V i e w p o i n t | 03 Oct 2025 03:00:00 ET │ 25 pages US Semiconductors Analyzing the Semi Cycle and the Impact of AI – Accelerating Growth, Higher Pricing, and Higher Valuation CITI'S TAKE In this note we outline five key metrics we use to determine where we are in the semiconductor cycle – revenue, inventory, margins, demand and valuation – and the impact AI has had on the semiconductor sector. Our analysis of thirty-five years of semiconductor data indicates there is plenty of room to go from a margin, ...

Group 1 - The semiconductor materials and equipment sector is experiencing a strong upward trend, with the Shanghai Stock Exchange's Sci-Tech Innovation Board Semiconductor Materials and Equipment Index rising by 9.37% [1] - Notable individual stock performances include ShenGong Co., which increased by 20.01%, and Shengmei Shanghai, which rose by 15.35% [1] - The Sci-Tech Semiconductor ETF (588170) has also seen significant gains, up 9.42%, with a trading volume of 4.52 billion yuan and a turnover rate of 38.2% [1] Group 2 - The semiconductor equipment and materials sector is showing strength, with several stocks hitting their daily limit up, including Changchuan Technology and Weidao Nano [2] - Analysts suggest that the semiconductor cycle may be entering an upward phase, driven by AI computing demand, which is expected to enhance overall industry demand [2] - The global semiconductor industry is in an accelerated growth phase, with AI demand being a core driver, particularly for high-end chips like GPUs and HBM [2] Group 3 - The Sci-Tech Semiconductor ETF (588170) tracks the Sci-Tech Innovation Board Semiconductor Materials and Equipment Index, focusing on semiconductor equipment (59%) and materials (25%) [3] - The semiconductor equipment and materials industry is crucial for domestic substitution, benefiting from the expansion of semiconductor demand driven by the AI revolution [3] - The Semiconductor Materials ETF (562590) also emphasizes the upstream semiconductor sector, with significant allocations to equipment and materials [3]

Core Viewpoint - The semiconductor materials and equipment sector is experiencing a strong upward trend, driven by AI demand and structural improvements in the industry, indicating a potential new growth phase for the sector [2][3]. Group 1: Market Performance - The Shanghai Stock Exchange's Sci-Tech Innovation Board semiconductor materials and equipment index surged by 9.37%, with notable gains from stocks such as ShenGong Co. (up 20.01%) and Shengmei Shanghai (up 15.35%) [1]. - The Sci-Tech Semiconductor ETF (588170) rose by 9.42%, marking its third consecutive increase, with a latest price of 1.5 yuan and a trading volume of 4.52 billion yuan [1]. - The ETF's latest scale reached 1.113 billion yuan, a record high since its inception, with a total of 815 million shares outstanding [1]. Group 2: Sector Analysis - The semiconductor equipment and materials sector is showing strength, with several companies hitting historical highs, including Changchuan Technology and Shengmei Shanghai [2]. - Current market conditions suggest that the semiconductor cycle may be entering an upward phase, supported by AI computing demand, which is expected to enhance overall industry demand [2]. - The semiconductor sector is characterized by a "bull long, bear short" feature, indicating a potential new upward phase driven by policy support, technological breakthroughs, and downstream demand [2]. Group 3: ETF Information - The Sci-Tech Semiconductor ETF (588170) tracks the semiconductor materials and equipment index, focusing on companies in semiconductor equipment (59%) and materials (25%) [3]. - The semiconductor materials ETF (562590) also emphasizes the upstream semiconductor sector, benefiting from the expansion of semiconductor demand driven by the AI revolution [3].

