the high-teens again.”

Lam Research ranks second with an operating margin of 29%. We discussed Lam in our deep-dive analysis earlier this year. We had highlighted, “Over the past decade or so, Lam was considered lower risk because it was expected that memory manufacturers would continue to buy from Lam even during a low point in the cycle. This happened in 2015, when Lam was insulated from the last deep memory trough. However, due to the China ban, Lam did not escape the memory trough this time around.” Rambus ranks third with an operating margin of 17%.

Source: YCharts

Qualcomm has the highest free cash flow margin of 44%. It has improved from 7% in the same period last year and 28% in Q2. Rambus ranks second with a free cash flow margin of 41% and Silicon Motion ranks third with 28%.

Source: YCharts

Stock-Based Compensation

Stock-based compensation is a non-cash expense added back to adjusted earnings. However, in practice this is an expense as per GAAP rules. Warren Buffet said the following, which relates to the importance of GAAP earnings over adjusted earnings when stock-based compensation is involved. “If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And if expenses should not go into the calculation of earnings, where in the world should they go?”

The stocks in the list below have stock-based compensation of less than 10% of their revenues, which is ideal. Rambus has the highest percentage of stock-based compensation at 9.5%, followed by Qualcomm at 7%, and FormFactor at 6.3%. Often, having higher stock-based compensation will weigh on GAAP profits. In this case, the list below is GAAP profitable in the majority of cases, and so this is less of a concern.

Source: YCharts

Valuations

In the below chart, we ranked companies based on the forward P/S ratio. Rambus has the highest forward P/S ratio at 13.1, followed by AMD at 8.7 and Apple at 7.4.

Source: YCharts

FormFactor has the highest forward P/E ratio of 52.2, followed by AMD at 44.6, and Intel at 44.4.

Source: YCharts

Ranking based on revenue estimates change for next quarter

Micron’s revenue estimates for the next quarter have been revised up 5.3%, followed by Qualcomm at 3.1% and Western Digital Corporation at 1.9%. Western Digital also figured in the top three list of companies that beat the analyst revenue estimates in the recent quarter, as discussed earlier.

Source: YCharts

Ranking based on adjusted EPS estimates change for the next quarter

Qualcomm’s adjusted EPS estimates have been revised up 5.6%, followed by Silicon Motion at 1.3%, and Apple by 1.1%. Apple’s top line estimates have been revised down, yet the bottom line was revised up. We’ve discussed in detail here the increasing mix of Apple’s Services, which has helped improve the bottom line.

Source: YCharts

Highlights and Lowlights in Q3

Intel beats consensus estimates driven by PC rebound

Intel had an excellent revenue beat of 4.1% and an adjusted EPS beat of 87%. Analyst consensus is for QoQ growth of 7% in the next quarter compared to a QoQ decline of (8%) in the same period last year. The following comments from the management point to PC rebound optimism.

Pat Gelsinger, CEO of Intel, said in the recent earnings call. “As we expected, customers completed their inventory burn in the first-half of the year, driving solid sequential growth, which we expect will continue into Q4. We expect full-year 2023 PC consumption to be in line with our Q1 expectations of approximately 270 million units.”As we expected, customers completed their inventory burn in the first-half of the year, driving solid sequential growth, which we expect will continue into Q4. We expect full-year 2023 PC consumption to be in line with our Q1 expectations of approximately 270 million units.”

David Zinsner, CFO of Intel, said in the recent earnings call. “Now turning to Q4 guidance. We expect fourth quarter revenue of $14.6 billion to $15.6 billion, delivering on our January commitment to grow revenue sequentially throughout 2023. In the client business, we're encouraged by the return of historical purchasing cycles as our channel checks, partner feedback and ASPs all point to healthy inventory levels and growing demand.”In the client business, we're encouraged by the return of historical purchasing cycles as our channel checks, partner feedback and ASPs all point to healthy inventory levels and growing demand.”

Silicon Motion sequential growth rebound

Silicon Motion, which experienced a (-20%) decline last year, is projected to rebound with 13% growth in Q4 this year. The company also beat consensus revenue estimates by 4% and adjusted EPS by 10.2%, which is very good. It has an operating margin of 9% and a solid free cash flow margin of 28%.

The management of Silicon Motion also echoed similar thoughts to Intel on the normalization of inventory levels.

Wallace Kou, CEO of the company, said in the recent earnings call. “With that, I will turn to our results for the third quarter. Our business continued to gain momentum with revenue growing 23% sequentially to $172 million and earnings per ADS growing 67% sequentially to $0.63. We saw inventory level begin to normalize across the majority of end markets and OEM order activity pick up in the third quarter leading to a strong revenue growth in the quarter.We saw inventory level begin to normalize across the majority of end markets and OEM order activity pick up in the third quarter leading to a strong revenue growth in the quarter.

We expect this trend to continue and are confident they will lead to strong sequential growth in the fourth quarter. While the first half of 2023 was challenging due to the global macro economy weakness and excess inventory in the channels the inventory level across our end market are normalizing and OEM demand continue to improve.

He further said, “By end market standpoint excess inventory in the PC and smartphone markets have plagued the industry since late 2022 when the global economy weakened and demand lowered. It has taken nearly a year, but we believe the inventory level in both the PC and smartphone markets are normalizing.”we believe the inventory level in both the PC and smartphone markets are normalizing.”

Micron benefitting from memory rebound

Micron beat the revenue estimate by 2.2% and adjusted EPS estimate by 9.2%. Micron stands out with the most significant sequential improvement in the next quarter, transitioning from a (-39%) decline last year to an anticipated 14% revenue growth this year. On the flip side, as seen in the earlier part of our analysis, the company ranks lower on the operating margin and cash flows from the list of PC and memory-related companies.

The company recently boosted guidance for next quarter. The company has increased its revenue guidance by 6.8% and expects its non-GAAP gross margin to approach break-even levels from the previous guidance of negative (4%).

In the recent UBS Technology conference, the management confirmed that the pricing is starting to increase. The company’s CEO, Sanjay Mehrotra said, “So last update that we had provided was at the time of our earnings call at the end of September in the Q4 earnings call. And in that update, we have said that, industry environment was improving, inventories were improving and that we were seeing pricing bottoming out. In fact, pricing is starting to increase.”And in that update, we have said that, industry environment was improving, inventories were improving and that we were seeing pricing bottoming out. In fact, pricing is starting to increase.”

Conclusion:

We are monitoring memory closely as the use of HBM3 and HBM3e becoming a central focus in the competition between AI accelerators in the data center. Per our write-up:

“If 2023 was the year AI accelerators made their importance known, then 2024 will be the year that memory and HBM3/HBM3E makes its importance known as the competition is going head-to-head at memory capacity and bandwidth per GPU rather than compute performance […] In fact, to drive the point further as to how important memory will be in the next generation of GPUs, the compute performance from the H100 to the H200 is not changing much. According to what the industry has seen so far from Nvidia’s GPU HGX 200 systems, there will be “32 PLOPS FP8” performance, which would be achieved through eight H100s with 3,958 teraflops of FP8 each. The translation is that Nvidia’s H200 upgrade is strategically focused on memory, which also translates to AMD having a strong sense of direction on design as it forced Nvidia to answer to the MI300X’s memory capacity and bandwidth.”then 2024 will be the year that memory and HBM3/HBM3E makes its importance known as the competition is going head-to-head at memory capacity and bandwidth per GPU rather than compute performance […] In fact, to drive the point further as to how important memory will be in the next generation of GPUs, the compute performance from the H100 to the H200 is not changing much. According to what the industry has seen so far from Nvidia’s GPU HGX 200 systems, there will be “32 PLOPS FP8” performance, which would be achieved through eight H100s with 3,958 teraflops of FP8 each. The translation is that Nvidia’s H200 upgrade is strategically focused on memory, which also translates to AMD having a strong sense of direction on design as it forced Nvidia to answer to the MI300X’s memory capacity and bandwidth.”

In addition to this, the AI-powered PC is going to be a massive trend, and may be the next domino in AI’s race toward a $15 trillion impact on GDP. Per the write-up on memory and PCs:

“AI-powered PCs will ultimately change the trajectory for AI, to where more people can access AI-powered applications, which in turn, will help AI developers be able to build a bigger ecosystem. There is a major bottleneck right now for AI applications to where client devices are not powerful enough or energy efficient enough to leverage AI capabilities.”

We are looking more closely at what stocks may benefit from the next leg up in AI, which is memory for AI accelerators and AI-enabled PCs. The goal is to line up the stocks we want to buy should semis see a pullback.

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

Recommended Reading:

Marvell Q3 Earnings: The Market Wants More on AI

Posted on December 1, 2023June 30, 2026 by io-fund

Marvell’s report was primarily in line with a marginal miss for the Q4 guide. The market was expecting $1.46B on the guide and Marvell provided $1.42B at the midpoint. For Q4, the adjusted EPS of $0.46 guided by management also missed estimates of $0.49. However, the cash was strong at $503M in operating cash flow and $448.3M in free cash flow.

Although the data center beat expectations, Marvell is expected to face near-term weakness in its Carrier Infrastructure (5G) and Enterprise Networking end markets, which partially contributed to the miss in guidance vs. consensus for both revenue and Non-GAAP EPS. The 5G market is weak because the initial wave of 5G rollout is finishing and also demand is continuing to weaken as carriers are holding back on CapEx spend in tough macroeconomic conditions. For Enterprise Networking, weakness is due to both inventory management form OEM customers and weak demand. Furthermore, there isn’t that much visibility for the Enterprise Networking business.

Regarding the data center, last quarter, Marvell was forthright in saying they had a $200 million quarterly revenue run rate, or $800 million annualized. Per the Q2 transcript: “Based on our latest demand outlook for our electro-optics products, we now expect revenue from AI to exit this year at over a $200 million quarterly revenue run rate or $800 million annualized.” It naturally follows that investors want an update to this number the following quarter.

Despite there being 20% growth this quarter in the data center and an impressive 35% expected next quarter for the data center, the CEO declined to raise the exit rate for AI other than to say: “well north of $200 million.” When pressed further, management declined to update the exit rate. This may seem like semantics, but it’s important because this is Marvell’s bull case. The rest of the segments weigh considerably on the company due to cyclicality.

Looking further into Q1, management seemed to imply the other segments could drag on the company’s outlook. They didn’t guide Q1, of course, but the response to a question in terms of whether the other segments will drag too much on revenue growth was answered with what appeared to be low confidence.

Financials

Marvell reported revenue of $1.419B, down 8% YoY and up 6% QoQ, slightly above consensus. Revenue next quarter is expected to be $1.420B, which is below consensus of $1.46B.

Non-GAAP EPS was $0.41, slightly above consensus of $0.40. GAAP EPS of ($0.19) missed guidance of ($0.07) EPS. Of this $269.8M is for the amortization of acquired intangible assets from the Inphi and Innovium acquisitions. There is another $158.5M paid in stock-based compensation.

Adjusted EPS for next quarter is expected to be $0.46 which is below consensus of $0.49.

The gross margin has been improving quite a bit. The adjusted gross margin was 60.6% and the guide for next quarter is 63.5% to 64.5%. The GAAP gross margin was considerably lower at 38.9% this quarter.

The adjusted operating margin was in line at 29.8% and the adjusted net margin was 25% for profits of $354 million.

Cash and cash equivalents was $726M, increasing by $202M from the Jul quarter. Operating Cash Flow was $503M up from last year of $411M. The gross debt-to-EBITDA ratio was 2.21 times and net debt-to-EBITDA ratio was 1.83 times. In other words, debt of $4.19 billion didn’t improve this quarter.

Revenue Segments:

Data Center:

Data Center Revenue of $555.8M (down 11% YoY, up 21% QoQ)

The strength in Data Center revenue was driven by stronger than expected AI revenue. A positive within the Data Center end market was cloud revenue returning to YoY growth. Cloud revenue grew >30% with contributions from AI and cloud infrastructure with AI revenue growing substantially faster than cloud infrastructure revenue. Marvell’s product portfolio of PAM4 optical products, Teralynx, Ethernet switches, and Data Center Interconnect products contributed to the QoQ growth for Data Center revenue. You can read our previous write-up on Marvell here.

