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Volatility in the market for the large technology companies has increased sharply in recent times. However, the fundamentals of the industry have not changed and the strength in the areas around AI continues. The volatility is driven by valuation concerns, the strong price rally we have seen in several companies, but above all by the increasing geopolitical risks in the world. As a result of the prevailing market environment, the GP Bullhound Global Technology Fund fell by 3.38% in July.
Despite the market volatility, the big tech companies have continued to do well, with solid results in Q2 and overall strong forward-looking statements.
However, most stocks in our portfolio have been hit hard by the broader market sell-off, and the stocks that have performed best over the past year have lost the most. Looking ahead, we believe that the current market estimates for 2024 and 2025 are still too conservative and that many companies will grow into their valuations. In this environment, we selectively buy on weakness to capture potential returns.
Q2 reporting season highlights
TSMC's Q2 sales met expectations with a gross margin of 53.2%, beating forecasts thanks to better utilization. Growth was driven by a 28% Q/Q increase in HPC demand, led by AI. The sales forecast for Q3 suggests growth of 32% over the previous year with an estimated gross margin of 53.5%-55.5%, which is well above previous forecasts. Industry fundamentals are strong with higher-than-expected growth and margins, but geopolitical risks are rising due to potential US restrictions on China and comments from Trump on Taiwan's defense. TSMC's strategic importance remains high, especially as all 2nm and 3nm production will take place in Taiwan in the coming years.
ASML reported sales of 6.2 billion euros and earnings per share of 4.01 euros, beating expectations of 6.1 billion euros and 3.72 euros. As a result of a higher sales mix of older immersion machines with better margins, with China accounting for 49% of total sales. Order intake was slightly higher than expected and amounted to EUR 5.6 billion, of which EUV orders accounted for EUR 2.5 billion. Although Q3 estimates were slightly below expectations, ASML maintained its full-year guidance and pointed to a stronger Q4. Despite the solid performance, ASML's share price was affected by rumors of potential US restrictions on equipment in the Chinese market, along with Trump's comments on Taiwan's defense. Future restrictions may target tools used for sub-14nm production – a small but crucial segment for Huawei.
Microsoft's sales and earnings per share met expectations, but Azure's growth missed slightly at 30% compared to the expected 31-32%. Demand, especially for AI, is greater than capacity. Capex was a substantial $19 billion, well above expectations of $15-16 billion, and free cash flow increased by 18% y-o-y to $23.3 billion. These capex figures are very positive for semiconductor companies.
AMD's results were in line with expectations, with data center sales up 115% year-over-year. AI and Intel's increased CPU market share were key drivers, with AI sales surpassing $1 billion in the quarter. AMD now predicts that AI sales will exceed $4.5 billion this year and likely approach $5 billion. The company is gaining market share in the CPU market and its cyclical segment is recovering, suggesting a strong outlook for H2 2024 and 2025. The tight supply of AI is also positive news for AMD's suppliers.