Chip Stocks Post Biggest Advance, Silicon Motion Earnings | Bloomberg Daybreak: Asia Edition

[music] Bloomberg Audio Studios podcasts radio news. [music] Welcome to the Daybreak Asia podcast. I'm Doug Krner. In the US session, we had a powerful rally in semiconductor [music] stocks. This really reflected the view that the recent selling that we have seen in this group was simply overdone. The Philadelphia semiconductor index jumped by more than 8% and on top of that other areas in the AI trade rallied as well. Take for example Microsoft up 15% on strong cloud growth and Oracle shares were higher by 8%. That was after the company expanded its Gemini AI partnership with Google. And some more tech earnings after the closing bell. We heard from Amazon and Apple. And we're going to take a closer look now at the market action with Daniel Newman. He is the CEO of Futurum Group. Daniel, joining from here in New York City, thank you so much for being here. Give me your sense of what you've seen play out over the last 24 hours. >> Well, Doug, I think we we are seeing a few different things at the same time. Structurally, we believe that the AI trade, the AI buildout is very much intact. We've had a very good set of earnings through this cycle so far. more very strong earnings delivered this week from the leaders in AI, the leading hyperscalers as well as the semiconductor companies. But at the same time, you saw a market go from, you know, all-time highs or near all-time highs to year lows in less than 30 days. We saw the Cosby uh in Korea almost on the daily uh you know, [clears throat] setting off trip uh you know, setting off trip wires and and having to to stop the market on a day-to-day. And then of course here in the US you know we had that hard fall and people were kind of wondering what's going on and obviously you know there was a lot of deleveraging going on there was there's been a lot of leverage into the market of course in Korea that was a thing but it was also it's also a very significant thing here in the United States. Um I think what we saw yesterday um was a lot of the capitulation that the market wanted to see and then you got some short covering and you now saw a huge powerful rally that was based on getting some good results from Microsoft getting some good results from uh you know today from Amazon. uh seeing these companies that are committing these big dollars in capex feeling confident that they are spending wisely and building an ROI strategy for their AI gave the market a chance to rally back higher. >> So Dan, I'm sure you're aware that we had some news today on the hedge fund called Situational Awareness. The fund sold the bulk of its public equity holdings to Citadel. And I think there's maybe a little bit of irony here in terms of the firm's name. situational awareness had been investing in companies tied to the boom in AI. So Dan, I'm wondering whether you think that we're going to get more stories like this, which is to say hedge funds being caught, maybe leverage is a factor and then the significant pain to their positions that is inflicted as a result. >> Well, I think we've gotten to the point where we risk too much leverage in the market everywhere. You know, this is what's happened with these, you know, three and four times leveraged ETFs on memory. This is what happened to Ashen Brener. He was, you know, heavily levered to make the kind of profits that he was making. And there's always opportunists in the market. In this case, it was Citadel. And Citadel was able to basically buy situational awarenesses positions at the bottom and immediately get the kind of rally we got today. But I think with the market between the Fed news this week, the concern about potential interest rate hikes, the uncertainty about in inflation, the macro overall, the China competition for AI with the United States, I think there is a lot to be said about the market as a whole and whether it has anything to do with how resilient uh or robust the AI trade is. What we believe though, Doug, is there's somewhere between 10 and 12 trillion dollars of cumulative capex that's going to be spent on AI between now and 2030. And companies like Nvidia and Micron, which were, you know, sold heavily, especially Micron, the memory names, in this last 30 days, these companies are trading at extremely cheap valuations based on their long-term agreements and the long-term profit expectations that they have. So I think this shakeout was probably healthy to delever some of what was going on in the market, but I think it also pro provides a good environment for some of these stocks that have gone down it feels like for a month straight to start going back up. So I hear your optimism when it comes to the buildout of AI focused on you know the chip sector and and the hardware manufacturers but I'm curious about the hyperscalers whether you expect the continued growth in data center activity to be concentrated in these big names whether it's an Amazon and I want to get your take on the results that we heard from Amazon after the bell names like Meta names like Alphabet names like Microsoft where we're going to see continued concentration among the hyperscalers or will we gradually see an expansion in data center buildout to go beyond these these big companies? >> Yeah, I I think you're going to see some augmentation to these bigger companies. I think these hyperscalers will remain the largest. They had such a market advantage coming out. We've seen new entrance popular names in the market like Nebius, Cororeweave, iron that are all building and adding capacity as part of this AI buildout and boom. But the hyperscalers have so much uh operational leverage. They have so much size and scale. They have the customers in many cases like in Google's case, they have a full stack of infrastructure. Amazon and Microsoft are following suit. Microsoft has the benefit of the largest enterprise distribution on the planet and AWS had the benefit of being the largest cloud coming into this uh AI pivot. Uh I think over the next handful of years what we know for sure is we are constrained. And so as long as we are constrained, we will see opportunistic