Group 1: Federal Reserve Insights - Fed Chair Jerome Powell's upcoming speech is crucial for understanding the central bank's policy direction following recent rate decisions and market reactions [1][2] - Powell's comments will be analyzed for insights on economic conditions, inflation progress, and potential future rate adjustments [1][2] - The speech may address market dislocations or unintended consequences from recent policy decisions, impacting bond yields, the dollar, and equity sector rotation [1] Group 2: Market Recalibration and Valuations - Investors are recalibrating after the Fed's rate cut decision, focusing on the sustainability of recent market leadership amid concerning technical signals [2][3] - High-flying stocks like IonQ, Oklo, Baidu, and Alibaba have reached extreme valuations, raising concerns about potential corrections [3] - The shift from momentum to fundamentals could create downside pressure for these stocks, leading to broader market rotation into defensive sectors [3] Group 3: Semiconductor Sector Analysis - Micron's earnings report is anticipated to provide insights into memory chip demand across various applications, serving as a bellwether for the semiconductor cycle [4] - Key areas of focus include high-bandwidth memory demand from AI chip manufacturers, DRAM pricing trends, and inventory levels [4] - Micron's guidance on future demand and competition dynamics will be critical for assessing the sustainability of semiconductor investments [4] Group 4: Consumer Spending and Housing Market - Earnings from Costco and housing market data will shed light on consumer spending patterns and residential real estate trends post-Fed rate decision [5][6] - Costco's results will provide insights into membership trends and same-store sales growth, particularly during economic uncertainty [5] - New and existing home sales data will help evaluate the impact of recent rate cuts on housing activity and affordability challenges [5][6] Group 5: Economic Growth and Inflation Data - The Q2 GDP revision and Core PCE Price Index will influence Fed policy expectations and market sector rotation decisions [7] - The GDP revision will offer insights into economic momentum and consumer spending patterns that informed the Fed's recent policy [7] - The Core PCE reading will be scrutinized for evidence of disinflation progress or concerns about price stability, impacting bond yields and sector rotation [7]

Summary of Key Points from the Conference Call Industry Overview: Global Semiconductor - **Sales Performance**: Global total semiconductor sales decreased by 5.2% month-over-month (M/M) in July, but still exceeded the 10-year and 5-year seasonal averages by approximately 290 basis points (bps) and 420 bps, respectively [1] - **Ex-Memory IC Sales**: Sales of semiconductors excluding memory integrated circuits (ICs) increased by 3.0% M/M, marking a significant reversal from typical seasonal declines of 5-3% [1] - **Logic Sales**: Logic sales reached a record high of $24.5 billion, up 1.7% M/M, outperforming the 10-year seasonal average by about 400 bps, driven by an all-time high average selling price (ASP) [1] - **Analog and MPU Sales**: Analog sales rose by 9.1% M/M, while microprocessor unit (MPU) sales increased by 0.6%, both above their respective 10-year seasonal averages [1] - **Year-over-Year Growth**: Year-over-year (YoY) total semiconductor sales growth accelerated to 24.4%, with year-to-date (YTD) growth at 18.3% [1] Memory Segment Insights - **Memory Sales Decline**: Memory sales fell by 22.8% M/M, which is approximately 360 bps below the 10-year seasonal average [2] - **ASP and Volume Changes**: Average selling prices (ASP) for memory decreased by 5.4% M/M, while volume declined by 18.4% M/M, aligning with normal seasonal patterns [2] - **Future Pricing Forecast**: Forecasts indicate that DDR and NAND contract pricing will rise by 3% quarter-over-quarter (Q/Q) in Q3 and 5% in Q4 of 2025, with expectations of continued undersupply into Q3 2026 [2] Future Projections - **Industry Revenue Forecasts**: The semiconductor industry revenue is projected to reach approximately $701 billion in 2025 (+16% YoY) and $841 billion in 2026 (+20% YoY), supported by increased logic revenues and extended DRAM/NAND undersupply [1] - **Q3:25 Outlook**: Street estimates suggest total semiconductor revenue will grow by 12.3% Q/Q, with ex-memory semiconductor sales increasing by 10.6% Q/Q [3] Preferred Stocks - **US Stocks**: Preferred stocks in the US include AVGO, NVDA, and TXN [1] - **International Stocks**: Internationally preferred stocks include ASE, Eugene Technology, Infineon, MediaTek, Renesas, SK Hynix, and TSMC [1] Additional Insights - **ASP Trends**: The ASP for logic products showed a slight decline of 0.5% M/M, while the overall ASP for semiconductors is expected to trend positively in the coming quarters [6] - **Market Dynamics**: The semiconductor market is experiencing a complex interplay of demand and supply dynamics, with certain segments like logic and analog showing resilience while memory faces challenges [1][2] This summary encapsulates the key insights and projections from the conference call, highlighting the current state and future outlook of the semiconductor industry.

