ADI's financial report exceeded expectations, and the semiconductor industry is in the beginning of recovery

Recently, analog chip giant ADI released its second quarter financial report for the 2024 fiscal year, exceeding the average expectations of Wall Street analysts. It is worth noting that, ADI's financial forecast for the third quarter is also better than the average given by analysts, The reason given by ADI is that it benefits from the recovery of demand for automotive and industrial chips after a prolonged downturn.

ADI CEO Vincent Roche stated that, ADI believes that the rationalization of inventory among its vast customer base is stabilizing, clearing the way for ADI to resume continuous growth in the third quarter.

ADI's financial report shows that the industry will usher in an upward cycle

The semiconductor market has always had a strong cyclical nature, and in the past few years, it has been in a downward cycle. This has also made many practitioners feel the "harsh winter", with layoffs and disbandments not uncommon. Many bankrupt and liquidated enterprises have quietly disappeared in those corners, and even many people have not heard of their names.

According to relevant data statistics, in 2023, 10900 chip related enterprises in China were cancelled or revoked by the industrial and commercial authorities. On average, nearly 30 chip enterprises disappear every day. Just three years later, Shanghai Wusheng Semiconductor, a large enterprise founded in 2021 with a registered capital of 10 billion yuan, announced bankruptcy and dissolution in 2024, becoming a microcosm of this semiconductor downturn cycle.

But as there is decline, there is rise. Even though some companies are constantly forced to leave, more companies are still entering this field. Data shows that in 2023, there were 65700 newly registered chip related enterprises, a year-on-year increase of 9.5%, proving that even though the market is very competitive, there are still a lot of opportunities.

Meanwhile, recent financial reports from ADI indicate that the market has begun to gradually recover. Its revenue for the second quarter ending May 4th was $2.16 billion, exceeding the average analyst expectation of $2.11 billion; The adjusted profit is $1.40 per share, while the expected profit is $1.26 per share.
Benefiting from strong performance in the aerospace and defense sectors, The revenue of ADI's industrial sector was $1.01 billion, higher than analysts' expectations of $952.2 million.

For the upcoming third quarter, ADI gave an optimistic evaluation, expecting revenue to reach 2.27 billion US dollars, with a fluctuation of 100 million US dollars, higher than the expected 2.16 billion US dollars. ADI believes that with the development of AI and strong demand for HBM chips, it will bring record revenue to its chip testing department in the short to medium term.

ADI believes that the current demand for industrial chips is improving as customers are digesting existing inventory and placing new orders amidst an economic slowdown. Vincent Roche believes that, ADI's customer inventory is gradually stabilizing, which has cleared the obstacles for the company's revenue growth in the third quarter. Coupled with improvements in new orders, ADI's optimistic expectations are currently at the beginning of a cyclical market recovery.

As the world's largest analog chip and embedded processor, TI made a similar judgment when releasing its first quarter financial report for the 2024 fiscal year. TI believes that the improvement in demand for consumer electronics products represents a relief from the adjustment of analog chip inventory.

It is worth mentioning that with the development of AI, the chip industry has accelerated its downturn. From the skyrocketing market value of Nvidia, AI has become a deterministic opportunity in the current industry. ADI believes that, AI technology will accelerate and assist its engineering team, improving the efficiency of product design and manufacturing processes. ADI is investing in AI technology to enhance product performance and bring more value to customers. The management is confident in the future development of AI and believes that it will be a key factor driving the company's long-term growth.

Will the chip industry start an upward cycle?
Semiconductor giants such as ADI and TI are optimistic about the future, and their revenue, although still declining, is already better than analysts' expectations. According to data, the expected global sales of semiconductor devices in 2024 have exceeded 570 billion US dollars, gradually approaching the peak of the past decade, with an expected year-on-year growth rate of over 11%.

Ju Long, Global Vice President and China President of SEMI, an international semiconductor organization, recently publicly stated that global semiconductor sales will achieve a positive growth of over 10% this year, and it is expected to exceed trillions of dollars by 2030.
According to the latest data from the Semiconductor Industry Association, global semiconductor sales increased by 15.7% year-on-year in March 2024, maintaining double-digit growth in the past three months. Nomura analysts believe that March will be the seasonal bottom of the three-month rolling average, and it is expected that global chip sales will grow strongly in the coming months.

The strong growth is driven by AI technology, and driven by this market demand, the cyclical recovery of the terminal market will expand from artificial intelligence servers to other major computing fields such as traditional servers, personal computers, and smartphones.

The recent Q2 2024 financial report released by Qualcomm further confirms this, with a net profit of $2.326 billion, a year-on-year increase of 37%. The main reason for the significant increase in net profit is due to the strong recovery of the Chinese market. Qualcomm revealed that the demand for high-end devices integrated with AI chatbots from Chinese consumers has significantly increased. In the first half of the fiscal year, sales to Chinese smartphone manufacturers increased by 40%, which also proves that the market is recovering.

At the same time, digital IC products such as storage chips, logic chips, and processor chips are maintaining strong growth, contributing an important force to the rebound of the chip market. Nomura analysts believe that storage chip sales represented by DRAM and NAND flash memory have increased by up to 70%.

Based on the financial report calls from storage giants Samsung and SK Hynix, it is expected that the prices of DRAM and NAND products may experience double-digit month on month growth in the second quarter, indicating that this market is entering a "super cycle".

Research firm Gartner also pointed out in a recent report that the storage chip market demand will show a strong recovery in 2024, with an estimated revenue surge of 66.3%. Among them, NAND Flash revenue will skyrocket by 49.6% DRAM revenue will skyrocket by 88%.

At the same time, many domestic listed companies also believe that they are currently in the stage of recovery. According to the financial report of semiconductor high-end micro and nano equipment manufacturer Microelectronics Nano, the new orders in the semiconductor field were 3.29 times higher than the new orders in the same period last year. Jingsheng Shares revealed that the current inventory level in the silicon industry has been reduced to a certain extent.

Nike Equipment, an intelligent manufacturing equipment company engaged in the semiconductor packaging field, stated that based on the contract orders in the first quarter of 2024, the market is recovering, and the semiconductor packaging equipment market has been recovering, with a year-on-year growth of over 500%. Huafeng Measurement and Control stated in an investor survey conducted in May 2024 that after a period of destocking, the semiconductor market gradually began to show signs of recovery starting from the fourth quarter of 2023.

A recent market research report jointly launched by SEMI and TechInsights shows that with the increase in sales in the electronics sector, stable inventory, and increased wafer fab capacity, the global semiconductor manufacturing industry showed signs of improvement in the first quarter of 2024, and it is expected that industry growth will become stronger in the second half of the year.

In the first quarter of 2024, sales in the electronics sector increased by 1% year-on-year, and it is expected to increase by 5% year-on-year in the second quarter of 2024. IC sales achieved a strong year-on-year growth of 22% in the first quarter of 2024, and are expected to surge by 21% in the second quarter of 2024.

The production capacity of wafer fabs will continue to increase. Based on 12 inch wafers, it is expected to produce over 40 million wafers per quarter. The production capacity will increase by 1.2% in the first quarter of 2024, and is expected to increase by 1.4% in the second quarter of 2024. Among them, China remains the country with the highest capacity growth rate among all regions.