GP Bullhound's weekly review of the latest news in public markets.

This week’s GP Bullhound Tech Thoughts Newsletter, brought to you by Inge Heydorn and Ofelia Aspemyr, highlights the following:

• The technology market correction was driven by heightened trade and political tensions with China - Nasdaq fell nearly 3%, and the PHLX semiconductor index 6.8%. Investments shifted from large-cap tech to other sectors, particularly small caps.
• Despite the market sell-off, we remain optimistic as we believe estimates for 2024 and 2025 are still too low, and companies will grow into their valuations.
• TSMC and ASML reported solid results with positive future outlooks, driven by AI demand and increased packaging capacity.

Market: The correction in the technology market happened quickly and was this time based on new rhetoric around the trade and political war with China. There were rumors of the Biden administration adding new restrictions on technology companies at the same time Trump was stating that Taiwan has to pay for US defense help. Nasdaq was down almost 3% on the comments and the PHLX semiconductor index was down 6.8%. Money has been moving out of large-cap tech over the last week into other sectors, especially small caps. However, we continue to see large-cap tech names performing well on the earnings front during the quarter and going forward.

Portfolio: Our portfolio was hit hard by the market sell-off as YTD strongly performing stocks were hit the hardest. But taking a step back, we feel that the estimates are still too low for 2024 and 2025 and that most companies will grow into their valuations.

Weekly conclusion: TSMC and ASML both reported solid results with a positive outlook for the coming years. A lot of volume is driven by AI, but other sectors will soon start to contribute.

Results TSMC (owned): Sales grew 33% Y/Y in USD, in line with earlier released numbers. The gross margin surprised on the upside at 53.2% driven by better utilization. The sales guidance for 3Q looks strong, implying 32% Y/Y growth with an expected gross margin of 53.5%-55.5%, well above the earlier guidance of around 51%. The better gross margin is driven by higher utilization.
The main driver of the growth for the quarter was HPC demand, which was very strong in the quarter, up 28% Q/Q, led by AI. The company also stated that packaging capacity will more than double for the company this year and the same next year to meet demand.
Fundamentals for the industry look very strong with better top-line growth and margin development than anticipated. However, geopolitical risk has increased. The rumors around more US restrictions on further export controls towards China and Trump's comments about Taiwan needing to pay for its security are significant. The strategic value of Taiwan and especially of TSMC is extremely high as for the coming years all high-end 2nm and 3nm production will be done by the company in Taiwan.

Our view: The higher sales and capacity utilization are clearly positive for ASML. TSMC also highlighted several times during the call that 2nm will be a larger node than 3nm. So the ramp-up for the build-out of 2nm will be strong. We also think that several clients like TSMC have been waiting for the TWINSCAN NXE:3800E to be ready technology-wise for mass production, which is happening now during 2H24.

ASML (owned): Reported Q2 24 revenues / EPS of €6.2bn / €4.01 ahead of estimates of €6.1bn / €3.72 and kept guidance unchanged for the year. The better-than-expected profits were driven by an increase in sales mix towards older immersion machines which carry higher gross margins. This went hand in hand with China now making up 49% of total revenues during Q2 24. Order intake surprised slightly positively at EUR5.6bn, whereof EUV stood for EUR2.5bn. Logic stood for over 70% of the order intake. Estimates for 3Q were slightly below expectations at EUR7bn of sales at the midpoint and a gross margin of 50.5%, but as stated, full-year guidance was kept, leading to a stronger 4Q.

Our view: The share price was hit hard by the rumors around new equipment restrictions from the US on the Chinese market at the same time as Trump was stating that Taiwan needs to pay for its defense. Will there be new restrictions? Hard to say, but our best guess is that they could restrict services of tools used for production below 14nm. This is a small business for ASML but important for Huawei.

General:

Amazon (owned): Announced that their Prime Day sales generated record sales with more items sold during the two-day event than any previous Prime Day event. Notably, independent sellers sold more than 200 million items during the Prime Day event. Amazon's AI shopping assistant was available for millions of customers. According to Adobe Analytics, electronics sales were strong during the days.

Our view: Interestingly, it sounds like electronics sales have been strong during the days, which is a major shift as electronics sales have been weak after COVID.

For enquiries, please contact: Inge Heydorn, Partner, at inge.heydorn@gpbullhound.com and Ofelia Aspemyr, Associate, at ofelia.aspemyr@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 12 offices spanning Europe, the US and Asia. For more information, visit www.gpbullhound.com