Taiwan Semiconductor reported earnings last week, providing the first glimpse into the AI semiconductor industry in the second quarter. Riding strong AI chip demand, TSMC boosted its full year revenue growth guidance, yet there are still some lingering doubts about the chipmaker’s growth in Q4.
HPC revenue continues to accelerate, reaching a record at $18 billion in Q2. Net profit reached a record in Q2 as margins outperformed. With that said, TSMC signaled significant margin pressures in Q3 from FX and ramping overseas fabs.
TSMC boosts FY revenue by 5 points
Q2 revenue increased 44.4% YoY and 17.8% QoQ in USD to $30.07 billion, well above TSMC’s guidance for $28.4 billion to $29.2 billion in revenue. This was driven by strong demand for AI accelerators built on TSMC’s 3nm and 5nm nodes.
For Q3, TSMC guided revenue of $31.8 billion to $33 billion. At midpoint of $32.4 billion, this represents YoY growth of 37.8% and QoQ growth of 7.8%. FX is playing a role here in this high-37% guide, with TSMC noting that revenue growth in NT$ is expected to be negatively impacted by 6.6 points based on current exchange rates, or ~31.2% YoY.
For the full-year, TSMC boosted its revenue growth forecast from mid-20% YoY to close to 30% YoY, driven by robust AI and HPC demand.
As it stands, TSMC’s growth in the first three quarters is far above the close to 30% guide, suggesting Q4 could see growth in the single digits. Management said they remain more conservative on Q4 at the moment. This is because although Q4 is typically seasonally strong for consumer electronics and smartphones, there is risk that tariffs put a damper on growth.
Management added that they have not seen any changes in customer behavior, but they are well aware of uncertainties from tariffs on consumer and price-sensitive end-markets. They added that Chinese rebate programs are stimulating near-term demand upside, but this is expected to phase out rather quickly and only create a mild recovery in non-AI demand this year.
HPC revenue rises 14% QoQ and up 19.2% CC
TSMC continues to benefit from robust AI accelerator demand, with HPC now accounting for three-fifths of the chipmaker’s revenue. TSMC stated that HPC revenue rose 14% QoQ in NT$ in Q2, though this increase was more pronounced on a US$ basis due to FX. TSMC’s revenue is recognized in US$, so every 1% appreciation of the NT$ adversely impacts NT$ reported revenue by ~1%.
Therefore, on a US$ basis, HPC revenue rose 19.2% QoQ to ~$18 billion, or up nearly $3 billion from Q1 in constant currency — its largest growth on record. The pace of acceleration in HPC revenue has been astonishingly quick, as the segment is now 2.5x larger than it was two years ago at $6.9 billion. HPC’s share of revenue also has increased 8 points YoY to 60%.
Smartphone revenue increased 7% QoQ to account for 27% of revenue in Q2, notably the strongest sequential increase for the segment since 2022.
IoT revenue increased 14% sequentially to account for 5% of revenue, while automotive was flat and also accounted for 5% of revenue. DCE increased 30% sequentially to account for 1%, while other segments rose 14% sequentially to 2% of revenue.
Revenue by Technology
TSMC’s advanced nodes – 3nm, 5nm, 7nm, and soon, 2nm – contribute the majority of revenue at 74% in Q2, fueled by AI accelerators and smartphones. 3nm ticked back up to 24% of revenue in Q2, while 5nm held flat at 36% of revenue, supported by Nvidia’s Blackwell GPUs. 7nm saw its contribution shrink one point to 14%, while mature nodes also shrunk one point to 26%.
TSMC shared some more details about its upcoming advanced nodes, stating that it remained on track for volume production on its 2nm node beginning in the second half of 2025, with a ramp profile similar to the 3nm node. Management also stated that they “expect the number of new tape-outs for 2nm technology in the first 2 years to be higher than both 3nm and 5nm,” driven by HPC and smartphone.
For the A16 node (1.6nm), TSMC said that it remains on track for volume production in the second half of 2026, believing this node will be best suited for “HPC applications with complex signal routes and dense power delivery networks.”
Margins guided to decline due to FX headwinds in Q3
Despite some FX headwinds to gross margin, TSMC’s operating margin outperformed, driving profit to a record level in Q2. However, Q3’s guide showed increasing FX headwinds and sharper sequential impact on margins.
Gross margin was 58.6% in Q2, at the high end of the guided range for 57% to 59%. Gross margin declined sequentially from 58.8%, with a 2.2 point headwind from FX and a 1 point headwind ramping overseas fabs offset by higher capacity utilization.
Operating margin was 49.6%, increasing 1.1 points sequentially from operating leverage, above guidance for 47% to 49%. Operating margin was up more than 7 points YoY.
Net margin was 42.7%, down slightly from 43.1% in the prior quarter but up nearly 6 points YoY.
For Q3, margins will decline due to FX:
TSMC guided gross margin to decline sequentially to 55.5% to 57.5%, or 2.1 points to 56.5% at midpoint. This is again due to continued FX headwinds, with approx. 2.6 points from unfavorable FX and overseas fab ramp in Kumamoto and Arizona.
Operating margin was guided to decline sequentially to 45.5% to 47.5%, or 3.1 points at midpoint. This would be the lowest level since Q2 2024.
EPS increased 67% YoY, up from 54%
TSMC delivered record profit in Q2, rising 61% YoY to NT$398.3 billion, or ~$12.8 billion. Adjusted EPS of $2.47 beat estimates for $2.31 and increased nearly 67% YoY, accelerating from recent growth in the 50% range. However, EPS growth is forecast to decelerate rather rapidly through Q4, with TSMC barely maintaining double-digit growth.
For 2025, adjusted EPS is expected to increase 35.2% YoY to $9.52, up from 31.5% growth two months ago.
Cash Flows dip yet Balance Sheet is Healthy
Cash flow margins dipped by a larger margin sequentially, and TSMC’s balance sheet remained healthy.
Operating cash flow was $16.2 billion for a 53.8% margin, down from a 74.5% margin in Q1 and a 56.1% margin in the year ago quarter.
Free cash flow was $6.5 billion for a 21.7% margin, down from a 35.1% margin in Q1 and a 25.5% margin in the year ago quarter.
Cash, equivalents and marketable securities totaled $90.4 billion, while debt totaled $32.3 billion.
Capex rose more than 51% YoY to $9.6 billion, slowing from a 74% pace in Q1. TSMC maintained its full year capex guide at $38 billion to $42 billion.
Inventories were $10.43 billion, up from $8.83 billion in Q1; however, the sequential increase looks to have been impacted by FX, as inventories in NT$ were up less than 4% QoQ.
Earnings call Q&A
While management offered little to no clarity on long-term AI growth or CoWoS capacity, they discussed long-term diversification of advanced node manufacturing to the US. Management also offered insights into advanced node capacity that signal Nvidia’s growth could remain strong come 2H.
Arizona Expansion
TSMC provided an update on its global expansion plans, which is important considering onshoring US manufacturing helps reduce geopolitical risk from China for the AI server supply chain. Management shared that they are expecting to bring 30% of their 2nm manufacturing to the US in Arizona.
As a result, TSMC is accelerating and expanding its presence in Arizona with its recent $165 billion investment plan, for six fabs, two advanced packaging fabs, and a major R&D facility to meet high multi-year demand from customers. The second fab in Arizona, utilizing 3nm tech, has finished construction with TSMC aiming to speed up volume production by several quarters. The third fab, offering 2nm and A16 advanced nodes, is under construction.
Management added that “despite the higher cost of overseas fabs, we will leverage our increasing size in Arizona and work on our operations to improve the cost structure,” to help minimize gross margin dilution impacts. This is important considering TSMC is forecasting increasing margin dilution from its growing overseas presence, widening from “2% to 3% every year in the early stages and widen to 3% to 4% in the later stages” over the next five years.
Nvidia H20 Impact
Morgan Stanley’s Charlie Chan questioned about Nvidia’s approval to resume shipping its H20 GPU to China, and if unlocking the Chinese market again would help TSMC raise its AI accelerator growth CAGR upwards from the mid-40% range.
C.C. Wei was rather tight-lipped about the potential impact, given that shipments have (likely) not yet resumed, saying that it is too early to provide an estimate on how this would impact growth. Wei explained that TSMC is not yet ready to increase its forecast, and “another quarter probably will be more appropriate to answer your question,” hinting that the AI accelerator CAGR may be updated in Q3.
However, it is expected that a majority of the H20s to be sold will be from existing inventory in the Taiwanese supply chain, meaning chips already built and revenue already booked. Therefore, it’s hard to see how TSMC could meaningfully increase its CAGR for the next four years based on just the H20.
In terms of China, however, the bigger opportunity here for TSMC may stem from Nvidia’s China-specific Blackwell B30 GPU, which is estimated to see shipments of up to 1.2 million units, or ~20% more than the total estimated H20 inventory. The B30 is expected to hit the market in Q4, following the H20’s resumption largely in Q3.
Advanced Node Capacity
Goldman Sachs’ Bruce Lu asked management about advanced node capacity, and supply-demand imbalances as more AI chips begin to shift to the 3nm node. While TSMC did not offer much beyond capacity being tight, one comment suggested Nvidia’s demand remains very strong.
C.C Wei explained that TSMC’s 5nm capacity is “very tight,” while 3nm capacity is even tighter and will continue to remain tight for a couple of years. Wei explained that TSMC can quickly retool advanced node fabs, such as 7nm to 5nm, 5nm to 3nm, etc, and keep utilization high to help meet demand. He would not commit to saying that demand would outpace supply, but that was implied given his comments of trying to “narrow the gap” between supply and demand.
However, one of the more important comments here was Wei stating that TSMC is using 7nm capacity to support 5nm demand, which provides another piece of evidence alongside surging HPC revenue that Nvidia’s Blackwell ramp is accelerating rapidly. Blackwell is built on TSMC’s N4P process, a subfamily of its 5nm node, offering higher performance, better power efficiency and higher transistor density.
Nvidia CEO Jensen Huang had stated that Nvidia was shipping nearly 1,000 racks per week to hyperscalers in May and expecting to ramp further, and this comment from TSMC supports lasting 5nm demand, likely from Nvidia given its high share of CoWoS (and manufacturing) capacity.
Conclusion
TSMC’s earnings provided more evidence that AI GPU demand remains strong, particularly for Nvidia, with HPC revenue rising to a fresh record with its largest QoQ increase, and commentary for 7nm capacity helping meet high 5nm demand. Supported by this robust AI and HPC demand, TSMC boosted its full-year guidance from mid-20% revenue growth to close to 30% growth, despite lingering concerns of tariff-related weakness come Q4.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
There is a small-cap company that is emerging as a potential beneficiary of an upcoming shift to co-packaged optics over the next two years. Nvidia introduced its first co-packaged optics (CPO) switches with integrated silicon photonics at GTC 2025, addressing the need of providing more bandwidth and faster speeds while reducing energy consumption in exascale GPU clusters.
Nvidia is utilizing TSMC’s COUPE (Compact Universal Photonic Engine) for its Quantum-X and Spectrum-X switches, and this company’s wafer-level optics tech (WLO) is expected to be an integral part of the CPO supply chain for TSMC’s COUPE.
For 2025, this company is expecting little to no revenue from CPO, though it expects the business to ramp quite rapidly come 2026 and beyond, due to the advantages CPO offers in terms of bandwidth and its upstream placement in the supply chain serving a critical need for COUPE.
While this analysis will focus on this stock’s opportunities in wafer-level optics, which has the potential to quickly become a significant driver for revenue growth from the emergence of co-packaged optics, it’s important to note that this segment remains quite small presently while automotive remains the core growth driver for the company.
Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock and crypto entries and exits. Beth Kindig offers weekly deep dives including lesser-known cryptocurrencies and AI stocks, plus the team offers trade alerts. 📈 The I/O Fund team is one of the only audited portfolios available to individual investors. 📊 If you’d like to subscribe to the Advanced Market Signals plan, email us at premium@io-fund.com. 📧4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock and crypto entries and exits. Beth Kindig offers weekly deep dives including lesser-known cryptocurrencies and AI stocks, plus the team offers trade alerts. 📈 The I/O Fund team is one of the only audited portfolios available to individual investors. 📊 If you’d like to subscribe to the Advanced Market Signals plan, email us at premium@io-fund.com. emium@io-fund.com. 📧
Nvidia Unveils New CPO Switches at GTC
The AI industry has been rapidly progressing towards million-plus GPU clusters, with Broadcom outlining late last year that it believes its three hyperscale customers are aiming to each have 1-million GPU clusters by 2027, which will require new scale-up networking architectures and components.
Co-packaged optics (CPOs) are seen as one possible way to break past the cost and power bottlenecks of current pluggable optical technologies and facilitate the development of larger-scale AI clusters. CPOs place optics directly on the switch die which decreases the distance and thus insertion loss, while improving power efficiency due to that shorter distance.
Nvidia’s two new switches unveiled at GTC, the Quantum-X Photonics InfiniBand and Spectrum-X Photonics Ethernet, were designed with that million-plus GPU cluster scale goal in mind. Nvidia says that by replacing pluggable optics with silicon photonics on the package, it can “deliver 3.5x more power efficiency, 63x greater signal integrity, 10x better network resiliency at scale and 1.3x faster deployment compared with traditional methods.” In simple terms, the switches are more reliable, more efficient, consume less power, and are quicker to deploy than current networking tech.
Nvidia VP Ian Buck stated at GTC that the CPO switches help reduce power consumption by eliminating the need for external lasers and pluggable transceivers to achieve a significant reduction in power from 39 watts to 9 watts. Buck explained that this “gives you that benefit from going from 39 watts of power down to only 9 watts of power for the same number of ports, and that's huge. It doesn't sound like 39 sounds a lot. But if you get 400,000 GPUs in an AI supercomputer, there's like 24 megawatts of lasers like so that's a lot of laser light that could be optimized and made more efficient.”
24 MW may not sound like much, but given that the GB300’s are expected to draw up to 140 kW per rack, that’s the equivalent of nearly 172 GB300 racks (or the equivalent of approx. 12,400 individual GPUs) in power savings from the shift to CPO. Thus, by shrinking the bill of materials by eliminating pluggable transceivers while simultaneously providing a much more power-efficient solution, Nvidia can further reduce TCO for its customers.
Nvidia Expects CPO Switch Availability as Soon as 2H 2025
Similar to its GPU roadmap, Nvidia is moving quickly when it comes to its CPO switches, expecting availability for its Quantum-X Photonics InfiniBand switches as soon as the second half of this year, while its Spectrum-X Photonics Ethernet switches are expected to be released in 2026.
TSMC’s COUPE Paves Way for CPO Adoption
Nvidia’s new switches rely on TSMC’s silicon photonics platform called COUPE (compact universal photonic engine).
TSMC first published research on this new platform in 2021, as a team of researchers discussed a primary challenge of mass adoption of silicon photonics, which was at the time the lack of an integration platform that could meet a range of power, performance and cost needs. TSMC’s researchers proposed COUPE, which they said had the ability to meet “the most demanding system requirements and pave the way for [silicon photonics]-based wafer level system integration (WLSI) for high performance computing applications.”
