U.S. Semiconductors & Semiconductor Capital Equipment| Q2 2023 Preview: AI and EveryoneElse

The main focus in upcoming earnings reports is expected to be on AI, with higher capex expected from cloud service providers (CSPs) reinvigorating the halo trade. Industrial, Enterprise, and Communications sectors may face headwinds while all eyes will be on the Auto sector for signs of weakness. There are concerns about stretched valuations particularly among SMID growth stocks, even though estimates have not moved higher.

NVDA is viewed as the best stock to participate in the AI theme, with potential EPS of $20+ next year after earnings. Compute could be worse due to softness in traditional server and PC markets. AMD may see a softer outlook but investors may look through it. INTC may struggle without a catalyst. Increased AI spending by major players like MSFT, AMZN, GOOG, META, and NVDA's earnings could be a catalyst for the AI trade.

Little upside is expected for Semi Cap estimates, with consensus WFE above even raised outlooks as Memory continues to deteriorate, and leading edge Foundry falters. Investors are hopeful for a bounce back year in 2025 but the work suggests another flat year. Analog end markets are mixed, with ADI and TXN corrections being painted as specific issues. Headwinds may be faced by Industrial, Enterprise, and Comm in this earnings period.

Few catalysts are expected in the RF space into next year, and SWKS is downgraded to EW as the stock closes the valuation gap with QRVO and approaches our $115 PT. The AAPL content story ended up flat this year, and there is not much to look forward to in Android with the market still underperforming. There is a risk to September guidance for QCOM given Android weakness, but some upside may be seen if QCOM provides an update on the possibility of keeping the modem for the IP16.