uh you know new companies entering the market to compete into these spaces and you will see these companies actually partnering with the likes of Google, Amazon, uh Microsoft, Oracle. So I think for the next handful of years it's more of a situation of and than or. But I think that you know the reason the AI trade as a whole will continue to have concern is not so much about to your point about the the hardware and the and the capex and the buildout. These companies Amazon validated and reaffirmed today that they actually raised their capex guidance to 220 billion and still can't build enough compute. Um Google raised its capex number significantly a week ago after having 82% growth in its cloud business. These companies are going to partner. They're going to expand. They're going to get access to every bit of compute they can because what we found out is as models are changing very quickly. And we saw the Kimmy incident a year ago. We had the DeepSeek incident. We're finding models are not the moat in itself. The moat is compute and having enough compute to support this boom. >> To that point, Deepseek is building an AI data center in Inner Mongolia. I mean, do we have to be concerned about I hear what you're saying in terms of where the LLM kind of part of the story fits in and the deepseek moment or the Kimmy K3 moment in China, but I'm wondering whether or not we have to be cognizant of the fact that China is going to be pretty aggressive in building out the compute infrastructure, the building out data centers, and whether or not they could do it at a lower cost and what level of risk that represents to American firms. Look, this is the most important. It's an existential battle for global economic leadership, winning AI. This is what people have to understand when they, you know, are are having this debate about the US and China. They're having debate about whether the US provides its leading edge technology uh from an Nvidia or, you know, whether we allow ASML to ship their most advanced machines. China absolutely is a formidable competitor and of course they play by different rules. We've seen that with Kimmy and others where there's you know suspicion that Kimmy is trained largely by using advanced techniques to distill and do more than just distill u claw anthropic. And so this is going to be the front in which we wage the next multiple decades of economic leadership war. And so yes, absolutely it's important that we are concerned. It's important that we build the right rules, that we provide US companies the opportunity to do business in China where it makes sense. But what we don't do is arm the largest competitor for economic leadership with all of our innovation, all of our tools without understanding the consequences. >> I want to ask about Apple and then I have one other question as it relates to breaking news on Anthropic. What did you make of Apple's results after the bell? Um, Apple did fine. I mean, look, the way Tim Cook was talking about input costs, his his desire for Chinese memory, uh, to be able to enable them, you would have thought they were going to miss their their profits. I mean, again, Apple's an operation, you know, is an operating machine. They they tend to make their numbers. They very rarely miss. Uh, the market's selling it because Apple's been a safe haven for the last month. It's run to all-time highs. There's still some questions around the company's AI strategy. You know, iPhone sales look decent. Mac sales were good, but you have to remember a lot of the the the revenues are based on pricing right now. Um, not just the actual unit sales. And and then of course, you know, China was down. So, you always have to look at that number. That's an important one for Apple. But they did make their their EPS number. It's notable that they made it off the tariff income that they had returned. Otherwise, they would have been in the midpoint of at the midpoint of their guidance last quarter as opposed to beating it. Uh it was a good quarter. It was a tidy quarter. Apple is the safe haven of the Mag 7 right now. Um and investors have have been backing it. I'm wondering right now though with this rotation if this is it wasn't so much Apple's bad print. it was more dollars are rotating back into this this AI boom with the Microsoft rally with the Amazon rally. Nvidia has been oversold. So you might start to see some of the error come out of that Apple balloon. >> You know, as I'm listening to you and I'm thinking about the rate of change that we have seen in artificial intelligence, I'm wondering about the next generation of handheld devices that is going to be custommade for this AI uh system that we are describing. And I want to get your view on anthropic because tonight in the US we learned that a couple of the company's AI models breached three different organizations in cyber security testing. Something went wrong. It went ary and this is only a little more than a week after open disclosed a similar incident. And I'm wondering whether you are concerned about the rate of change, particularly on the LLM side, the model side, that things are moving a little too quickly for your comfort level and that we need to try to find a way to modulate this, or are you okay, and maybe you're of the belief that the industry can regulate itself and get this stuff under control? What's your feeling on that? Well, as a footnote on your comment about the future of devices, [clears throat] that is Apple's existential risk is if a new device or platform was to disrupt Apple's position. Now, going back to the anthropic and open AI situation, this is really interesting. You know, you have two companies that have been sort of screaming from the rooftop that AI needs more regulation. Um, we've had this kind of back and forth about can the Frontier models and these closed source win. We've had companies like Nvidia coming out loudly to support more open-source globally. Um, and you know, you have these jailbreak sort of rogue agents coming out and part of me almost wonders like how does this happen? How do two different trillion dollar companies have agents doing things that they're not monitoring them? They're not