However, the strength in cloud revenue was offset by enterprise on-premise data center revenue declining QoQ, which was expected by management. Similar to Q2, data center revenue for the storage market remains weak.

Enterprise Networking:

Enterprise Networking revenue of $271.1M (down 28% YoY, down 17% QoQ). Enterprise Networking revenue weakness was due to weak demand in this end market, which is in-line with management expectations.

Carrier Infrastructure:

Carrier Infrastructure (5G) revenue of $316.5M (up 17% YoY, up 15% QoQ. 5G revenue strength was driven by the wireless part of its 5G end market

Consumer:

Consumer revenue of $168.7M (down 5%, up 1% QoQ)

Automotive:

Automotive/Industrial revenue of $106.5M (up 26% YoY, down 3% QoQ)

Earnings Call:

AI Revenue:

The comments on AI revenue were positive in the opening remarks yet the CEO sounded less confident during the Q&A. Personally, I found it to be confusing and analysts did, as well.

To start, the opening remarks were encouraging but it later changed, for example: “In our data center end market, revenue for the third quarter was $556 million, well above our guidance, driven by stronger than forecasted AI revenue,” and also, “In cloud, revenue from both AI and standard cloud infrastructure grew sequentially with AI growing significantly faster.”

At this point, given this commentary, the expectation was for a higher exit rate than the $200M provided last quarter. Yet, when pressed in the Q&A, management had a different tone.

Q:: I'm kind of hearing mixed signals on the custom silicon opportunity. And I just wanted you guys to clarify on that. I guess, first of all, are you guys above or below $200 million expectation you guys had for the year? […] You guys talked about that $200 million for this year -Christopher Rollins

A: Yeah, exactly. So yeah, so we're tracking, I'd say, close to the $200 million, okay, for this year. And then what we had said at the Investor Day and kind of the long-term was this $800 million, and that was between, sometime between FY 2025 and 2026, that was what the — if you looked at the slide from a couple of years back.

And what we had said, I think I think two quarters back or it was a quarter back that, that number would be bigger overtime now because of the AI piece of it, even though some of the stuff had shifted around that wasn't an AI. And I think that's still largely on track in that timeframe. We never gave an exact kind of — it's going to happen in XYZ quarter.

But in that FY 2024, 2025 to FY 2025, 2026 timeframe it should be able to get towards above that number we gave before which is the $800 million.

So I don't think there's any mixed signals. I don't think there's any update, which I think we're – I think there's some enthusiasm around, but nothing's changed from a quarter ago. In fact, I think the thing that's positive is that the chips are looking really good to go to production for next year, and that was always a risk.” -CEO, Matthew Murphy

My translation: To be frank, I do think the CEO gave mixed signals as the opening remarks stated “significantly above our forecast,” yet later, the CEO stated: “nothing's changed from a quarter ago.” It seems management is mixing words by saying “above our forecast” to reference a forecast from many quarters or even years ago instead of the forecast in Q2.

It's quite obvious this year the market is keen on AI revenue, and mixing words when describing the AI revenue was odd, at best, and careless, at worst.

Fiscal Q1:

The rebound we outlined in our pre-earnings report is crucial for a win-win scenario to where the rebound ideally aligns with AI driving more data center revenue. Therefore, although being two quarters out, Q1 is important because it’s the quarter the rebound is expected to be most evident with 13.2% revenue growth and 60% EPS growth expected.

The question on the call about fiscal Q1 did not exude confidence:

“And then also for fiscal Q1, do you still think that revenue can grow? I know you said that networking is down and carriers down. But data center would be up. Do you think that total revenue can be up? Thanks.” -Tim Acuri, UBS

“On Q1, while we don't guide specifically, I understand what you're looking for. I think the way to think about it is that, and I guess I gave the information. Carrier is down after a really great run in that's going to stay weak. The telco environment and CapEx spending is very constrained out there and the end customers seem to be having some trouble. We talked about enterprise being down.

And then on consumer, which actually did a little bit better than we thought it would have this year. The last time buy program that we had has been largely going to conclude now in the fourth quarter, and so we see a stepping down there. So if you kind of add all that up, that's about half our revenue that's going to come down in Q1.

And then the real question is the data center strength and how does that continue? And it's too early to call, but just the way to think about it is it's a lot to offset at this juncture when you have that much of your of your revenue coming down.” -CEO, Matt Murphy

Later, it was asked if carrier would bottom in Q4 but the CEO indicated it could be Q1 or further out. Carrier is the second largest segment and so this may be where the lack of confidence in Q1 is coming from.

Q: “Thank you for that Matt. One last one on carrier. Is Q4 going to be the bottom? Or do you think there could be some more yet to drop? And then I think you have some additional content coming at one of your customers at the end of the year. Is that going to be a meaningful lift for the segment? Thanks.” -Christopher Rolland

A: “Yes. So there's – as I think I said in my remarks, there's going to be continued softness into Q1 in carrier, okay? It's going to take, who knows how many quarters. And it really depends, I think, there'll be some inventory and then you've got to also look at kind of where the CapEx ends up during next year and where carriers are actually going to spend globally on their deployments.” -Matt Murphy

Conclusion:

Marvell has a strong AI story that is obfuscated by its other segments. The lack of confidence for fiscal Q1 due to the other segments, plus management declining to update the AI exit rate is why the price action reversed. I agree with the market; I think the report needed to be stronger in terms of management communicating more clearly on the AI story since this is the bull case. The tone is that this is a waiting game, and it’s not possible for management to help investors time when the many pieces will come together. Lastly, the opening remarks were confusing — although it doesn’t change Marvell’s potential, it did create some disappointment that there was not “significantly more revenue” from AI – rather, come to find out, the guide was unchanged. Or, if there is significantly more revenue, than Marvell is not willing to be as forthright as management was last quarter, and is leaving investors guessing.

There were some positives such as the cash flow and margin improvement. However, without more AI revenue to report in terms of an exit rate, these improvements won’t be enough to end the year as a 2023 outlier.

Recommended Reading:

Marvell Q3: AI-Driven Rebound on the Books, Bottom Line in Focus

Posted on November 30, 2023June 30, 2026 by io-fund

We encourage you to read our previous post-ER write-up found here and also the pre-ER found here as it goes through the pros/cons of Marvell’s fundamental profile, and our motivation in adding the stock back to our portfolio.

Per our last write-up, the bull case is this:

“Marvell doubled its AI revenue from $400 million to $800 million. This means AI is now 14.4% of revenue, up from roughly 7% (on an annual run rate). This is bullish for our CY2024 thesis, and was not expected so soon. The most important statement on the call was this:

“Based on our latest demand outlook for our electro-optics products, we now expect revenue from AI to exit this year at over a $200 million quarterly revenue run rate or $800 million annualized. This is well above what we had outlined last quarter. Put this in perspective, this would put us at the run rate we had previously communicated for all of next year.”

However, the bottom line is in bad shape as it’s not an ideal time to have to access the debt capital markets. Per our last write-up:

“Where the report is concerning is the increasing net debt to EBITDA ratio, which has increased from 1.6X to 1.8X. You can expect us to risk manage this position depending on FED actions. It was stated in the call: “we will opportunistically explore accessing the debt capital markets to refinance our upcoming debt maturities.”

This is an important quarter for Marvell to step up and improve its bottom line as the market has overlooked this given the AI story is quite strong. The ingredients are there as revenue and EPS is expected to nicely rebound over the next few quarters, it’ll be up to management to prove they can give the market what it wants in terms of profits and cash flow margin.

Revenue and EPS

Q2 revenue declined by (-11.6%) YoY to $1.341 billion
Management Q3 revenue guidance and consensus is $1.4 billion, representing a YoY decline of (8.9%) at the mid-point. It’s expected that the revenue YoY decline will bottom in Q3 and a return to growth is expected in Q4.

GAAP EPS was (-$0.24) last quarter and is expected to be ($-0.07) +/- $0.05 this quarter. The negative to thin profit margin is one of the primary concerns with Marvell.
Last quarter, adjusted EPS was $0.33. Management’s Q3 guidance ranges from $0.35 to $0.45, mid-point of $0.40. This represents a YoY decline of (29.7%). The YoY decline in earnings will also bottom out in Q3 with a return to growth expected in Q4.

Margins

Management guidance for Q3 gross margin is 46.8%. Adjusted gross margin guidance is 60.8%. It was stated that adj. gross margin will reach 64% in Q4 helped by a recovery in data center storage. The gross margin is also expected to benefit from cost cutting initiatives like optimizing headcount and continuing to partner with the suppliers to drive more efficiency in the supply chain.

o The Q2 gross margin was 38.9% compared to 42.2% in Q1 and 51.8% in the same period last year. The gross margin was down due to lower percentage of data center revenues in the revenue mix.

Management has guided for GAAP operating margin of (-1%) compared to (-15.3%) in the previous quarter. Management guidance on adjusted operating margin is 29.6% compared to 25.2% in Q1.
The adjusted net margin improved 164 basis points sequentially to 21.64% and was down from 32% in the same period last year.

Cash Flow and Balance Sheet

The operating cash flow margin was 8.4% compared to 15.8% in Q1 and 21.8% in the same period last year. The operating cash flow margin was low primarily due to an increase in DSO (days sales outstanding) and severance-related cash restructuring charges. Management mentioned that they expect DSO to improve in the next quarter.

The CFO, Willem Meintjes, replied to an analyst’s question.

“Yes, so this quarter certainly DSO was impacted somewhat by linearity. We do expect a nice back — bounce-back in Q3 and some normalization.”

It is crucial for the company to improves its cash flows in the coming quarter. The free cash flow dropped to $1.2 million compared to $105.8 million in Q1 and $256.3 million in the same period last year. The lower operating cash flows and higher capex of $111 million led to the drop in the free cash flow.

The company has cash of $423.4 million compared to $1.03 billion at the end of Q1. Debt is $4.15 billion, which includes short-term debt of $1.02 billion. The company used $572 million to repay debt in the recent quarter. Due to the lower cash flows, the company had to repay its debt entirely from the cash balance. This was contrary to what management had indicated in the Q1 earnings call when they stated they would repay debt from free cash flow and cash balance.

They have resumed buybacks as indicated in the last earnings call and it doesn’t seem ideal the company would take this route when the net debt to EBITDA ratio has increased from 1.6x in Q1 to 1.83 in Q2. Per the earnings call, “we will opportunistically explore accessing the debt capital markets to refinance our upcoming debt maturities.”

This is our primary concern with Marvell in the near term given elevated interest rates.

Key Metrics

Data center revenue was down (-29%) and was up 6% QoQ to $459.8 million, which should be marking a bottom, as long as storage recovery doesn’t get pushed out further. This exceeded guidance of 0% QoQ growth. The beat was due to the AI networking products. We’ve covered additional datapoints on the storage recovery and memory rebound here. This compares to being down (-32%) YoY last quarter and (-12%) QoQ decline.

On a QoQ basis, data center is expected to accelerate to “mid-teens” growth. Per management: “Demand for our AI products continues to grow at an extraordinary rate and we are working very closely with our customers to meet rapidly evolving needs. On the other hand, enterprise on-premise is expected to continue to trend down. As a result, we are projecting overall data center revenue in the third quarter to grow in the mid-teens sequentially on a percentage basis.”

Carrier infrastructure end market was down (-3%) YoY and down (-5%) QoQ to $275.5 million due to wired networks whereas 5G was strong at 25% QoQ growth. The carrier end market is expected to grow in low single digit sequentially helped by wireless.

Enterprise networking declined (-4%) YoY and (-10%) QoQ to $327.7 million. This is expected to decline further into the low teens QoQ next quarter. Per management, enterprise networking will take a few quarters to normalize: “We expect this inventory re-normalization to take a few quarters to resolve as customer balance sheets get worked down over time.”

Consumer end market is up 2% YoY and up 18% QoQ to $167.7 million. Revenue is expected to grow sequentially in the low teens next quarter.

Automotive and industrial end market was up 32% YoY and 23% QoQ to $110.2 million driven by increased adoption of Ethernet in cars. This segment is expected to be up 30% YoY and flat sequentially.

