Since the beginning of the year 2023, many US semiconductor companies have seen a certain degree of increase in their stocks. Especially in the case of Nvidia.US, the company's stock price has risen by more than 50% from the beginning of the year until now. So, is the recent rise in semiconductor stocks only due to the bottoming out of the industry?

Dolphin believes that the stock price performance is mainly influenced by two factors - "fundamental + expected". This article mainly looks at the semiconductor industry from these three aspects.

Fundamentals: 1) Demand side, the overall industry is still weak; 2) inventory side, showing structural features. Apple's inventory is normal, Android and PC inventories are at a high level; 3) inventory shift situation, Nvidia has basically completed inventory adjustment, Qualcomm's inventory risk is high.
Expectations: 1) Valuation expectations, overall Nasdaq stocks have received some repair from severely undervalued positions; 2) Industry expectations, shipments of smartphones and PCs have fallen to historically low levels, and there is not much room for further decline. With the progress of inventory digestion, there is a chance for a rebound in the second half of the year. New applications such as ChatGPT also bring new incremental space.
Individual stock situation: 1) Apple's inventory situation is relatively good, and demand is better than the Android side; 2) Although Nvidia has a high inventory, with the industry hitting bottom and the company's resolute write-down treatment, it also has the potential to be the first to emerge from the downturn; 3) Qualcomm's inventory has been rapidly rising since the second half of 2022, and the company's performance may still be affected by inventory pressure.

Overall, Dolphin believes that the semiconductor industry is expected to gradually emerge from industry undervaluation. Considering the inventory digestion situation, the overall order is "PC/data center>Apple end>Android end", and the PC end may get out of trouble before the mobile phone end. So far, the stock price performance has also reflected some repair expectations. Dolphin calculated through the DCF model that Nvidia and Apple still have no clear upward space in the current situation.

Dolphin will continue to track changes in the semiconductor industry. If the core companies show better-than-expected performance, it is expected to further expand the upward space of stock prices. Due to their different characteristics, when expectations improve, Nvidia's stock price elasticity is also expected to be better than Apple's.

Here is Dolphin's analysis of the current semiconductor industry:

I. Fundamentals

Since this round of semiconductor downturn was mainly caused by "insufficient demand", the shortage on the demand side will affect the supply-side capacity situation through orders. Because the supply side (production capacity side) is affected by the demand side, Dolphin's analysis of the current semiconductor fundamentals mainly focuses on the demand side (shipment volume) and inventory side (inventory situation). 1.1 Demand Side (Shipments)

Semiconductor products are often used as components in electronic products, and smartphones and PCs are two major terminal products. The downturn in the two terminal markets directly affects the demand for semiconductor products.

① Smartphone Market: In the fourth quarter of 2022, the global smartphone shipments barely reached 300 million units, a year-on-year decrease of 17.1%, and the decline in the smartphone market continued to expand. The fourth quarter was originally the traditional peak season for smartphone sales, but due to the epidemic situation in the Chinese market last quarter, the decline further widened.

② PC Market: In the fourth quarter of 2022, global PC shipments fell below 70 million units, a year-on-year decline of 27.5%. Under the influence of the epidemic, PC benefited from the promotion of home-based economy and office work. The quarterly shipments fell back to more than 60 million units, and the global PC shipments have returned to normal levels before the epidemic. The risk of further decline is not great.

Considering the overall shipments of smartphones and PCs, the overall situation is still "weak on the demand side". In the last quarter, the shipments of smartphones and PCs both fell again, and there was no sign of downstream demand improvement.

The weakness of the demand side of the industry directly puts pressure on the sales of the entire supply chain from upstream to downstream products: The king of the smartphone market, Apple, also experienced a rare decline in the last quarter .

The downstream cancellations also directly affect the revenue of semiconductor companies, and Nvidia, Qualcomm, and Intel all showed double-digit declines in revenue. Among the core technology companies, only AMD and TSMC still have year-on-year growth, with AMD mainly benefiting from the acquisition of Xilinx in the first quarter of last year, which belongs to the exogenous growth; while TSMC is located at the top of the industry chain, and the drag of cancellations has not yet been conveyed, but the risk will gradually increase in the future quarters.

1.2 Inventory Side (Inventory Situation)

Under the condition of weak downstream demand, there will naturally be chain transmission on the industrial chain, which will cause a certain accumulation of inventory for companies in the industrial chain. So, how is the inventory situation for semiconductors now?

The financial reports of major US technology companies have basically been released, and the inventory situation of the industrial chain can be seen from them:

====== Smartphone sector: Apple's inventory situation is relatively good, while the inventory situation of Android chain has not yet returned to a reasonable level.

① Apple chain: After experiencing the Q4 sales season, Apple's inventory turnover days have returned to a historical reasonable level of about 8 days. According to Apple's financial report, the inventory situation of the Apple chain is pretty good.

