Semi’s Q2 Winners: Light
Earnings Reviews & Our Updated Gameplan
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Let’s Set The Stage
As we said a couple of days ago, “This was an extremely busy week.” Not just for software stocks but also for the semiconductor companies that reported last week, many of which are part of our The Pragmatic Optimist Portfolio.
And last week’s ERs from the semi companies did not disappoint 🤑. Instead, they validated our decision from last month to allocate a larger portion of our idle capital towards optical and photonic stocks amid the June/July AI panic.
For this post we will:
Start with an executive summary tying in as many insights as possible from earnings last week.
Break down our takeaways from the ERs of the semi companies that reported last week.
Update our investment thesis for winning semi stocks mentioned in this post
Conclude with our game plan for the week ahead, key levels we’re watching, and whether we expect the breakout to continue or fade.
📌On a YTD basis, The TPO Portfolio has delivered returns of 27% 💪, compared to 17% for QQQ QQQ 0.43%↑ and 24% for AIQ 0.80%↑. Our portfolio remained exceptionally resilient during July, declining just (3.5)% compared to (8)% and (14)% for QQQ and AIQ, respectively.
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Executive Summary Of Earnings That Were
There were 4 broad-based learnings that we took away from all the semi companies that reported this week:
Server CPUs continue to be the growth story, as compared to GPUs, in the months that lie ahead. AMD AMD 0.00%↑ signaled that ASPs of server CPUs are on the rise and will keep rising, confirming the same trend reported by Intel INTC 0.00%↑ two weeks ago.
Memory and storage companies are enduring another bout of skepticism regarding their scope for margin expansion. Guidance from some of the companies that reported this week hinted at transitory margin pressures ahead. This doesn’t do much good for the current sentiment around memory/storage stocks that is lingering out there.
As 400G networking products and solutions mature, 800G solutions are in full ramp while the entire networking industry (optical stocks included) is poised for the coming wave of adoption for 1.6T solutions. Remember, with every wave of adoption, the scope for margin expansion increases because of the 2x bandwidth value-add. AI networking beneficiaries who show early gains as their customer upgrade to 1.6T will grow their profit margins faster.
The conclusion from optical stocks that reported last week is that they are heavily capacity constrained. In other words, if these optical companies had more capacity, they would generate more revenue because demand for laser chips and optical components still outstrips supply. The question is how much incremental capacity can optical companies sustainably build out to meet robust demand without getting overly aggressive with their spending plans.
At The Pragmatic Optimist, we’re delighted with our fund’s performance this week. Many semi companies that reported this week, particularly SiTime SITM 0.00%↑ and Applied Optoelectronics AAOI 0.00%↑ published strong earnings, pushing our fund’s performance up 8.7% this week and 27% on a YTD basis. So far, optical stocks have carried the weight backing up our capital allocation strategy from last month, where we allocated a higher portion of our cash towards optical stocks during the selloff.
💡We shall now progress to the next few sections where we review our key takeaways from earnings reports per sector in the semiconductor landscape and uncover about what separated the winners from the losers.
📌 We will end the post with key price levels for the semiconductor sector that we’re watching this week and our action plan for navigating the portfolio over the next few weeks.