Conclusion:

We are watching tonight’s report with anticipation as we hope to see the product story overcome the challenges seen in the bottom line, — if not this quarter than at least in the company’s guidance for next quarter. There is an incoming, material rebound, as detailed above. What we want to see is if the rebound is strong enough to result in a decent cash margin and GAAP profits. If so, we will have a win-win to where the fundamentals are improving and a nice product story is setting up for 2024. If not, we will go back to the drawing board to figure out how to risk manage in a way that instills persistence for the longer-term thesis.

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

Recommended Reading:

Nvidia’s Fiscal Q3 Earnings Preview: The Pressure Is On

Posted on November 27, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Nov 21, 2023,11:18am ESTForbes Forbes on Nov 21, 2023,11:18am EST

Nvidia has surged this year with 241% gains YTD, which has more than doubled the returns of the FAANGs. This is no small feat considering it’s widely understood Big Tech is holding up the broader market. Valuations are stretched and leadership is only narrowing; to say there’s pressure going into Nvidia’s report this evening is an understatement.

The outsized demand for the H100 has led to historic moments as Nvidia is expected to exit this fiscal year with quarterly data center revenue of $14 to $15 billion compared to $3.6 billion per quarter at FY2023 exit. Should these estimates be correct (we will get the official guide this evening), Nvidia will end the year with a bang with approximately 300% growth in the final fiscal quarter.

Wow, what a year. Investors may not truly appreciate what Nvidia accomplished given a global pandemic and shelter-in-place orders fueled triple digit growth in tech stocks three years ago. Yet, what Nvidia accomplished was entirely due to product-market fit and design prowess with no end of the world scenario needed. It’s rare what Nvidia did, which was to ignite demand of enormous magnitude.

It’s well known my firm was early to this move in Nvidia with a bold analysis that claimed Nvidia will surpass Apple in valuation by 2026. You can look forward to my firm updating the long-term thesis in the coming weeks with details on how Nvidia will close-in on the next trillion in market cap. But in the near-term, Nvidia investors face what makes or breaks a portfolio, which is the inevitable moment of when Nvidia will top and sell off, how to handle these enormous gains, and if Nvidia can surprise the market again now that it was the defacto leader in the Nasdaq’s historic rally this year.

My firm strongly believes that simply picking a stock is akin to playing a fantasy sport, whereas discussing how to manage the stock is what separates fantasy from the live game. On Nvidia, we’ve been quite clear that we were net buyers in 2022 and we have been trimming the position to take gains in 2023. Meanwhile, Nvidia has remained our largest position until very recently when we put a different stock as first place and Nvidia as second place. Although we typically reserve our trades for our research members, we’ve been open about our strategy of active portfolio management with this spectacular, winning position. Judging by filings by famous hedge fund managers, we are in good company with this strategy.

Going into this highly anticipated report, I’d like to provide my readers with more information on how we are managing our Nvidia position and what to expect from the earnings report. This is a near-term analysis whereas our long-term thesis that Nvidia will surpass Apple in valuation is still firmly intact.

Neck-Breaking Release Cycle: H200 is Hopping Ahead

Nvidia has a near-monopoly in data center GPUs, and one of its strategies to protect its moat is to upgrade GPUs quickly to where it’s hard for AMD, Intel or custom silicon to catch up. The release cycle from the H100 to H200 is neck-breaking, as a typical cycle is two years whereas the H200 will ship in volume one year following the H100. The B100 based on the Blackwell architecture is expected to hit the market at the end of calendar year 2024 with the X100 following soon after.

Source: NVIDIA INVESTOR’S PRESENTATION

If 2023 was the year AI accelerators made their importance known to Wall Street, then 2024 will be the year that memory and HBM3/HBM3E makes its importance known as the competition is going head-to-head at memory capacity and bandwidth per GPU rather than compute performance. This further translates to mean the AI race is more focused on inference for the next generation of GPUs as the neural network can be run entirely in memory without the need to move data back-and-forth with the external memory. The H200 is the first GPU with HBM3e for 141 GB of memory and 4.8 TB/s bandwidth. This will result in 1.6X to 1.9X better inferencing performance than the H100.

To drive the point further as to how important memory will be in the next generation of GPUs, the compute performance from the H100 to the H200 is not changing much. According to what the industry has seen so far from Nvidia’s GPU HGX 200 systems, there will be “32 PLOPS FP8” performance, which would be achieved through eight H100s with 3,958 teraflops of FP8 each. The translation is that Nvidia’s H200 upgrade is strategically focused on memory, which also translates to Nvidia feeling pressure from AMD as the MI300X will be the first GPU to hit the market with the memory capacity and bandwidth offering full utilization to increase LLM inferencing performance.

By adding HBM3 and HBM3e memory, the compute engines get a performance boost, albeit at a higher cost as HBM3 costs 5-6 times more than typical DRAM. Fewer GPUs will be needed so the cost does not translate to an equal increase in total cost of ownership. GPUs with HBM3 and HBM3E will run compute-intensive large language models with fewer GPUs than is required with the H100s due to offering roughly double the memory. The need for fewer GPUs is accomplished by running LLMs in the memory. The H200 with 141GB of memory compared to the H100’s 80GB will reduce the number of GPUs required for running popular large language models.

If you read between the lines on the H200, then Nvidia is a bit nervous about AMD’s MI300X with the H200 serving as an attempt to bridge the H100 and the B100. AMD’s design more than doubles the memory of the H100 with 192GB HBM3 memory and 5 TB/s of bandwidth, and most importantly, will be out a few months prior to the H200. The MI300X was the first to run a 40B parameter large language model on a single GPU.

AMD should feel satisfied that it forced the near-monopoly leader to hurry toward releasing the H200 with HBM3e as an answer to the MI300X. We covered this in a deep dive for our premium members in July and reiterated it again in August when we covered our favorite memory stock.

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What to Expect in the Upcoming Earnings Report:

The very quarter that Nvidia began reporting double digit negative revenue growth of (-16.5%) was the best buying moment. Near the bottom a year ago, our firm wrote for Forbes that Nvidia Was Ready to Rumble with the RTX 40 Series and the H100 GPUs. Notably, Nvidia is up 200% YTD yet is up over 300% since the October low, which is why timing matters.

One year later, and Nvidia is unrecognizable from where the company was exactly one year ago. For the October quarter, Nvidia is expected to report YoY growth of 169.6% to 171% for $16 to 16.1 billion and growth of 190.6% YoY growth for the December quarter. According to current estimates, the December quarter is peak growth.

Source: I/O FUND

Pictured Above: The very quarter that Nvidia bottomed in fiscal Q1 was the quarter that the stock was had its highest short interest since the Covid low as the product thesis was little understood at the time.highest short interest since the Covid low as the product thesis was little understood at the time.

A beat is very important for Nvidia given the spotlight on this company. Demand is certainly there, and what instead is in question (into the foreseeable future) is supply.

Here is what the CFO stated on the last earnings call:

“We expect supply to increase each quarter through next year” and also “Demand for our Data Center platform where AI is tremendous and broad-based across industries on customers. Our demand visibility extends into next year. Our supply over the next several quarters will continue to ramp as we lower cycle times and work with our supply partners to add capacity.”

Where the market was a tad disappointed last quarter was when the CFO declined to elaborate on what percentage increase in supply she was expecting to see. The translation is that these are hard comps to compete with, and without a substantial increase in supply, the growth rate may have an inherent constraint given supply has already increased triple digits YoY.

The soaring demand for GPUs is evident in Nvidia’s growth rate. Per the Financial Times, Nvidia is planning to ship 1.5M to 2M GPUs next year compared to a target of 500,000 this year. Given this outsized demand, the hiccup is more likely to happen on the supply side. For this reason, we detail Taiwan Semiconductor’s chart below.

When you strip out data center revenue, what you have is an even higher growth rate for the data center segment of 239% to $13 billion expected this quarter. So, the question remains —- can supply continue to grow at these elevated percentages?

Source: NVIDIA IR

The data center segment is clearly the thesis but it doesn’t hurt that gaming has rebounded, as well, with 22% growth last quarter.

Source: NVIDIA IR

Last quarter, the gross margin improved significantly to 70.1% compared to 64.6% in Q1 and 43.5% in the same period last year. This was the best gross margin in Nvidia’s history due to higher average sales prices and some contribution from the increased mix of software.

Per the CFO: “software is a part of almost all of our products, whether they're our Data Center products, GPU systems or any of our products within gaming and our future automotive products.” Separately, the standalone software business is worth “hundreds of millions of dollars annually.” As seen with our note on the H100 release from last year, its important investors are early to a tipping point. This is why we’ve been adamant that Nvidia’s true AI moment was in 2020 with the A100. If you bought the stock for the H100, you likely missed this year’s power move. The same will be true for Nvidia’s software revenue.

Regarding this quarter’s gross margin, management expects it to expand to 71.5% in the upcoming quarter. The operating income grew by an incredible 1,263% YoY to $6.8 billion, which shows the cyclical nature of semiconductors. The operating margin was 50.3% compared to 7.4% in the same period last year. The management guidance for the next quarter is 53.1%. Typically, Nvidia’s operating margin is in the 30% range.

Source: NVIDIA IR

This has flowed through to the bottom line with Nvidia’s adjusted EPS up 429% YoY for $2.70 compared to 481.3% growth expected this quarter for EPS of $3.37.

Source: SEEKING ALPHA

Nvidia has the strongest cash flow margins among mega cap stocks. The operating cash flow margin is 47% with a free cash flow margin of 44.8%. In addition to higher revenue helping the cash flow, there was also $1.25 billion in customer payments received ahead of the invoice date.

Source: YCHARTS

The company has cash and marketable securities of $16.02 billion with debt of $9.7 billion. Last quarter, there was $3.28 billion shares repurchased. The Board of Directors approved an additional $25 billion in stock purchases with $4 billion authorized remaining at the end of Q2.

Data Center Assumptions

I/O Fund Analyst Notes on Nvidia’s Data Center Segment

The magnitude of Q4 guidance will be very important given heighted expectations. Assuming Nvidia meets its Q3 guidance of $16B +/- 2%, we’ve put together a simple scenario analysis to parameterize the different outcomes anticipated based on Nvidia’s potential Q4 guidance.+/- indicates anticipated stock positive or negative price performance on the next trading day based on that scenario.

Source: I/O FUND

At $40,000 per H100, that equals $28B in H100 sales alone, and when you add the A100 and other data center sales at a current run rate of $14B, the Data Center segment could report total revenue of $42B in FY24 (CY23). When you equal this out across the upcoming quarters, it looks something like this based on our estimates and Piper Sandler estimates.

Nvidia's Data Center segment could report total revenue of $42B in FY24 (CY23)

Source: ESTIMATES FOR DATA CENTER REVENUE FOR Q3 AND Q4 FROM PIPER SANDLER

We believe the market will reactive negatively if Nvidia provides F4Q24 (Jan-Q) guidance that is in-line or lower than consensus growth of 11% Q/Q for the Jan-Q.

On the flip side, Nvidia will likely need to provide guidance of at least greater than 20% Q/Q growth for a significant positive reaction. This is because consensus will need to make upward revisions to their earnings for the remainder of FY24 (CY23) and FY25 (CY24). This is critical to support the current valuation with NVDA trading at ~45x NTM Non-GAAP P/E in-line with its 5 year average of ~45x NTM Non-GAAP P/E as of Monday November 21, 2023.

Our base case assumption is that Nvidia’s F4Q24 (Jan-Q) guidance will estimate Q/Q growth of at least +20%. Recall, H100 was only introduced to the market toward end of CY22. The Apr-Q was the very first quarter when Nvidia was beginning to see the impact of AI and demand for the H100. Piper Sandler believes Nvidia will close out the year with data center revenue of $42B and 2H23 Data Center revenue ~88% greater than 1H23 revenue.

Furthermore, we believe if Nvidia maintains its ~35% beat that it had for the Jul-Q for the rest of FY24 (CY23), Nvidia can potentially do $52B in Data Center revenue for FY24 (CY23).

Looking ahead to FY25, we believe Nvidia can do ~$92B in Data Center revenue based on our estimates for % beats for Actual Data Center revenue vs. Estimates for Data Center Revenue (Piper Sandler).