② Android chain: As Qualcomm's customers are mainly Android manufacturers, the situation of Android chain can be seen from Qualcomm's financial report. Qualcomm's inventory turnover days have been significantly increasing since the third quarter, especially in the fourth quarter, reaching an astonishing 140+ days. From this, it can be seen that the inventory pressure on the Android side has been transmitted to upstream chip manufacturers such as Qualcomm since the third quarter of last year. And now, judging from the high inventory of Qualcomm, it will be difficult for Android inventory to return to a reasonable level in the short term.

PC sector: Inventory turnover days continue to rise.

Among the U.S. chip stocks, downstream of Intel, Nvidia, and AMD is mainly PCs. From the financial reports of the three companies, the inventory turnover situation of$AMD(AMD.US) is the best, mainly because the company acquired Xilinx last year. At the same time, it can also be seen that the inventory turnover days of the three companies have been increasing since the second quarter of last year, indicating that the inventory pressure of PCs has affected upstream chip side since the second quarter.

1.3 Inventory reduction action

From the above companies, there is an increasing inventory pressure of Qualcomm, Nvidia, Intel, and AMD, while Apple and TSMC are currently maintaining a relatively reasonable inventory level.

To digest the high inventory pressure, downstream demand needs to recover or the company needs to reduce the inventory calculation. Nowadays, in the case of downstream demand not yet recovering, the company has to deal with the inventory as soon as possible to reduce the inventory pressure. However, inventory reduction calculation will often erode the current gross margin of the company.

From the gross margins of various companies, Nvidia, AMD, and Intel have all shown some decline, while Qualcomm still maintains a higher gross margin. Especially in the second and third quarters, Nvidia's gross margin has shown a significant decline, and it is believed that Nvidia took the lead in reducing its inventory calculation.

Now that Nvidia's gross margin has returned to a reasonable level of over 60%, it basically means that the disposal of the company's old products has come to an end. However, under the influence of rising inventory, Qualcomm has not yet made any impairment value calculation before its gross margin continues to increase, so there may be some pressure on its gross margin in the next financial report.

Summary of the current fundamentals of semiconductors: downstream demand is not strong, and inventory shows a structured upward trend. Apple's performance is relatively normal, while the Android side is suffering from inventory pressure. Inventory pressure of PC core chips has begun to ease, and inventory turnover has achieved certain results. Android core chip inventories, represented by Qualcomm, are still high and may undergo inventory processing in the future.

II. Expected Outlook

Fundamentals often show the current situation of a company, and the company's stock price reflects market expectations to some extent. Although the industry has not yet seen a significant improvement, the market's expectations for US tech stocks have begun to improve since the beginning of the year.

From the perspective of valuation expectations and industry expectations, Dolphin believes that:

2.1 Valuation Expectations

After a year of decline, the overall valuation of the NASDAQ has dropped to a historic low. Looking at the valuation situation of the past two years, the NASDAQ index valuation percentile at the beginning of the year has fallen below 15%.

Although the semiconductor industry has not yet seen signs of improvement, the market expects the overall valuation of the NASDAQ to recover due to factors such as the weakening of US bond rate hike expectations. The stock price has also received some upward momentum.

Source: Wind, Changqiao Dolphin Investment Research

2.2 Industry Outlook

1) Smartphone market: The global smartphone shipment volume in the previous quarter has fallen to a low of 300 million units, and with the impact of policy relaxation and economic recovery, the smartphone market will gradually stabilize and rebound in 2023. The Apple supply chain has not yet shown signs of high inventory, and the Android industry chain is about to undergo inventory devaluation, after which the risk will be cleared.

2) PC market: The global PC shipment volume has fallen below 70 million units in the previous quarter, and has basically returned to the normal level before the epidemic. Therefore, there is little room for the PC shipment volume to decline again. With PC industry chain companies' inventory turnover underway, risks are gradually emerging, and industry chain companies are expected to have opportunities to return to the game after inventory adjustments.

3) New markets such as ChatGPT: 1 million in 5 days, over 100 million in 2 months. ChatGPT has emerged and is expected to drive new application markets such as AI, robotics, and other new demand releases, bringing new incremental space to the industry. The implementation of large-scale language models also requires support from chips such as data centers and computing power. New markets are expected to bring new incremental space to the industry.

Summary of the current expected outlook for semiconductors: the low valuation end will be repaired, the industry end will bottom out and rebound. The shipment volumes of the smartphone and PC markets have fallen to historically low positions, and there is little room for further decline. With the progress of inventory turnover, there is a chance of a rebound within the year. At the same time, new applications such as ChatGPT have brought new incremental space to the industry.