COUPE combines a photonic integrated circuit (PIC) with a 65nm electronic integrated circuit (EIC) via its SoIC-X advanced packaging tech. TSMC says that utilizing SoIC-X “enables the lowest impedance at the die-to-die interface and therefore the highest energy efficiency.” COUPE is also easily integrated with merchant ASICs and GPUs to form a co-packaged structure.
TSMC laid out a tentative timeline at the 2024 North American Technology Symposium in April 2024. At the symposium, TSMC laid forth a plan to enable COUPE in pluggable optics in 2025, and COUPE on substrate in a CoWoS-based CPO in 2026, which it said would offer 2x reduction in power and 10x reduction in latency. TSMC mentioned that it was exploring COUPE on CoWoS interposers for further power reduction.
Recently, TSMC has been rather tight-lipped about COUPE and co-packaged optics — in Q4’s earnings call, CEO C.C. Wei was questioned about CPO and how it would facilitate this shift in the supply chain. Wei answered that for “big volume, I don’t think it will be in this year, or probably we have to wait for one or one and a half year to see that contribution or the volume production. The initial results are quite good, no doubt about it.”
SoIC capacity is expected to rise at a rapid rate, though there have not been any major updates recently. At the beginning of 2024, TSMC’s SoIC capacity was estimated to reach 5,000 to 6,000 wafers/month by the end of the year, a 150% to 200% YoY increase. 2025’s capacity at the time was expected to reach 10,000 wafers/month, nearly doubling YoY. A recent update from TrendForce reaffirmed the 10,000/month capacity for 2025 and outlined the possibility of another doubling of capacity in 2026.
It had been reported in May 2024 that TSMC was aiming to expand its SoIC capacity at a 100% CAGR from 2023 through 2026, correlating to an “eight-fold” increase in capacity from 2023’s levels by 2026.
FOCI’s Role in CPO with TSMC
While TSMC is taking a more back-seat view to CPO’s timelines, suppliers are expecting a more accelerated ramp, with FOCI and Browave both seeing initial shipments in 2025 and a rapid ramp through 2026. FOCI is viewed as one of TSMC’s closest collaborators on CPO.
In its 2023 annual report, FOCI stated that “CPO technology has just entered the market, and the production cost is still high,” but with the “explosion of high-speed transmission demand, it is expected that CPO technology will be a necessary technology that cannot be ignored and will enter the market in large quantities after 2025.”
According to DigiTimes, FOCI anticipates that CPO fiber array products will see some smaller scale shipments in 2025, leveraging its ReLFACon (Reflowable Lensed Fiber Array Connector) products for optical switches and HPC/AI use cases. Mass production of CPO components is expected in 2026.
FOCI is rumored to be the sole supplier of external fiber array units (FAUs) to TSMC’s first and second-gen COUPE via its ReLFACon product. FAUs are a critical part of CPO tech — the FAUs ensure smooth and efficient coupling of optical fibers to the silicon photonics engines, which enables high data throughput and reduces latency. In COUPE, the FAUs are used to align optical fibers on the PIC; COUPE 2.0 introduces a broad-band coupler that integrates with the FAUs to minimize insertion loss and extend alignment tolerance, which can lower manufacturing costs at the alignment stage.
FOCI is not the only supplier preparing for strong growth come 2026 — Browave (which also holds a 4.6% stake in FOCI) is said to be fast-tracking its CPO development, as one of the named partners for Nvidia’s switches at GTC. Browave “expects to complete CPO validation by late 2025,” and is preparing for a “breakout” 2026, per DigiTimes.
Explosive Growth Forecasted for CPO Market
The CPO market is relatively new in that 2025 is expected to be the first year when growth surfaces before accelerating through 2026. Morgan Stanley estimated the CPO market size at just $8 million in 2023, projecting a 172% CAGR through 2030 in its base case scenario to reach $9.3 billion.
This base case forecast has a few key assumptions: 1) Nvidia is the first to adopt CPO in its Rubin rack systems in 2026, with Rubin’s shipment volume reaching 200,000 units in 2026 and 700,000 in 2027; 2) other vendors including Cisco, Broadcom and Marvell begin shipments in 2027.
Morgan Stanley also outlined a bull case scenario, projecting growth at a 210% CAGR, resulting in a significantly larger end market of $23 billion by 2030. This relies on much more optimistic assumptions: 1) Rubin shipments of 500,000 in 2026 and 1.75 million in 2027; 2) broader adoption of CPO by more chip manufacturers; 3) CPO yield rates greatly improved.
However, Morgan Stanley’s bear case scenario sees the CPO market only $1.3 billion by 2030, on the assumptions that CPO yield issues cause shipment delays and thus a lower customer willingness to adopt the technology.
CPO One of 3 Growth Opportunities Ahead for Himax
Himax is expected to be a critical player in this CPO push due to its partnership with FOCI, and sees CPO and WLO as one of three different growth opportunities ahead (with the other two being automotive OLED and ultralow power WiseEye AI sensing chips). For Himax, WLO presents a rather large opportunity over the next six to twelve quarters as Nvidia progresses with CPO switches to enable the scaling of data centers to millions of GPUs.
In June 2024, Himax deepened its strategic partnership with FOCI and acquired a 5.3% equity stake in the firm for $16 million. Himax explained that the partnership leverages and combines WFO’s expertise with FOCI’s advanced ReLFACon solution to develop linear pluggable optics (LPO) and co-packaged optics solutions for AI and HPC chips that “demand enhanced bandwidth, improved data rate, minimized signal loss, reduced latency, and lower energy consumption.”
Himax says that its WLO technology plays a crucial role in CPO by “providing essential optical coupling capability” as a core part of the CPO solution. Himax is said to be a sole supplier of micro-lens array units to FOCI’s FAUs for first and second-gen COUPE.
Himax Outlines CPO’s Value Proposition, Ramp Profile
Shortly after this investment, in August’s Q2 earnings call, management noted that they expect WLO to play an “even more decisive role in the next-generation optical technology landscape,” due to its versatility, precision and “small form factor characteristics that are not feasible with alternative technologies.” They stated that they believe LPO and CPO tech can “generate new, long-lasting revenue streams for Himax.”
Management added that they are working closely with FOCI to align with multi-year roadmaps of foundry partners and AI chip customers with an effort to meet their near-term production targets. It is assumed that this comment is referring to TSMC’s COUPE and Nvidia’s CPO switches.
Q2’s analyst Q&A highlighted that this is not simply an R&D project, but rather one that is progressing quickly towards mass production:
Q: Donnie Teng, Nomura
My second question is regarding to the CPO. So would you maybe elaborate more on, you know, what’s the timeline of the CPO product. When should we expect to see some, you know, small volume contribution? And how confident you are to ramp up this business in the mid to long term?
A: Jordan Wu, Himax CEO
“First on precise timeline, I’m bound by NDA of my partner and customer, so I’m afraid I cannot give you very, very specific date or timetable. But I can tell you, what we are working on right now, the design is targeting for mass production. It is certainly not a R&D concept. …. Actually we’re way past the stage … and we are now pushing towards mass production ASAP. That’s what I can tell you. In fact, we expect to see some small but very early result hopefully by the end of this year but that’s minimal. But the next year, you know, if everything goes as planned, there will be steady ramping. And the confidence level mid to long term, I would say very confident.
… So I would say, you know, everybody in the ecosystem is very keen to making sure that this happens ASAP. … And we have a roadmap together with partners, our customers, to really pretty dramatically expand the transmission bandwidth very substantially. I’m talking about by multiple times over the next few years. And you know, some of these projects are already in experimental stage in the earlier experimental stage or more mature experimental stage.”
Himax confirmed in its 2024 annual report that small-scale production of its first-gen CPO solution was already underway by the end of 2024.
Himax Provides Major Update in Q4, Lays Out CPO Revenue Opportunity
Himax provided a major update in Q4 regarding CPO, as it continues to progress through small-scale production of its solution for LPOs and developing its platform for CPO architectures with FOCI.
Management stated that the long-term prospect of CPO remains unchanged despite the market’s AI jitters from DeepSeek, and this was “evident by the significant increase in [the] customer’s recent trial production volume forecast, indicating an accelerated timeline for CPO technology to enter mass production.” They also expect sample volume increases over the next few quarters.
Most importantly, Himax’s management outlined what CPO’s revenue contribution could look like in the future, with CEO Jordan Wu emphasizing that Himax is now “more optimistic than ever” about the outlook for WLO and CPO products, which they believe are “poised to generate significant growth opportunities and become a major revenue and profit contributor in the years ahead.”
Here’s what Wu said about 2025, 2026 and the revenue opportunity in dollar terms:
“2025 will be a year for engineering validation with only sample shipments for us. So while the sample shipment will accelerate quarter by quarter, the revenue contribution will be rather limited, if you compare that with our total revenue. The fourth quarter, which presumably will be the peak of this year, the revenue is set to be in millions of dollars based on current forecast. But again, it's still quite small compared to our total size and things can still change. It's still early.sample shipment will accelerate quarter by quarter, the revenue contribution will be rather limited, if you compare that with our total revenue. The fourth quarter, which presumably will be the peak of this year, the revenue is set to be in millions of dollars based on current forecast. But again, it's still quite small compared to our total size and things can still change. It's still early.
Now, in all likelihood, mass production will commence in 2026, but we don't know how, and certainly we won't comment on exactly when, in 2026. It's probably still more than a year from now. There are still many unknowns, like how many customers, how many projects, or their ramping curve, etc. And therefore, while 2026 is likely to be the first year of mass production, it is still early and it's still difficult to give a revenue indication for the year at this point.in all likelihood, mass production will commence in 2026, but we don't know how, and certainly we won't comment on exactly when, in 2026. It's probably still more than a year from now. There are still many unknowns, like how many customers, how many projects, or their ramping curve, etc. And therefore, while 2026 is likely to be the first year of mass production, it is still early and it's still difficult to give a revenue indication for the year at this point.
Now, if we look further ahead and ignore the exact timing and ramping curve, etc, for the time being, and just try to kind of paint a picture for, I would call it annualized potential revenue for Himax,… when the CPO business reaches an ‘early stage’ of mass production, right … when the industry is perhaps still testing the water, with maybe only premium models equipped with CPO.
In making the assessment, we have considered leading AI customer total advanced GPU shipment outlook … and the leading foundry's total CoWoS capacity plan, which is very much public information. And we have assumed a very low percentage of CPO attach rate for both, right. … So with such conservative assumptions, I can say that our annualized CPO revenue could still reach hundreds of millions of dollars when we get there. Again, this is early stage, and this is the best I can do in terms of providing a revenue indication.” I can say that our annualized CPO revenue could still reach hundreds of millions of dollars when we get there. Again, this is early stage, and this is the best I can do in terms of providing a revenue indication.”
Wu believes that the determining factor is not a question of whether CPO adoption will occur, but rather a question of how fast CPO will penetrate the industry due to the benefits it offers to power consumption, bandwidth, and cost. Wu added that he also believes the ultimate demand for the new tech is likely to be far above what Himax can predict at this stage.
Putting Hundreds of Millions of Revenue in Perspective
While hundreds of millions of dollars is but a mere splash in the bucket for a company like Nvidia or TSMC when it comes to AI-driven revenue, that opportunity is remarkably large for a company like Himax.
Himax reported just $907 million in revenue in 2024, or just over a (4%) YoY decline due to global demand weakness and conservative purchasing trends from customers due to market uncertainty. Gross margin improved more than 2.5 points YoY to 30.5%, its first annual expansion since 2021, aided by strong 20% YoY growth in the automotive segment (50% of revenue in Q4) which Himax says enjoys a higher gross margin than its corporate average.
Himax’s revenue performance has been challenged since 2021, where the pandemic-driven operating environment led to demand outpacing supply in core display driver end markets, leading to 110% YoY automotive revenue growth, 77% YoY tablet IC growth, and 85% YoY smartphone growth. Himax generated $1.55 billion in revenue in 2021, up more than 74% YoY while gross margin nearly doubled to 48.4% due to very favorable price and product mix. Revenue has declined YoY each year since then.
For an emerging new opportunity that has yet to generate meaningful revenue, WLO holds the potential to grow into the size of 25% to 50% of Himax’s current annual revenue, or multiple times the size of its non-driver business, which has reported revenue between $140 million to $185 million the past four years.
The CPO-driven opportunity holds remarkable potential to dramatically increase Himax’s topline and growth and put it on a path to quickly reach fresh records for revenue. However, this opportunity also extends down the line as it may provide a substantial boost to Himax’s earnings power.
Himax is currently operating at around a 30% gross margin and high-single digit operating margin profile. However, this operating margin is driven entirely by Himax’s driver segments, as its non-driver segment had generated widening operating losses from 2021 through 2023 before slightly rebounding in 2024.
Operating losses for Himax’s non-driver segment widened from ($17.7 million), or an (11%) margin, in 2022 to ($32.1 million), or a (23%) margin, in 2023. However, losses rebounded slightly to ($24.5 million) in 2024, or a (16%) margin. This weakness amplified the rapidly shrinking operating income from drivers, which faced pricing pressures in 2022 and 2023, and weighed down on the segment’s rebound to $93 million in operating income in 2024.
Himax explained that low sales volumes in non-drivers “led to insufficient revenue to fully cover expenses” over the past few years, but as volume production ramps, such as for products including WLO and WiseEye, Himax expects to generate positive operating income as non-driver products have “higher gross margins as well as higher growth potential” versus drivers.
Given some of the uncertainties about timing of CPO’s ramp, volumes at mass production, realized selling prices and other factors, Himax has provided no insight into what the margin profile for WLO could look like. Assuming the CPO business ramps as expected and matures into a 40% gross margin, 15% operating margin business at an $500 million dollar scale, it could generate $200 million in gross profit and $75 million in operating income by itself. This alone could represent a ~$0.40 positive impact to EPS.
If CPO matures into a much higher-margin business due to Himax’s and FOCI’s positioning in the supply playing a core role to help foundry partners meet high demand, say at 60% gross and 30% operating margins (approx. in line with 2021’s corporate operating margin), it could generate $300 million in gross profit and $150 million in operating income, or up to $1 in positive EPS impact.
At the moment, there is little analyst coverage and limited visibility into Himax’s growth prospects. Current analyst estimates point to a slight YoY decline in EPS in 2025 to $0.44, with revenue rising 8% to $981 million as Himax works its way out of a more challenging macro backdrop. For 2026, EPS is expected to double to $0.88 with revenue growth of 20% to $1.18 billion, though this could be impacted by the timing and pace of CPO’s ramp.
Himax does have other growth opportunities outside of CPO, with management anticipating strong growth in its WiseEye business in 2025 and continuing momentum in automotive TDDIs, timing controllers and growth in auto OLED.
