{"id":11917,"date":"2023-09-08T08:42:32","date_gmt":"2023-09-08T07:42:32","guid":{"rendered":"https:\/\/www.gpbullhound.com\/?post_type=article&p=11917"},"modified":"2023-09-08T09:11:50","modified_gmt":"2023-09-08T08:11:50","slug":"tech-thoughts-newsletter-8-september-2023","status":"publish","type":"article","link":"https:\/\/www.gpbullhound.com\/articles\/tech-thoughts-newsletter-8-september-2023\/","title":{"rendered":"Tech Thoughts Newsletter \u2013 8 September 2023."},"content":{"rendered":"\n
Market<\/strong>: September is always a volatile month in the market. This week was no different, with weak German economic data and weakening trade data from China, contrasting with stronger US data, which in turn drove expectations that rates would stay higher for longer. The worst of all worlds. On top of that, there is news of further tension between China and the US, as Apple iPhones were banned from being used by government workers in China. <\/p>\n\n\n\n Portfolio<\/strong>: No major changes in the portfolio this week \u2013 we added to our semicap exposure on weakness.<\/p>\n\n\n\n US and China \u2013 semis getting political again<\/strong><\/p>\n\n\n\n Portfolio view: <\/strong>Apple (owned) is clearly vulnerable to further China restrictions. It is perhaps not a coincidence that the Huawei scrutiny and the Apple ban are happening together, with China using the iPhone ban as a weapon against the SMIC\/Huawei response<\/strong>. The big question is still the extent to which the restrictions become broader or if China influences its consumers to reject Apple in favour of local brands. The reality is that Apple is one of the most \u201cmade in China\u201d brands out there. The interdependency between Apple and China is not to be underestimated, and is one of the factors that could ultimately lead to the situation being diffused. China is Apple\u2019s biggest market, but Apple is also indirectly one of China\u2019s biggest employers (via Foxconn). <\/strong><\/p>\n\n\n\n We don\u2019t own memory or SMIC, so we have limited direct exposure to the US licensing issues that might arise with Huawei\u2019s latest launch. The fact that SMIC (or \u201cChina\u201d) have been able to build 7nm chips without EUV is impressive, <\/strong>but two important points to make: firstly, it is unlikely that they could get beyond\/below 7nm without EUV (which they cannot access); secondly, it is very unlikely that the 7nm chips they\u2019re producing make any economic sense <\/strong>\u2013 it is very likely with that amount of multiple patterning, that the yields will be low, time-consuming and costly. It makes competing on a global scale unlikely. <\/p>\n\n\n\n Semis leadership race continues \u2013 Intel vs TSMC. Good news for ASML<\/strong><\/p>\n\n\n\n Portfolio view: <\/strong>Intel\u2019s return to leading-edge manufacturing depends on building leading-edge fabs and adopting EUV\/High NA \u2013 already in ASML\u2019s order books. It has only a handful of EUV machines in production. For context, we think (as a rough estimate) TSMC has about 100 tools in production. That\u2019s an extraordinary level of catch-up required<\/strong> \u2013 and we believe Intel will be a significant driver of orders for ASML over the next two to three years. Intel is forced to invest to catch up for the last 10 years of underinvestment \u2013 we are sceptical as to whether it will succeed. Still, we will continue to benefit from it trying, through ASML and other semicap equipment names that we own in the portfolio. It also means that TSMC will be forced to keep investing in order not to fall behind. The leadership race is a big part of what drives our structural solid view on the sector. <\/strong><\/p>\n\n\n\n Semicap resilience \u2013 and cycle bottoming<\/strong><\/p>\n\n\n\n Portfolio view: <\/strong>Semicap earnings resilience in the current spend-down cycle has been impressive. Despite the memory weakness feeding through to lower revenues, all of our semicap holdings have continued to generate strong FCF and strong margins. Their ability to execute cost control and cash generation in the face of an industry downturn is impressive. <\/strong><\/p>\n\n\n\n We\u2019ve commented before that the advantage tech has (at least the tech businesses we own) is typically high gross margins, which give it the ability to flexibly manage its cost base \u2013 the fact that we\u2019re seeing that in one of the most historically cyclical parts of tech (semicap equipment) is quite extraordinary. <\/strong><\/p>\n\n\n\n Investing in the right part of the AI value chain<\/strong><\/p>\n\n\n\n Portfolio view<\/strong>: There is no doubt that companies are spending on AI, but right now it feels like the industry-specific solutions that c3.ai is offering are being slow to be adopted. Initially, for enterprise software customers, we believe it makes more sense to get AI capabilities via their existing platform software providers initially, rather than to initiate a new software relationship with a new provider. That\u2019s not to say that industry-specific solutions won\u2019t be adopted in time, but it\u2019s still early days and visibility is low. We continue to prefer to be exposed to AI software spend via the best-in-class platform players who are all initiating pricing for AI features that we think can contribute materially to ARPU growt<\/strong>h (we own Microsoft, ServiceNow, Salesforce, Adobe and Workday).<\/p>\n\n\n\n China auto strength <\/strong><\/p>\n\n\n\n Portfolio view: <\/strong>The EV shift and the increased semiconductor requirements in EV continue to be a key exposure in the portfolio for us \u2013 we own Infineon and NXP, both of whom sell into BYD.<\/p>\n\n\n\n\n
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