Source: I/O FUND

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Exploring Scenarios for the Upcoming Earnings Report:

The neutral-case scenario is that Nvidia reports in line, but can’t give the Street what it wants, which is a raise on already impressive growth to help sustain the market leader’s gains this year.

If investors are being realistic, a raise is best left to next quarter when the company typically offers a fiscal year outlook. The question is not whether Nvidia is a top AI stock, and has a promising future (of course it does). The question at hand is whether Nvidia can produce a report that pushes buyers off the sidelines. These are two different matters, and are often in opposition after a large run-up in price.

The best-case scenario is that Nvidia’s been downplaying its supply (just a touch) and there will be a beat for the fiscal Q4 guide. Nvidia’s story is quite clear, which is that the data center segment is producing historic growth and the bottom line is so beautiful, you have to squint to make sure it’s real. If this happens, we could see the price go into the mid-$500s before technicals are predicting that buyers will be exhausted. As a reminder, that’s only a 7% move from where the stock is trading now.

Piper Sandler has a data center estimate for fiscal year 2024 of $42 billion, which translates to $14.9 billion in data center revenue if we assume $13 billion this quarter. We detail below the price targets we are eyeing to take more gains should Nvidia report a beat on Q4FY24.

The topping-out scenario is that Nvidia’s buying is exhausted, and there isn’t one fundamental analyst on earth that can help investors figure out when this will happen. That is best left to somewhat-esoteric technical analysis. As you’ll note, I am not calling this the bear-case as there is not a bear case for Nvidia. Even if the company loses China entirely due to restrictions, it’s likely that demand gets absorbed. However, there is a bear case for the semiconductor sector, of which Nvidia is exposed to, and I detail this for you below.

Regarding the topping-out scenario, it’s unlikely Nvidia has a major negative surprise to the downside as semiconductors have strong visibility compared to, say, an ad-tech company. The management team should be going to great lengths to be consistent and accurate with Wall Street given the long golden roadway in front of them. Therefore, the topping-out scenario is aptly named as a 200% gain means you’ve got to impress the Street to keep those gains, and Nvidia may need to refuel for a quarter or so until we can get to a new fiscal year guide next quarter.

The Red Scare

What’s not to be forgotten in the excitement of the product road map is China, which has been the predominant risk for semiconductor stocks dating back to 2018. Last year, the government restricted Nvidia from selling its two most powerful chips to China, the A100 and H100. To circumvent these restrictions, Nvidia designed slightly less powerful chips called the A800 and H800. As reported by Reuters, the H800 has as much computing power as the H100 in certain settings. For the United States, these chips are important to block as they strengthen China’s military.

Last month, the U.S. Department of Commerce announced updated rules focuses on computing performance by removing the bandwidth parameter and focusing exclusively on how powerful a chip is, as well as performance density, which will prevent companies from working loopholes. According to an official who spoke to Reuters, “the U.S. will require companies to notify the government about semiconductors whose performance is just below the guidelines before they are shipped to China.”

Although this is a medium-term issue for Nvidia, analysts believe the demand is high enough today that the company shouldn’t have any issues absorbing the 20% to 25% loss in its data center segment from tighter export restrictions to China. Looking further out for FY2025, Keybanc sees a $5 impact to Nvidia’s $25.62 EPS estimate, and up to a $20B impact to its data center segment with current estimates at $101B for the data center in FY2025.

Eventually, demand may settle – especially as more competitors step up – and investors should pencil-in losing China revenue as a risk that is materializing now, with the revenue impact likely to be felt in FY2025.

The Topping Out Scenario

Nvidia (NVDA)

Nvidia continues to push to all-time highs, which is a scenario that was outlined in our prior free report on NVDA in September of this year. In the last analysis, the I/O Fund Portfolio Manager stated: “as long as we hold $340, Nvidia has the potential for one more swing higher into year-end/early next year.”

The primary scenario presented had the $545-$574 region as the target for the next swing higher. As of today, we are about 7% away from this target in what appears to be the final 5th wave in an uptrend off the October 2022 low.

I have laid out two scenarios that I continue to see playing out in the coming weeks-months:

The topping-out scenario has NVDA in a complex topping pattern. We would see a sharp reversal from current levels that would ultimately break below $435-$419 support region. This would signal that the top is in, and we would then setup our downward targets to start accumulating again.
The bull scenario has us already in the final swing higher. Our targets are between $545 – $575 for this move. If we end up seeing a gap and continuation higher from the earnings report, then we would get a direct path to these targets. We would use this strength to continue to trim. The other scenario is that we see a slight pullback that holds the $435-$419 region, which would set us up for a push into higher targets in the coming months.

Source: I/O FUND

Semiconductor Industry May Be the Achilles Heel

Nvidia could certainly miss, yet it’s less likely given the company has outsized demand and visibility on supply. Within this context, it is easier to see the level of risk with interrelated stocks. One chart that is quite concerning, which has ramifications for all of tech, is Taiwan Semiconductor (TSM)

Source: I/O FUND

The bounce from the October, 2022 low is clearly an overlapping and messy move higher. This is common of B waves. What’s concerning is that the drop from the July high is a 5 wave pattern that broke through the major trendline. This would be wave 1 of the larger (C) wave.

What followed is a 3 wave retrace, so far, which would be wave 2. If the next drop is a 5 wave pattern that takes us below $89, it will be a strong warning. On the other hand, if we can see a vertical move over $104, then it will shift the odds away from the red count above, and suggest that we could see a larger swing higher into early 2024, which would be the green count.

We do not own TSM as we closed this position, yet one reason we are watching this chart is to help manage our semiconductor positions as a break below $89 is concerning enough to have a read-through to our other positions. In this case, we will likely hedge the semiconductor stocks that we have identified as those we want to own in a downturn.

A break below $89 could also be concerning given TSM is in the crosshairs with China, and the United States recently tightened export restrictions to effectively cutoff AI chips. China has made it known they are pursuing domestic silicon, and if so, TSM may become stuck in a tug-o-war on which country gets 3nm, 4nm and 5nm supply.

The Broader Semiconductor Sector (PHLX)

The PHLX Semiconductor Index is a popular index of the broader semiconductor sector. It currently has the same downside setup that we are seeing in TSM. However, it is moving up into major resistance and into a cycle that suggests a reversal is likely to follow.

Source: I/O FUND

The fan placed at the October, 2022 low represents a series of important angles that the PHLX has been using in its push higher. The red 1×1 line is a true 45 degrees off the low, and is the most important angle in defining an uptrend. Note how price broke below it and is now testing this angle as resistance.

Furthermore, those symbols above price represent cycles that we see within the PHLX. Note how price tends to reverse the trend that is moving into them. So, regarding these cycles, how we trend into them is the most important thing. We are currently trending up, into the current cycle, while testing the major angle in red.

It is likely that the broader semi sector sees a reversal soon, and until the PHLX can retake the red 1×1 angle, the pressure and risk remain to the downside.

Conclusion:

Nvidia’s earnings outcome is not easy to read in the tea leaves. This is because the fundamentals are the best in the S&P 500 and the CFO has been clear that she has strong visibility for this quarter and into next year. It’s possible the company misses, but not probable (outside of something China related). Rather, Nvidia’s issues are sector-wide as semiconductor indexes and the bellwether TSM are looking weak on technicals. This would signal even if Nvidia beats/raises and the stock goes up, that its peer group may weigh on the company’s price action in the near-term. There’s also immense pressure that Nvidia raises, which may not be realistic given constraints on supply.

We’ve been crystal clear in both August and September that Nvidia has a move to $545 to $570 and this could mark the top. We continue to believe this is the price target where our firm will again take gains. If we don’t get there this evening, and price breaks down, then we will also take gains. In our opinion, this is the only way to procure a win-win scenario with a stock that holds a leading allocation in a portfolio that has extended 200% in one year.

Meanwhile, you can look forward to an update on how, exactly, Nvidia will surpass Apple’s valuation by 2026 in the coming weeks.

Our premium members will receive our post-earnings analysis this evening after hours. If you own Nvidia stock, or are looking to own NVDA, we encourage you to attend our weekly premium webinars, held every Thursday at 4:30 pm EST. Next week, we will discuss our plan following NVDA’s earnings, as well as a handful of other AI plays for 2024 – what our targets are, where we plan to buy as well as take gains.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

2024 Trend: Memory and PC Rebound

Posted on November 17, 2023June 30, 2026 by io-fund

The focus of our recent AMD deep dive in July helped emphasize how memory has become a point of fierce competition among AI accelerators.

“The MI300X requires more power than its predecessor MI250X at 750 watts, and this is higher than Nvidia’s H100 at 700 watts. However, it’s not an apples-to-apples because what the MI300X promises to deliver is running compute-intensive large language models with fewer GPUs than is required with the H100s due to offering roughly double the memory.”due to offering roughly double the memory.”

We discussed this further in the Lam Research: Wafer Fab Equipment Leader & HBM/DRAM Memory deep dive when it was stated:

“The impetus is AI acceleration, which is in a stage where it’s fiercely competing on memory […] In fact, according to Lam, AI servers use 8X DRAM and 3X NAND compared to an enterprise class server […]according to Lam, AI servers use 8X DRAM and 3X NAND compared to an enterprise class server […]

Point being, memory is becoming an important component in the AI arms race, and Lam is a major equipment supplier and beneficiary of capital intensity that follows each new generation of HBM.memory is becoming an important component in the AI arms race, and Lam is a major equipment supplier and beneficiary of capital intensity that follows each new generation of HBM.

In the analysis, we touched on the GH200 super chip from Nvidia, which “combines the H100 GPU with Grace 72-core Arm CPUs for an increase of memory capacity by 3.5X and memory bandwidth by 3X. Per the press release: HBM3e memory, which is 50% faster than current HBM3, delivers a total of 10TB/sec of combined bandwidth, allowing the new platform to run models 3.5x larger than the previous version, while improving performance with 3x faster memory bandwidth.”

Since then, more information has been revealed about Nvidia’s H200 GPUs, which will have 141GB total of HBM3e memory with 4.8 TB/s of bandwidth across six HBM3e stacks. This compares to the H100 with 80GB of HBM3 and 3.35 TB/s of bandwidth. To see how this compares to the MI300X from AMD, you can read more here.

If 2023 was the year AI accelerators made their importance known, then 2024 will be the year that memory and HBM3/HBM3E makes its importance known as the competition is going head-to-head at memory capacity and bandwidth per GPU rather than compute performance. This further translates to mean the AI race is more focused on inference for the next generation of GPUs as the neural network can be run entirely in memory without the need to move data back-and-forth with the external memory.

In fact, to drive the point further as to how important memory will be in the next generation of GPUs, the compute performance from the H100 to the H200 is not changing much. According to what the industry has seen so far from Nvidia’s GPU HGX 200 systems, there will be “32 PLOPS FP8” performance, which would be achieved through eight H100s with 3,958 teraflops of FP8 each. The translation is that Nvidia’s H200 upgrade is strategically focused on memory, which also translates to AMD having a strong sense of direction on design as it forced Nvidia to answer to the MI300X’s memory capacity and bandwidth. It’s also quite strategic for AMD to go directly toward competing on LLM inferencing performance as these are the workloads that will be most in demand.

Memory is Tough

As we review the memory market, and also segue to the PC market in this analysis, it bears mentioning that the memory is a tough market. It can often be a race to the bottom on pricing, there are rollercoaster-like cyclical patterns, it’s heavily exposed to consumer devices, and it has many global leaders not trading on the Nasdaq. Memory leaders are concentrated in APAC and so any United States stock needs to be measured against overseas competitors.

With that said, over the past year, the memory, smartphone, and PC markets have been going through inventory corrections, but these markets are close to bottoming based on recent earnings commentary from several semiconductor companies such as Samsung, Microsoft, AMD, Intel and others. Sometime in the medium term, PCs will go through a super cycle driven by AI. We want to look more closely at the timing of this and who the major players might be.

In the Lam Research analysis, it was stated that the pummeled consumer market is deceiving as eventually hybrid AI will bring AI processing capabilities to the edge, including consumer devices. Memory is a key component in the competitive AI race both inside and outside the data center. Although the introduction to this analysis emphasized data center AI accelerators, we want to start to turn our focus toward the edge.