Quick Note on Technicals
In 2019, Himax appears to have put in a major low. That being said, investors should still expect large swings and the potential for bouts of volatility as this larger uptrend pattern plays out.
The current drop that we are in is hitting strong support just under $8. If this level can hold, we should see one more push into the $17 region in the coming months, which would complete a large 1st wave. If this does happen, we would then need a 2nd wave pullback to follow. This would likely take you back into the $10 – $7 range, before commencing with the larger uptrend pattern. If any bout of volatility takes us under $6.40, then we should expect a drop into the $4 – $2 region before finding a meaningful low.
While the larger pattern suggests much higher prices for HIMX, based on the overlapping nature of this pattern, investors should expect periods of heightened volatility along the way. The $6.40 price point is a major line in the sand. If this holds and we see a push into the $17 region, investors should also be aware for the potential of a notable pullback before taking off.
Major Risk: China Sourcing:
Himax operates via a fabless business model utilizing third-party foundries and OSAT capabilities, and primarily sells products via direct sales teams in core regions Taiwan, China, South Korea and Japan. However, Himax generates more than three-fourths of its revenue from China, which could place it in the cross-hairs of increased geo-political tensions.
Himax notes that it relies on TSMC, UMC, GlobalFoundries Singapore, Macronix, PSMC, Nexchip and SK Hynix System IC for wafer fabrication, while its WLO production is done in-house in its two facilities in Taiwan.
China’s revenue share declined slightly from 76.2% in 2023 to 73.4% in 2024, with a majority of this revenue (85%) in the Drivers business. China accounted for nearly 77% of Himax’s Drivers business in 2024, and 63% of its Non-Drivers business. While Himax may not be exposed directly to US-based tariffs due to its concentration in Asia for supply chain and manufacturing, it warned that it expects to “continue to be subject to economic and political events and other developments that affect our customers in Asia,” and if tariffs dent consumer electronics demand either in Asia or globally, Himax could face revenue headwinds as a result.
The I/O Fund owns a stock that is rumored to be a future CPO supplier to Nvidia (and is a current Nvidia supplier) while being vertically integrated on sourcing. This company’s CEO pointed out this is an area incremental strength and an advantage as they manufacture most of their parts internally (which is quite rare) and can quickly capitalize on a rapid ramp in demand. The company stated that they also will source when the demand requires it, yet the vertical integration on the manufacturing side with primary production in the US, and some in Europe, help avoid heightened tariff risks from China.
Conclusion
CPO beckons a massive opportunity ahead for Himax due to its positioning upstream in the supply chain for TSMC. Management outlined that the emerging technology could represent hundreds of millions of dollars in annualized revenue assuming a low attach rate as the tech ramps through 2026 and beyond.
While CPO promises hundreds of millions of potential revenue and possibly a large positive impact to EPS as it matures, Himax’s driver business remains in the driver’s seat for 2025 and 2026 until CPO growth arises, and the segment is still plagued by margin weakness. The driver business is far from 2021’s peak for revenues and margins, and thus Himax’s EPS, and it may struggle to return to 2021’s levels due to the supply chain circumstances and resulting pricing advantages it benefited from at the time.
Despite that, Himax appears relatively priced ahead of a potential revenue acceleration and development of a multi-million dollar business line. Himax is currently trading at 18x forward earnings, with EPS estimated to double in 2026, and 1.4x forward sales, with prior peaks around 3x. Gross margins are showing strength due to strong automotive sales and strict cost management, while operating income is beginning to recover from a prolonged contraction from headwinds in the driver segment.
Small caps can have quick and volatile moves, and Himax is no exception. Shares surged 45% in one day in December when it was first named as a potential AI supplier to TSMC, and then rose nearly 100% in seven days in January before plunging nearly -28% during DeepSeek’s market rout and is down nearly 50% from the January high.
The I/O Fund owns a different NVDA and possible future CPO supplier, sharing this research with our Pro and Advanced subscribers, while discussing potential setups and trading plans in our weekly webinars with Portfolio Manager Knox Ridley. Take advantage of a limited-time offer for $75 off Pro or $100 off Advanced here.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Micron beat analyst consensus estimates and offered better-than-expected guidance. The company expects strong growth to continue in the next quarter, driven by increased DRAM and NAND shipments. The management also highlighted strong AI data center demand and the ramp-up of HBM products.
Management was quite optimistic about the opportunity in HBM, by increasing the TAM for calendar year 2025 from over $30 billion to over $35 billion. The management also reiterated that the company’s 2025 HBM production is fully allocated and is in discussion with customers for the calendar year 2026.
In the past, Micron did not report the AI HBM revenue. Management highlighted that the company reported record data center revenue, with the HBM revenue growing more than 50% sequentially, to over $1 billion in their recent quarter. The HBM shipments were ahead of the company’s projections, demonstrating strong execution of the ongoing ramp.
The management also highlighted that the company’s HBM3E 8-high is designed into NVIDIA's GB200 system, and the HBM3E 12-high is designed into the GB300. Micron also initiated volume shipments to the third large HBM3E customer in FQ2 and anticipates additional customers over time. At the recent GTC 2025 event, Micron showcased its complete AI memory and storage portfolio to support AI from the data center to the edge. The company’s High-performance Micron 9550 NVMe and Micron 7450 NVMe SSDs are included on the GB200 NVL72 recommended vendor list. They expect multibillion dollars in HBM revenue in FY2025. Micron’s HBM4 is expected to ramp in volume in calendar year 2026 and is 60% faster than HBM3E.
This quarter, revenue grew by 38.3% YoY yet was down (-7.5%) QoQ to $8.05 billion, beating estimates by 2%. Adjusted EPS grew by 271.4% YoY to $1.56, beating estimates by 9.5%. However, the company’s gross margins were below the guidance due to a higher mix of consumer products and lower NAND prices.
The FQ3 revenue guidance is $8.8 billion, representing YoY growth of 29.2% and 9.3% QoQ growth at the midpoint, beating estimates by 3.8%. Adjusted EPS guide is $1.57, representing YoY growth of 153.2%, beating estimates by 3.3%.
Micron’s valuation remains low with a P/E ratio of 22.7 and a forward P/E ratio of 13.6. Its P/S ratio is 3.4 and a forward P/S ratio is 3. A few reasons that Micron’s valuation is lower than AI peers is likely due to memory being more cyclical and Micron seeing fierce competition with SK Hynix and Samsung, which leads to more commoditized pricing. There is China, as well, which represents 12% of revenue – although this is not likely to be a leading reason for the lower valuation. Micron's earnings power also fluctuates wildly at times due to the cyclical nature of the memory market. More recently, the increasing consumer revenue mix and lower NAND prices have also led to analysts reducing estimates, which have also led to lower valuations.
What Micron will need to answer is if the cyclical nature of the memory market will smooth out as the dollar content of memory is rapidly increasing. AI training and inference rely heavily on high-bandwidth memory (HBM) for the massive memory bandwidth that complex models require. AI servers also use more DRAM and NAND than a traditional server. These are reasons that Micron’s cyclical fundamentals could become more secular as the AI economy is built out.
Ultimately, we want to keep a close eye on companies that are at the forefront of AI yet have valuations that do not reflect this outsized growth. Below are notes that discuss the most recent earnings report as well as references to our previous coverage.
Bullish HBM commentary
Management set out an optimistic tone about the opportunity in HBM and increased the TAM to over $35 billion for CY2025, up 17% from the previous estimate provided during FQ1 results. As previously noted, the company’s 2025 HBM production was fully allocated and are further seeing strong demand for the HBM supply in 2026 and are in discussions with the customers on agreements for their calendar 2026 HBM demand.
“We see strong demand for HBM and have once again increased our HBM TAM estimate for calendar 2025 to over $35 billion. We remain on track to reach HBM share similar to our overall DRAM supply share on a run rate basis in calendar Q4 2025. As previously mentioned, Micron has sold out of our HBM output in calendar 2025. We are seeing strong demand for our HBM supply in 2026 and are in discussions with our customers on agreements for their calendar 2026 HBM demand.”
They also highlighted that they have initiated volume shipments to the third large HBM3E customer. “We are making good progress on additional platform and customer qualifications with HBM. Micron's HBM3E 8-high is designed into NVIDIA's GB200 system, and our HBM3E 12-high is designed into the GB300. In fiscal Q2, we initiated volume shipments to our third large HBM3E customer and anticipate additional customers over time. We expect multibillion dollars in HBM revenue in fiscal 2025.”
We covered this in the past when we stated in our December post-earnings update that “Management pointed out they are raising their view of server unit percentage growth for the current year and they anticipate server unit growth to continue in 2025. The CEO also stated that HBM has exceeded their plans due to solid execution on yield and capacity ramps.” We also stated that the next catalyst would be the availability of HBM4 in CY2026.
Similarly, we highlighted during the September post-earning update that the company delivered strong results due to robust data center/HBM revenue. We informed our members in June 2024 that that HBM is sold out for calendar year 2025 with pricing already contracted for.
Market Outlook
Management increased the 2025 DRAM bit shipment forecast from mid-teens percentage range to mid-to high teens percentage range due to the growing adoption of AI in smartphone & PC devices and HBM is also a strong contributor to the bit demand growth.
“Now turning to our market outlook. Calendar 2024 DRAM bit demand growth was in the high teens, consistent with our prior expectations. Calendar 2024 NAND bit demand growth was approximately 10%, slightly below our previous view of low double digits. We forecast calendar 2025 DRAM bit demand growth in the mid- to high teens percentage range and NAND in the low double-digit percentage range. Over the medium term, we expect industry bit demand growth of mid-teens CAGR for both DRAM and NAND.”
HBM4E to consume higher silicon
Management mentioned that HBM4E will consume 4x the amount of silicon compared to D5. “As noted before, HBM3E consumes 3x the amount of silicon compared to D5 to produce the same number of bits. Looking ahead, we expect the trade ratio to increase with HBM4 and then again with HBM4E when we expect it to exceed 4:1. The sustained and significant increase in silicon intensity for the foreseeable future contributes to tightness for industry leading-edge node supply and constraints capacity for non-HBM products.”
Growth in the second half of CY2025
Management mentioned that the transition from 8-high offering to 12-high offerings will increase revenue in the second half of the year due to premium pricing. Also, shipping to the third large customer will also lead to a revenue increase in the second half of the year. However, revenue growth rate has peaked for now and will decelerate in the year's second half.
Q: CJ Muse (Analyst)
“Very helpful. And a quick follow-up. You revised your HBM industry revenue outlook higher. Curious if there's a framework on how you're thinking about kind of first half versus second half for the industry?
A: Sanjay Mehrotra (CEO)
Of course, the revenue in the second half as you go from 8-high to 12-high continues to go up because 12-high will be carrying a certain premium over 8-high. So if we have projected more than $35 billion for calendar year 2025 and a bigger portion of that in second half of calendar '25 versus first half. And more than $35 billion, of course, is the industry TAM for HBM that we have referred to here.
And I'll just point out that, of course, with respect to HBM, there is expansion of HBM customer base taking place. Micron itself, now we are shipping to a third large customer that we have begun shipping our products to. So that also is contributing to the growth in HBM revenue in the second half as the customer base expands.”
Financials:
Revenue growth momentum eases
FQ2 revenue grew by 38.3% YoY and down (-7.5%) QoQ to $8.05 billion, beating estimates by 2%, driven by strong HBM revenue that grew more than 50% sequentially to over $1 billion.
FQ2 DRAM revenue grew by 47% YoY to $6.1 billion, representing 76% of total revenue. DRAM revenue was down (- 4%) QoQ, with bit shipments decreasing in the high single-digit percentage range and prices increasing in the mid-single-digit percentage range because of improving portfolio mix.
The company’s DRAM revenue was down sequentially due to the decrease in bit shipments. However, management expects bit shipment to increase in Q3, which will likely help with the DRAM revenue recovery.
FQ2 NAND revenue grew by 18% YoY to $1.9 billion, representing 23% of total revenue. NAND revenue was down (-17%) QoQ, with bit shipments modestly higher and prices decreasing in the high-teens percentage range. FQ2 bit NAND bit shipments exceeded management expectations, driven by higher consumer-oriented shipments. Management anticipates growth in DRAM and NAND bit shipments in FQ3.
The company expects strong growth to continue in the next quarter with revenue guidance of $8.8 billion, representing YoY growth of 29.2% and 9.3% QoQ growth at the midpoint, beating estimates by 3.8%. However, revenue growth rate has peaked for now and will decelerate in the calendar year's second half.
Analysts expect revenue to grow 25.3% YoY to $9.71 billion in FQ4 and 23.8% growth in FQ1.
For FY2025 ending August, analysts expect revenue to grow 39.1% YoY to $34.93 billion and 28.6% growth to $44.93 billion in FY2026.
Strong YoY Margin Expansion, Yet Consumer Weighs on Margins
The company’s margins are improving on a YoY basis driven by operating leverage. However, margins are down sequentially, and the company’s gross margins were below guidance due to a higher mix of consumer products and lower NAND prices. This was partially offset by high-value DRAM portfolio mix. Management expects gross margins to be down sequentially in FQ3 due to higher consumer mix, NAND underutilization charges, and NAND pricing weakness. This was also highlighted by the management during the Wolfe Conference last month. It was further clarified during the earnings call Q&A that gross margins will improve in FQ4.
Q: Harlan Sur (Analyst)
"Back in mid-February at an investor conference, I know the team had walked us through the dynamics on a weaker gross margin profile during the May quarter. That's playing out, but you did anticipate an improved gross margin profile beyond this quarter, fiscal Q3. So is that still the case that we should see gross margin improvements maybe starting in fiscal Q4 and potentially beyond? And is that a possible data center and your consumer-related products? Is that across total DRAM and your NAND segments? Any color here would be great.
A: Mark Murphy (CFO)
Sure, Harlan, this is Mark. I'll take that. So let me just make some comments about the third quarter. It is down sequentially, as we had indicated in the conference. And again, as we said in the conference down primarily due to higher mix of consumer-oriented volumes, lower CQ1 pricing on consumer-oriented markets and industry and can just generally, all that partially offset by higher HBM. We do see — while down, conditions have improved since those public comments. And the updated view is reflected in the guide today.
Now we're not providing guidance on the fourth quarter. However, we do expect gross margin to be up somewhat. There's always tailwinds and headwinds. As you know, on tailwinds, we do expect market conditions to improve. We do expect HBM and other high-value products to grow and contribute to mix improvement…. So in short, we would expect fourth quarter margins to be up somewhat from third quarter.”
FQ2 gross margin was 36.8% compared to 18.5% in the same period last year and 38.4% in the FQ1. It was lower than the guidance of 37.5% due to a higher consumer mix. Management guidance for the next quarter is 35.5%.
FQ2 adjusted gross margin was 37.9% compared to 20% in the same period last year and 39.5% in the FQ1, missing guidance of 38.5%. Management guidance for next quarter is 36.5%.
FQ2 operating margin was 22% compared to 3.3% in the same period last year and 25% in FQ1, driven by operating leverage. Management guide for the next quarter is 21.1%.