III. Individual Stock Situation

Looking at the company situation combined with the industry, Dolphin believes that: ①Apple's inventory situation is relatively good, and the demand side is also better than the Android side; ②Although NVIDIA has a high inventory, it may be the first to emerge from the decline due to the industry's bottoming out and the company's resolute devaluation processing. The inventory of Qualcomm has been rapidly increasing since the second half of 2022, and the company's performance may be affected by inventory impairment.

Therefore, at this point, Dolphin Jun is more optimistic about individual stocks. It is believed that NVIDIA and Apple may be able to emerge from the industry's downturn first, while Qualcomm will have to work on solving its inventory backlog in the coming quarters.

"3.1 NVIDIA - The strongest elasticity in the rebound"

NVIDIA is expected to be the most promising company in terms of performance, and takes a leading role in the rise of this round of semiconductors. This is mainly due to a combination of multiple positive factors:

Although the company's original business has a high inventory, the company took the lead in clearing inventory and basically completed the clearance of old goods;
The PC market demand has bottomed out, and virtual currency prices such as ChatGPT have also rebounded somewhat;
ChatGPT brings market attention to computing power, and the company is the king of computing chip track;

Under the effect of "three positive factors," NVIDIA's stock price has risen more than 60% since the beginning of the year.

"Why is it said that NVIDIA will have the strongest elasticity? Under the DCF model, NVIDIA's market value is mainly derived not from current performance, but more from the discount of future performance. Thus, changes in expected performance will have a significant impact on the company's stock price.

In the performance estimation of NVIDIA, Dolphin Jun expects the company to gradually emerge from the predicament starting from 2023.

"Performance Expectations": Since the gaming business and data center business account for nearly 90% of revenue, Dolphin Jun predicts that the gaming business will return to growth in 2023 and then gradually decline; data center business will continue to maintain a high double-digit growth in the future;

"Gross Margin Expectations ": After completing the inventory clearance, the company's gross margin will return to the level of over 60% in 2023;

"R&D expenses and sales expenses": As the business returns to growth, the overall expense ratio will decline;

At present, Dolphin Jun has lowered the DCF valuation for NVIDIA to a risk-free rate of 3% (corresponding to a WACC of 10.22%). Then, the corresponding DCF valuation of the company is USD 609.8 billion (corresponding to USD 247.0 per share), which has only 5% gap with the current stock price (USD 235.54). NVIDIA needs to make greater breakthroughs in business progress to further unlock upward potential.

Long Bridge Dolphin NVIDIA historical article retrospective:

In-Depth

June 6, 2022 "Did the US Stock Market Tremble and Mistakenly Kill Apple, Tesla and NVIDIA?""

February 28, 2022 "NVIDIA: High growth is true, but cost-effectiveness is still somewhat lacking" On December 6th, 2021, "NVIDIA: Valuation Cannot Rely on Imagination Alone"

On September 16th, 2021, "NVIDIA (Part 1): How did the chip bull, which grew twenty times in five years, refine itself?"

On September 28th, 2021, "NVIDIA (Part 2): The Dual Wheeled-Drive is No More, will Davis Turn the Tide with Double Kill?"

Earnings Season

Teleconference on November 18th, 2022, "Can Inventories Continue to Rise and be Digested in the Next Quarter? (NVIDIA FY2023Q3 Earnings Call)"

Earnings Review on November 18th, 2022, "NVIDIA: Profit has fallen by two-thirds, when will the turning point come?"

Teleconference on August 25th, 2022, "How Does Management Explain the Gross Margin Plunge? (NVIDIA FY2023Q2 earnings call)"

Earnings Review on August 25th, 2022, "NVIDIA, Stuck in the Mud, is it Returning to 2018?"

Performance Forecast Review on August 8th, 2022, "Thunder Rumbles, NVIDIA's Performance in Free Fall"

Teleconference on May 26th, 2022, "The Combination of COVID-19 and Lockdowns Causes a Slump in Gaming which Negatively Impacts the Second Quarter Results (NVIDIA Earnings Call)"

Earnings Review on May 26th, 2022, "Without the 'COVID-19 Fatty', NVIDIA's Performance is Disappointing"

Teleconference on February 17th, 2022, "NVIDIA: Multi-Chip Push, the Data Center is the Company's Focus (Teleconference Summary)"

Earnings Review on February 17th, 2022, "Behind NVIDIA's Surprising Performance Lies Hidden Concerns | Financial Report Analysis" On November 18, 2021, on the phone conference, "How does Nvidia build the metaverse? Management: Focus on Omniverse (Nvidia conference call)" was discussed.

On November 18, 2021, the financial report was evaluated in "Will Nvidia continue to thrive with its computing power and metaverse backing?".

3.2 Apple - Steady Certainty

Apple has always been a leading stock in Nasdaq, primarily due to the company's steadiness. Even in years affected by the pandemic, Apple still made profits of nearly hundreds of billions of dollars.

