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

In this week's GP Bullhound's Weekly Tech Thoughts Newsletter, we discuss the impact of persistent high interest rates and inflation on market stability, with no significant changes to our portfolios. We highlight key earnings from Amazon and AMD, emphasizing their expansion into AI, and Qualcomm's gains in China's high-end smartphone market. Apple's results slightly exceeded expectations, with new AI developments anticipated.

Market: The key drivers of the markets currently are higher interest rates and stubborn inflation. Expectations of cuts to U.S. interest rates are now off the table, which should reduce market risk.

Portfolio: We have not made any major changes to the portfolios this week. The fundamentals around our selected stocks and data points continue to be very strong.

Weekly Conclusion: The capex guidance from hyperscalers continues to grow rapidly, and we can now also see corporate investments in AI. The capital intensity for the four major hyperscalers reached 13.7% in Q1, but with growing cash generation, free cash flow was up 23% year-over-year to USD 99 billion. An interesting statement from Pat Gelsinger, CEO of Intel, last week: “The foundry market is expected to grow from $110 billion today to $240 billion by 2030, with almost 90% of the growth coming from EUV nodes and advanced packaging.”

Results: Amazon (Owned): EPS totaled USD 0.98, beating expectations by USD 0.15 and clearly indicating the leverage of the business and their focus on operational expenditures. Sales were USD 143.3 billion versus consensus expectations of USD 142.5 billion. Operating income grew 218% year-over-year, leaving the operating margin at 10.7%. AWS sales accelerated to 17%, clearly above expectations of 14.7%, driven by diminishing cost optimizations and Gen AI workloads. The advertising business continued to impress, growing 24% year-over-year. The capex in Q1 totaled USD 14 billion, up 5% year-over-year, which should be seen as the low of the year as AI infrastructure investments now will accelerate. The company expects Q2 sales to reach between USD 144 billion and USD 149 billion, slightly below the market consensus forecast of USD 150 billion. The operating income is expected to total between USD 10 billion and USD 14 billion.

Our View: The results clearly show that the company has been working hard on the profitability side, and we expect that to continue this year. The heavy investments in AI infrastructure are the only drag. However, these investments are a major positive for our hardware and semi equipment names. Amazon also stated that their own AI chips (Tranium/Inferentia) will ramp up volumes in the second half, which is a major positive for Marvell.

AMD (Owned): Sales grew 10% year-over-year to USD 5.7 billion, with an EPS of 0.62, in line with expectations. Data center revenue grew 80% year-over-year to 2.28 billion, driven sequentially by AI demand while both CPU and AI grew year-over-year. The company is clearly ramping up their AI offering now and raised the full-year guidance for it to USD 4 billion from earlier USD 3.5 billion. The market, however, was hoping for a higher lift. On the CPU side, the company is clearly gaining share from Intel with the Genoa product, and Turing will be ramping up in the second half of 2024. Gross margin is negatively affected in the short run by the MI300 ramp. Gaming was down 48% year-over-year and expected to fall further in Q2 driven by inventory adjustments and lower demand. Client group sales grew 85% year-over-year as PC inventories were being rebuilt and the underlying market improved somewhat. The Embedded sales, which are late cyclical, lost 46% of sales year-over-year and gaming console sales were as expected weak. The forecast for Q2 was in line with expectations at USD 5.7 billion ± 300 million, with a gross margin of 53%.

Our View: The company is clearly gaining momentum in their AI GPU business, and demand is stronger than they can supply. The CPU business is doing well in a slower market but will likely pick up in the second half of 2024. The negatives are the weak gaming business and the Embedded business, which is going through an inventory correction. However, we believe that the momentum going into the second half of 2024 will be very strong for AMD, and we will see further AI upgrades during the year as they ramp up production to meet demand.

Qualcomm (Not Owned): Sales totaled USD 9.4 billion, with an EPS of USD 2.44; sales were in line, while the EPS was better. The big driver for the quarter was Android sales into China, up 40% year-over-year. The high-end smartphone demand in China seems to be stronger than the lower end, and the local brands are doing well. The guidance for the June quarter was better than expected, with sales to be between USD 8.8 billion and USD 9.6 billion and an EPS between 2.15 and 2.35, well ahead of expectations of USD 9.1 billion and USD 2.16.

Our View: The high-end handset market in China seems to be recovering, and the added services around AI seem to be drawing interest. The complexity around AI solutions also seems to benefit Qualcomm as customers are looking to consolidate their vendor suppliers when complexity increases. Qualcomm believes they have an edge by producing the CPU, Modem, and the RF, which benefits inference on the phones in terms of speed and power.

Apple (Small Position): Sales fell 4% year-over-year to USD 90.8 billion, and EPS reached USD 1.53, both a touch better than expected. Product gross margin fell 280 basis points to 36.6%, driven by lower volumes and mix. iPhone sales fell 10% year-over-year and 34% quarter-over-quarter due to weakness in China. Services was the bright point in the report, growing 14% year-over-year. The iPad business fell 17% year-over-year while the Wearables business fell 9.6%. The Mac business grew 4% year-over-year, slightly better than expected, and a new MacBook Air was released in March. The company also released a new buyback program worth USD 110 billion, the largest in history. The guidance for the June quarter is that revenue will grow by low single digits year-over-year, which is above forecasts, driven by double-digit growth in Services and the iPad business. The company is expected to launch new iPads on May 7th. The gross margin is expected to be around 45.5% to 46.5%. The company is also highlighting that they will come out with interesting AI solutions soon.

Our View: The March quarter came in very much in line with our expectations, while the guidance for the June quarter is slightly better on both the top line and the margins. We still believe Apple is fully valued at these levels.

Automotive: April sales numbers for automotive vendors are now starting to come in. XPeng delivered 9,393 cars in April, up 33% year-over-year and 4% month-over-month.

For enquiries, please contact: Inge Heydorn, Partner, at [email protected] and Nejla-Selma Salkovic, Associate, at [email protected]

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