It's also important to point out that what matters most for determining a good stock is dollar content per chip. For example, HBM3e is priced five to six times higher than typical DRAM. This means that if the shipment volume is 2% of total DRAM, then its sales ratio reaches 12%. Our goal is to find the semiconductors that can charge more for their chips in the AI super cycle for PCs rather than simply PC players.

Memory Rebound

HBM3 sales are expected to explode. According to Trend Force, HBM3 could grow to $8.9 billion in 2024 for a 127% YoY increase.

SK Hynix is projecting 100% growth in HBM demand this year and next, revised up from 50% growth. According to SK Hynix, the AI chip boom will drive an 82% CAGR for HBM3 by 2027. SK Hynix has reclaimed its spot as the number two memory company globally due to HBM sales, and was the preferred supplier of HBM3 for Nvidia’s H100 GPUs.

Samsung, the world’s largest manufacturer of DRAM and NAND by revenue, has shown a trend of QoQ improvements in revenue and operating profits since 4Q22. As long as this trend continues, then it’s likely the memory market has bottomed. According to the Korea Economic Daily, Samsung executives stated at a conference: “Our customers’ current (HBM) orders have more than doubled from last year.”

Micron shows something similar to where the company was reporting deeply negative growth and is rebounding significantly on revenue. This is easily seen on a QoQ basis pictured below.

As a percentage of revenue, Micron’s QoQ Profit Improvement is also quite clear with a recovery by the second half of 2024.

Although HBM3 will participate, the major memory suppliers are primarily rebounding from lapping a trough in a consumer cycle that had peaked following Covid. Typically, memory stocks would be on a deep discount given the steep cycle, yet SMH returns are > QQQ returns. This has lifted the tide of all boats, and memory stocks such as Micron and Lam are not trading where they’d typically trade, which makes a near-term buy less likely for the I/O Fund until we see a pullback. This is where the I/O Fund is unique, not only do we strive to be early in our research, such as to the importance of memory in the next release of AI accelerators, but we are also careful with our timing.

PC Rebound

Similar to the memory and smartphone markets, the PC market is in the process of normalizing inventory. Silicon Motion, one of the largest manufacturers of NAND flash controllers, which go into PCs and smartphones, commented in its recent earnings call that inventory for the PC and smartphone markets is normalizing and these markets are poised to return to growth in CY24.

“We saw inventory level begin to normalize across the majority of end markets and OEM order activity pick up in the third quarter leading to a strong revenue growth in the quarter. We expect this trend to continue and are confident they will lead to strong sequential growth in the fourth quarter. While the first half of 2023 was challenging due to the global macro economy weakness and excess inventory in the channels the inventory level across our end market is normalizing and OEM demand continue to improve.” -Silicon Motion, Q3 Earnings Call Nov 2023

“By end market standpoint, excess inventory in the PC and smartphone markets have plagued the industry since late 2022, when the global economy weakened and demand slowed. It has taken nearly a year where we believe the inventory level in both the PC and smartphone markets are normalizing. We are seeing more consistent order pattern from our customers and better visibility that are more closely aligned with end market demand. We are optimistic that this trend will continue and that the industry is well positioned to return to growth in 2024.” -Silicon Motion, Q3 Earnings Call Nov 2023

This commentary by Silicon Motion was also supported by AMD in its recent earnings call, in which management commented that it expects growth for the PC market in CY24, and the PC market will return to normal seasonality levels in demand.

“Year-over-year, we expect revenue for the Data Center and the Client segments to be up by strong double-digit percentage, the Gaming segment to decline, given where we are in the console cycle, and the Embedded segment to decline due to additional softening of demand in the embedded market.

Sequentially, we expect Data Center segment to grow by strong double-digit percentage, Client segment revenue to increase and the Gaming and Embedded segment to decline by double-digit percentage […]

Sales of our Ryzen 7000 processors featuring our industry-leading Ryzen AI on-chip accelerator, grew significantly in the quarter as inventory levels in the PC market normalized and demand began returning to seasonal patterns.” –AMD Q3 2023 Earnings Call

For the PC market, HP believes AI can help double the PC market’s growth over the next 3 years.

“The biggest opportunity we see is with in Personal Systems. The ability to run generative AI applications on a PC will enable personalized experiences, improved latency, provide better security and privacy protections, and reduce costs. And as we begin commercializing AI-enabled devices, we believe the overall PC category growth rate can double over the next three years.” -HPQ Analyst Day

Intel has ambitious plans to take advantage of the AI opportunity in PCs. Through its AI PC Acceleration Program, Intel is focused on having AI on more than 100M PCs by 2025. Intel is working with over 100 independent software vendors on more than 300 accelerated AI features, including well-known companies such as Adobe, Webex, and Zoom.

On December 14th, Intel will launch the Core Ultra Processors. The new processors are a 7nm chiplet design which makes updates easier, and allows for the most efficient use of the chip tiles. Especially for AI purposes, chiplets are replacing monolithic circuits, where the overall system is divided into smaller parts so that 3nm or 5nm nodes can be replaced when needed. This avoids having to replace all of the components as nodes shrink and design companies otherwise battle Moore’s Law. With chiplets, AI platforms can scale by adding computing power and reduce total cost of ownership.

The Meteor Lake architecture will come with a neural processing unit (NPU) to execute AI workloads. The goal of AI edge devices (PCs, mobile devices, and edge servers) is to diversify AI execution for both speed and power efficiency. By running the workloads across NPUs, GPUs and CPUs, the Core Ultra will drive better efficiency.

Per Intel’s management in the most recent earnings call:

“Built on Intel 4, the Intel Core Ultra has been shipping to customers for several weeks and will officially launch on December 14 alongside our 5th Gen Xeon. The Ultra represents the first client chiplet design enabled by Foveros Advanced 3D packaging technology, delivering improved power efficiency and graphics performance.

It is also the first Intel client processor to feature our integrated neural processing unit, or NPU, that enables dedicated low-power compute for AI workloads. Next year, we will deliver Arrow Lake as well as Lunar Lake, which offers our next-gen NPU, ultra-low power mobility and breakthrough performance per watt.”

Intel and also Qualcomm are set to release WiFi 7 in Q4. WiFi 7 will be two to four times faster than WiFi 6 and will have twice as many data streams. Although AI applications are not mainstream yet, WiFi 7 makes it possible to develop and distribute AI applications due to the high capacity, low latency, and extended range. The high bandwidth consumption that AI applications require, along with moving AI workloads to AI devices means WiFi 7 will be instrumental for AI-powered PCs.

Note: We will discuss Qualcomm again when we look more closely at the mobile rebound.

2024 Refresh: Windows 12

“We actually think 2024 is going to be a pretty good year for client, in particular because of the Windows refresh. We still think that the install base is pretty old, and does require a refresh. We think next year may be the start of that given the Windows catalyst.” -Intel, Citi Analyst Conference, Sept 6th

In September, a CoPilot update was rolled-out for Windows 11 with over 150 features such as CoPilot in Windows, which is a toolbar that allows generative AI to be used across any task across the Windows operating system. The new update also added AI-powered Bing search to the taskbar.

Windows 11 was an exciting update, yet the next Windows release is expected to make a much bigger impact. The Intel statement was the first to hint at the Windows refresh, which is generally understood to be Windows 12, due to come out in 2024.

We had noted that AMD also referenced a Windows refresh in the last earnings call. Per management’s opening remarks noted in our Post-ER writeup: “Looking forward, we are executing on a multiyear Ryzen AI road map to deliver leadership compute capabilities built on top of Microsoft's Windows software ecosystem to enable the new generation of AI PCs that will fundamentally redefine the computing experience over the coming years.”

It's likely that Intel and AMD are leaking the next Windows refresh because Microsoft is working closely with hardware partners to optimize chips to handle the AI workloads. The Ryzen 7000 mobile processors are the first x86 chips to contain a dedicated AI engine to support Microsoft’s Windows Studio Effects. Typically, this requires Arm-based hardware with a dedicated neural processing unit (NPU).

AI-powered PCs will ultimately change the trajectory for AI, to where more people can access AI-powered applications, which in turn, will help AI developers be able to build a bigger ecosystem. There is a major bottleneck right now for AI applications to where client devices are not powerful enough or energy efficient enough to leverage AI capabilities.

Look for Windows 12 to be a major release for 2024, and to be the official moment AI-powered PCs kickoff.

What Industry Analysts are Saying:

Gartner:

Per Gartner, “The global PC market is expected to rebound in the fourth quarter of 2023 as the beleaguered industry begins a return to growth. Worldwide PC shipments totaled 64.3 million in the third quarter of 2023, according to analysis from Gartner, marking a 9% decrease compared to the same period last year and the eighth consecutive quarterly decline.”

Additional Management Commentary:

AMD:

“Sales of our Ryzen 7000 processors, featuring our industry-leading Ryzen AI on-chip accelerator, grew significantly in the quarter as inventory levels in the PC market normalized and demand began returning to seasonal patterns.” -AMD, Q3 Earnings

“Question – Blayne Curtis: Thanks. And then I just wanted to ask on the PC market, I think you and Intel have seen you were under-shipping in the first half. Maybe you're kind of over-shipping a little bit now, restocking. I'm just kind of curious your perspective of what that normalized run rate is in terms of the size of the PC market and kind of any perspective, if inventory levels are starting to move back up.

Answer – Lisa T. Su: Yeah, I would say again, Blayne, when we look at sort of the third quarter and sort of the environment that we're on now, I think inventory levels are relatively normalized, and so the sell-in and consumption are fairly close. We were building up for holiday season that is a strong season for us overall. When I think about the size of the market, I think from a consumption standpoint, this year is probably somewhere like 250 to 255 million units or so.”

“Jean Hu

Yeah. Hi, Stacy. I'll say the first thing is, if you look at 2023, it's a very unusual year for the industry, right, especially the PC market. It's one of the worst down cycles during the last 3 decades. So during that kind of a down cycle, definitely, we had headwinds on gross margin side, on our Client business, which we have made significant progress in Q3 and Q4 in second half.”

Microsoft:

“In our consumer business, PC market unit volumes are returning to pre-pandemic levels.”

“Windows OEM revenue increased 4% year-over-year, significantly ahead of expectations driven by stronger-than-expected consumer channel inventory builds and the stabilizing PC market demand noted earlier, particularly in commercial.”

Previous Cyclical Behavior

According to Deutsche Bank, past semiconductor cycles have lasted on average of ~28 months (2 years, 4 months).

If we look at the beginning of 2018 to the end of Feb 2020, the last down cycle, the SOXX was down 14% off of its high due to the US and China trade war, which included bans on Huawei and ZTE. Semiconductor companies were negatively impacted by these bans. By the end of February 2020, semiconductor stocks were down the following from their highs:

QRVO: down 15%
HP: down 21%
SWKS: down 22%
QCOM: down 18%
DELL: down 42%

Conclusion:

As we look toward 2024, memory and PCs are shaping up to be a predominant theme. This broad analysis looks at management commentary across a range of companies that all seem to point toward the bottom being in for PCs and memory. In the coming weeks, we will look closer at specific companies that will participate as we narrow our focus for 2024.

Recommended Reading:

Big Tech companies continue to invest in AI

Posted on November 10, 2023June 30, 2026 by io-fund

Big Tech capex is a leading indicator for AI semiconductor companies and has been a secular tailwind for our holdings, such as Nvidia and AMD. The combined capex of Big Tech companies has increased from $41.4 billion in 2017 to $150.6 billion in 2022, growing at a CAGR of 29.5%. In the recent earnings calls, management teams from big tech companies are indicating they will continue to invest in AI.

On a side note, increased capex related to AI does not mean AI stocks will move in a linear fashion, rather we track data like this to help us determine what to buy during selloffs, and at the bottom of selloffs.

Semiconductor Market Update

According to the Semiconductor Industry Association (SIA), global semiconductor sales were up 1.9% MoM and down (-4.5%) YoY in September to $44.9 billion. Q3 global semiconductor sales were up 6.3% QoQ and down (-4.5%) YoY to $134.7 billion.