FQ2 adjusted operating margin was 24.9% compared to 3.5% in the same period last year and 27.5% in the FQ1. Management guide for the next quarter is 23.7%.
FQ2 net margin was 19.7% or $1.58 billion compared to 13.6% or $793 million in the same period last year. FQ2 adjusted net margin was 22.1% or $1.78 billion compared to $476 million or 8.2% of revenue in the same period last year.
Adj.EPS growth of 271%
FQ2 GAAP EPS grew by 98.6% YoY to $1.41, beating estimates by 11.4%. Adjusted EPS grew by 271.4% YoY to $1.56, beating estimates by 9.5% driven by strong operating leverage.
Management adjusted EPS guide is $1.57 for FQ3, representing a YoY growth of 153.2%, beating estimates by 3.3%.
Analysts expect adjusted EPS to grow 73.7% YoY to $2.05 in FQ4 and 41.3% growth in FQ1.
For the FY2025 ending August, analysts expect adjusted EPS to grow 419.6% YoY to $6.76 and 64.7% YoY growth to $11.12 in FY2026. However, due to a higher consumer revenue mix and lower NAND prices, analysts have reduced the estimates significantly for this FY2025 from 783% expected growth in June 2024 to the current expected growth of 420%, with some of the growth being pushed to the FY2026.
Cash Flow and Balance Sheet
The company’s cash flow improved, driven by higher profits.
FQ2 operating cash flow margin was 49% or $3.94 billion compared to 20.9% or $1.22 billion in the same period last year.
FQ2 adjusted free cash flow margin was 10.6% or $857 million compared to ($29 million) or (-0.5%) in the same period last year.
FQ2 capex was $4.06 billion, up 193% YoY. The company received government subsidies of $963 million (23.7% of capex) in FQ2 compared to $149 million in the same period last year. Management expects the FQ3 capex to be over $3.0 billion and the FY2025 capex to be about $14 billion. Management mentioned in the earnings call that the majority of the FY2025 capex is to support the multiyear facility investments for DRAM and HBM manufacturing, including the Idaho fab, Singapore HBM advanced packaging facility, and Taiwan DRAM test facility.
Earlier in December last year, the U.S. Department of Commerce finalized the $6.17 billion government subsidies under the Chips Act. It will disburse the funds based on Micron’s completion of project milestones. The $6.17 billion funding package, representing roughly 5% of the total estimated capital expenditure in New York and Idaho, will support the construction of two fabs in Clay, New York, and one in Boise, Idaho. This funding is part of Micron's $125 billion capex plan for both states over the next two decades.
The company had cash and investments of $9.6 billion and debt of $14.36 billion compared to $8.74 billion and $13.8 billion in the previous quarter.
During FQ2, Micron extended the debt maturities through a $1 billion 10-year senior note offering and a $1.7 billion term loan, with proceeds used to pay down notes maturing in 2026 and the previous term loan balance.
The company’s inventory increased to $9.0 billion from $8.71 billion in FQ1 to support the strong AI-demand. Management mentioned that the inventory levels will normalize in a couple of quarters.
Business Units
Compute and Networking (CNBU)Compute and Networking (CNBU)
Compute and Networking revenue grew by 109% YoY and 4% QoQ to $4.56 billion. For the third consecutive quarter, CNBU revenue reached a new quarterly record, driven by a more than 50% sequential increase in HBM revenue to over $1 billion. However, the CNBU revenue growth decelerated from 153% and 152% growth in the last two quarters and is likely tied to the Blackwell delays.
The company’s CEO Sanjay Mehrotra, highlighted in the earnings call, “Our HBM shipments were ahead of our plans, demonstrating strong execution of our ongoing ramp. The combination of our revenue from high-capacity DRAM modules and our industry-leading LPDRAM for the data center also exceeded the $1 billion milestone for the quarter.”
Mobile (MBU)Mobile (MBU)
FQ2 Mobile Business Unit revenue was down (-33%) YoY and (-30%) sequentially to $1.07 billion due to inventory corrections.
Embedded (EBU)Embedded (EBU)
FQ2 Embedded business unit revenue was down (-8%) YoY and (-3%) QoQ to $1.03 billion. It was lower due to inventory correction in the company’s automotive customers. The CEO highlighted in the earnings call that the customers are nearing the completion of inventory adjustments. “Automotive OEMs, industrial and consumer embedded customers are in the later stages of adjusting their inventory levels. In automotive, which comprises the largest portion of our EBU revenue, memory and storage content per car continues to increase as AI-enabled in-vehicle infotainment systems become more enriched and driver assistance functions become more capable.”
Storage (SBU)Storage (SBU)
Revenue for the Storage business unit was $1.4 billion, up 54% YoY and down (-20%) sequentially. The sequential decline in SBU revenue was driven primarily by lower storage investments from data center customers after several quarters of very strong growth and the overall NAND industry pricing.
Earnings Call Notes:
AI PCs and Mobile
Management expects mid-single-digit unit PC growth in calendar 2025, with a stronger second half. AI PCs require increased DRAM, with a minimum of 16GB of DRAM compared to 12GB content last year. They expect smartphone unit volume growth in calendar 2025 to remain at low single-digit percentages and customer inventories are improving. AI smartphones require DRAM capacities of 12GB or higher compared to 8GB in last year’s models.
“We expect the PC market to grow mid-single digits in unit terms in calendar 2025, with growth weighted to the second half of calendar 2025. The Windows 10 end of life in October 2025, combined with an aging installed base and the desire amongst customers to ensure that their PC hardware specs can support compelling AI applications in the future, are key catalysts that drive this growth.
AI PCs required a minimum of 16 gigabytes of DRAM, with many models requiring even higher memory versus the average 12 gigabyte PC content last year. During the quarter, we sampled our 16-gigabit 1 gamma-based D5 products to PC clients. In NAND, we launched our Gen9 based 4600 performance SSDs, the fastest in the world for the client market, and completed qualifications of our 2650 mainstream SSDs at multiple PC OEMs.
Turning to mobile. Our expectations for smartphone unit volume growth in calendar 2025 remain at low single-digit percentages. Smartphone customer inventory dynamics have played out as anticipated, leading to mobile DRAM and NAND bit shipment growth in our fiscal Q3. AI adoption continues to be a significant driver for increased mobile DRAM demand.
AI-capable flagship phones increasingly feature DRAM capacities of 12 gigabyte or higher compared to the 8 gigabyte in last year's models. Smartphone OEMs are using Micron's industry-leading 9.6 gigabit per second LP5X DRAM to improve AI performance, delivering up to 20% more tokens per second than those using legacy speed grades on the same SoC.”
Tariffs
Management mentioned that they plan to pass the costs of tariffs to the customers. China accounted for 12% of FY2024 revenue. “On tariffs, Micron serves as the U.S. importer of record for a very limited volume of products that would be subject to newly announced tariffs on Canada, Mexico and China. We continue to monitor the possibility of future tariffs and are prepared to work with our customers and suppliers to understand future tariff effects and supply chain options that may arise. Where tariffs do have an impact, we intend to pass those costs along to our customers.”
Valuation:
The company is trading at a P/E ratio of 22.7 and a forward P/E ratio of 13.6. Micron’s P/S ratio is 3.4 and a forward P/S ratio is 3.0. It is trading below its five-year average P/S ratio of 3.7. A few reasons for Micron’s low valuation are likely due to memory being more cyclical and Micron seeing fierce competition with SK Hynix and Samsung, which leads to more commoditized pricing. More recently, the increasing consumer revenue mix and lower NAND prices have also led to analysts reducing estimates, which have also led to lower valuations.
Conclusion
Micron beat the top-line and bottom-line analyst consensus estimates. However, the consumer revenue mix, NAND underutilization charges, and NAND pricing weakness weigh on the gross margins.
This stock would be a breakout buy rather than a counter-trend entry as we’d like to see the market begin to recognize Micron as being more secular once the HBM-related revenue begins to rival the other more cyclical revenue segments.
I/O Fund Equity Analyst Royston Roche contributed to this report.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Nvidia has led the Mag 7 for two years with a return of 853% since Jan of 2023. The second closest Mag 7 return in this time frame is Meta at 495% with all other Mag 7 stocks returning less than 200%, and popular tech ETF QQQ returning 105% in that time frame. All the above is outstanding performance, yet one stock has clearly set itself apart.
Given the spectacular outperformance of more than 7X the QQQs, it goes without saying there is outsized pressure on Nvidia’s stock, whether it’s from short sellers who are still in disbelief, or from investors who are simply wanting to book gains.
Recently, a low-cost large language model (LLM) from China sent the stock down 25% in two days. In the heart of the aftermath, I spoke with Charles Payne on Fox Business News, discussing key reasons investors should stay the course, given cheaper AI development will drive more demand (not less). The stock has nearly recouped its losses, trading 6% below its high before the Deep Seek news broke. Ultimately, Deep Seek is immaterial to AI demand, or perhaps even a net add given AI is too expensive to develop for most developers, resulting in fewer consumer and enterprise applications.
When it comes to Nvidia, there’s no denying the Street gets plenty wrong. Perhaps most egregious was when the Street dropped the stock 60% based on a gaming miss, as Ethereum’s merge to proof of stake in September of 2022 was expected to be the death knell for the AI juggernaut. A month later, the AI GPUs that drove the 7X outperformance shipped. The disconnect was staggering.
The I/O Fund has a strong track record on this stock, discussing every twist and turn publicly for our free stock newsletter readers with documented gains of up to 4,100% as far back as 2018 based on a very-early AI thesis. That gaming miss that resulted in a drop of 60%? We bought that too.
However, it’s important that I pause the exuberance and discuss something stirring beneath the surface. Recently, in this quarterly only, key suppliers are providing mixed guidance on the timing of Nvidia’s Blackwell GB200 systems. The commentary is subtle, and it would require knowing this stock thoroughly to identify the change in tone.
To put it simply, if Blackwell GB200s were ramping, we would see strong sequential growth for Q1. At the very least, there would be some indication Q2 is setting up for strong growth, and yet the commentary is shifting toward a second half discussion. When you add that suppliers do not want to get into the crosshairs with Nvidia, yet are under SEC regulations on how they offer guidance, the language used is incredibly easy to miss.
Ultimately, my spidey senses are up as commentary for Q1 and Q2 should be stronger on the products and solutions that supply Nvidia’s GB200 NVL systems. Meanwhile, Nvidia’s management team is under immense pressure as the company has beat revenue estimates by $1 billion or more for six quarters. This means even a minor delay or minor adjustment in expectations could come under close scrutiny.
As a reminder, we don’t make earnings calls, as many factors can affect stock price. For example, even though I’m getting mixed signals on the timing for GB200 NVL systems, Nvidia’s B200s are ramping, and theoretically can absorb some of this demand.
Instead of making an earnings call, we present quality research so that investors are fully informed to make their own decisions. From there, we take this a step further and publish every single trade we make on our research site. In finance, full transparency is rare, yet through never-ending tenacity, my firm has offered up to 4100% gains on Nvidia alone. We continue this long-standing dedication to our readers in the analysis below.
Nvidia’s Future Hinges on Blackwell – GB200s are the Standout SKUs
Due to the cyclical nature of GPU shipments, the differences in each generation are critical for investors to track. The Hopper generation has driven immense revenue growth over the past two years, while the Blackwell generation is expected to drive revenue that exceeds 2023 and 2024 combined. Hopper brought Nvidia to a $100 billion data center segment – at $26.3 billion in fiscal Q2 2024 – yet I pointed out how Blackwell could drive the data center segment to $200 billion-plus ten months ago.
You can read more about the nuances of each generation of Nvidia’s AI accelerators here, and why Nvidia’s future generations of GPUs can help Nvidia Stock reach $10 Trillion in Market Cap.Nvidia Stock reach $10 Trillion in Market Cap.
The rack-scale GB200 NVL72 features 36 GB200s, or 72 B200 GPUs and 36 Grace CPUs, offering up to 30X inference improvement and up to 5X training improvement versus the HGX H100, with significant improvements in energy efficiency and data processing speeds. The GB200 NVL72 was designed to address and unlock real-time inference for trillion-plus parameter models.
Despite being on an accelerated timeline, Blackwell will deliver the largest leap generationally to date for Nvidia’s AI GPUs.
The B200 GPU will deliver a 2.5X training improvement and 5X inference improvement over the H100.
Blackwell will see a massive upgrade in chip size, at 208 billion transistors compared to the H100’s 80 billion transistors.
The B200 will also have 20 petaflops of FP4 compared to the H100’s 4 petaflops of FP8. I’ve covered the importance of this awhile back, and more recently following DeepSeek.
Blackwell’s pricing power is one of the key factors behind its growth potential, with the GB200 expected to be priced between $60,000 to $70,000, around double the H200’s estimated $32,000 price tag. For rack-scale solutions, the price tags are much heftier – the GB200 NVL36 (featuring 18 GB200s and 18 Grace CPUs) is estimated to carry a $1.8 million price tag, while the GB200 NVL72 is estimated to command an eye-watering $3 million price tag.
Roughly 35,000 NVL72 racks are estimated to be shipped this year, that’s already up to $105 billion in revenue for Nvidia. This volume correlates to shipments of ~2.52 million GB200s, versus Hopper shipments of 2 million-plus in 2024. To note, the revenue and volume do not include the NVL36 racks, B200s, B200As, B300s, and Hopper GPUs still on deck this year.
Nvidia B200s Will Be in High Demand and Likely Ship in Volume in H1
There is certainly a scenario where Nvidia’s GPUs are in such high demand that other SKUs can help make up for a delay on the much-larger GB200 NVL systems. The B200s are expected to be in high demand and companies such as Super Micro are shipping B200 HGX systems in volume. This is one reason Super Micro has seen favorable price action despite lowering their fiscal year guidance; it’s assumed the company can make up for any delays on the GB200s with B200 and B200 HGX systems.
However, the market does not like surprises. As of now, the market is expecting the GB200s to ramp in Q1 and further ramp in volume in Q2. It will be a tall order to meet these expectations (on the dot) with lower priced GPUs and HGX systems.
SECTION TAKEAWAY: Blackwell is a significant undertaking to have 36 GPUs and up to 72 GPUs communicate as one GPU (number depends on the SKU, with complexity increasing if it’s a single rack versus multi-rack configuration). Previously, Nvidia’s AI systems combined 8 GPUs. This significant leap not only increases pricing from roughly $32,000 per GPU to up to $3 million per system, but it also greatly increases the need for new networking architecture and comes with increased power requirements.
Nvidia GB200 Delay Rumors Grow – The I/O Fund’s Take for Q1 & Q2
Dating back six months, there have been rumors that the GB200s are delayed. The first rumor came from The Information, stating machines were sitting idle at Taiwan Semiconductor, where Nvidia’s chips are made. I informed my readers at the time this was unlikely to be the case as TSMC was reporting record high-performance computing revenue. In fact, TSMC continues to report strong HPC revenue.
