What happened
Shares of leading semiconductor companies Intel (INTC 1.73%), Qualcomm (QCOM), and Taiwan Semiconductor Manufacturing (TSM 3.22%) rose 7.6%, 3.1%, and 2.1%, respectively, in Wednesday trading.
Virtually all chip stocks were lifted by the fiscal second-quarter report Micron Technology (MU 0.43%) delivered Tuesday after the market close. While the results themselves were pretty terrible, the report and the conference call offered reasons to believe that the industry has reached its cyclical bottom.
In addition, Intel gave a presentation Wednesday about its current data center chips and future roadmap that seemed to greatly encourage investors, indicating that the company's pervasive delays in releasing new chips may now be a thing of the past.
So what
In its presentation, Intel disclosed that its fourth-generation Xeon processor for data centers, code-named "Sapphire Rapids," was finally being shipped to over 50 original equipment manufacturers after receiving 450 design wins. Sapphire Rapids experienced numerous delays en route to market; it was initially slated to be released a year ago.
The Sapphire Rapids delays led to terrible-looking earnings numbers for Intel and a loss of market share to Advanced Micro Devices (AMD 1.58%) in the all-important data center market. However, it looks as though the chips are finally shipping, and to a large number of customers.
Perhaps more encouraging, Intel outlined an aggressively rapid plan for the introduction of future generations of data center chips, with its fifth-generation Emerald Rapids processor scheduled to ship in the fourth quarter of 2023, followed by Sierra Forest and Granite Rapids in 2024.
One might ask why Intel needs to introduce so many different chips in such rapid succession. Besides catching up to rivals that are nodes ahead of it, Intel management also noted that its different chips would be optimized for different workloads. For instance, some data center chips will be optimized for performance, especially for the heavy computing workloads of AI, while others would be optimized for efficiency and power consumption. Data center workloads are expanding and diversifying with the advent of AI and other types of computing, so Intel seems like it's on the right track in having a diverse product portfolio.
In addition, Intel also laid out some bullish data center growth projections -- it anticipates an annualized growth rate for data center processors in the low-20% range over the next five years. Even if Intel only maintains its current market share instead of clawing some back from AMD, that projection bodes well for the chipmaker.
Image source: Getty Images.
While Intel was an outperformer Wednesday, both Qualcomm and Taiwan Semiconductor were caught up in buying across the sector as well, likely on the back of Micron's earnings. While Micron's numbers were pretty bad by any measure -- it missed revenue projections and delivered a hefty per-share loss -- it appears as though semiconductor traders see this quarter as the bottom in memory chip demand.
Of note, Micron CEO Sanjay Mehrotra said on the conference call with analysts that he believes his company's data center revenue bottomed in the second fiscal quarter, which ended in February. Moreover, while Mehrotra sees PC chip unit sales volume declining by a mid-single-digit percentage in its fiscal 2023, he also predicted that the second half would be much stronger than the first half because customer inventories are depleting. That outlook generally extended to the mobile chip market as well: Micron predicts its mobile unit sales will fall slightly this year, but that the second half will be better than the first.
However, setting a bullish tone for TSMC and Qualcomm, Mehrotra sounded highly enthusiastic about generative AI and its prospects for boosting the whole semiconductor sector over the next few years. That should benefit TSMC, which has the outright lead in leading-edge logic chip manufacturing. Meanwhile, Mehrotra also noted the shifting mix in smartphones toward more higher-end flagship models. Consumers favoring larger and more powerful phones should benefit Qualcomm, which gets more money per unit for higher-powered modems. That would pave the way for revenue growth even if sales are flattish on a unit basis.
Now what
Investing in the semiconductor sector isn't for the faint of heart, as these stocks can, almost out of nowhere, plunge when their earnings seem fine, and then rocket higher when their earnings look terrible. Wednesday was an example of the latter situation.
This is also the case for cyclical stocks in general, but semiconductor businesses are interesting in that they have the potential to grow at higher rates than GDP over the long term. That's why they can be attractive for long-term-oriented investors who don't mind keeping up with the competitive shifts in technology (such as what happened to Intel over the past couple of years), or holding on through nausea-inducing industrywide downturns like the one that occurred last year. Because despite all the ups and downs, the semiconductor sector has been one of the best-performing sectors in the market over the past decade.