John Neuffer, SIA President and CEO said, “Global semiconductor sales increased on a month-to-month basis for the seventh consecutive time in September, reinforcing the positive momentum the chip market has experienced during the middle part of this year,”increased on a month-to-month basis for the seventh consecutive time in September, reinforcing the positive momentum the chip market has experienced during the middle part of this year,” he further said, “The long-term outlook for semiconductor demand remains strong, with chips enabling countless products the world depends on and giving rise to new, transformative technologies of the future.”

Meanwhile, South Korean exports rose in October as semiconductor exports reported the smallest drop since August 2022 of (-3.1%) YoY in October. Chip sales helped the rise in the country’s exports for the first time in about a year.

Management Commentary on Big Tech Capex

Microsoft

Microsoft spent $28.40 billion in capex in 2022, up 3.3% YoY. YTD September 2023, the company has already spent $29.7 billion and therefore will see a significant jump in capex for the year 2023, helped by investments in cloud and AI.

Amy Hood, CFO of Microsoft, said in the recent earnings call. “Capital expenditures, including finance leases were $11.2 billion to support cloud demand, including investments to scale our AI infrastructure. Cash paid for PP&E was $9.9 billion.” including investments to scale our AI infrastructure. Cash paid for PP&E was $9.9 billion.” She further added, “We expect capital expenditures to increase sequentially on a dollar basis, driven by investments in our cloud and AI infrastructure. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.”driven by investments in our cloud and AI infrastructure. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.”

Nvidia had announced last year that they have a multi-year collaboration with Microsoft to build a giant AI supercomputer using thousands of Nvidia GPUs, Nvidia Quantum-2 InfiniBand, and full stack of Nvidia AI software to cater to the growing demand for AI.

Alphabet

The company spent $31.49 billion in capex in 2022, up 27.8% YoY. In the recent quarter, the company’s capex grew by 10.7% YoY to $8.06 billion. YTD September 2023, the capex was $21.3 billion down (-11.1%) YoY. However, the company will see an increase in Q4 and continue to grow in 2024.

Ruth Porat, CFO of Alphabet, said in the recent earnings call. “Finally, our reported CapEx in Q3 was $8 billion, driven overwhelmingly by investment in our technical infrastructure with the largest component for servers, followed by data centers, reflecting a meaningful increase in our investments in AI compute.reflecting a meaningful increase in our investments in AI compute.

The growth in reported cash CapEx in Q3 is somewhat muted due to the timing of supplier payments, which can cause variability from quarter-to-quarter. We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.” We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.”

She further clarified to an analyst that “2024 aggregate CapEx will be above the full year 2023.” “2024 aggregate CapEx will be above the full year 2023.”

The main takeaway is that the investment in technical infrastructure is growing and will continue to grow in 2024. There is an increasing shift in investment in technical infrastructure (i.e., AI and cloud) compared to other capex like office facilities, which is of prime importance for our portfolio. Ruth had clarified the change in shift in the Q4 2022 earnings call, “We're increasing our investments in technical infrastructure. And that's not just for AI. That's to support investments across Alphabet, in particular in Cloud as well. And at the same time, we're meaningfully decreasing our CapEx for office facilities.”we're meaningfully decreasing our CapEx for office facilities.”

Amazon

The company spent $58.62 billion in capex in 2022, down (-2%) YoY. The key takeaway is the company’s technological infrastructure spend is increasing. To understand the breakup of Amazon’s capex, we looked at some of the other previous earnings calls and understand technology infrastructure spend to be over 50% of the total capex. Brian Olsavsky, CFO of the company said in the Q2 2022 earnings call, “In 2021, we incurred approximately $60 billion in capital investments. , “In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores, “In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores.” He further said, “We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”“We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”

The guidance for 2023 capex is $50 billion, down (14.7%) YoY. However, technology infrastructure continues to grow. Brian said in the recent earnings call. “Now, let's turn to our capital investments. We define our capital investments as a combination of CapEx plus equipment finance leases. These investments were $50 billion for the trailing 12-month period ended September 30, down from $60 billion in the comparable prior year period. For the full year 2023, we expect capital investments to be approximately $50 billion compared to $59 billion in 2022. We expect fulfillment and transportation CapEx to be down year-over-year, partially offset by increased infrastructure CapEx to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.”We expect fulfillment and transportation CapEx to be down year-over-year, partially offset by increased infrastructure CapEx to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.”

We will be listening closely for 2024 capex discussions next quarter.

Conclusion

We continue to monitor Big Tech capex commentary and are encouraged by Meta’s recent guide for FY2024. Meta is the only company that has provided this level of visibility. In addition to a potential increase in capex from Big Tech, we are hearing across the board that a higher allocation of capex is going toward AI infrastructure.

With that said, it’s normal for cloud IaaS to go through periods of optimization. Given Meta’s guide, we are hopeful a period of optimization will not happen in 2024. Meanwhile, we will continue to closely monitor Big Tech capex comments closely as an important proxy for AI accelerators.

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

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Apple Q4: iPhone Revenue Accelerates while Services Shine

Cloudflare 3Q23 Earnings Summary

Supermicro Fiscal Q1: “Conservative” Guide

AMD Q3 Earnings: $2B in GPU Revenue for 2024

AMD Q3 Pre-Earnings: With Bated Breath for Q4 Commentary

Posted on October 31, 2023June 30, 2026 by io-fund

Nvidia’s dominance and AMD’s potential are both massive, which is why the battle between these two companies is far more exciting than the Mag 7 combined. Where else can you find the most powerful trend we’ve seen in decades come head-to-head between two companies? The MI300 will ramp in Q4 with El Capitan, but it’s the additional color management provides in terms of Q4 data center commentary that the market will be looking for. It may come in Q4 or the management team may force investors to wait for additional color until early 2024. Regardless, this is a highly anticipated earnings report, not only for the I/O Fund but I suspect many will be watching this report with interest given the catalyst that AMD is sitting on — and most crucially, must execute on.

Revenue and EPS:

Revenue for this quarter is expected to be $5.7 billion, per both management guidance and analyst consensus. This represents growth of 2.3%. This should be the bottom for AMD with revenue consensus at 14% next quarter and accelerating for the next four quarters through September of 2024. When there’s a catalyst on the horizon, I tend to see analyst estimates as a baseline.

EPS also rebounds from here with $0.60 EPS expected this quarter, yet EPS will reach $1.11 EPS by September 2024.

Margins:

GAAP gross margin was 46% last quarter. The last few quarters, GAAP GM was affected by the Xilinx acquisition. Typical range is GM of 45% in 2022 and 48% in 2021.

AMD’s guidance for Q3 is adjusted gross margin of 51%. This represents 100 basis points improvement from the previous quarter.

The operating margin was 0% last quarter. The CFO has been clear that it will recover when client sales of PCs recover. According to most industry analysts who track PC sales, we have bottomed in Q3 or will bottom in Q4 (see below). The GAAP OM was 5% in 2022 and 25% in 2021.

Adjusted operating margin was 20% last quarter for adjusted operating profit of $1.06 billion.

Net margin was 0% while adjusted net margin was 17.5%.

Cash Flow:

AMD reported operating cash flow of $379 million last quarter. This is low for the company as the last two fiscal years have been $3.6B and $3.5B, respectively.

Free cash flow was $254 million in the most recent quarter, for a margin of 4.70%. This compares to a FCF margin of 13% last year and a FCF margin of 20% in 2021. The company has $6.3 billion on its balance sheet with $2.46 billion in debt.

Key Segments:

Data Center:

The data center segment has been reporting negative growth due to tough comps. Last quarter growth was (-11%) compared to 83% in the year ago quarter.

Investors should expect revenue growth to be flat YoY for Q3 yet is expected to report double digit growth QoQ. For Q4, DC is expected to report 50% sequential growth as there will be sizable revenue from MI300s powering the El Capitan supercomputer that launches in November. We covered this here following the last earnings report. For a deep dive on AMD’s MI300 GPUs and how they compare to Nvidia’s H100 GPUs, reference this analysis here.

According to the earnings call Q&A, the acceleration in the data center between Q3 and Q4 will be about 50% growth. This is exciting, yet the market will want to see more balanced, commercial demand beyond the government-owned supercomputer. I’ve included the transcript that references the 50% growth below as this is what most of the near-term price action will be based on.

In terms of when AMD will show up with broader MI300 GPU sales, it took Nvidia six months from initial shipments in October through the April quarter to see a more obvious impact. That’s a general idea of what to expect. It could be a bit sooner or a bit later.

Per our write-up last quarter, management stated: “In the datacenter market, we see a mixed environment as AI deployments are expanding. However, cloud customers continue optimizing their datacenter compute and enterprise customers remain cautious with new deployments. Against this backdrop, we expect strong growth driven by higher fourth gen EPYC and Ryzen 7000 processor sales and initial shipments of our Instinct MI300 accelerators in the fourth quarter.”

Regarding fourth gen EPYC, this is an important series to help AMD resume strength in the data center. Last quarter 4th Gen EPYCs carried the segment as CPU revenue nearly doubled while 3rd Gen inventory levels were high. In September, the company released 4th Gen workload-specific CPUs for edge computing and telcos. This needs to be monitored closely as we want to see 4th Gen strength overtake 3rd Gen weakness.

Here is the transcript on the discussion around Q4’s 50% revenue impact from El Capitan:

Matt Ramsay:

“Last quarter, you had given us some metrics around potentially being able to grow your datacenter business by 50% in the second-half of the year versus the first-half. And maybe you could give us a little bit of an update on how you're thinking about that milestone and the drivers of growth across CPU and accelerator for the back-half? Thanks.”

Lisa Su:

“And we are still looking at a zip code of, let's call it, 50% plus or minus second-half to first-half. So, it's a big ramp, but when we look at all the components, I think that the customer pull is certainly there. And it's exciting to be in this part of the industry.”

When asked whether the company has the supply to meet the demand, the CFO stated:

“We feel that we have ample supply for an aggressive ramp in the fourth quarter and into 2024. But this is certainly one of the areas that we spent quite a bit of time to ensure that we do have that confidence.”

Per management, El Capitan will contribute “several hundred million” in revenue for Q4. Of the obstacles that AMD must overcome, our analysis made it quite clear it was the software part of the equation that AMD must solve.

Per management: “There is a sort of large, call it, lumpy supercomputer win, so our El Capitan win will be in the fourth quarter primarily, with a little bit in the first quarter” and later it was stated by management: “You can assume that the El Capitan is several hundred million” of the Q4 data center revenue.

Ideally, AMD announces commercial customers soon. I’m sure Meta will be one of the first customers, considering the company has been ordering Bergamo from AMD, was on stage at AMD’s conference recently in June, and PyTorch is optimizing its framework for AMD’s software stack RocM. It’s just a guess at this point, but that’s a lot of collaboration.

ONE MORE COMMENT ON THE 50% QoQ RAMP in Q4:

“Aaron Rakers

[…] I think, last quarter, you had alluded to, for the full-year, the expectation is still growing 10% or double digits, I should say, for the full-year the Datacenter business, just confirming that. And what I'm really trying to ask is, given the guidance of flat year-over-year growth in Datacenter in 3Q, it would seem, if my math is correct, you're implying a 50% or so increase sequentially into 4Q. I'm just trying to frame exactly how you're thinking about the cadence of what 4Q looks like, underpinning that expectation?

Jean Hu

Hi, Aaron. Thanks for the question. I think as Lisa just mentioned earlier, it's a very dynamic market. There are puts and takes. We have a tremendously strong momentum with our product portfolio, but there is continued softness in enterprise market, and also call it, the optimization is still ongoing. So, overall on balance, we think year-over-year it's probably more like a high single-digit. It's really strong ramp, not only in Q3, right, sequentially earnings double-digit — strong double-digit. And the Q4, of course we're going to see continued sequential strong ramp.”

Last year, in FY2022, the data center segment reported $6.043B in revenue. This means at high single-digit, or 9% growth, FY2023 DC segment will report $6.586B. This leaves $3.986B for the next two quarters given $2.6B has already been reported in Q1 and Q2 this year.