watching them. It's wild to me that this took days on the Open AI one. We don't know what's going to happen with the anthropic one yet. With the OpenAI one, these went on for days before they were even discovered. Um, so we have technology and a rate of change that's, you know, that's exponential right now. And the problem is policy makers and and and regulation can never keep up. So expecting those things to happen and get ahead is is is it's never happened in history and now we have the most important arms race between the east and the west especially US and China where we're going to say let's slow down. I just don't see that happening. I do think we need more framework. I do think we need policies that quickly have models evaluated before they're sent out in mass. And I do think some of that's being worked on. I I think that these systems and some of these rogue events, they will continue to happen and we do need to, you know, pay better attention, but I put a lot of the blame on this on Anthropic and on Open AI. They're building new products. They're shipping them out. They should be watching that. >> Dan, we'll leave it there. Thank you so very much. He is Daniel Newman, the CEO of Futurum Group, joining from New York City here on [music] the Daybreak Asia podcast. >> [music] >> Welcome back to the Daybreak Asia podcast. I'm Doug Krishnner. In New York trading, US listed shares in Silicon Motion picked up 24%. This Taiwan-based semiconductor device maker reported second quarter results above expectations. Now, Silicon Motion also gave a revenue forecast much stronger than expected. The CFO of Silicon Motion is Jason Sai. He spoke with Bloomberg TV host David Inglace and Ivon Man. >> Jason, it's great to have you back on earnings and and post earnings certainly as as what the market was liking here was the guidance for the third quarter. Um and of course these blowout earnings from your side of things in the second. Um what does it tell you about where you can still gain market share and really how sustainable this momentum is now? >> Yeah, thanks for having me on the show again. I really appreciate it. Um, look, I think if you take a look at our core business over the course of the last many years, you know, we've been very consumer ccentric PCs and smartphones and obviously we've seen all the data points around the weakness in these markets driven by high high cost of memory and storage. We've been gaining a lot of share here. We've been laying the foundation for a lot of share gain with the flash makers, the module makers. And so we've far exceeded any um, you know, the the end market results because of the share gain because we're upgrading to higherend products. And so that business, the core business continues to execute extremely well in a difficult environment. I think what investors have really liked is diversifying our business. Um our automotive uh fair eye solutions have done extremely well. That's scaling incredibly well. Our enterprise boot drive business is scaling incredibly well and that's going that's becoming a bigger and bigger portion of our business. And then you know our enterprise controller business is you know was zero a year ago and you know exiting this year we expect that to be 5 to 10% of our business and that's started to scale this second quarter. So we're we're really seeing a a really nice diversification of our business playing out. We're confident that we can grow our business in excess of 100% this year. So from you know 800 plus million last year to you know 100% of that. There's more than 100% of that this year. Gross margins are improving. operating leverage is coming in along with it. So overall driven by strength in the core business, expanding opportunities, improving profitability and and responsible expense management. Um you know I think we're we're really excited by not just what the rest of this year holds but certainly going into 27 and 28. >> I mean things look fantastic on all fronts and I think the fact that you you know you outperformed your your guidance. I think my my first question there then would be you've given guidance out. Um I mean how how visible is it? I mean it's it's great to have a number out there but I just want to get a sense really of underlying demand where it's [snorts] it seems companies are giving out guidance and just outperforming what they give out. You know for us there was a lot of things that happened intraquarter right you know demand spikes more than expected our customers are seeing better sell through our customers are upgrading the components that they were ordering all these things are happening intraquarter you know we've got inventory that can support that type of dynamic movement but you know as some of these new businesses scale new customers scale sometimes early on they're not necessarily as confident on kind of the scale of that um ramp and as that ramp happens they become more confident on what demand looks like and they upsize the orders and so yes I think you know we we always try to give a balanced view on what guidance uses a realistic view on kind of what we think we can do but certainly um you know the hope is that you know the the customers are seeing better demand and I think we're certainly seeing that through the share gains and through the the advancements into new markets, new businesses, and new customers. One of the things that we really are proud of is a lot of these new businesses, the visibility and the durability is is great. These are products, our solutions are going into products that are, you know, in cars and base stations and in data centers that are, you know, part of devices that are tens of thousands, hundreds of thousands, millions of dollars. And so, you know, that type of visibility, that type of design win has [clears throat] better visibility. It's has higher barriers to entry, gives us longerterm understanding as to kind of how we need to source, what we need to source, what inventory we need to have. So, it really helps drive that long-term visibility for us and gives us confidence on, you know, not just second quarter, third quarter doing well, but next two years, three years doing