Goldman Sachs held a semiconductor conference, here are the top 10 highlights.

Artificial intelligence is developing rapidly, how does the semiconductor industry view it?

Last week, the second Global Semiconductor Conference initiated by Goldman Sachs was held in New York. The management and investor teams of global semiconductor equipment, equipment and material companies exchanged insights on industry development direction.

Toshiya Hari, Managing Director of Goldman Sachs, said that attendees, including Intel, Marvell, Micron Tech, Renesas Electronics, and Advantest, were very concerned about artificial intelligence. The management teams of these companies generally believe that artificial intelligence will be a "long-term" growth driver, although some people say that growth may take some time to achieve.

Intel and Micron Tech said there are signs that the downturn in personal computers may be stabilizing. There are also signs that the memory industry has finally "bottomed out."

Here are the top ten points of the chip conference summarized by Hari:

1) Focus on artificial intelligence

Intel, Marvell, Micron Tech, Renesas, and Advantest paid great attention to artificial intelligence throughout the conference, especially speaking about recent and long-term opportunities related to this growth theme.

Intel emphasized the applicability of Sapphire Rapids (the fourth-generation Xeon scalable processor based on Intel 7 technology) in processing artificial intelligence workloads (it is worth noting that last year Nvidia chose Sapphire Rapids as the standard server CPU for its DGX H100 system), and the management team also shared that the sales volume of Gaudi (Habana's training and inference accelerator) has increased by about 2.5 times in the past 90 days.

Marvell reiterated what was disclosed in the performance conference call last week, that is, optical DSP and custom computing processors are expected to double AI revenue from the base of about $200 million in the fiscal years 2024 and 2025.

Micron Tech said that although it is difficult to quantify AI revenue and it currently accounts for a small proportion of total revenue, they believe that the impact of AI on content growth makes it an important long-term growth driver. Although the scope is different, Micron Tech believes that compared with traditional servers, AI servers can embed 8 times DRAM and 3 times NAND.

Renesas Electronics emphasized the medium- to long-term growth potential of MCUs in edge computing (that is, specific application markets with a scale of billions of dollars). They recently acquired predictive AI company Reality AI, which will particularly enhance their MCU capabilities in industrial applications (such as HVAC), and continue to invest in CXL memory accelerators.

As for Advantest, the management said that although the demand for high-performance computing (HPC) and artificial intelligence (AI) is unlikely to have a significant impact on the demand for testers in 2023, the company believes that in the medium and long term, HPC/AI will become a growth driver. The reasons include: a) The increase in transistor count is expected, and b) the testing intensity may increase as the industry accelerates the adoption of advanced packaging technology, and c) the company is confident in maintaining its dominant market share in this market area.

2) The PC market tends to be stable

There are signs of stability in the PC market. Intel raised the midpoint of its second-quarter revenue outlook from $12 billion to $12.25 billion (MoM growth of 5%, YoY decline of 20%), based on strong linear growth in customers (i.e. PCs) and data centers and artificial intelligence so far this quarter.

Micron Tech reiterated its expectation that customer PC (and smartphone) inventory will reach or approach normal levels at the end of the second quarter. Although component supply in subsequent quarters and beyond will depend on PC sales, we expect that the relative undersupply situation that has persisted for at least the past nine months compared to terminal demand will soon ease.

3) Memory fundamentals hit bottom

Although Micron Tech disclosed that recent negatives could have a high single-digit impact on total revenue (%), which is higher than the single-digit range provided by management on May 22, which put pressure on the stock last week, our positive view of the memory cycle remains unchanged, based on stable demand and supply-side discipline (i.e. capital expenditure and production cuts).

Between DRAM and NAND, we still expect DRAM to experience a more pronounced and sustained recovery, based on measures of relative inventory levels (i.e. DRAM < NAND) and relative industry consolidation levels (i.e. DRAM > NAND). In NAND, we are concerned that suppliers with relatively weak balance sheets may accelerate production again after pricing recovers above cash costs.

4) Analog/MCU/power semiconductor pricing is good

In the broad MCU, analog, and power semiconductor fields, Microchip and Infineon have pointed out stable industry trends, contrary to growing investor skepticism.

Microchip reiterated its revenue prospects for the June quarter (up 2-3% quarter-over-quarter) and the September quarter (unlikely to decline quarter-over-quarter), while Infineon reiterated its confidence in the growth prospects of automotive semiconductors, as basic demand in Europe and the United States remains solid.