Financial Data and Key Metrics Changes - Sales revenue for Huahong Semiconductor reached $566 million, an increase of 18.3% year-over-year and 4.6% quarter-over-quarter, primarily driven by increased wafer shipments [4][7] - Gross margin stood at 10.9%, up 0.4 percentage points year-over-year and 1.7 percentage points quarter-over-quarter, driven by improved capacity utilization [4][8] - Net loss for the period was $32.8 million, compared to $41.7 million in Q2 2024 and $52.2 million in Q1 2025 [9] - Net profit attributable to shareholders was $8 million, a 19.2% increase year-over-year and 112.1% increase quarter-over-quarter [9] Business Line Data and Key Metrics Changes - Revenue from embedded and volatile memory was $141.2 million, a 2.9% increase year-over-year, driven by increased demand for MCU products [10] - Revenue from logic and power management IC was $161.2 million, a 59.3% increase year-over-year, mainly driven by increased demand for other power management IC products [11] - Revenue from power devices increased, with the company maintaining a large capacity in both 8-inch and 12-inch fabs [49] Market Data and Key Metrics Changes - Revenue from China was $469.7 million, contributing 83% of total revenue, an increase of 21.8% year-over-year [10] - Revenue from North America was $53 million, a 13.2% increase year-over-year, while revenue from Europe decreased by 14.2% [10] - The semiconductor market is expected to grow significantly, with projections indicating it could reach a $1 trillion industry within a few years [68] Company Strategy and Development Direction - The company is focusing on enhancing core competencies in products, processes, R&D, and supply chain management, with a strategy to diversify product portfolios [5] - Huahong Semiconductor aims to solidify its leading position in the semiconductor industry through strategic initiatives and partnerships [6] - The company plans to continue expanding capacity while improving efficiency and targeting technology areas with growth potential [42] Management Comments on Operating Environment and Future Outlook - Management expressed confidence in the sustainability of demand, citing robust internal factors such as capacity utilization and cost reduction efforts [18][20] - The company anticipates a gross margin in the range of 10% to 12% for Q3 2025, with visibility for Q4 being less certain [21] - Management noted that the semiconductor industry is experiencing a shift towards more stability in capacity increases, which is expected to positively impact the market [32] Other Important Information - Net cash flow generated from operating activities was $169.6 million, a 75.1% increase year-over-year [12] - Capital expenditures were $407.7 million, with significant investments in manufacturing capacity [12] - The company is actively collaborating with European firms for their China for China strategy, while also exploring local partnerships [97] Q&A Session Summary Question: Sustainability of Demand in the Second Half - Management indicated that robust demand is expected to continue, driven by internal factors such as capacity utilization and cost reduction efforts [18][20] Question: Pricing Adjustments and ASP Outlook - Management expects small price movements in the second half, primarily focused on 12-inch and IC platforms, with adjustments reflecting in Q3 and Q4 [22][25] Question: Regional Demand Differentiation - Management acknowledged strong domestic demand while noting weaker overseas demand, emphasizing the complexity of end markets [36][39] Question: Semiconductor Cycle and Gross Margin Outlook - Management noted that the semiconductor industry has become less cyclical, with growth driven by various end markets, and expects gross margins to remain stable [66][73] Question: AI Server Market Opportunities - Management highlighted the significant growth potential in the AI server market, particularly for power management chips [90][92] Question: Local Foundry Collaborations - Management discussed ongoing collaborations with European companies and expressed openness to partnerships with other foundries, emphasizing a focus on existing strategic partners [97][99]