Apple's steadiness is due to: ①Steady income: Apple's leading product strength, consumers are willing to pay for relatively high-priced Apple products; ②Steady gross profit margin: Apple's excellent industrial chain status, the company has bargaining power advantages, and gross profit margin can remain relatively stable.

In calculating Apple's performance, Dolphin estimates that the company will gradually return to growth after last quarter's decline.

Business outlook: The company's software services will maintain growth, and the future growth rate of core hardware products is not fast, but the unit price is expected to continue to increase;

Gross margin outlook: With the establishment of the Southeast Asian production line and the industrial chain status, the company's gross profit margins are expected to continue to steadily increase;

Research and development costs and sales costs: With revenue growth, the overall cost ratio will decline;

At present, Dolphin has reduced the DCF valuation risk-free rate to 3% (corresponding to a WACC of 9.08%), and the corresponding company DCF valuation is 2.36 trillion US dollars (corresponding to 149 US dollars/share), which is not significantly different from the current stock price (154 US dollars/share). Without the continuation of new product sales, Apple's performance is difficult to make significant breakthroughs and can only be a steady dividend stock.

Long Bridge Dolphin Apple historical article review:

Earnings season

On October 28, 2022, on the phone conference, "Apple: Weak season, "Roll King" is also hard to escape decline (FY2022Q4 conference call)" was discussed.

On October 28, 2022, in the financial report evaluation, "Apple: The only giant who has not fallen, how much longer can it last?" was discussed. On July 29, 2022, Phone Conference "What will the management explain with only iPhone business left (Apple phone conference)" and Financial Report Review "The barely growing iPhone unexpectedly became the last fig leaf for Apple".

On April 29, 2022, Phone Conference "Multiple factors hinder, Apple gives a weak guidance (Phone conference summary)" and Financial Report Review "Apple, who earns crazy money, should worry about growth! ｜Earnings season".

On January 28, 2022, Phone Conference "Apple: Supply crisis eased, innovation ignited true technology (phone conference summary)" and Financial Report Review "Apple's hard power, sweet and fragrant again | Reading financial reports".

On October 29, 2021, Phone Conference "What did Apple management communicate after the performance expectations fell short?" and Financial Report Review "Embarrassed Answer Sheet of Apple After Expectations Fell Short".

On July 28, 2021, Phone Conference "Apple's interpretation of management after the five events exceeded expectations (with the full Q&A)" and Financial Report Review "Apple: The definition of excellence, five events exceed expectations".

On April 29, 2021, Phone Conference "Apple 2021 Q2 Performance Conference Summary" and Financial Report Review "Excellent companies always exceed expectations, and the new financial quarter of Apple is tough enough!". On April 25th, 2021, The Outlook for Financial Reports: "After a Dominant First Quarter Report, Will Apple's New Quarter Continue to Explode?" Deeply analyzes the situation.

On December 29th, 2022, "Semiconductor Avalanche? Real Elasticity Will Come After the Most Brutal Decline" was published.

On November 11th, 2022, "Will Apple Still be Sweet After Good Performance and a Fall?" was published.

On June 17th, 2022, "Consumer Electronics 'Ripe,' Apple Perseveres, Xiaomi Struggles" was published.

On June 6th, 2022, "Did the US Stock Market Tremor Unfairly Affect Apple, Tesla, and Nvidia?" was published.

On February 28th, 2022, "Apple: Impressive Cost Pressures Transfer, You Deserve It!" was published.

On December 6th, 2021, "Apple: Double-Wheel Drive Gradually Weakened, 'Limp' Hardware Urgently Needs a Strong New Product to Revive" was published.

Overall, Nvidia and Apple have distinct characteristics. Nvidia's stock price mainly reflects future performance expectations, so it can have greater elasticity. Apple's performance is relatively stable, so the magnitude of its rise and fall is relatively small.

Based on the current business situation and stock price, neither of them shows significant upward potential. In terms of investment strategy, when the industry outlook is positive, Nvidia can bring greater returns, while when the industry is relatively weak, Apple's performance will appear more stable.

Dolphin Semiconductor Industry Research Related Reading

On December 29th, 2022, "Semiconductor Industry Comment: 'Semiconductor Avalanche? Real Elasticity Will Come After the Most Brutal Decline'" was published.

On December 1st, 2022, "Commentary on Changes in Xiaomi's Inventory: 'Three Arrows' that Turn Around the Plight of Xiaomi" was published.

On June 24th, 2022, "Semiconductor Industry Comment: 'Cancel Order, Cancel Order, Cancel Order, Will Semiconductors Really "Change Weather?"'" was published. On June 17, 2022, Commentary on the Consumer Electronics Industry "Apple Holds Strong While Xiaomi Struggles" (https://longbridgeapp.com/topics/2917540).

Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure (https://support.longbridge.global/topics/misc/dolphin-disclaimer)

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