NVDA stock outlook: TSMC shows no signs of idle machines with strong QoQ growth for the HPC segment during Q2 to Q4.
In January, analyst Ming-Chi Kuo reported there were “Short-term Potential Risks in Nvidia and Related Supply Chain,” stating that GB200 NVL72 shipments in 2025 could reach roughly 25,000 to 35,000 racks compared to 50,000 to 80,000 racks from last year. The same analyst reported earlier in the year that “The biggest challenges in NVL72 development mainly stem from the 132kW thermal design point (TDP) requirement, which makes it the highest-power-consuming server in history. Nvidia and its supply chain need more time to solve unprecedented technology issues.”
This post piqued my interest as the emphasis would be outside the foundry. Instead, this would suggest an entirely new delay with thermal management issues (direct liquid cooling), or perhaps with power management solutions, or even networking related — rather than a material delay related to TSMC and yield issues.
To cross-examine this possibility, below is a brief summary from some of the more well-known direct-liquid cooling suppliers, PMIC suppliers (power management integrated circuits), and a few networking companies outlining commentary that leads to a higher probability there is a delay for the GB200s. If my read-through from these management teams is correct, the delay falls somewhere on the thermal/power solutions or networking components part of the supply chain rather than on TSMC.
Explaining the Lower Rack Shipments of NVL72 Systems
Regarding the statement that the GB200 NVL72 shipments in 2025 could reach roughly 25,000 to 35,000 racks compared to 50,000 to 80,000 racks from last year, I want to take a step back and clarify here that while that would represent a substantial drop, it’s more representative of a significant shift in NVL72 share from last year, and more reflective of what key partner TSMC can handle in terms of CoWoS capacity.
In July of 2024, estimates for GB200 racks were revised 50% higher from 40,000 to 60,000 racks, with the NVL36 at more than 80% share at 50,000 racks with the remaining 10,000 racks to be NVL72.
This would correlate to 2.52 million GPUs shipped – coincidentally, the same amount of GPUs expected to be shipped with 35,000 NVL72 racks, with more on deck from NVL36 configurations.
So, while it may look to be a large decline, GPU shipments at 35,000 NVL72 racks plus additional NVL36 racks would actually be higher than last year’s 60,000 NVL72 and NVL36 estimate due to a large shift towards the NVL72 configuration.
Additionally, the industry’s more recent, most optimistic forecasts for 50,000 to 80,000 NVL72 racks would be unrealistic and practically impossible for TSMC to meet – at the midpoint, this would require ~4.68 million B200 GPUs, or more than 292,000 in CoWoS wafer allocation simply for the NVL72 (not including NVL36).
Current estimates from Morgan Stanley place the B200’s CoWoS allocation at ~220,000 wafers for 2025, or more than 30% of TSMC’s total capacity for the year. This coincides with estimated B200 GPU shipments of 3.52 million, more than enough to handle 35,000 NVL72 racks and similar volumes of NVL36 racks.
SECTION TAKEAWAY:
With what the I/O Fund knows today, the product mix of NVL72 being higher, thus resulting in a lower number of racks being delivered, is not the issue. Rather, it’s the timing that could pose an issue due to Wall Street potentially having to face uncertainty on what quarter NVL systems would ship in volume.
Blackwell Necessitates Direct Liquid Cooling – Super Micro and Vertiv’s Comments
In June, we wrote an analysis on AI Power Consumption: Rapidly Becoming Mission Critical which stated that as the industry progresses towards a million-GPU scale, more emphasis is placed on future AI GPU generations to focus on power efficiency while delivering increasing levels of compute. Data centers are expected to adopt liquid cooling technologies to meet the cooling requirements to house these increasingly large GPU clusters, and the percentage of air-cooled systems shipped versus liquid cooled systems will change (dramatically) with Blackwell’s NVL systems.
Therefore, any changes to Blackwell’s NVL systems timing would appear in commentary from companies that provide direct-liquid cooling solutions and servers, as the previous generations are air cooled.
Super Micro Lowers FY25 Revenue Guide, Pushes Back 30% Liquid Cooling Target
Super Micro recently reported preliminary fiscal Q2 results, in which it cut its fiscal 2025 revenue guide while hinting that Blackwell GPUs could take longer to ramp in the first part of the calendar year.
At Computex in June 2024, CEO Charles Liang stated that he “expects 15 percent of racks [SMCI] sells this year to use DLC, and 30 percent to employ it [in 2025].” In August 2024, Liang slightly changed his tune, noting that they now expect “25% to 30% of the new global datacenter deployments to use DLC solutions in the next 12 months.”
I remember this comment well, as it was part of the evidence used to debunk the August rumors considering SMCI had moved up their timeline for DLC delivery (from end of year 2025 to mid-year 2025).
Two weeks ago in the February 2025 report, this timeline was shifted back with Liang stating that Super Micro now believes that “DLC or overall liquid cooling market share will grow all the way to 30% or even more in the next 12 months” — it’s not a dramatic shift in tone but rather pushes the 30% target back from mid-year 2025 noted in August, to beyond the original year-end timeline — to now technically being early 2026.
The August earnings call also housed one critical piece of information regarding Blackwell and Super Micro’s 2025 revenue. Wells Fargo’s Aaron Rakers questioned management about Blackwell and guidance for December 2024 and onwards. Liang explained that for the December quarter, Blackwell “will be very small. Engineering sample small volume. So the real volume, I believe, had to be March quarter next year. And that's why we foresee only $26 billion to $30 billion.”
But now, SMCI implied they are not able to ship Blackwell in the March quarter:
“Do you guys have a forecast from NVIDIA? You know when you think you're going to start to see you know supply the GPU, so that you can ship the NVL72 where visibility is still pretty low on availability of the GPUs?
Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereSign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick here
Charles Liang
We already proved pretty much everything. And now, just waiting for – and we are in some allocation, some volume, but the volume demand is way much bigger. So we are waiting for more allocation. So hopefully very soon we can ship in much higher volume."
Super Micro revised its FY25 guidance lower at the beginning of last week, now seeing revenue of $23.5 billion to $25.0 billion, or more than 13% lower than the initial guide at midpoint. Q3 revenue was guided between $5 billion and $6 billion, below the $5.95 billion estimate. A weaker-than-expected March and FY25 guide plays into management’s comments of a lack of Blackwell NVL72 availability, with Super Micro only just beginning volume shipments of Blackwell-based racks:
Q: Jon Tanwanteng, CJS Securities: “I was wondering if you could break down the factors …driving the reduction in the 2025 revenue guidance. How much is maybe pricing related? How much do you think is related to delays or availability of Blackwell?”
A: David Weigand, Super Micro CFO: “Yeah, I would say, Jon, that probably the biggest factor was just the delay in new technology because we were, when you think about it, we were all set to go. We were all set to ship with liquid cooling. We were ready. But the problem was that not everything else was.”
This was corroborated by Liang:
“Once Blackwell [is] in volume production, I believe we will have strong growth. And now we are just preparing, diligently preparing all the logistics, including the system enclosure, thermal solution, for sure GPU supply from our vendor Nvidia. So we are well prepared and once logistics ready, we are ready to ramp up our growth.”
Super Micro has walked back the revenue guide that hinged on Blackwell’s NVL systems shipping in volume in the March quarter. Management was also quite clear that the new product was facing a delay as they await more GPU supply.
Vertiv Signals Softer Q1
Vertiv is a provider of thermal and power management solutions and is a leader in direct liquid cooling. The company stated they benefited from a “particularly strong” Q4, with revenue rising nearly 26% YoY as they overdelivered by nearly $200 million as customers wanted products as soon as possible.
Vertiv’s strength in Q4 may be tied to key partner Dell, as its AI server backlog in fiscal Q3 (October quarter) rose more than 18% QoQ to $4.5 billion after being flat QoQ in Q2, and its AI pipeline rising more than 50% QoQ. Analysts placed Dell’s AI server pipeline at $16 to $17 billion, up from $11 to $13 billion previously, a rather large jump for one quarter. However, Dell noted that one factor for its softer Q4 and fiscal year guide was the “unpredictability of the AI shipments” as there are “some more timing differences than what we were anticipating when we gave the guide the last quarter.”
For Q1, Vertiv guided a deceleration to 19% YoY growth, with FY25 revenue growth guided at 16%. Management defended this deceleration into Q1 by saying: “Now of course, Q4 was particularly strong. So we should not look at Q1 as a quarter-to-quarter, really look at the first quarter sales as the acceleration that has taken place. With a 19% organic growth in the first quarter, I feel very, very good about what that tells us about our overall trajectory” and also that it is “higher than what we actually saw in 2024.”
Liquid cooling capacity is not a constraint for Vertiv, as they had said last summer that they were “on track to finish in 2024 with a 45x capacity increase compared to baseline at the end of 2023.”
I agree with the analyst sentiment (and weak price action) following the report that the commentary doesn’t check out exactly. Per I/O Fund numbers, management is contradicting itself by guiding for organic growth of 19% at the midpoint for Q1 but 16% growth for the fiscal year (i.e., slower growth later in the year) while stating shipments will increase QoQ.
Additionally, the QoQ/YoY has to be looked at which is lower than what typical seasonality would account for, as our numbers indicate Vertiv was down (12.1%) due to seasonal sequential growth from Q4-Q1. This year, Vertiv is down (16.9%) from Q4-Q1.
My conclusion (still to be confirmed) is that Vertiv may see a weak Q2 before there is an acceleration into the back half.
One Q&A exchange in Q4’s call voiced these concerns:
Q: Steve Tusa, JP Morgan: “Obviously, there's a lot of focus on orders, I think, for good reason. Everybody's trying to discern the trend relative to these CapEx numbers, the pipelines that are obviously pretty eye-popping. You're now two quarters step down relative to what we see at your customers and the way they're spending in these pipelines. What is that disconnect? Is there some sort of disconnect between you guys and everybody else talking about doubling their data center businesses?”
A: Giordano Albertazzi, Vertiv CEO: “I don't think there is a disconnect, quite honestly. If you look at our orders trajectory last year, if you think about a 60% year-on-year growth in the first half of the last year, that's a lot of growth. When our customers talk about their CapEx, of course, they also talk about a lot of the silicon part of their CapEx, not all the data centers. So, I feel pretty good about our visibility of the market and what we win in the market.”
Networking Companies Shift Tone on Timing for GB200s
Please note: the full research including company names, management statements and stock tickers are provided to our research members We offer a more generalized discussion below.to our research members We offer a more generalized discussion below.
PCIe 6.0 supplier:
PCIe 6.0 is a networking standard expected to initially ship with Nvidia’s Blackwell. A key supplier stated to expect this in the second half of the year, as these products “are driving higher dollar content opportunities […] on a full rack and full accelerator basis and we expect volume deployments to begin in the second half of this year.”
Revealed at GTC in March of 2024, PCIe 6.0 was initially expected to launch with the GB200s. The following quote from this supplier also hints that merchant GPUs (Nvidia) will not be driving H1 – which would be odd if Blackwell was shipping. “Now, if you look into 2025, we see both contributing growth. The first half of the year will be more predominantly the internal AI accelerator programs. But if you get into the back half of the year, the transition on the merchant GPUs will also be very strong for us. This is where you'll see the custom rack configurations start to deploy and that’s where we see a big dollar increase in our contemporary GPU with [our product] starting to ramp.”
PMIC Suppliers:
PMICs (power management integrated circuits) are a critical part of the picture for Blackwell, given that these components were linked to Blackwell’s rumored power management issues. Major PMIC suppliers were unable to confirm volume shipments in the first quarter in recent earnings calls.
One PMIC supplier that we covered on our Advanced site on Feb 5th, is stating that “We know that we're not the only one players going after this, so the share is still to be determined. The final design, everything is still to be finalized as well, too. So we're working closely with the customer. Again, at this point, we can say that we're targeting for a mid-year launch.”
This company is either discussing Blackwell Ultra with the B300s, or they are implying GB200s are delayed.
The competing PMIC supplier stated: “Just to add a little bit of color to how we see the year rolling out, we believe that we will be off to a slower start in the first half of the year. But as the year develops, the customer base is expected to broaden as hyperscalers launch their new products. We have multiple product ramps with both existing customers as well as with these new hyperscalers.”
The takeaway is that neither PMIC supplier can confirm they are shipping in volume in Q1 or Q2, yet meanwhile, both are saying they are still part of the supply chain.
Semtech Suddenly Pulls Guidance on Active Copper Cabling (ACCs)
Perhaps the most drastic commentary to come out of the last few weeks was when a key supplier pulled its Q1 guidance intra-quarter.
Semtech filed an 8-K stating that “net sales from its CopperEdge products used in active copper cables are expected to be lower than the Company’s previously disclosed floor case estimate of $50 million due to rack architecture changes, with no expected ramp-up over the course of fiscal year 2026.”
ACC content had been estimated to be substantially higher with 36×2 configurations – it had been rumored back in October 2024 that Nvidia was halting development of one of the NVL72 configurations, the NVL36x2, which linked two 36 GPU racks together in a side-by-side system. Semtech pulling guidance strengthens this view.
The shift in architecture to discontinue the 36×2 configuration was said to possibly “disrupt the supply chain for assembly and cooling solutions,” by removing dual-rack configurations and focusing solely on single-rack NVL72 and NVL36 configurations. DLC suppliers have been pushing back Blackwell’s ramp later in the year, suggesting that the market may have faced some impacts from this rumored design change late last year.
While shifting architectures is not a big deal in the medium-term (as stated above, NVL72 single rack configurations are expected to see a higher mix); it’s the suddenness that Semtech pulled it’s guidance that is cause for concern as the company had reaffirmed its optimistic revenue floor guidance based on two factors – the timing of Blackwell’s launch and changes in rack design. This suggests both factors may be in play, as a late-stage design change was expected to have downstream impacts on timing for DLC ramping.
Potential Flat Q1 or Flat Q2
A week after we began covering the topic for our research members, Mizuho’s Vijay Rakesh stated he is expecting a “more flattish” Q1 with data center revenue of $36.7 billion versus $37.4 billion consensus.
To reiterate, if there is an issue, it will appear in Q1 or Q2 according to management commentary provided above. For Q4, the QoQ growth in the data center is expected to be $2.6 billion, compared to $4.5 billion QoQ from Q3-Q4.
What to Look for in Nvidia’s Q4 Report
We have yet to see a DLC supplier come in strong, so we believe the risk is elevated that Nvidia reports a weaker-than-expected Q1 or Q2 as the B200s absorbing a timing delay on the GB200s is a tall order.
In terms of the GB200s shipping on time, I’m open to this – and highly prefer it, given I continue to hold a large Nvidia position. However, I can't find clear evidence in the supply chain that these larger systems are ramping for a strong Q1 performance.
HP Enterprise stated that they’ve only now shipped their first Blackwell based system, while Super Micro walked back its FY25 guidance in part due to a soft fiscal Q3, which they had previously said would be when Blackwell increases in volume.