Investment Rating - The report indicates a general improvement in investor sentiment towards the Asia Pacific region, with a net 21% of participants expecting a stronger Japan economy and a net 10% anticipating a weaker Chinese economy, marking significant improvements from previous months [4][25]. Core Insights - The report highlights a recovery in growth expectations, with a notable shift in investor sentiment from panic to optimism, driven by confidence in trade resolutions and global monetary easing [1]. - Earnings recovery is anticipated, with nearly 90% of participants expecting higher earnings levels in the coming year, a significant turnaround from previous expectations of a slowdown [2]. - The semiconductor sector is viewed positively, with a net 38% of investors expecting it to strengthen over the next 12 months, indicating a favorable outlook for technology investments [6][61]. Summary by Sections Economic Outlook - A net 46% of investors expect a weaker global economy, down from 82% in April, while a net 45% foresee a weaker Asian economy, improving from 89% [1]. - In China, the economic outlook has improved, with only a net 10% expecting a weaker economy, a significant drop from 48% the previous month [3][25]. Country Allocation - Japan has regained its position as the most favored market, followed by India, with South Korea rising to the third spot due to expectations of policy reforms [5][49]. - Thailand and Indonesia remain the least preferred markets among investors [5]. Sector Preferences - In the Asia ex-Japan portfolio, technology sectors are favored, while energy, materials, and real estate are avoided [6][51]. - In Japan, banks are the top choice, benefiting from higher interest rates, followed by semiconductors [7][46]. Investment Themes - AI is the most favored investment theme in China, while in India, IT services, infrastructure, and consumption are the primary themes being monitored [54][56]. - The report notes a positive sentiment towards the semiconductor cycle, with expectations for growth in exports from Korea and Taiwan [61].

Arrow Electronics (ARW) Conference Call Summary Industry Overview - The semiconductor cycle has been one of the longest and most profound in recent history, with indications that the bottom has been reached and recovery is underway [5][6] - Leading indicators such as book-to-bill ratios are above parity across all regions, and backlogs are building, providing improved visibility [6][12] Company Insights Business Segments - Arrow Electronics operates in two main segments: Global Components and Enterprise Computing Solutions (ECS) [9] - The inventory correction phase is largely behind, with some pockets of excess inventory remaining [12] - The ECS segment focuses on cloud, hybrid cloud, and infrastructure software, targeting mid-market customers [48] Financial Performance - The company has seen growth in gross profit (GP) and operating income (OI) over the last three quarters, with expectations for continued growth [50] - Recurring revenue in the ECS business is approaching one-third of total volume, contributing positively to margins [53] Competitive Advantages - Arrow's competitive edge lies in its vast supply chain assets and engineering capabilities, allowing it to serve large multinationals and mass markets effectively [22][24] - The company has invested in value-added services, enhancing its market position beyond traditional distribution [25][29] Market Trends Demand by Region and Vertical - Key verticals include industrial, transportation (including automotive), and aerospace and defense, with varying demand trends across regions [18][19] - Asia, particularly China, is leading the recovery, impacting regional margins [19][20] Tariff Impact - Tariffs have a minimal impact on Arrow's top and bottom lines, estimated at 2-4% of global component sales, and are viewed as neutral overall [38][39] - The company is actively helping customers navigate tariff implications and optimize their supply chains [44][46] Margin Outlook - Operating margins are expected to improve as the market normalizes, driven by scale, return of mass market demand, and growth in value-added offerings [31][33] - The ECS segment's margin profile is stable, with expectations for gradual improvement as recurring revenue grows [56] Investment Thesis - Arrow Electronics is aligned with attractive end markets with healthy growth potential, aiming to grow at or above market rates [59] - The company prioritizes organic growth, selective M&A, and capital returns, with a focus on enhancing shareholder value [60] Conclusion - Arrow Electronics is positioned for recovery and growth, with a clear strategy to leverage its competitive advantages and navigate market challenges effectively [61]

Core Insights - Stanley Druckenmiller's Duquesne Family Office has been active in the first quarter of 2025, adding new positions and increasing existing ones [3][4] Group 1: Taiwan Semiconductor Manufacturing (TSMC) - TSMC was one of Druckenmiller's largest bets, with a 457% increase in shares to 491,265 [7] - The stock experienced a decline but rebounded due to strong first-quarter results, with revenue up 41.6% year over year and earnings per share increasing by 60% [8] - Despite a slight dip in sales from the previous quarter, demand from major customers suggests potential for modest growth [9] - TSMC's largest customer, Nvidia, saw Microsoft increase its capital expenditures by 53% year over year, indicating strong demand in the semiconductor sector [10] Group 2: Flutter Entertainment - Druckenmiller increased his position in Flutter Entertainment by purchasing over 1 million shares, making it the 11th-largest holding in the portfolio [11] - Flutter's FanDuel brand grew monthly users by 11% year over year to 4.3 million, capturing a 43% market share in the U.S. sports betting market [11] - The company launched a cross-promotion for FanDuel, boosting monthly iGaming users in the U.S. above 1 million, with first-quarter revenue from iGaming growing by 32% year over year to $472 million [12] Group 3: Docusign - Druckenmiller initiated a new position in Docusign valued at $87.5 million, making it the 10th largest position in the portfolio [14] - Docusign's revenue grew by 7% year over year, with subscriptions accounting for 97% of first-quarter revenue [14] - The company reported a gross margin of 78.9% and free cash flow of $232.1 million, representing 33% of total revenue [15]

