Tech Thoughts Newsletter – 8 March 2024.

Market: Volatility increased this week after the late rally last week. Investors are getting worried about the levels of the major indexes. On the tech side, two of the magnificent seven seem to be having some demand headwinds: Apple and Tesla, while Google seems to be struggling to get its AI offering in order. We also once again confirmed that telecom and industrial semiconductor demand is weak for the moment (Broadcom/Marvell) while AI demand is strong. 

Portfolio: We increased our position in ServiceNow on the back of weak share price performance. 

• Broadcom (small position): Broadcom’s results came in slightly better than expected on both the top and bottom lines. Revenue grew 11% Y/Y, excluding the VMware part, with the semiconductor part growing 4% (slightly below consensus). The company also reconfirmed its guidance for the year on both the top and bottom lines. AI revenue quadrupled Y/Y to $2.3bn, offsetting the slowdown in telecom and enterprise. The breakdown of semiconductor sales shows that Networking grew 46% Y/Y driven by AI. The company is lifting its full-year growth target for the unit and expects it to grow over 35% Y/Y for the full year, up from earlier guidance of 30% growth. The demand for AI accelerator ASIC mainly drives the demand. The main client here is Google, but the company also states that they have a second one. 
• Wireless sales fell 4% Y/Y driven by weaker demand from Apple but bear in mind that the comparison is made with a boosted inventory build quarter last year. 
• Both server storage and broadband sales fell over 20% Y/Y driven by weak demand and inventory corrections. 
• Software sales totalled $4.6bn, including the VMware unit, and are expected to grow sequentially every quarter this year. The coming quarter will help by the unit being included for the whole quarter. However, the company indicates that bookings are growing very fast as it’s been focused on upselling in VMware unit, which has been a very successful exercise.  

Our view: No big surprises for us. The demand for AI accelerators is strong and driven by Google AI chips, while demand from the telecom world is weak. The company expects AI sales to be over $10bn this year. The main part of that is AI accelerators, but also the demand for ethernet switches. The software side seems to be delivering, indicating mid-single-digit growth this year.  

• Marvell (small position): Marvelll’s results came in line with expectations but with a 1Q guidance clearly below expectations. The company states that it expects further growth of its AI business in 1Q with initial shipments of ASIC AI accelerators, but the cyclical downturn in telecom and enterprise drags down the growth. This is very much in line with what we saw in Broadcom’s results above. 
• Data centres sales grew 58% Y/Y and 38% Q/Q in the quarter driven by cloud demand and switching. The company expects sales to grow low single-digit Q/Q into 1Q, helped by AI Accelerator sales (Amazon), partly offset by enterprise on-premise data centres to be somewhat weaker Q/Q. 

Our view: The 1Q guidance was disappointing but the important growth factors on the AI side will start to kick in during the year. The inventory correction that’s going on in telecoms and enterprise will be over by mid-year, indicating a very strong second half of 2024. The number of design wins in the AI area is also indicating strong demand for 2025 and 2026.

Semiconductors & Apple

• Foxconn Technology’s February sales fell 12.3% Y/Y and 32.5% M/M, which is in line with expectations given the strong demand last year and the recoupment of Apple volumes lost in 4Q22. All segments lost sales M/M, while cloud and networking products grew Y/Y. 
• Counterpoint research indicates that smartphone sales in China are down 7% Y/Y in the first six weeks 2024, and that Apple iPhone sales are down a whopping 24% Y/Y. 

Our view: That Apple (small-owned) sales would be down Y/Y and M/M is no surprise, so it’s hard to read too much out of the sales number. Counterpoint research is, however, worrying, with Apple losing market share in China, especially towards Huawei. The market decline of 7% indicates that the market for smartphones continues to be weak. However, from a semiconductor perspective, more stable inventories have been worked off during 2023. 

We saw semiconductor sales grow by 15.5% Y/Y in January with all main digital segments indicating growth. Memory was the standout, with 89% Y/Y growth. Analog was down slightly Y/Y.

No surprises here, as many segments have worked off excess inventories, while analog/industrial still has a bit to go. It also shows that the underlying demand has not really improved and has become more stabilised at a lower level. Another example of the status of the handset industry can be seen in the sales number from Largan, the camera lens maker. February sales were down 24% M/M, while being up 32% Y/Y. Really enjoying better demand after the inventory correction last year. 

Automotive

• The Chinese EV market has been the main driver of electrical car sales in the last 12 months and is, thereby, very important to track. The short-term problem this year is that the Chinese holiday fell in February, while last year it took place in January, making comparison difficult. Total February car sales reached 1.09m, down 21% year over year, according to the Chinese car association, which is slightly weaker than expected. 
• Deliveries of new energy vehicles fell 9% Y/Y to 401.000 after a very strong January.

Our view: It’s difficult to read anything into the February numbers due to the holiday effect, so we wait for March to get a better reading of the demand. 

For enquiries, please contact:
Inge Heydorn, Partner, at inge.heydorn@gpbullhound.com
Nejla-Selma Salkovic, Associate, at nejla-selma.salkovic@gpbullhound.com

About GP Bullhound
GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to the world’s best entrepreneurs and founders. Founded in 1999 in London and Menlo Park, the firm today has 13 offices spanning Europe, the US and Asia.