Combined with comments from Vertiv and Dell, as well as other suppliers noted in this analysis, there appears to be an air pocket, of sorts. A quarter that doesn't blow it out of the water would be unusual for Nvidia as it has consistently smashed expectations since Hopper’s breakout quarter in 2023.
On that note, Nvidia’s data center revenue has consistently exceeded expectations by at least $1 billion or more for six consecutive quarters, with fiscal Q2 ‘24 being the largest at a nearly $2.5 billion beat. Last quarter, fiscal Q3 ‘25, was the second largest at nearly $2 billion.
Nvidia’s Q2 ‘24 saw the largest beat at $2.5 billion, while Q3 ‘25 followed with a nearly $2 billion surprise, driven by strong demand for Hopper
This has driven a string of impressive top-line beats each quarter, with the smallest revenue beat being $1.29 billion in fiscal Q2 ‘25. The shrinking size of revenue beats in that quarter correlated to a deceleration in QoQ revenue growth to 15.3%, one factor behind the more than 6% decline Nvidia felt the day following that report.
For the upcoming fiscal Q4 report, revenue is expected to be $38.1 billion, for QoQ growth of 8.6% while Q1 ‘26 is expected to see revenue of $41.98 billion, for QoQ growth of 10.2%.
Conclusion:
Given market jitters around DeepSeek, which turned out to be a non-issue, something more material related to the GB200s, such as growth slowing below expectations at the start of the new fiscal year, could send the stock below $100 — which we would see as a buying opportunity. We provided a more detailed buy plan before the earnings season began in the article “Where I Plan To Buy Nvidia Stock Next”
There is a scenario where Nvidia’s stock marches higher – perhaps based on the remaining strength from Hopper and the B200s, B200 HGX systems and B200As packaged with CoWoS-S and having a lower thermal design power (TDP). Or perhaps the string of suppliers discussed here are simply stating the GB200s are not ramping in volume in Q1 but will in Q2. Even still, I prefer to wait to see how this resolves as my firm has been tracking key suppliers and AI proxies for six years to confidently build our positions.
Ultimately, my firm trimmed our Nvidia position (to a 10% allocation) and will happily buy lower should the assumptions in this analysis materialize. Nvidia remains the stock of the decade; however, stock returns – and product launches — are not perfectly linear.
The I/O Fund has recently added five new small and mid-cap positions poised to benefit from the ongoing AI spending war. Join us every Thursday at 4:30 p.m. for our exclusive 1-hour webinar, where we cover market entries, exits, and key insights on the broader market. Take advantage of $50 off our Advanced monthly service, now priced at $99/month. Use Code SAVE50ADV through Feb 28th MidnightJoin us every Thursday at 4:30 p.m. for our exclusive 1-hour webinar, where we cover market entries, exits, and key insights on the broader market. Take advantage of $50 off our Advanced monthly service, now priced at $99/month. Use Code SAVE50ADV through Feb 28th Midnight
Disclosure: The I/O Fund owns Nvidia and a handful of Nvidia suppliers including some of the suppliers listed in this analysis. To view the full portfolio, subscribe here.
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.
Alpha and Omega is openly being considered as a supplier for Nvidia’s B300 systems, expected to ship mid-year. Given its tiny revenue of $173.2 million, and our ability to combine technicals with fundamentals, we feel it’s a shot worth taking. Should AOSL be confirmed as the supplier over Monolithic Power Systems, then the company would theoretically surge. Should they not be confirmed, the stock would theoretically plummet. It’s not for the faint of heart, yet we continue to like the risk/reward the stock offers.
AOSL supplies the PMICs and MOSFETs powering each GPU, and for the upcoming platform of this customer (widely known to be Nvidia), AOSL will additionally sell the total solution controller and the multiphase controller. The number of PMICs/MOSFETs is expected to triple from 9 to 16 up to 50 MOSFETs per GPU.
With that introduction, the earnings report this quarter matters very little — what matters is if AOSL becomes a confirmed supplier. That announcement, or any supply chain whispers, will likely happen outside of an earnings report as we approach CY Q1-Q2.
For example, this week, a new write-up caused AOSL’s stock to rise 11%, stating AOS’s new power-management IC (PMIC) controller and DrMOS chips helps to “significantly cut transient power demands by several hundred watts during the brief periods when the SoC draws peak power” and was available in production quantities with a lead time of 12 to 16 weeks.
However, last month, there was a third-party analyst that stated AOS was seeing thermal management issues, causing over-heating. The same analyst also indicated AOSL would be a GB200 supplier, yet management is pointing toward the B300s (and associated systems) as the main design they will participate in.
Regardless of the factual accuracy of any single analyst, AOS is certainly in the middle of the action when it comes to qualification testing for the outsized power requirements of Nvidia’s road map. With this small of market cap and revenue base, the news and rumors can quickly change the stock price in either direction.
Below, we do our due diligence on the earnings report, including what management is saying about their AI systems partner, the weak margins that drove some of the weak price action this quarter, and an idea on timing for when the stock will (or will not) show a sizable impact from being the chosen PMIC and controller supplier for the new server design.
Revenue
Alpha and Omega reported a slight revenue beat in Q2, but that was unfortunately overshadowed by lingering margin weakness.
Looking ahead, management hinted that Q3 would be the bottom for the year, signaling that revenue and margins are expected to recover “beyond the March quarter with incremental growth likely from smartphones, graphic cards and AI.” Management also hinted at increasing contributions from next-gen GPU platforms beginning in the middle of the calendar year.
Q2 revenue increased 4.8% YoY to $173.2 million, accelerating from 0.7% growth last quarter. Management said the results came in ahead of expectations and confirmed that inventory corrections are complete.
For Q3, revenue was guided at $158 million, +/- $10 million, for YoY growth of 5.3%. This was below expectations for $161 million, with management seeing some pricing pressures from a more “subdued” market environment. However, the low guide was also partially due to the wind down of licensing and engineering revenue with the 24-month contract expiring this month – for reference, licensing revenue was $5.4 million in Q4.
Management reiterated on a lack of visibility into 2025, though they did explain that they “expect both revenue and margin to recover beyond the March quarter.”
As stated in the introduction, this all comes down to whether AOS is chosen as the supplier over Monolithic Power, and if they are chosen, to what extent
Margins
This was the weakest part of the report, with margins coming in at the low end of the guided ranges and forecast to contract again across the board. Gross margin is now approaching the low-20% range, while operating margin was guided to drop to the lowest level in two years.
Given Q2’s margins came in low across the board, management is forecasting further contraction in a seasonally slower Q3, partially impacted by the wind down of licensing revenue as the 24-month contract expires this month
Gross margin contracted to 23.1% in Q2, coming in at the low end of the 24%, +/- 1% guide. The QoQ decline was once again attributed to “ASP erosion and mix changes.” On a YoY basis, gross margin is down 3.5 points.
For Q3, management guided for gross margin to contract further to 21.5%, +/- 1%, with some impacts from the phase-out of licensing and engineering revenue in the quarter.
Operating was contracted to (3.4%) in Q2, down from (0.1%) last quarter. The contraction stemmed from R&D expenses coming in slightly above expectations combined with the weaker gross margin.
For Q3, operating margin is expected to contract further to (7.9%), with operating loss more than doubling sequentially to ($12.5 million).
Net margin declined to ($3.8 million) in Q3.
EPS
Adjusted EPS came in just ahead of estimates, though GAAP EPS missed the mark.
Adjusted EPS was $0.09 in Q2, beating estimates for $0.08. GAAP EPS was ($0.29), missing estimates for ($0.23).
Adjusted EPS estimates have come down significantly due to the recent margin weakness, and likely will come down further given Q3’s weak margin guide. Last quarter, AOSL was expected to report $0.35 in adjusted EPS in the second half of the fiscal year — $0.14 in Q3 and $0.21 in Q4 – though that was seen at just $0.08 combined heading into Q2’s report.
Cash and Balance Sheet
Despite the margin shortfall, operating and free cash flow both improved sequentially.
Operating cash flow was $14.1 million in Q2, up from $11.0 million in Q1. OCF margin improved from 6.1% to 8.1% in Q2.
Free cash flow was $6.7 million in Q2, up from $4.3 million in Q1. FCF margin improved from 2.4% to 3.9% in Q2.
Capex was $7.4 million in Q2, and guided to be $7 million to $9 million for Q3, a slight sequential increase at midpoint.
Inventory decreased $1.2 million sequentially to $183.7 million.
Cash and equivalents totaled $182.6 million.
Debt totaled $32.6 million.
Key Segments
Computing
Computing revenue increased 6.0% YoY but decreased (0.5%) QoQ to ~$76.0 million. This decelerated further from 8.6% growth last quarter. Management said that the segment’s results were slightly better than typical seasonality, though they were “slightly worse than our original expectation for slight sequential growth.”
During the quarter, PC and graphics card strength was offset by seasonal declines in notebooks and tablets. Servers and AI GPUs were “softer as the industry prepares for the next platform transition.”
Management added in the prepared remarks: “Within AI for large data centers, we are a contender in the middle stages of the design-in phase and we see potential for these products to contribute to revenue in the middle of the calendar year. On graphics cards, the next generation platform is ramping up to mass production. With this new platform, we expect BOM content to increase as more power stage ICs, paired with our controller, are being used to power the GPU.”
For Q3, management said Computing revenue will “will likely decline due to seasonality,” with PCs expected to be flat as “tariff uncertainty is leading to demand pull-in with PC makers.”
Consumer
Consumer revenue declined (3.9%) YoY and (28.8%) QoQ to ~$22.5 million, in line with management’s expectations due to seasonality in gaming and appliances, with wearables normalizing after reaching a record level last quarter.
Management added that they do not expect “gaming to return to meaningful growth until the customer transitions to the next platform.” For Q3, revenue is forecast to see a low-single digit decline QoQ due to continued seasonality for gaming and TVs, with some softness in home appliances.
Communications
Communications revenue rose 14.2% YoY but declined (6.4%) QoQ to $33.3 million. Management explained that this was ahead of expectations for a double-digit QoQ decline as US and China smartphone demand only moderated slightly, with Korea increasing in preparation for product launches.
Management added that the “better-than-expected results are due to combination of market share gains, a mix-shift to higher end phones in China, and generally higher charging currents driving increased BOM content.”
Looking ahead to Q3, management expects a low-teens QoQ decline due to seasonality.
Power Supply and Industrial
Power Supply and Industrial revenue was flat YoY and up 9.6% QoQ to $34.9 million, driven by strength in quick chargers and power tools, with steady demand for e-mobility and AC-DC power supplies. Management said that they see opportunities ahead in 2025 for “quick chargers due to increased BOM content driven by higher charging currents,” while they are working on “leveraging relationships in Taiwan to partner on DC fans for server racks.”
For Q3, management forecast a low-teens QoQ decline due to seasonal declines in quick chargers, offset by e-mobility and AC-DC power supplies.
Earnings Call
AOSL’s Commentary about Being a Potential B300 Supplier
Reading between the lines suggests that AOSL is stating they are in the qualification stages for Nvidia’s upcoming B300s, due mid-year this year, as the company is quite explicit in stating they are currently in the design phase for a release mid-year. The B200s are well beyond their design phase, and beginning to ship.
Here is what management stated: “The second category of projects that we are targeting is the AI data center portion. And this is where our solutions are being used on board to power GPUs and these go into their server solutions.
And this is something that we are very excited to take part in, to be able to design into. We are right now still in the middle of that designing phase and we're closely working with that customer in bringing up boards and working with them. And I'm not going to go into details about the design but we did already indicate that this is something targeting mid-year for the launch.”
When pressed again on where they are in terms of timing and content share, the response was the following – indicating the potential for promising things for AOS over the next few months.
“Yes, we certainly think the potential for our business in data centers to be much bigger than that of the graphics portion simply because the usage goes up much more. As you can imagine in these data centers, the power levels are significantly bigger, so it simply requires more power stages to power each of these GPUs.
I don't want to quantify that at the moment, but basically it is something that is multiples bigger, you can say, in terms of the total attempt that we can go after. We know that we're not the only one players going after this, so the share is still to be determined. The final design, everything is still to be finalized as well, too. So we're working closely with the customer. Again, at this point, we can say that we're targeting for a mid-year launch.”
Notably, the company was asked about thermal issues but politely declined responding, stating they would not discuss the designs of their partner or any rumors. They simply reiterated they are “one of the main contenders.”
Margins:
At one point an analyst asked about the long-term target of $1 billion in revenue with a 30% margin, which was stated previously at an analyst day. The CFO corrected him and answered it was their medium-term target, which is incremental positive.
“Yes, our midterm target model is revenue reaches $1 billion. And then at that time, we expect non-GAAP gross margin to be around about 30% range. So that's our midterm target.”
Bill of Materials (BOM) will go up in any AI-design related wins. We’ve covered this in the past here. Additionally, the margins are expected to bottom next quarter with improvement as AOS goes into the June quarter – below is what the CFO stated.
“Sure. I mean, generally, I mean, yes, for the next 12 to 18 months, I would expect that the product mix probably will improve from this March quarter low point of the margin. I would expect probably in the June quarter, we can expect the gross margin on a non-GAAP basis to get back to the December quarter level. So the March quarter was mainly some product there and also the decrease in license and engineering service revenue, and along with the Lunar New Year period, which is not going to help on the margin side. So then, I mean, I would expect that, yes, we can bounce back and recover from there.”
Average sales prices (ASPs) are currently seeing some erosion, yet management pointed toward the new product line being a way to counter this: “Okay, sure. Yes, I mean, for the whole year, ASP erosion was in the range of mid-to-high single digit range on the same product basis. So going forward for this calendar year 2025, we continue to expect the mid to single digit — mid single digit type of ASP erosion. What we do here is we will accelerate our new product rollout to counter the ASP erosion. So with some good opportunities designed in here, yes, we expect beyond March quarter that all of gross margin can bounce back and recover.”
Conclusion:
AOSL sold off following the report as AI-related design wins are not appearing in the financials yet, and meanwhile, the company is seeing headwinds to its margins. Whether we buy more AOSL or sell AOSL will not be determined by this earnings report, it is nearly meaningless until we get more indication of how the design qualification is going for the B300s.
Fortunately, we use technicals to guide our high beta stocks, which can often show strength long before the fundamentals – especially in the case of supply chain whispers (or leaks). Therefore, we will continue following our plan for AOSL while adhering to our stops, yet also being generous with those stops to make sure the volatility does not prevent us from participating in the upside. Should we get the announcement we are seeking, the upside could be sizable. We want to hang in there and see how this plays out.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Himax Technologies produces display imaging processing solutions, including display driver chips, timing controllers, CMOS image sensors, microdisplays and WiseEye AI chips and modules.
Himax Technologies is a leading provider of endpoint AI solutions, particularly through its ultra-low-power WiseEye ASIC AI processors and modules.
Himax Technologies could be a major player in silicon photonics, a revolutionary semiconductor technology that uses light (photons) instead of electricity (electrons) to transmit data within and between computer chips.