Financial Data and Key Metrics Changes - Net sales for Q3 2023 were €6.7 billion, aligning with guidance [6] - Gross margin for the quarter was 51.9%, exceeding guidance due to product mix and one-off cost effects [7] - Net income for Q3 was €1.9 billion, representing 28.4% of net sales, resulting in an EPS of €4.81 [8] - Cash, cash equivalents, and short-term investments at the end of Q3 totaled €5 billion [8] - Q3 net system bookings were €2.6 billion, with a backlog exceeding €35 billion at the end of Q3 [10] Business Line Data and Key Metrics Changes - Revenue from EUV systems was €1.9 billion from 10 systems shipped, while net system sales totaled €5.3 billion, driven primarily by logic at 76% [7] - Installed base management sales for the quarter were €1.4 billion, as guided [7] - The installed base business is expected to decline by around 5% year-over-year, a revision from previous flat growth expectations [18] Market Data and Key Metrics Changes - Q3 bookings were primarily driven by logic at 80%, with memory accounting for 20% [8] - The company noted a moderation in orders as customers manage cash flows and delay purchases due to industry cycles [9] - China demand for DPV systems remains strong, with a significant portion of orders booked in 2022 [16] Company Strategy and Development Direction - The company expects significant growth in 2025, driven by new fab projects and increased capacity from existing fabs [15][22] - The company is preparing for a strong recovery in 2025, with expectations of a transition year in 2024 [24] - The geopolitical environment, particularly export controls, may impact regional shipment splits but not global demand [21] Management's Comments on Operating Environment and Future Outlook - Management highlighted ongoing macroeconomic uncertainties, including inflation and geopolitical tensions, affecting customer behavior [13] - There are signs of improvement in end-market inventory levels, particularly in logic, while memory remains weak [14][60] - Management expects a recovery in memory to follow the logic recovery, although timing remains uncertain [60] Other Important Information - An interim dividend of €1.45 per ordinary share is scheduled for payment on November 10, 2023 [11] - The company plans to manage cash flows prudently due to ongoing pressure on free cash flow [11] Q&A Session Summary Question: How to think about gross margin expectations for 2024? - Management indicated that while they cannot provide specific guidance, factors such as ASP increases and service improvements will positively impact gross margin, while capacity expansion and high NA tool preparations may present headwinds [26][30] Question: Expectations for revenue not recognized by year-end? - Management confirmed expectations for revenue not recognized to be around €2.3 billion by year-end, with some catch-up anticipated in 2024 [31][33] Question: Unit expectations for EUV and DUV in 2024? - Management expects a reduction in DUV units due to previous high volumes in China and new export controls, while EUV units may also decline but with higher sales prices [38][40] Question: Sustainability of spending levels in China? - Management believes that spending levels in China will remain strong due to significant investments in renewable energy and industrial IoT, despite geopolitical tensions [44][46] Question: Percentage of shipments to China under new restrictions? - Management indicated that 10% to 15% of shipments this year may fall under the new restrictions, primarily affecting advanced semiconductor manufacturing [51] Question: Utilization levels and trends across memory versus logic? - Management noted that logic utilization is showing signs of improvement, while memory utilization remains low, with expectations that memory will follow logic's recovery [58][60] Question: Impact of 2025 guidance in light of current macro environment? - Management emphasized that despite current uncertainties, the cyclical nature of the industry suggests a strong recovery in 2025, supported by underlying demand trends [67][72]