well. the again don't get me wrong that's a fantastic problem to have. Um what are your conversations like now with uh with your suppliers? I just want to understand how you're managing your future capacity as most demand comes online. >> Yeah, you know I think it's well known that you know TSMC and and a lot of the substrate uh folks are tight on capacity. Substrate availability is tight. We're fortunate that we're one of the top customers of TSMC and we've been a great they've been a great partner of ours. We've been a great partner of them for 20 plus years. So, you know, they've always been very helpful for us in being able to expand our capacity, expand our allocation, expand our our wafer availability um in real time. And so, working with them closely to ensure that we've got a good understanding as to kind of what the base case looks like versus kind of what upside looks like. and being having that ability to flex with them. Uh substrates, you know, as you guys all know, has been tight. Um our customers have been willing to work with us to find alternative substrates that help ease some of those supply constraints. We've got, you know, a tier, you know, just best-in-class operations team that have been on this since the very early days. and so have been ahead of making sure that as substrate availability becomes tighter and tighter, we've got alternatives that we can scale with our customers. So, we're we're confident that even as the business more than doubles this year, um we've got the capacity to support that. >> Uh you you talked about these these ramp ups that you've had obviously with Nvidia. I think you have one coming up with Google as well. Um can you tell us a bit more about I mean it seems like you're seeing a lot of growth on that front here. Should I be worried about concentration risk I if in any event that you know we start to see volumes start to to to fade a little bit or that you know this ramp up is is is actually going to be delayed anyway. >> Yeah. So a lot of these programs that you're referring to, you know, coming in later this year going into 27, driving growth 27 and 28th as well, but these are, you know, certainly some examples that folks have talked about, but behind the scenes, it's a much broader range of customers and markets, uh, solutions that we're supporting, right? Um, you know, we've got a telco company for one of the largest telco equipment companies out there work using our b our boot drives for their base stations that'll start scaling in the back half of the year. We've got virtually every automaker around the world, whether it's, you know, traditional internal combustion engine, whether it's battery electric, whether it's autonomous, what have you, right? We have virtually every automaker using our solutions as well. So, you know, point being is that a lot of this growing business is scaling across a very broad range of customers. Certainly, people like to talk about the largest GPU company or the largest search company and those are, you know, big names to be associated with and we're certainly very proud of the wins we have there, but if you just kind of double click a little bit beyond that, you know, the the the breath and scale of other customers is pretty fantastic as well. So, it's a really diversified business, diversified end markets, a diver diversified customer base that we have. And so, we're not um we're not concerned that there's going to be an outsized contribution from one customer or one product or one vertical that's going to have issues down the road. And that's, you know, for our business, having the diversification helps us kind of work through the cyclicality of certain end markets in any given period, right? Having that wide range of end markets helps smooth that out. >> Yeah. And and certainly, I mean, as you say, you're shifting beyond just the consumer-driven side of things, but I guess it is still a headwind for Silicon Motion is, of course, um the potential slowdown what we're seeing in the PC market, smartphone market. I think during the analyst call, you guys were asked about the China uh outlook there. What is the demand picture looking like to you on that front here? And what what do you think is going to be the outlook moving forward? Yeah, we're certainly seeing that, right? I mean, I think certainly on especially on the low end in China, it's been an incredibly difficult market there. Um, we don't really do a whole lot on the low end. We're more mainstream to premium side. So, we and that's where a lot of the handset OEMs are focusing more of their attention on a low-end handset. The cost of memory, the cost of DRAM and NAND far exceeds kind of the affordability of that product. So where you're seeing the biggest hit in unit volume and demand is on the low end. Mainstream premium ones are still holding up a little bit better and that's where we see um most of our business and certainly the share gains that we've talked about here is doing wonders. We're going to be you know almost doubling our smartphone related business this year, consumer and IoT related business this year. Our client SSDs again similar dynamic. low end is where you're seeing a lot more of the pressure. We're not so much at the low end. We're on the mainstream to higher end. Um we're we you know first half this year we've grown 40% yearon year and certainly that's on in the face of a very challenging PC market. And so overall I think the story that we've been talking about the foundation that we've been building in share gains has really be continued to pay dividends. We're seeing flash makers being less interested in the space, more interested in outsourcing, more interested in working with us, and that's helping drive a lot of opportunities. That was Jason Sai, CFO at Silicon Motion, speaking with Bloomberg TV host David Inglace and Ivon Man, bringing you their conversation here on the Daybreak Asia podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday we look at the stories [music] shaping markets, finance, and geopolitics in the Asia-Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore [music] and Australia. I'm Doug Krer, and this is Bloomberg. [music]