Silicon photonics enables faster, more efficient data transfer using less power, generating less heat with more data capacity, which is crucial for AI and HPC applications.
Taiwan Semiconductor Manufacturing Company is a leading innovator in silicon photonics with its COUPE (compact optical engine) technology enabling high-bandwidth and low-latency communications between chips, and Himax is rumored to be an exclusive key supplier of micro-lens arrays.
Himax Technologies (NASDAQ: HIMX) is a Taiwan-based semiconductor company specializing in display imaging processing technologies. The fabless company’s product portfolio encompasses display driver integrated circuits (DDIC), touch display driver integrated circuits (TDDI), timing controllers (Tcon), liquid crystal on silicon (LCoS) microdisplays and complementary metal-oxide semiconductors (CMOS) image sensors. Its products cater to a range of applications in laptops, tablets, TVs, monitors, smartphones, automobiles and augmented reality (AR) and virtual reality (VR) devices.
Their main business is supplying display driver chips (DDIC and TDDI) to original equipment manufacturers (OEMs). DDICs are required in almost every electronic device with a screen and TDDI is required for every device that has a touch screen. Himax has a 50% market share of TDDI in the global automotive market. Himax’s end-user products are primarily used by consumers, which lends to the cyclical nature of its business.
WiseEye Ultralow Power AI Sensing and Applications
Himax’s WiseEye AI sensing technology brings computer vision AI to endpoint devices. Its CMOS image sensors include near-infrared (NIR) and RGB and ultralow power always-on sensor (AoS). Himax’s AI is tailored for endpoint devices. Endpoint AI is not to be mistaken for edge AI:
Endpoint AI focuses on implementing AI directly on end-user devices, such as smartphones, tablets, laptops, smart home devices, and wearables. It aims to enhance user interaction and provide personalized, localized experiences. In other words, AI models run on these devices, enabling features like voice assistants, facial recognition or smart recommendations without relying on cloud processing.
Edge AI, on the other hand, refers to AI that processes data on devices located near the data source in a network. These devices are typically at the "edge" of the network, such as sensors or cameras. The key idea is that data is processed locally on these devices without needing to be it to the cloud for analysis, which reduces latency and bandwidth usage.
Endpoint AI is designed for local image and AI smart sensing. These are used in devices like smart doorbells, smart home cameras, smart glasses, and fitness trackers for motion sensing, object recognition, activity tracking and gesture base controls. It’s also used in smartphones and tablets for facial recognition, gesture control and augmented reality. Its WiseEye AI chips enable real-time monitoring and image-based decision-making as AI tasks are performed locally and directly on the device.
Rather Than Diversification, Himax is Exposed to Consumers
While Himax's products span across many industries and applications, their diversification is limited because of their product's end-user, consumers. Unlike Amphenol, with balanced end market exposure and true diversification in short cycles (IT datacom, mobile devices, mobile networks) and longer cycle end markets like industrials, commercial aviation and defense, Himax's business is cyclical.
Endpoint AI is targeted at consumers, typically on personal devices. Edge AI is targeted at industries and enterprises, used in applications like automation, industrial systems and smart cities. It’s this end-user component that has made its results volatile, lumpy and cyclical. A weak consumer lends to weak results for Himax. Additionally, 75% of its revenues are derived from China, and a significant portion of its products are manufactured in China. However, there could be a major catalyst to offset the cyclicality of its business; which is silicon photonics.
The Next Frontier of AI Chip Development: Silicon Photonics
Silicon Photonics is a revolutionary technology that uses light (photons) instead of electricity (electrons) to transmit data within and between computer chips. This enables much faster and more efficient data transfer with less power, generating less heat. This technology is ideally suited for AI and high-performance computing (HPC) applications. There are many advantages to photonics, including:
Higher Bandwidth: Light can carry much more data than electrical signals thereby enabling faster transmission of data.
Lower Latency: There is reduced delay in the data transfers, which is crucial for real-time applications.
Improved Power Efficiency: Optical communications can be much more energy-efficient than electrical connections, especially over long distances (IE, optical fiber).
Smaller Size: Integrating optical components on silicon chips allows for smaller and even more compact devices.
Less Heat: Light doesn’t generate much heat compared to electricity.
Taiwan Semi and Nvidia Team Up on Silicon Photonics
TSMC is a leader in silicon photonics with its COUPE (Compact Universal Optical Photonics Engine) technology. COUPE combines optical interconnects with advanced packaging techniques, such as CoWoS (Chip-on-Wafer-on-Substrate), to facilitate high-bandwidth, low-latency communication between chips. Speculation is that TSMC has been working with Nvidia to develop a silicon photonic-based chip prototype. It’s rumored they’ve created one at the end of 2024. They are also working on optical packaging technologies to improve AI performance and usher in a new packaging architecture for optoelectronic chip integration.
Here’s How Himax May Become a Key Player in Silicon Photonics
What Does This Have to Do with Himax? According to TF International Securities analyst Ming-Chi Kuo, Himax exclusively supplies their micro-lens arrays to TSMC for the first and second generations of COUPE FAUs. Himax exclusively supplies their micro-lens arrays to TSMC for the first and second generations of COUPE FAUs. FAUs are fiber array units, which are essential components of optical engines, helping them to focus and direct light for efficient data transmission. Since their components are vital for advanced packaging technology to enable high-performance computing for AI, they are a key upstream player in the AI ecosystem.
Ming-Chi Kuo said via X, "Himax Emerging as a Key AI Upstream Winner in TSMC's COUPE (Silicon Photonics), Significantly Boosting Growth Visibility for 2026-2028." He further stated, "I previously shared my prediction that Himax might be a potential supplier for TSMC. My latest supply chain survey indicates that TSMC's COUPE (silicon photonics) development and ecosystem visibility have improved markedly. Furthermore, it's confirmed that Himax is the exclusive supplier of micro-lens arrays for the first and second generations of COUPE FAUs).”
Kuo estimates Himax revenue will reach $1.16 billion vs consensus estimates of $1.11 billion in 2026, $1.42 billion in 2027 and $2.4 billion in 2028. Kuo estimates EPS of $1.00 vs consensus estimates of $0.80 for 2026, $1.60 in 2027 and $3.40 in 2028. Kuo also states that the first generation of COUPE is fully developed with mass production validation on the way and receiving the highest priority among TSMC’s developing technologies. Second-gen mass production validation is expected in the first half of 2026. Kuo believes Nvidia's Rubin GPUs could use COUPE upon mass production.
Himax’s WLO Technology is Key to Developing Silicon Photonics
Himax is involved with silicon photonics through its strategic partner Fiber Optic Communications Inc. (FOCI), a leading provider of optical communications solutions, which also owns a 5.3% equity stake. WLO technology is essential for manufacturing the miniature and precise optical components needed for silicon photonics like waveguides, diffraction gratings and lenses.
Wafer-level optics (WLO) is a key technology from Himax that’s being used in collaboration with FOCI to leverage their involvement in co-packaged optics (CPO), which involves packaging optical components directly onto semiconductors like CPUs and GPUs, reducing the distance that data needs to travel, improving bandwidth, latency and power efficiency. They also collaborate to develop laser-packaged optics (LPO), which uses lasers for even faster transmission. Himax and FOCI are collaborating to develop and manufacture CPO and LPO solutions, combining Himax's WLO expertise with FOCI's optical interconnect technology.
Himax, with its partnership with FOCI, could also be a key supplier of WLO components for TSMC's COUPE platform. These components would be essential for enabling the optical interconnects within CPO-based chips.
In its Q3 2024 earnings presentation, Himax listed WLO as a growth opportunity and noted, “Collaborating with the world's leading AI semiconductor and foundry partner in LPO/CPO, incorporating FOCI's proprietary LPO/CPO connector technology with Himax's nano-scale WLO to create an industry-leading optical transmission solution for Generative AI and HPC” The “foundry partner” is referring to TSMC.
Himax’s Three Subsidiaries
The Company operates three subsidiaries under the Himax umbrella. While each division operates with some degree of independence, they aren’t completely separate entities, and the Company doesn’t report revenues by division. These subsidiaries are:
Himax Technologies LTD: This is the main division that produces its display driver integrated circuits (DDIC), for which they have an 8% global market share. They produce thin-film transistor liquid crystal display (TFT-LCD), electrophoretic display (EPD), organic light-emitting diode (OLED), and LED display drivers. It provides technologies for touch sensor displays, including pure in-cell touch TDDI as well as 3D decoder processors, ASIC service and IP licensing, wafer level optics (WLO), power management chips, WiseEye AI processors and modules. They have in-house WLO fabs and color filter fabs. End markets include 4K/8K TVs, gaming monitors, smartphones, tablets, smart speakers and automobile infotainment systems.
Himax Display Inc.: This division focuses on microdisplay products. They produce the liquid crystal on display (LCoS) modules for head-mounted display, heads-up display (HUD) and pico projector applications. They have in-house LC and module display facilities.
Himax Imaging LTD: This division specializes in CMOS image sensors and ultralow power always-on sensors (AoS) CMOS image sensors. CMOS image sensors record light data to capture images and video, which are often used in digital cameras, webcams and scanners. Its end-user applications include monitors, smart TVs, ADAS, smart home devices, augmented reality (AR)/virtual reality (VR) headsets, digital cameras, webcams, facial recognition and advanced driver assistance systems (ADAS). This division also produces their micro-lens arrays.
Financials: Cyclical, But Still Beat Top and Bottom-Line Consensus
A weak consumer base, especially in China, and an inventory glut caused YoY sales to decline. Q3 2024 QoQ sales also declined due to the stronger Q2 2024 ramp-up from consumer shopping holidays in China. A surge in Q2 also comes from the highly publicized, overhyped run-up to the Chinese government’s stimulus efforts to bolster its fledging economy. Markets were propped up in anticipation of a major stimulus package, which was released at the end of September 2024 with monetary easing through interest rate cuts and easing of the reserve requirement ratio (RRR) for banks to inject liquidity into the economy.
While there was a short-term boost to China's stock market and some economic indicators, the longer-term effectiveness remains to be seen. Himax’s revenues are highly dependent on the Chinese economy as they derive 75% of their revenues from China. The recovery of their automotive market was a boon for their earnings as their higher margin automotive TDDI and in-cell touch displays got a boost, and its latest technology went into mass production in Q3.
Himax reported Q3 2024 EPS of $0.07, beating the consensus estimate of $.06 by a penny. Revenues fell 6.75% YoY to $221.41 million but still beat the consensus analyst estimates for $219.96 by 1.11%.
Revenue Fell in Q3 Due to Softer Consumer Market
Q3 revenue fell (6.75%) YoY and (7.18%) QoQ to $222.41, beating consensus analyst estimates for $219.96 million by $2.45 million of 1.11%. The YoY revenue decline was attributed to the softer Chinese economy, but order momentum was strong in automotive, tablet and Tcon products.
Three Categories of Revenue Reported in Q3 2024
While Himax has three subsidiaries, as mentioned earlier, they only report revenue based on three specific categories:
Large-sized display drivers: $30.7 million in revenues, down 21.2% QoQ due to weaker monitor and TV IC sales attributed to customers' de-stocking amid challenging market conditions following substantial Q2 replenishment for shopping festivals.
Small and Medium-sized display drivers: $155.4 million in revenues, down 2.2% but beating guidance of being down in the low-teens attributed to stronger-than-expected automotive and tablets markets. Automotive drive sales, including TDDI and DDIC, had mid-single digit declines, which beat estimates of decline in the high teens.
Non-driver products: $36.3 million in revenues was a 13.1% QoQ decline, primarily from the double-digit sequential decline in Tcon sales. Again, due to customers pulling forward inventory purchases in the prior quarter in anticipation of strong sales during the shopping festivals.
This better-than-expected result was primarily fueled by rush orders from Chinese panel customers shortly after Himax's last earnings call on the backdrop of the Chinese government's renewed trade-in stimulus announcement made in mid-August as part of their efforts to boost automobile consumption further. Himax's automotive business, comprising drivers, Tcon, and OLED 3 sales, remained the largest revenue contributor in the third quarter, representing nearly half of total sales.
The small and medium-sized driver IC segment accounted for 69.9% of total sales for the quarter, compared to 66.3% in the previous quarter and 67.6% a year ago. Sequential declines were due to customers pulling forward their inventory purchases in the prior quarter, anticipating strong sales during shopping festivals.
EPS: Q3 EPS Beats After a Lumpy Pull-In Q2
Himax reported Q3 EPS of $0.07 vs $0.06 consensus estimates, a penny beat. The Company guided Q4 EPS between $0.93 to $0.11, mid-point $0.10. Q2 2024 had an unusual high EPS of $0.17 due to the extra inventory customers ordered in anticipation of Chinese shopping holidays including the “520 Festival” and “618 Shopping Festival”.
Margins: Consistent Gross Margins and Annual Bonuses Drop Operating Margins in Q3
Himax remained consistent on its gross margin, reporting 30% for Q3 2024. The operating margin dropped to 2.6% due to the annual spike in operating expenses. Operating expenses rose 28.4% QoQ to $60.8 million, again primarily due to employee awards and bonuses, which are paid out at the end of September each year. Himax grants annual bonuses at the end of September every year.
Cash and Debt Levels Drop Sequentially From Annual Bonuses
The sequential drop in cash from $253.8 million in Q2 to $205.5 million in Q3 2024 was primarily due to $50.7 million paid in annual dividends. The ($1.3 million) in operating cash flow was primarily due to the $30.1 million paid out in employee bonuses. Himax had $36 million in debt, of which $6 million was the current portion.
Conference Call: More Hints on Himax’s Future WLO Prospects
CEO Jordan Wu stated that the macro environment remains challenging. Their panel customers are reducing production to stabilize panel prices in response to current market conditions. End brands are simultaneously taking a cautious approach to procuring panels and are maintaining lower inventories. These factors have compressed chip demand, causing Himax to take a conservative outlook for Q4. The global economy is still uncertain, but they are confident in its business outlook for automotive, AI, wafer level optics (WLO) and organic light emitting diode (OLED), which are its key growth drivers.
The automotive display market is its primary revenue contributor and continues to expand. New and cutting-edge technologies LCD, TDDI, OLEN and Tcon will continue to provide sustainable long-term growth. There have been significant fluctuations in the automotive market demand in the Chinese market, which accounts for over 30% of global vehicle sales.
WiseEye PalmVein provides high security and reliability with low false acceptance and rejection rates, using unique internal vein patterns to prevent replication or spoofing. With local identification processing to enhance privacy, Himax anticipates strong sales growth and expanding applications for the WiseEye PalmVein module starting next year.
Large-panel display driver chips are expected to have double-digit sales decreases in Q4 due to soft holiday shopping demand expectations and ongoing customer de-stocking since Q2. Panel makers are strategically reducing production.
CEO Wu commented on presumably TSMC and its WLO business, “Moreover, Himax and FOCI, along with world-leading AI semiconductor companies and foundry partners, have begun new technology development for future generation products. We believe this will create new revenue streams for Himax and make a significant contribution to our total revenue and profit in the coming years.”
