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Yet More Semiconductor Superstars

January 20, 2024

This is a fabulous chart. There is a golden cross buy signal on the moving averages and most recently a breakout to a new high from a substantial consolidation. Semiconductor shares could be poised to go through the roof.

When it comes to shares, always remember that the past is another country. It might seem that semiconductor shares have already gone up so much they cannot climb any more. Wrong! They can always climb more. It is only with hindsight we can ever know how huge a bull run is going to be. We do know, or strongly suspect, that generational AI (gen AI) is a step change in an accelerating technology revolution, that can only happen because the global semiconductor industry is performing at the top of its game.

So it is no surprise that one of the best ways to take advantage of what is happening is to buy shares in companies that design and make semiconductors. I know it’s obvious but it is still true.

Taiwan Semiconductor Manufacturing is one of the biggest guns in the industry, indispensable to what is happening. You will not be astonished to learn that this fabulous business is based in Taiwan, which is a considerable risk factor given the attitude of the mainland Chinese leadership toward an independent Taiwan. That is a wall of worry that TSM shares have to climb; doesn’t mean they won’t do it.

TSM is a class act as an investment albeit its earnings reports are never the most exciting affairs with a long roll call of statistics.

In the past few years, we have sharply increased our capex spending, in preparation to capture a harvest of growth opportunities from HPC, AI, and 5G megatrends. Despite a challenging 2023, our revenue remains well on track to grow between 15pc and 20pc CAGR [compound annual growth rate] over the next several years in U.S. dollar terms, which is the target we communicated back in January 2022 investor conference. With our 2024 capex guidance of $28bn to $32bn, the rate of increase of our capital spending has begun to level off as we capture and harvest the growth.

The objectives of TSMC’s capital management are to fund the company’s growth organically, generate good profitability, preserve financial flexibility, and distribute a sustainable and steadily increasing cash dividend to shareholders. As a result of our rigorous capital management, in November, TSMC’s board of directors approved the distribution of a 3.5 NT per share cash dividend for the third quarter of 2023, up from 3 NT previously. This will become the new minimum quarterly dividend level going forward. Third quarter ’23 cash dividend will be distributed in April of 2024.

In 2023, TSMC’s shareholders received a total of 11.525 NT cash dividend per share, and they will receive at least 13.5 NT per share cash dividend for 2024. In the next few years, we expect the focus of our cash dividend policy to continue to shift from a sustainable to a steadily increasing cash dividend per share.

Wendell Huang, CFO, Taiwan Semiconductor, Q4 2023, 18 January 2024

Note: $US1 – NT31.43

What is clear is that TSM is anticipating a strong recovery in demand in 2024 and beyond.

Coming up the steep inventory correction and low base of 2023, for the full year of 2024, we forecast the overall semiconductor market, excluding memory, to increase by more than 10pc year over year, while foundry industry growth is forecasted to be approximately 20pc. For TSMC, supported by our technology leadership and broader customer base, we are confident to outperform the foundry industry growth. We expect our business to grow quarter over quarter throughout 2024, and our full year revenue expect to increase by low to mid 20pc in U.S. dollar terms.

C.C.Wei, CEO, Taiwan Semiconductor, Q4 2023, 18 January 2024

AI is already ramping up the excitement.

The surge in AI-related demand in 2023 supports our already strong conviction that the structural demand for energy-efficient computing will accelerate in an intelligent and connected world. TSMC is a key enabler of AI applications.

No matter which approach is taken, AI technology is evolving to use more complex AI models, as the amount of computation required for training and inference is increasing. As a result, AI models need to be supported by more powerful semiconductor hardware, which requires use of the most advanced semiconductor process technologies. Thus, the value of TSMC technology position is increasing, and we are all well positioned to capture the major portion of the market in terms of semiconductor components in AI. To address insatiable AI-related demand for energy-efficient computing power, customers rely on TSMC to provide the most leading edge processing technology at scale with a dependable and predictable cadence of technology offering.