The CFO is implying $1.6B for this upcoming quarter per the “flat YoY” comment. This also matches the “double digit” QoQ growth. This leaves $2.386B revenue for Q4. These are the approximate numbers to watch in the upcoming quarter.

Client Segment/PCs:

Although data center is where the focus tends to gravitate, the Client Segment is going to be critical in the upcoming report. Last quarter the Client / PC segment was up 35% QoQ yet was down (-54%) YoY. The March quarter should have marked the bottom at $739M in revenue, with the June quarter showing some improvement at $998M in revenue.

Per management in the last earnings call: client segment will grow in the seasonally stronger second half of the year” including a launch of a dedicated AI engine for the mobile 7040 Ryzen CPUs.

Industry analysts at Gartner are targeting Q4 as the rebound quarter for PCs. The CFO of AMD likely has a good idea as to their unique levels of demand, therefore, we are looking for Q3 to be the rebound given the CFO’s comments. Whether it happens in Q3 or Q4, it’s a good supportive segment to the data center ramp that El Capitan will provide, at minimum.

Gartner’s most recent report on PC sales:

Worldwide PC shipments totaled 64.3M units in the third quarter of 2023, a 9% decrease from the third quarter of 2022, according to preliminary results by Gartner.
While the third quarter's results mark the eighth consecutive quarter of decline for the global PC market, Gartner is expecting to see growth again starting in the fourth quarter of this year. "There is evidence that the PC market's decline has finally bottomed out.”
The good news for PC vendors is that that the worst could be over by the end of 2023,” said Kitagawa. “The business PC market is ready for the next replacement cycle, driven by the Windows 11 upgrades. Consumer PC demand should also begin to recover as PCs purchased during the pandemic are entering the early stages of a refresh cycle.”
Gartner is projecting 4.9% growth for the worldwide PC market for 2024, with growth expected in both the business and consumer segments.

An analyst from Citi has September as the rebound, per an analyst note: “Christopher Danely notes that notebook shipments were up 7% month-over-month in September, which was well above the firm's expectation of down 2% month-over-month, driven by stronger seasonal demand and pull-in from Q4. As a result, Q3 notebook shipments were up 6% quarter-over-quarter, which is above the firm's prior expectation of up 3% quarter-over-quarter.”

Gaming:

Gaming is expected to decline again this quarter. We will look for comments on when this segment will bottom. The Radeon 7000 series built on RDNA 3 architecture is still ramping, but the company has been facing tough comps. Last quarter, the segment reported (-4%) YoY revenue of $1.6B.

Embedded:

The embedded segment will be weaker than usual over the next two quarters. Per management: “Embedded segment revenue to decline in the back-half of the year as lead times normalize and some customers reduce their inventory levels.” Embedded has been reporting very high and unusual growth due to the Xilinx acquisition with triple digit growth and even four-digit growth (it was up 1,868% in the Dec quarter). Look for embedded to normalize.

A Note on the Software Platform RocM:

In the deep dive on AMD entitled AMD is Ready to Rival on AI Acceleration, the analysis broke down the differences between CUDA and RocM. There is where Nvidia has the largest lead over AMD. As the two competitors face off, there will be many new developments to track, most recently AMD’s recent acquisition of Nod.ai to (quickly) expand its open AI software capabilities. I imagine analysts will be asking about this acquisition on the call, and our post-ER write-up will cover any Q&A on AMD’s plans with this acquisition.

Conclusion:

AMD is the top earnings report for our firm to watch over the next few quarters. We are not looking for a H100 moment, rather we are looking for a MI300 moment. For AMD, this is characterized by undercutting the competitor on price while bringing the heat on performance. If the performance is there (to be determined by benchmark tests) than AMD will fare well with the hyperscalers. Let’s see how this unfolds.

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TSM Results: Recovery in sight but technicals look weak

Posted on October 20, 2023June 30, 2026 by io-fund

Taiwan Semiconductor Manufacturing delivered a strong earnings report that beat top-line and bottom-line estimates. The company's Q4 revenue guide was also higher than analyst estimates. However, the chart is not looking good, and this may be a situation where technicals are providing a heads up that TSM has too much geopolitical risk for buyers to step in. We cover the earnings report below, and as a courtesy to Pro Members, we are relaying the technical setup we are tracking. Advanced Members will receive real-time trade alerts regarding any final decisions on this position.

TSM expects healthy growth in 2024. Management mentioned in the earnings call that they see early signs of demand stabilization in the PC and smartphone markets. Along with this, due to technological leadership, it can capture a significant portion of AI business.

Revenue & EPS

Revenue declined by (-14.6%) YoY and up 10.2% QoQ to $17.28 billion. Revenue came at the higher end of the guidance of $16.7 billion to $17.5 billion and beat the analysts estimate by 1.48%.

Wendell Huang, CFO of the company, said, “Our third quarter business was supported by the strong ramp of our industry-leading 3-nanometer technology and higher demand for 5-nanometer technologies, partially offset by customers’ ongoing inventory adjustment,”strong ramp of our industry-leading 3-nanometer technology and higher demand for 5-nanometer technologies, partially offset by customers’ ongoing inventory adjustment,” he further added, “Moving into fourth quarter 2023, we expect our business to be supported by the continued strong ramp of our 3-nanomenter technology, partially offset by customers’ continued inventory adjustment.”continued strong ramp of our 3-nanomenter technology, partially offset by customers’ continued inventory adjustment.”

Management guidance for the next quarter is $18.8 billion to $19.6 billion, representing a YoY decline of (-3.66%) at the mid-point, which came in about 5% higher than estimates, primarily due to the strong ramp up of 3-nanometer technology.

EPS came at $1.29 and beat estimates by 11.2%.

Margins

Gross margin came in at 54.3% compared to 60.4% in the same period last year and 54.1% in Q2. This beat was management guidance of 51.5% to 53.5%. The sequential improvement of 20 basis points was due to a higher capacity utilization rate and more favourable foreign exchange rate, and was partially offset by the initial ramp-up of the 3-nanometer technology.
Management guidance for gross margin next quarter is 51.5% to 53.5%
The operating margin of 41.7% compared to 50.6% in the same period last year and was lower by 30 basis points QoQ.
Net margin of 38.6% compared to 45.8% in the same period last year and 37.8% in Q2.

Cash Flow and Balance Sheet

Overall, cash flow is improving and returning to normal levels.

Operating cash flow of $9.31 billion or 54% of revenue compared to $13.61 billion or 67% of revenue in Q3 of last year, yet is up from 35% of revenue in Q2.
Free cash flow of $2.15 billion or 12% of revenue compares to a FCF margin last year of 24% of revenue, yet is a marked improvement from last quarter at (-17%) of revenue.

Capex was down (-18.9%) YoY to $7.1 billion. Management confirmed in the earnings call that capex will be $32 billion for 2023. In the last earnings call, they mentioned that due to the uncertainty in the business environment, capex would be at the lower end of their range of $32 billion to $36 billion.

Looking forward, the management expects capex to cool off in the next few years, which is a positive if revenue accelerates. Wendell Huang said in the earnings call. “Now in terms of CapEx, what we can see now is that we, in the past few years, have invested very heavily to capture the growth in the next few years. And as we begin to harvest those investments, we expect our — the increase of our CapEx to be leveling off in the next few years. That doesn't mean the dollar amount is going to reduce. But the capital intensity is expected to decline in the next few years.”have invested very heavily to capture the growth in the next few years. And as we begin to harvest those investments, we expect our — the increase of our CapEx to be leveling off in the next few years. That doesn't mean the dollar amount is going to reduce. But the capital intensity is expected to decline in the next few years.”

The company has cash and marketable securities of $48.06 billion and debt of $29.1 billion.

Key Metrics

The 3-nanometer process technology is seeing a strong ramp in the second half of the year supported by both HPC and smartphones. CEO Dr. C.C. Wei, said in the earnings call. “N3 is already involving production with good yield, and we are seeing a strong ramp in the second half of this year, supported by both HPC and smartphone applications. We reaffirm N3 will contribute a mid-single-digit percentage of our total wafer revenue in 2023, and we expect a much higher percentage in 2024 supported by robust demand for multiple customers.”with good yield, and we are seeing a strong ramp in the second half of this year, supported by both HPC and smartphone applications. We reaffirm N3 will contribute a mid-single-digit percentage of our total wafer revenue in 2023, and we expect a much higher percentage in 2024 supported by robust demand for multiple customers.”

Smartphone grew by 33% QoQ compared to a decline of (9%) QoQ in Q2
High-performance computing grew by 6% QoQ compared to a decline of (5%) QoQ in Q2
IoT grew by 24% QoQ compared to a decline of (11%) QoQ in Q2
Automotive declined by (24%) QoQ compared to a growth of 3% QoQ in Q2
Digital Consumer Electronics declined by (1%) QoQ compared to an increase of 25% QoQ in Q2.
Others declined by (2%) QoQ compared to a decline of (5%) QoQ in Q2

Conclusion

The signs of stabilization of demand in PC and smartphone markets, and the potential to capture the AI business due to technological leadership, lay a strong foundation for growth in 2024. However, the technical chart is at odds with this conclusion.

Technical Analysis

By Knox Ridley

TSM, like many stocks off the October low, has not been a vertical pattern. In fact, as you can see below, it has many overlaps, marked with large swings in both directions. The pattern into the June high best fits as a large degree corrective rally (B wave). In other words, the 2022 decline was the A wave down, 2023 was the B wave up, and the pattern requires one more down move to new lows before completing, which would be called the C wave.

What gives me caution is that C waves are always 5-wave patterns. Now, look at the shape of the pattern from the June high. It’s clearly 5 waves down. The other issue I have is that TSM has broken the major trend channel pointing up. This is rarely a good sign and further supports the above analysis. The retrace up is currently testing the lower end of the channel, and unable to break back in.

In conclusion, this bounce is likely a reasonable place to exit/trim. We will be look to much lower levels to build a long-term position in this company.

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

Recommended Readings:

AEHR Fiscal Q1: More Orders Likely this Fiscal Year

Posted on October 6, 2023June 30, 2026 by io-fund

AEHR came in as expected and beat in some cases. Management reiterated guidance of at least $100 million for 50% year-over-year growth. Given the company added its sixth customer this quarter, the market may have wanted a raise. If we are patient, it’s likely AEHR will see a raise over the next two to three quarters. Management alluded to more orders likely being placed and delivered this fiscal year. This is detailed in the earnings notes below.

AEHR has a large and obtainable TAM relative to its market cap, which we’ve covered in the past when we stated: “SiC wafer market is expected to grow 35X by 2030 – that’s not a typo. “Forecast from William Blair estimate that the silicon carbide market for devices in electric vehicles alone, such as traction inverters and onboard chargers is expected to grow from 119,000 6-inch equivalent silicon carbide wafers for EVs in 2021 to more than 4.1 million 6-inch equivalent wafers in 2030, representing a compound annual growth rate of 48.4%. This equates to almost 35 times larger in 2030 than in 2021.”

As industrial uses for SiC ramp, the TAM could be closer to 6 million wafers needed every year by 2030. This was discussed on the call as the past two customers were not EV related. Batteries were also discussed on the call, and we’ve included these notes below.

Revenue:

Revenue of 93.3% beat estimates of 80.4%. These beats are easier on small numbers. The difference was about $1 million in revenue at $20.6M reported compared to $19.25M expected.

Product revenue declined $1.7M QoQ to $19.4M in revenue. Services was flat at $1.27M in revenue.

Management went out of their way to remind investors that this is the strongest first quarter they’ve ever reported, and that first quarter is typically seasonally weak. We also reminded our Members going into the earnings call that AEHR’s revenue can be lumpy.

EPS:

EPS was in line:

GAAP EPS of $0.16 is up from $0.02 in the year ago quarter.
The adjusted EPS of $0.18 beat estimates of $0.16 EPS.

Margins:

The gross margin this quarter is weak at 48.4%, and this is the lowest gross margin since Q1 of last year. The Fox-XP system’s automated WaferPak aligner caused the decrease in margin. The automated aligners are built externally. Per the CEO: “the first units have a higher incremental cost to us than the ones going forward.” When the CFO was asked if the gross margin would return to 50%, he affirmed this by saying “So we're still targeting 50% above the margin for the year, and that's what we're looking at.”