AI PCs are prompting display upgrades for notebooks. Wu commented, “In the third quarter, our newly introduced in-cell touch TDDI successfully entered mass production for a prominent brand’s first AI PC. Several projects are also in progress with other brands for their upcoming notebook models.”
Himax, in collaboration with FOCI, is advancing through the small-scale production phase of their first-generation solution for laser-packaged optics (LPO) architecture and has begun developing next-generation technologies for more complex co-packaged optics (CPO) architectures. WLO and CPO revenue is not expected in Q4.
Himax has created nano-scale precision optical systems for LPO/CPO designed to meet the demands of high-speed computing and are key to the success of LPO/CPO optical solutions. Additionally, Himax's WLO expertise is gaining recognition, with increasing engineering collaborations in AR/VR and other applications, positioning WLO to contribute significantly to future revenue and profit.
CEO Wu provided more elaboration on their technology roadmap with WLO. The company is working on next-generation technologies focused on increasing the number of optical fiber lines in advanced multi-chip modules to boost data transmission rates significantly. By bundling multiple chipsets into a single module, the goal is to improve bandwidth, utilizing optical fibers to replace traditional metal wiring for high-speed data transfer.
The Company is focused on packing more optical fiber lines into limited space to achieve higher bandwidth. It requires advancements in optical design and manufacturing, such as improved waveform integrity and precise coupling with photonic ICs. While the timeline is challenging, there is strong customer demand to accelerate the migration from first-generation LPO to more advanced CPO and prepare next-generation products to meet increasing data transmission needs.
CEO Wu concluded the Q&A with, “Without specifics, we believe the same existing capacity will generate substantially more revenue and profit for us as the products for LPO/CPO demand much more sophisticated optical design and manufacturing, compared to those used for our earlier products, which, as I mentioned, is for consumer electronics. So, I hope all address your questions regarding this WLO business.”
Conclusion: Himax has a stable yet cyclical business with its optical display driver chips and various products used by consumers. The Company has been consistent with its gross margins despite falling YoY revenues stemming from an uncertain macroeconomic climate, especially in China. The potential for its future WLO and silicon photonics business is what’s been keeping shares elevated.
Silicon photonics could be the next-generation technology essential for advancing semiconductors and continuing the progress of Moore's Law, particularly for AI and high-performance computing (HPC) applications. This could be the true growth driver that Himax needs to offset lumpiness with the rest of its business, which is overly concentrated in China.
They derive 75% of revenues from China and are highly dependent on their consumers. This poses geopolitical risks also especially with Trump's tariff threats, which are expected to start at 10% on Chinese imports to the U.S. on February 1, 2025. This could further hurt demand for Himax products. While most of their customer base is concentrated in China, a significant number of their OEMs are in China and presumably export their products to the United States.
The speculation that Himax is the exclusive supplier of micro-lens arrays to TSMC for their COUPE platform has added a 30% premium to shares, as it was trading around $6.50 before the December 12, 2024, TF International Securities analyst Ming-Cho Kuos’ blog post.
As for the future of the technology, CEO Wu stated, “We are certainly very excited about the prospect because, you know, if we look at our partners or customers’ projected capacity expansion as well as their projected growth of such high-end 2.5D modules or XPUs, even if we to fully utilize our existing capacity, we can only meet a small fraction of their projected demand.” Wu also clarified that WLO revenues would not be seen in Q4 2024.
The Company is profitable and has $206.5 million in cash with very little debt at $36 million. While cash flow has been decelerating, Q4 would have been the turning point at $27 million or 12% of revenue if backing out the annual worker’s bonus payouts. The stock trades at 10.99X forward earnings and has a 3% annual dividend yield. If the TSMC rumor turns out to be valid, then it may be the magic bullet to smooth out the cyclical nature of its current business model.
Welcome to the I/O Fund’s new Discovery Tier, where we cover a new stock idea on a weekly or bi-monthly basis. We are excited to bring you more coverage from the I/O Fund team geared toward new idea generation only.
I/O Fund Equity Analyst, Jea Yu, contributed to this analysis
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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.
This article was originally published on Forbes on Aug 12, 2022,01:21 pm EDTForbes on Aug 12, 2022,01:21 pm EDT
Semiconductor stocks have gained prominence due to growth drivers such as artificial intelligence, high-performance computing, 5G, robotics, machine learning, and electric vehicles. Despite semiconductor companies underperforming YTD, there is evidence that more supply will come online by the end of the year that will be met with equal or greater demand. Here is what AMD stated in their most recent earnings call:
“Certainly, on the Embedded side, we were supply constrained in the second quarter. And even on the Server side, we were tight in the second quarter. We have additional supply that’s coming online, especially as we get towards the end of the year. That will help us really meet more of the demand from customers. So, we feel pretty good about all of those puts and takes.”
Below, we review the stocks in the sector to find out which companies stand out in terms of revenue growth, profits, cash flows, and earnings surprise.
Sign up for I/O Fund's free newsletter with gains of up to 403% – Click hereSign up for I/O Fund's free newsletter with gains of up to 403% – Click hereClick here
Top Semiconductor stocks with the highest revenue growth rates for the current fiscal year
Revenue Growth Estimate for Current Fiscal Year – SOURCE: YCHARTS AND SEEKING ALPHA
Indie Semiconductor is leading with the expected year-over-year growth of 131% in the current fiscal year. The company is benefitting from the growth trend in advanced-driver assistance systems and electric vehicles. The company expects to be profitable by the end of 2023. The company has a Serviceable Addressable Market (SAM) of $40 billion by 2026. The company supplies chips and software to the automobile sector. Its chips power sensor capabilities like LiDAR and Radar, and vehicle electrification.
Monolithic Power Systems (MPWR) is expected to grow 50% in the current fiscal year. The company’s recent Q2 2022 results were strong. Revenue grew by 57% YoY to $461 million, beat the analysts' estimates by $30.41 million. The adjusted EPS came at $3.25 and beat estimates by $0.31. The Storage & Computing revenue grew by 112% YoY to $122 million; enterprise data revenue grew by 118% YoY to $65 million, and automotive grew by 25% YoY to $61 million. The management expects Q3 revenue of $490 million, representing a 51% YoY growth at the mid-point of the guidance. It was also significantly higher than the analysts' initial estimate of $400 million.
Top Semiconductor stocks with the highest revenue growth rates for the next fiscal year
Revenue growth estimate for the next fiscal year – SOURCE: YCHARTS AND SEEKING ALPHA
Aehr Test Systems has developed a unique technology that provides tangible benefits for testing emerging semiconductor components, such as silicon carbide and silicon photonics. Silicon carbide (SiC) is increasingly being used in EVs, while silicon photonics is being integrated into edge computing data centers. Tesla was the first to start using SiC in its vehicles with its Model 3. More EV manufacturers could follow suit due to SiC’s ability to withstand hostile conditions, improve efficiencies, and lower failure rates.
The company’s recent fiscal year ending May 2022 results were strong as revenue grew by 206% YoY to $50.8 million. The adjusted net income was $11.7 million or $0.42 per share compared to an adjusted net loss of $3.2 million or $(0.13) per share in the previous year. The management has guided revenue of $65 million for the FY ending May 2023, representing a YoY growth of 28% at the mid-point. The analyst expects revenue to grow 22% in FY ending May 2023 and 60% in the next fiscal year ending May 2024.
Sign up for I/O Fund's free newsletter with gains of up to 403% – Click hereSign up for I/O Fund's free newsletter with gains of up to 403% – Click hereClick here
Semiconductor Stocks with Top Forward P/S multiples
PS Ratio (Forward) – SOURCE: YCHARTS
The companies that outperform the market deserve a premium valuation. Nvidia is leading the sector. Nvidia has a solid long-term growth prospect in AI data centers and from the automotive chips. Similarly, Wolfspeed, which is a leading company in Silicon Carbide Technology, has a premium valuation.
Ambarella is another notable company trading at a fwd P/S ratio of 10. The company’s chips which were previously popular for using in drones and cameras have recently found a niche in the automobile sector. The company’s AI computer vision chips benefit from the Internet of Things, ADAS, and autonomous driving.
Quarterly Revenue Surprise
Quarterly Revenue Surprise – SOURCE: YCHARTS
Semiconductor Equipment Company ACM Research crushed the analyst’s consensus revenue estimates by 44%. The company’s Q2 revenue grew by 94% YoY to $104.4 million. The revenue also included $12.9 million that could not be shipped in Q1 due to the Covid-related restrictions in China. The company also maintained the revenue guidance for the year 2022 in the range of $365 million to $405 million, representing a YoY growth of 48% at the mid-point of the guidance.
Texas Instruments beat analysts' revenue estimates by 12%. The company’s Q2 revenue grew by 14% YoY to $5.2 billion. Susquehanna analyst Christopher Rolland in a note to the clients said, "[Texas Instruments] reported better results and guidance, in part as management overestimated China shutdown impacts of ~10% of [second-quarter] sales (~$500mln), and in part on the back of solid Automotive and Industrial demand,"
Top ranked semiconductor stocks based on Free Cash Flow Margin
Top ranked semiconductor stocks based on Free Cash Flow Margin – SOURCE: YCHARTS
Companies with a high cash flow margin also have a premium valuation. ASML Holding is leading the sector with the highest free cash flow margin. This is an important financial metric in the current environment, and we have noticed in the last few earnings seasons that shares were sold off when companies fell short on this metric.
Top ranked semiconductor stocks based on Net Profit Margin
Top ranked semiconductor stocks based on Net Profit Margin – SOURCE: YCHARTS
Texas Instruments leads the sector in this metric with a 44% net profit margin in the company’s recent quarterly results. Leading foundry, Taiwan Semiconductor, ranks second with a 41% net profit margin. TSMC’s revenue growth was strong, with good profits and cash flows also helped by the hike in chip production prices for its clients.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
This article was originally published on Forbes on May 28, 2022,11:54pm EDTForbes on May 28, 2022,11:54pm EDT
Semiconductor stocks have gained prominence due to growth drivers such as artificial intelligence, high-performance computing, 5G, robotics, machine learning, and electric vehicles. Despite supply constraints and the challenging macro environment, semiconductor stocks have withstood the tech sell-off better than other sectors. This is due to many semiconductor companies being profitable with strong free cash flows.
We reviewed the stocks in the sector to find out which companies stand out in terms of revenue growth, profits, cash flows, and earnings surprise.
Top 20 semiconductor stocks with highest growth rates for the current fiscal year.
Source: YCharts
In the above chart, Indie Semiconductor leads with the expected growth of 130% year-over-year in the current fiscal year. The company is riding the growth trend in advanced-driver assistance systems (ADAS) and electric vehicles. It has a Serviceable Addressable Market (SAM) of $40 billion by 2026. The company supplies chips and software to the automobile sector. It’s chips power sensor capabilities like LiDAR and Radar, and vehicle electrification.
The company’s revenues accelerated by 171% YoY to $22 million in the recent quarter. The management expects revenue to grow 178% at the mid-point in the next quarter. While the company is not profitable at the moment. The management expects it to be profitable in the second half of next year.
AMD is expected to grow 60% this year due to the Xilinx acquisition. The company had initially guided for organic growth of 31% during Q4 results. The Xilinx acquisition was completed in February this year, and partly by better demand from end markets. In the recent quarter, the company’s revenue grew by 71% YoY to $5.9 billion, with organic revenue growth of 55%. Even if we exclude Xilinx, the company is a leading growth stock among the semis due to data center growth and gaming.
Top 20 semiconductor stocks with highest growth rates for the next fiscal year.
Source: YCharts
Navitas Semiconductor has the highest growth rate in the above chart. The company is a leading player in the Gallium Nitride (GaN) chips. The benefits of GaN include fast charging and better power efficiency. Currently used in mobile phones & laptops, EVs are the future opportunity. Ambarella is another interesting company to watch. The company’s chips which were previously popular for using in drones and cameras have recently found a niche in the automobile sector. The company’s AI computer vision chips benefit from the Internet of Things, ADAS, and autonomous driving. The company’s revenue in the 4Q FY2022 grew by 45% YoY to $62.1 million. The computer vision revenue accounted for more than 25% of the FY2022 revenue and is expected to be 45% of FY2023 revenues.
Semiconductors with Top Forward P/S Sales multiples
Source: YCharts
In the above chart, SiTime Corporation has the highest forward P/S ratio. The company is a leading provider of Silicon Timing Solutions. In the recent quarter results, the company’s revenue grew by 98% YoY to $70.3 million. The revenue is expected to grow 50% this year and 23% in the next year. The strong growth rates are reflected in the company’s share price, which has doubled in the past year.
Sign up for I/O Fund's free newsletter with gains of up to 403% – Click hereSign up for I/O Fund's free newsletter with gains of up to 403% – Click hereClick here
Wolfspeed is another leading company that has a premium valuation due to the company’s expertise in Silicon Carbide chips. The company’s revenue is expected to grow 38% this year and 44% in the next year. According to MarketsandMarkets, the Silicon Carbide market is expected to grow at a compound annual growth rate of 19% from 2021 to 2026. Hybrid and electric cars are the future growth drivers for Silicon Carbide.
The company recently entered a deal with Lucid Motors to supply Silicon Carbide devices from the newly opened Mohawk Valley Fab. According to Gregg Lowe, CEO of Wolfspeed, “As the world advances towards an all-electric future for transportation, Silicon Carbide technology is at the forefront of the industry’s transition to EVs, enabling superior performance, range and charge time. Our investment in the Mohawk Valley Fab ensures our customers, including Lucid, have access to the advanced products they need to deliver innovative solutions to the market.”
Nvidia has seen some weakness recently due to the broader tech sell-off. However, the company deserves a premium valuation due to the company’s growth prospects in the AI data center and solid long-term prospects in the automotive chip industry.
Quarterly Revenue Surprise
Source: YCharts
Cirrus Logic crushed analysts’ consensus revenue estimates by 17%. The company’s Q4 FY2022 revenue grew by 67% YoY to $490 million. The company’s guidance for the next quarter is between $350 million to $390 million, representing a YoY growth of 26% at the mid-point of the guidance. It was higher than the analysts’ consensus estimates of $295 million. John Forsyth, CEO of the company, said, “We delivered strong financial results in FY22 as revenue increased 30 percent year over year driven by high-performance mixed-signal content gains.”
Top 5 ranked semiconductor stocks based on Free Cash Flow Margin
Source: YCharts
Cirrus Logic not only beat analysts’ revenue estimates it also ranked the highest among the semiconductor companies with the highest free cash flow margins. This is an important financial metric in the current environment as we have noticed in the current earnings season that many companies that fell short in this metric the shares got sold off.
Top 5 ranked semiconductor stocks based on Net Profit Margin
Source: YCharts
In the above chart, Indie Semiconductor, which we discussed earlier in our article, also ranked the highest among the companies with the highest net profit margins. Intel ranks third in the category. However, the company faces significant competition from AMD, which can be seen in the lower valuation the company is trading.