At the same time, as process technology complexity increases, the engagement lead time with customer also started much earlier. Thus, almost all the AI innovators are working with TSMC, and we are observing a much higher level of customer interest and engagement at N2 as compared with N3 at a similar stage from both HPC and smartphone applications. Our 2-nanometer technology will adopt narrow-sheet transistor structure and be the most advanced semiconductor technology in the industry in both density and energy efficient when it is introduced in 2025. Our N2 technology development is progressing well with device performance and year on track or ahead of plan.

C.C.Wei, CEO, Taiwan Semiconductor, Q4 2023, 18 January 2024

TSM is an amazing company.

TSMC’s success is predicated on providing the industry’s most leading edge processing technology at scale in a most efficient and cost effective manner to enable all the innovators to successfully offer their best products to the world.

Mark Liu, chaIrman, Taiwan Semiconductor, Q4 2023, 18 January 2024

Red-Hot New Kid on the Block

Unlike TSM, Super Micro Computer (SMCI) is a new name for Quentinvest. The company is firing on all cylinders and has just smashed Q2 sales and earnings expectations out of sight.

Super Micro Computer SMCI shares were up over 31pc in recent Friday trading after the company said its fiscal Q2 results will likely exceed its previous guidance.

The company said late Thursday that preliminary data show fiscal Q2 non-GAAP net income will now likely be $5.40 to $5.55 per diluted share, compared with its prior guidance of $4.40 to $4.88.

Analysts polled by Capital IQ expect $5.01.

The company said it now expects net sales between $3.6bn and $3.65bn, versus its previous outlook range of $2.7bn to $2.9bn.

Analysts polled by Capital IQ expect $3.15bn.

MT Newswires, 18 January 2024

SMCI shares look positively cheap after their amazing earnings report.

Super Micro Computer (NASDAQ:SMCI) delivered new fiscal Q2 2024 guidance that took investors by surprise. The business is guiding for such a strong fiscal Q2 2024 that investors are in awe.

More specifically, SMCI with a net cash position of approximately $400m, is expecting its revenues in fiscal Q2 2024 to grow by more than 100pc y/y to approximately $3.7bn.

According to my estimates, this leaves this hyper-growth business priced at 14x non-GAAP EPS. Even as we consider some notable risk factors facing this business, I still believe this stock offers investors a compelling risk-reward.

Seeking Alpha, 19 January 2024

The same analyst explains what SMCI does.

Super Micro Computer specialises in designing high-performance and energy-efficient computer systems for diverse markets such as data centres, cloud computing, and AI. Their product range includes servers, storage systems, and blade servers. The company stands out for its rapid development and testing of new computing platforms using common building blocks. Collaboration with leading hardware and software suppliers helps integrate cutting-edge technologies into their products.

A distinctive feature is their commitment to resource-saving architecture, aiming to reduce data centre operating costs. This architecture supports independent refresh of CPU and memory resources, lowering refresh cycle costs and minimising electronic waste. Super Micro Computer also offers space and power-efficient products by enabling the sharing of computing resources in data centers.

The majority of their business revolves around server and storage systems, with a notable success in providing complete rack-scale solutions to major AI innovators, including Nvidia. This strategic focus positions them well in the growing AI market, with potential for expansion to additional clients beyond Nvidia.

Seeking Alpha, 19 January 2024

Strategy – Load Up with Semiconductor Shares

I have just spotted an amazing piece of news about a planned global network of chip fabrication plants.

OpenAI CEO Sam Altman plans to use the billions of dollars he is trying to raise for a chip venture for setting up a network of factories that will manufacture semiconductors, Bloomberg News reported, citing several people with knowledge of the plans.

Altman has had talks with several large potential investors in the hopes of raising the vast sums needed for chip fabrication plants, the report said.

The project would involve working with top chip manufacturers, and the network of fabs would be global in scope, some of the people said, according to the report.

Reuters, 19 January 2024

Sam Altman is the man behind ChatGBT and he thinks that future demand for semiconductors is going to be very strong, which bodes well for the whole sector. I am beginning to wonder if it is the fading of Moore’s Law which is driving the boom in semiconductor shares. Moore’s Law (Moore’s Law is named after Intel cofounder Gordon Moore. He observed in 1965 that transistors were shrinking so fast that every year twice as many could fit onto a chip, and in 1975 adjusted the pace to a doubling every two years).

