Semiconductor & Electronics Outlook | Diverging Trends in AI Chips and Consumer Devices | Blog

Since the last earnings season, volatility in tech and semiconductor stocks has risen notably, with increasingly divergent performance among individual companies. For instance, TSMC delivered another impressive quarter and highlighted AI demand is real and robust, while ASML disappointed and also slashed its guidance. This marks a shift from the broad industry-wide gains seen in the first half of the year.

In this article, we provide a comprehensive outlook on the semiconductor industry in 2H 2024, drawing on the latest Q3 earnings reports from ASML and TSMC, as well as financial performance from companies across the smartphone and PC supply chains.

I. Consumer Electronics Entering Peak Season, But Mass Upgrade is Cycle Unlikely

Smartphone Market: Android Launched Earlier than Usual, iPhone to Drive Growth in H2, Inventory Levels Remain Healthy

Major smartphone brands including Apple, Samsung, and Xiaomi, have generally returned to growth since the second half of last year. Notably, the Android camp has seen a stronger recovery, resulting in faster inventory replenishment of Android phones, as exemplified by Xiaomi’s elevated inventory levels (brown bars in charts below). In contrast, Apple’s revenue (blue bars) only turned positive in Q2, with inventory levels yet to rise significantly, suggesting that Apple will be the primary driver of smartphone inventory restocking in the second half of the year.

In the smartphone supply chain, companies like chipmakers Qualcomm and MediaTek, lens suppliers Largan Precision and Sunny Optical, and OEM supplier Foxconn all posted positive performance in the first half of the year, thanks to strong sales of Android devices. Reassuringly, despite improved revenue momentum, most suppliers have not seen a significant increase in inventories, in either absolute terms or year-over-year (YoY) growth rates, indicating relatively healthy inventory levels in the smartphone supply chain and room for further restocking activity.

What about smartphone upgrade momentum in 2H2024? To gain an early foothold in the AI space, many Android brands launched new products earlier than usual this year, rolling out AI-powered devices in the first half of the year. This means fewer product launches in 2H2024, which could dilute peak season demand. Meanwhile, iPhone sales have been tepid since the launch of iPhone 16, with Apple projecting to ship around 90 million units in 2H2024, representing YoY growth of roughly 10%. Whether consumers will embrace the new Apple Intelligence features remains uncertain.

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PC Market: Modest Recovery with Sluggish Chinese Demand and Limited Contribution from AI PCs This Year

Turning to the PC market, benefiting from low bases from the previous year, brands like Lenovo, HP, Dell, ASUS, and Acer have all seen a notable rebound in YoY revenue growth in 1H2024. That said, HP’s earnings report on August 28 shows that the PC recovery is primarily driven by sales in the Americas, while demand in the EMEA and APAC (particularly China) regions remains weak, especially with intense price competition in China, which has led HP to lower its full-year EPS guidance.

The area of strength for these brands lies in their non-PC businesses, primarily the AI segment. The brands have seen significant increases in inventories, driven by strong performance in AI-related businesses and presumably to support ramp-up of AI server production ahead. For the PC supply chain, the chart below divides suppliers into manufacturers that handle PC assembly (the upper part of the chart) and PC CPU manufacturers (the lower part of the chart). The first group includes Quanta, Wistron, Compal, and Inventec, while the latter includes Intel and AMD. In terms of revenue growth, the OEMs are outperforming CPU makers, largely due to involvement in AI server manufacturing.

For PC market outlook in 2H2024, suppliers generally expect a seasonal uptick but with weaker momentum. Analysts now forecast PC shipments to remain flat year-over-year, citing weak demand due to slow economic growth in China and low penetration of AI PCs that’s unlikely to drive a significant upgrade cycle this year.

