Bloomberg Intelligence
This analysis is by Bloomberg Senior Intelligence Analyst Kunjan Sobhani, with contributing analysis by Oscar Hernandez Tejada. It appeared first on the Bloomberg Terminal.
After turmoil through 2023 across most cyclical semiconductor markets — as the sector grappled with inventory gluts, weak end-market demand and geopolitical tensions — optimism for a slow but steady recovery in 2H continues to rise. AI exposed names have shown no signs of slowing, both across fundamentals and valuations, and are likely to continue showcasing strengths in 2H across chipmakers, memory and advanced-packaging providers. Valuations and estimates for non-AI cyclical players seem to be pricing in a 2H recovery. Incremental beats and raises could be a tailwind here, though any misses may drive significant volatility.
Focus has shifted to a rebound in end-market demand and AI growth. Despite geopolitical and economic uncertainties, increasing semi valuations signal optimism for a strong sales comeback in 2H.
Three keys for 2H: Global semiconductors
Key Drivers
Chip valuations signal optimism on cyclical rebound, AI
The Philadelphia semiconductor index, up about 27% this year, has been buoyed by the surge in generative AI and optimism that growth will return across most end markets. That’s after a 2023 trough driven by an inventory glut and lack of demand across most non-AI cyclical markets. Multiples at chipmakers with high exposure to secular end markets, especially AI, have expanded, and these producers could continue to beat and raise estimates, while 2Q results and 3Q outlooks for non-AI cyclical semis will remain a key driver of further performance.
Cyclical rebound, AI bolster 2024 and 2025 outlooks
Optimism for a 2H recovery, especially in the cyclical non-AI segments, has increased following 1Q results. Uncertainty about end-market demand is waning, inventory gluts are easing and a surge in orders from generative AI is driving the outlook for expansion. About 90% of the companies in the BI global semiconductor peer group are expected to post half-over-half revenue gains vs. about 33% that did so in 1H. The SOX index’s forward-PE multiple is above its five-year historical average of 17x, yet there’s still potential for further beat and raises to estimates in select names.
At the same time, we expect caution over end-market exposure, economic uncertainties (interest rates, recessionary fears) and US-China trade tensions to cloud the outlook for businesses with high exposure to secular generative-AI trends.
Company Total Return Performance
Higher channel visibility into the cycle
The forward-P/E ratio of the BI semi peer group has risen to 18x, slightly above its historical average of 15x. We believe the bottom of the cycle, especially in PCs and smartphones, has likely already passed, given the normalization of chip inventories across these industries. Uncertainty persists over the strength of recovery in select consumer-exposed products, and growth in auto and industrial sectors has slowed vs. expectations amid rising US-China tensions, but there’s potential for a rebound in 2H. Global demand from select markets with secular tailwinds like AI could offset those hindrances in the near term
Most chipmakers believe they’ve seen the bottom. We think the likelihood of significant cuts to earnings forecasts remains low heading into 2H, especially given the many rounds of estimate reductions in 2023.
Industry Forward P/E Valuation
Looking beyond the inventory glut
The outlooks for 2Q and 3Q from chipmakers suggest better demand visibility in 2H and 2024, with most of the inventory correction behind. Semi companies typically bottom a few quarters ahead of fundamental troughs, and there’s substantial evidence that the worst came in 2023, specifically for smartphones and PCs. Despite an uncertain economic environment, we believe most chipmakers exposed to smartphone, PC and data-center markets will meet earnings expectations due to easier year-over-year comparisons after demand slumped.
Orders driven by the surge in AI-server spending are likely to remain robust, which would buoy sales prospects for companies with high exposure to such secular-growth markets. Yet non-AI and enterprise-server demand remains mixed, albeit with some signs of the slower but gradual comeback expected in 2024.
Industry Share Performance
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