Now semiconductor companies have to work harder and software is becoming an ever more important part of the continued drive to faster, more powerful chips. This in turn promises to make the industry less cyclical, bigger and more powerful than ever.

This is unknown territory for the industry but may help explain why investors are becoming so excited and why sector charts look so strong.

Nvidia Still Massively Undervalued

I have also just been reading an amazing piece on Nvidia. Listen to this:

At the beginning of December last year, AMD held an AI event, where it discussed its upcoming product line. At the beginning, Lisa Su shared the following:

Now a year ago, when we were thinking about AI, we were super excited. And we estimated the data center, AI accelerated market would grow approximately 50pc annually over the next few years, from something like $30bn in 2023 to more than $150bn in 2027. And that felt like a big number. We’re now expecting that the data centre accelerator TAM [total addressable market] will grow more than 70pc annually over the next 4 years to over $400bn in 2027.

Dr Lisa Su, CEO, Advanced Micro Devices, early December 2023

The updated numbers haven’t been previously shared by the CEO on the company’s earnings call at the end of October, so they can be regarded as one of the latest predictions of how the market could evolve in the upcoming years. To reach a total addressable market, or TAM, of more than $400bn for 2027 with 70pc YOY growth, AMD estimates the current market size for 2023 around $50bn, which is a significant increase from the previous $30bn estimate. However, when we look at Nvidia’s latest quarter and its Q4 FY2024 guidance, its data centre revenue could reach $50bn for 2023, so it’s absolutely justified. I believe this 70pc YOY growth in the upcoming 4 years could be a once-in-a-lifetime opportunity for investors, and current valuations in the sector are far from reflecting it in my opinion (to be discussed later).

As Nvidia’s product portfolio covers most of the data centre accelerator market, which should dominate its product portfolio in the upcoming years, this could be a good starting point for estimating the company’s growth prospects over the medium term. Current analyst estimates call for a 54pc YOY increase in revenues for 2025, but only for 20pc in 2026 and 11pc in 2027. I believe these are overly conservative estimates in light of the facts discussed until now, so there could be significant room for upward revisions on the top and bottom lines, which usually results in an increasing share price. It’s no wonder that Seeking Alpha’s Quant Rating system also incorporates EPS revisions into its valuation framework.

Another convincing sign that spending on accelerated computing in data centres is set to continue to soar is the comments that hyperscalers made on their most recent earnings calls. As this segment provides roughly 50pc of Nvidia’s data center revenue, it’s worth following them closely. Here are a few citations from Microsoft, Alphabet, and Amazon executives, who combined sit on a $328bn cash balance and seem to have investments in AI as their top priority when it comes to Capex:

“We expect capital expenditures to increase sequentially on a dollar basis, driven by investments in our cloud and AI infrastructure.” – Amy Hood, Microsoft EVP & CEO, Microsoft Q1 FY2024 earnings call.

“We expect fulfillment and transportation CapEx to be down year-over-year, partially offset by increased infrastructure CapEx to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.” – Brian Olsavsky, Amazon SVP &CFO, Amazon Q3 2023 earnings call.

“We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.” – Ruth Porat, Alphabet CFO, Alphabet Q3 2023 earnings call.

Nicholas Istvan Kiss, 17 January 2024

Note in particular what this guy has to say about a once-in-a-lifetime investment opportunity. And this is from a guy who seems to know what he is talking about. Plus look at the chart of what is going on at Nvidia.

Our analyst concludes.

Nvidia had a great 2023 after the demand for its accelerated computing hardware began to increase exponentially thanks to the increasing adoption of AI and ML based technologies. This increasing demand seems likely to last through 2024 and beyond, and Nvidia should continue to be the best one-stop shop for these technologies. This should lead to materially increasing earnings estimates throughout the year, which could fuel further share price gains.

Nicholas Istvan Kiss, 17 January 2024

Share Recommendations

Taiwan Semiconductor Manufacturing. TSM. Buy @ $114.20

Super Micro Computing. SMCI. Buy @ $423.36

iShares Semiconductor. SOXX. Buy @ $601.23

Nvidia NVDA. Buy @ $594

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