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II. ASML Earnings Fell Short of Expectations, But This Doesn’t Signal a Broader Semiconductor Downturn

ASML's Q3 earnings report reveals a complex picture of the semiconductor sector at this stage. Despite recording a third-quarter revenue of €7.46 billion (above its forecast range of €6.7~7.3 billion) and delivering a gross margin of 50.8% (vs. expectations of 50~51%, ASML saw a sharp decline in new orders, from €5.6 billion in the previous quarter to €2.6 billion. Specifically, net bookings for EUV systems plummeted by €1.1 billion from €2.5 billion to €1.4 billion.

Two factors contributed to falling orders

Customer cautiousness: Major clients like Samsung and Intel have decelerated their pace of investment due to slower-than-expected progress on adopting more advanced processes. For example, Samsung has scaled back investment at its Texas facilities due to challenges concerning 2nm chip yields.
Slowing demand from China: The surge in demand fueled by the stockpiling effect, where Chinese customers aggressively purchased ASML equipment over the past few years in anticipation of U.S. export controls, has leveled off, resulting in weakening demand.

While ASML is grappling with falling orders, TSMC raised its capex outlook for both FY2024 and FY2025. This is mainly driven by the rapid development of AI applications, fueling demand for advanced process capacity. Thus, from an industry point of view, despite reduced EUV orders, robust demand for TSMC’s chips has more or less offset the impact of weakened demand other chipmakers are seeing.

In conclusion, ASML's earnings reflect a period of transition in the semiconductor industry. On one hand, advanced processes continue to be a key growth driver. On the other hand, geopolitical factors and macroeconomic uncertainties are also impacting the industry’s development. Nevertheless, observing the inventory levels of other equipment manufacturers, inventory pressure seems largely confined to ASML, as inventory levels of other equipment makers like Applied Materials, Lam Research and Tokyo Electron remain low. This also suggests that ASML’s weaker performance does not necessarily indicate a broader downturn in the semiconductor industry. In contrast, TSMC’s raised capex guidance for FY2025 suggests that demand for upstream equipment remains intact.

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III. TSMC Q3 Earnings Beat Forecasts, with AI Demand Outlook Raised Again

TSMC posted a stellar third quarter, with Q3 revenue reaching $23.504 billion, up 36% year over year (prev. 32.8%) and surpassing guidance range of $22.4~23.2 billion. Gross margin and operating margin also rose significantly to 57.8% (prev. 53.2%) and 47.4% (prev. 42.7%), respectively, both surpassing the high end of previous guidance, suggesting the company has successfully navigated through gross margin dilution pressures at the initial phase of N3 ramp-up. Revenue share of its high-performance computing segment also remained consistently above 50% of total revenue, underpinning the strong Q3 performance.

TSMC projects its 2024 full-year median revenue to reach $89.69 billion, which represents a YoY growth of 29.4%, well above market expectations. The company also expects revenue from AI-related products to triple this year, with its contribution to overall revenue revised upward to 14-16% (vs. 11-13% in previous quarter). Looking ahead to 2025, management expects another year of healthy growth, emphasizing that the AI demand is real while non-AI segments have stabilized. The company also says its capex next year will likely be higher than this year.

Overall, TSMC has successfully overcome the gross margin pressures associated with the early stages of N3 ramp, also reporting better-than-expected revenue and margins. This reflects growing demand for advanced process chips and will also bolster TSMC's pricing power. Additionally, the record-high revenue and profit in Q3 also reflect demand driven by AI and the busy season for smartphones.

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IV. MM Research Insights

An analysis on earnings reports of TSMC, ASML, Micron and key players in the smartphone/PC supply chains reflects a clear cyclical mismatch in demand for AI chips and consumer electronics. While TSMC’s and Micron’s earnings confirm that demand for AI and high-performance computing remains robust, their outlook on smartphone and PC shipments remains subdued, suggesting relatively limited demand for consumer electronics. Thankfully, inventory levels within the supply chains have not shown significant increases, and inventory days also remain at healthy levels. The lowered guidance on new orders by ASML can be attributed to the U.S.-China tech war and export restrictions on advanced semiconductor manufacturing equipment, as well as delayed progress on advanced processes with Samsung and Intel that has reduced EUV demand.

Looking ahead, whether consumer electronics can ...

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