In terms of pricing, Infineon said that pricing in all segments still has elasticity and is even increasing in some areas of strong demand. Similarly, Microchip also talked about stable recent pricing and shared its view that, given the high capital intensity of mature process nodes, the deflationary nature of future industry pricing may be less than in the past.

5) TEL bullish on 2024 wafer fab market

Although most wafer fab equipment (WFE) suppliers have not commented on 2024, Tokyo Electron (TEL) reiterated its view that the WFE market in 2024 may recover to a level similar to that in 2022 (meaning a YoY growth of about 25%). This is driven by the recovery of memory spending after the upgrade cycle of the data center and the significant inventory adjustment this year.

It should be noted that our expectations for the 2024 WFE market are more pessimistic, with an annual growth rate of 7%, based on the double-digit YoY growth of memory and the stable prospects of advanced logic/casting industry, partially offset by the decline of mature/professional nodes.

6) GAA drives the growth of advanced logic/wafer fab spending

Applied Materials, ASML, ASM International, and TEL all see Gate-All-Around (GAA) as a potential factor driving the increase in spending on advanced logic/wafer fabs in the next few years.

ASM International stated that it will begin receiving GAA orders in the fourth quarter of 2023 and expects the growth of its epitaxy business to be catalyzed by the shift to GAA.

Applied Materials stated in its recent earnings conference call that the GAA transformation will create approximately $1 billion in additional opportunities for every 100,000 wafer start capacity added and is expected to gain a 5% market share in the transistor market, especially in product areas such as epitaxy and selective removal, during the transition from FinFET to GAA.

7) Optimistic long-term outlook for capital investment in mature nodes

Applied Materials reiterated that its ICAPS (Internet of Things, Communications, Automotive, Power, and Sensors) business will grow faster in 2023 than in 2022, driven by strong markets in China, Japan, Europe, and the United States.

Although we expect capital expenditures for mature/special nodes to remain cyclical, we agree with the view that the capital intensity of the backend will remain at a higher level than in the past 5-10 years, as the second-hand equipment market used by IDM and wafer fab suppliers in the past has shrunk.

It should be noted that TEL stated that they expect the demand for die bonding equipment related to mature process nodes to reach approximately $50 billion by 2030, higher than the approximately $30 billion in 2023, while ASML responded to doubts about spending on mature/special nodes in China by stating that it has begun installing orders for lithography equipment in clean rooms.

8) Industry begins to recover in the second half of the year

Entegris reiterated its 2023 market outlook, with MSI production expected to decline by low double digits YoY (%) and industrial capital expenditures expected to decline by approximately 20% YoY.

However, the company expects a moderate recovery in the second half of the year, driven by the growth of advanced logic/wafer manufacturing in artificial intelligence and the launch of new consumer electronics products. Management remains confident in its ability to provide sustained growth, with six to seven growth drivers expected this year as customers execute their respective technology transitions (such as Gate-All-Around), consuming more Entegris products per wafer.

9) Keeping cautious on wafer production, but ASP prospects remain good:

SUMCO is relatively conservative about its silicon wafer business outlook, as inventory adjustments in the memory sector may lead to a MoM decline in shipments in the second half of the year.

However, it is worth mentioning that management has stated that wafer pricing continues to be basically in line with long-term contract prices, and wafer pricing is expected to increase by about 10% YoY in 2024.

10) CHIPS Act:

As part of the CHIPS for America plan, we invited Mr. Todd Fisher to attend the meeting. Before joining the U.S. Department of Commerce in 2021, he worked in the finance and investment industry for 30 years, including nearly 25 years at KKR & Co. Inc.

Regarding the CHIPS Act, Mr. Fisher shared the U.S. government's long-term goals, including: a) pursuing economic and national security at the macro level, and b) establishing at least two leading advanced logic/wafer ecosystems in the United States by the end of this decade, as well as c) creating a resilient supply chain in mature process nodes and specialized technologies.

Mr. Fisher pointed out that there is no bias in dealing with domestic or international applicants, as the goal of the program is to encourage companies to invest in R&D and keep intellectual property in the United States.

In summarizing his speech, Mr. Fisher outlined the six criteria for evaluating applications: 1) impact on economic and national security (the most important), 2) financial feasibility, 3) commercial feasibility (including potential long-term impact on industry supply and demand), 4) technical feasibility, 5) talent pool, and 6) broader impact (important discussions around R&D).