Intel Moves Closer to Mercy Cry
The semiconductor industry has largely moved to an outsourced market, where the chip designers (e.g., AMD, NVIDIA, etc.) outsource the fabrication to specialized chip manufactures (e.g., TSMC). The outsourced model is referred to as the fabless ecosystem.
Intel’s business model, so far, is one where they do everything on their own (design & manufacture chips…but are now falling behind on the manufacturing side). Intel just delivered strong quarterly earnings, reporting notable demand in cloud/notebook/5G infrastructure.
However, the strong earnings were met with a 17% stock price drop, due to Intel’s announcement that its next-generation process technology (7nm) would be delayed an additional 12 months. The delay will likely be a huge advantage for Intel’s competitors in the chip design space.
Intel continues to invest heavily in future process technology, but hinted--for the first time--it will consider outsourcing the manufacturing role. The last major fabless hold-out, Intel, may be about to give in. Stay tuned.
Microsoft Building the Full, Modern Technology Stack
Microsoft delivered a solid quarter on almost all metrics. The market may not be impressed, but we appreciate its clear focus on the long-term growth potentials. Here are things interesting from last week's call.
Commercial Cloud reached a $50B annual run rate, and Azure grew 50% YoY. Yes, the growth rate slowed down (see chart below), but the company also saw large deals getting closed and healthy Azure contracts extension. Looking into the detail, we see consumption up and stronger long-term commitments.
Small and medium business weaknesses showed up, a lot, in both the financial result and the management's comments, which could create short-term noises.
MSFT also expects to maintain a similar Capex level ($4.7B in the quarter) into the new fiscal year, signaling a strong commitment to investing in the long game.
What's More Expensive Than SaaS?
Everything is arguably expensive. But what's more expensive than SaaS companies? The answer is the Chinese Semiconductor.
You know things are stretched when we start parsing expensive valuations from ridiculously expensive. The chart below shows there are 10 listed semiconductor companies in China with a market value exceeding 10 billion USD. The average price-to-book value is 21x, and the average price-to-sales is 35x.
Cambricon Technology is the latest company joining the expensive cohort, after the IPO today, with the stock currently trading at over 200x price to sales.
Flaws in 5G Investing: Look At The Big Picture
We are asked many times why we don't think the obvious "5G" names, such as Ericsson, Nokia, and carriers, are the best ones to put your money in. I believe the CEO of Ericsson answered it very well in the latest earnings call. We also lay out our thesis here.
The CEO makes another interesting point below: that Europe is very likely to fall further behind in the tech race. This race is happening NOW.
Some Unpopular Opinions on Apple's Strong Quarter
Admittedly it's an impressive quarter: all product groups and geographies saw revenue growth YoY. The second time in the past ten years! The most significant upside came from the following areas, and it does feel like a one-time boost:
Mac and iPad strength due to WFH, likely demand pulled forward.
iPhone did better than expected thanks to strong iPhone SE sales and the stimulus package, but it grew only 2% and could mean lower demand for higher-priced iPhone launching later this year.
Wearable and services did not show much revenue upside. Services gross margin was good, but more driven by mix (e.g., app store revenue given everyone is staying home downloading games), doubting if it can sustain.
On the call, Luca said they want to offer competitive products in services, and gross margin is a byproduct. However, the growing areas in services generally have a lower margin.
AMD on Track while Intel Falling Further Behind...
To summarize the recent earnings calls in one phrase, “on track” for AMD, and “delay” for Intel.
AMD delivered a powerful quarterly result, with revenue from notebook and server CPU more than doubled from a year ago and reaching a record high.
CEO Lisa Su expects 2020 revenue to grow 32% YoY, compared to the guidance of 25% three months ago and high 20s at the beginning of the year, driven by continued market share gain and new game console.
Teradyne: Strong Mobility Demand, but Not 5G Driven Yet
$TER is a leading semiconductor testing company, having access to the first-hand evidence in the early phase of next-gen technology development, such as 5G. In the last quarter, the company saw
Mobility-related demand was accelerating;
5G infrastructure remained weak, smartphones testing demands were strong, but more driven by complexity (e.g., rich features on your phone) rather than 5G;
5G is still in the early innings of a multi-year rollout.
Auto Sector Getting Better?
The automotive sector was terrible in the second quarter; however, $NXPI sees the light at the end of the tunnel!
What's Next Between Qualcomm and Huawei?
Qualcomm reported solid earnings last week, in which the company also disclosed the patent settlement with Huawei. With the latest agreement, Qualcomm finally has a licensing agreement in place with ALL the leading smartphone OEMs after several years of non-stop dispute. Will selling chips to Huawei be the next step? We entertained the idea earlier (see our "The Silicon War" series). Let us know your thoughts!
On a separate note, while the overall smartphone market remained challenged, Qualcomm's push into the radio-frequency (RF) front end market is paying off. Chipset pricing growth more than offset the unit weakness.
Shopify: "Retail Operating System" for Merchants Online
Both the U.S. and China command a huge retail sales market: $5.5T in the U.S. and $5.8T in China as of 2019. The penetration of eCommerce in China was 26%-ish while the U.S. was a little behind, with only 11% as of 2019. COVID-19 has been accelerating the digital transformation, eCommerce included. That's a long-run way for $SHOP to ride.
Qorvo: Covid19 Didn't Stop 5G Network Buildout
Google: Soft Advertising but Strong Cloud
$GOOGL delivered the first YoY revenue decline in its history, dragged by the ad revenue; however, the cloud business continued to shine, in terms of both growth and investment.
Amazon: It's eCommerce Time
The expectation was high, but $AMZN delivered. The eCommerce business stood the test.
ServiceNow: Proof of Resilience
Despite the disruption caused by Covid-19, $NOW executed well towards its long-term goal of $10 billion run rate cloud company.
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