Operating margin was also softer than it’s been in previous quarters at 20%. The CFO stated opex was higher due to “increased headcount related expense and R&D programs.”

Gross margin of 48.4% compares to 51.5% last quarter and 42% in the year ago quarter
Operating margin of 20% compares to 25.3% last quarter and 4.3% in the year ago quarter. This resulted in operating income of $4.12 million.
Net margin of 22.6% was also softer on a sequential basis but up nearly 700% year-over-year (due to small numbers).

Cash Flows:

The operating cash flow of $3.9 million was down 28.6% year-over-year. However, cash on the balance sheet of $51 million is up from $36.2 million in the year ago quarter and up 6.5% sequentially.

Key Metrics:

I suspect the key metrics is why we are seeing the weak price action after hours. Inventory is higher than usual at $31.56 million, up $7.6 million QoQ. Often, this can be a flag for a semiconductor stock yet management has stated their plan is to increase inventory to meet upcoming demand. Per the CEO: “ I mean we are able to ship more than anybody else. We literally can ship up to, call it, 50, 80, 100 testers, call it, wafers or blades of capacity a month, we are shipping more per month than the combined number of installed base of every other competing alternative has ever shipped.”

Bookings in Q1 of $18.4 million declined (-3.7%) year-over-year. Bookings were up from $15.2 million last quarter. Backlog of $22.3 million was up 14.4% year-over-year yet was down sequentially. We had discussed that these are lumpy in our pre-earnings report. The effective backlog of $24 million was a bit lackluster given management had stated they received $15 million in effective backlog for Q1 three months ago.

Earnings Call:

AEHR’s key metrics matter, but the stock tends to move intra-quarter with new order announcements. If AEHR gets more orders in the next two quarters, it will be very positive for the stock as we are hovering at a baseline guide of $100 million this year. As investors, we are already sold on the product’s potential but I do include a few more notes on that regard, as well.

Comments on Upcoming Orders, New Customers and Q2 Revenue Recognition

In the opening comments, the CEO stated the following: “Acceptance and production release of these FOX XPs with the integrated aligners and the associated revenue recognition provide a solid start to our second quarter revenue and pave the path for revenue recognition immediately upon all future shipments of these products to this customer and forecasted shipments to additional customers this fiscal year.”

An analyst asked for more clarification and AEHR stated that $8 million in revenue was being recognized in September due to a deferred situation on two aligners.

Separate from this $8M, this was also a bullish statement on the call: “We continue to feel confident that this customer will move forward with us using the FOX-XP multi-wafer solution for their high-volume needs, including initial purchase orders and system shipments this fiscal year.”

And management hinted again they may see more order than what is currently being forecast:

“Our meetings also included face-to-face meetings with potential new silicon carbide companies who have now told us that they intend to place their first purchase orders with us over the next several months, including some that want us to ship systems, WaferPaks and aligners to them this fiscal year.”

New Customers:

AEHR announced their sixth customer for silicon carbide this quarter. Customer #5 and Customer #6 are not EV customers, which is generally seen as a positive because it increases TAM by 2.8 million wafers in addition to the 4.5 million wafers estimated for the EV market.

“These additional applications expand our market opportunity beyond the 4.5 million 6-inch equivalent silicon carbide wafers that William Blair forecast will be needed per year by 2030 just for electric vehicles. These new applications are driving an additional 2.8 million 6-inch equivalent wafers annually by 2030 to address industrial, solar, electric trains, energy conversion and other applications.”

With that said, ON Semi is 88% of revenue, and thus it’s quite apparent EV-related customers have a larger need for AEHR’s testing equipment as new customers have not been able to shake ON’s large customer share. ON was 79% last quarter so this is increasing – although, as stated, AEHR is lumpy and so this could decrease again next quarter.

More on 800-volt Batteries:

In the call, management elaborated on the need for silicon carbide by 2025 to 2026. Specifically management stated it was due to 800 volt EV batteries. Management stated: “Per UBS in 2023, 91% of the batteries sold in electric vehicles are forecasted to be 400 volts and only 9% are 800 volts. But by 2026, UBS expects a percentage of 800-volt battery cars to be above 30%, which is why it appears so many silicon carbide suppliers are timing their major ramps to be in the 2025 to 2026 time frame.”

The 800-volt battery needs to be tested up to 1,200 volts AC. AEHR’s WaferPaks are able to test and burn-in wafers up to 2,000 volts whereas competitive systems spark and create damage at 900 volts. We’ve covered AEHR’s product extensively (see recommended reading below) yet this was another mention of AEHR’s competitive advantage that is notable.

This was also a big statement on the call product-wise: “In fact, we've never lost a head-to-head evaluation to a competitive product since introducing our FOX-NP and XP configured with the silicon carbide and gallium nitride test resources.”

Conclusion:

Overall, AEHR has a bright future but small caps are very volatile. This is where technical analysis helps quite a bit. For example, we moved to the sidelines during a drawdown in H1 2022 and then re-entered the stock and captured a 151% move from the August 2022 low. We will continue to use technical analysis especially for small caps, which carry much more risk than a large cap stock.

Interesting enough, Knox had stated last week that the $37 to $38 level is what he’s expecting to see. This level needs to hold for the earnings report to be a buy.

For real-time trade alerts and access to our 1-hour webinars, upgrade to Advanced Market Signals.Advanced Market Signals.

Product Thesis:
AEHR: The Silicon Carbide Revolution – read this for our investment thesis

Original Analysis in 2021:
Deep Dive on AEHR – more information on our investment thesis

Earnings Coverage:
Fiscal Q4 Earnings: Strong Top Line, Strong Bottom Line
Fiscal Q3 Earnings: All Eyes on Next Fiscal Guide
Fiscal Q2 Earnings: Silicon Photonics and Inventory/Capacity – read this for why AEHR is outperforming its competitors.

AEHR Customer:
ON Semiconductor: Powering the EV Highway

AEHR Fiscal Q1 Pre-Earnings: Rapid Growth Up Ahead

Posted on October 5, 2023June 30, 2026 by io-fund

For those new to AEHR, please reference Recommended Reading for product thesis, previous earnings coverage and more. All of our Must-Read Theses for the I/O Fund Portfolio are located here.are located here.

AEHR is the rare small cap that has top line growth coupled with bottom line strength. We recently discussed what comprises a defensible portfolio in tech in our Q3 Kickoff webinar. AEHR fits the criteria we outlined in the webinar, and has seen a high allocation at times in our portfolio because of how many boxes it ticks. It’s both the consistent revenue growth andand the bottom-line growth that causes this stock to defy the odds.

AEHR has seen a ramp in demand over the past three years because silicon carbide is replacing silicon in electric vehicles. Tesla was the first to adopt silicon carbide for the 2018 Model 3 by working with ST Microelectronics to add SiC MOSFETs to an inverter design. The result was a more compact, lighter inverter at 4.8Kg compared to Si IGBT inverters that weigh 2-3X more (8kg to 12kg). SiC inverters offer 97% efficiency, resulting in more range, and this is achieved without the need to increase battery capacity.

As also pointed out in our previous write-up, by withstanding higher temperatures combined with lower switching losses and lower thermal resistance, silicon carbide (SiC) can handle more power while using less energy. SiC reduces the power consumption and reduces the size of power supply systems that require high-voltage conversion, which makes SiC especially compatible with electric vehicle (EV) on-board chargers and solar photovoltaic power systems.

Financials:

AEHR will be going through a few quarters of rapid growth.

Revenue:

This quarter, the company is expected to report revenue of $19.3 million, for growth of 80.4%. The next few quarters are also expected to be strong on growth (see below).
Fiscal year estimates have remained unchanged since the last earnings report at 58.4% growth for $102.9 million in revenue. Management provided guidance for at least $100 million in revenue, or 50% YoY growth.

Notably, the next two years look stable for AEHR at 55% growth expected in FY2025 and 42% growth in FY2026. There are only two analysts covering the stock for FY2025, and only one analyst covering the stock in FY2026. However, it helps to see there isn’t a sudden drop off in growth expected (as of now). There was a downward revision of 17% over the last month for the upcoming quarter, however, with fiscal year estimates remaining steady, it’s a matter of this revenue being recognized later in the year.

Pictured Above: AEHR is approaching a few quarters of rapid growth

EPS:

EPS of $0.23 in the last quarter beat expectations by 7%. In the upcoming quarter, the company is expected to report EPS of $0.16. Overall, earnings will nearly double in FY2024, per management guidance of “GAAP net income of $28 million for at least 90% earnings growth.” As growth investors who want defensible companies this is music to our ears.

Margins:

As stated, AEHR is one-of-a-kind in terms of being a small cap tech stock with strong margins.

Gross margin last quarter of 51.5%. This can be impacted by 1-2% based on product mix and freight costs. Overall, it’s been ticking upward and has been in the low 40% and mid 40% range a few times over the past eight quarters.
Operating margin last year of 20.6% has seen stellar margin expansion from 15.4% for the previous fiscal year. The operating margin last quarter was 25.3%.
The company pays stock-based compensation of 3% for an adjusted operating margin of 27.4%.
Net margin grew 380 basis points last fiscal year to 22.4%. The net margin for the quarter was 27.4%.

Cash Flow:

Operating cash flow has been lumpy overall but was very strong last quarter for 800% growth to $5.87 million. This led to a cash flow margin of 26.4%. However, this is unusual. The previous op cash flow margins were 3% and 15.4% in FY2022 and FY2023, respectively.

Similarly, the free cash flow margin last quarter of 21% was higher than usual. For previous fiscal years, the FCF margin trended at 2% in FY2022 and 13.3% in FY2023.

This helped the company’s cash position grow 52% in the most recent quarter to $47.9 million. The company has no debt.

The company has also been exercising at the market (ATM) offerings. The company sold $7.9 million worth of shares in the third quarter and expects to sell shares worth $17.7 million in the upcoming fiscal year.

Key Metrics:

The company has been increasing its inventory in anticipation of heightened demand. The inventory stood at $23.9 million last quarter, for an increase of $2.3 million. Per the January earnings call: “We are increasing inventory to support our expected growth in the second half of fiscal 2023, and we continue to purchase inventory to ensure adequate supply to meet current customer and future customer market demand.”

Bookings in the fourth quarter were $15.2 million, up from $4.4 million in the year ago quarter. These are lumpy but can cause the stock to move quite a bit during a good quarter. What we want to see is FY2024 exceed FY2023, which was at $87.7 million. The highest quarter in company history was fiscal Q3 ending in February at $33.3 million.

Last earnings call, management stated there was more than $15 million in bookings received in the first six weeks of Q1. Let’s see if this quarter can meet or exceed the company’s previous record of $33.3 million. This has led to an effective backlog of $40 million.

Backlog is also lumpy at $24.5 million, up 121% last quarter. As long as these trend upward, the lumpiness is to be expected. In the previous quarter ending in February, the backlog was $31.6 million.

What to Watch For:

Bookings and Backlog are important for this stock. As stated, these can be lumpy but have been trending at historical highs for the company.

AEHR received an order on September 18th that will likely be discussed on the call. The order will be filled by end of calendar 2023. According to the press release, this is an initial order from a new customer. The customer is “a US-based multibillion-dollar semiconductor supplier serving several markets including automotive, computing, consumer, energy, industrial, and medical.”

Look for AEHR to increase its number of customers as we move along over the next few quarters. According to a Craig-Hallum analyst, AEHR may be engaged “with up to two dozen” potential SiC customers.

We’ve been reporting for quite a few quarters that H2 2023 is expected to be strong for the automotive supply chain. Let’s hope this materializes. In the January call, this was stated: “And as we had — if you look at the amount of capacity that everybody’s talking about to hit in 2025 calendar-wise, most people are just really focused on second half 2023 and into 2024 is where just a lot of capacity is coming online and so it may be less to do with the timing of us as the timing of that silicon carbide ramp. And our goal is to get qualified before that ramp happens and have a ton of capacity and material on hand to be able to address it.”

Additional catalysts are silicon photonics and gallium nitride, which have been covered in the recommended reading below.