Can AI Drive PC Growth?

Earnings Highlights

Atomera (ATOM) reported last night, and after listening to the conference call we think we’re missing something. The company reported revenue of $550k, a touch above the consensus estimate of $500k for the December quarter but posted a larger EPS loss of ($0.18) vs. an estimated (0.11). The company is an early stage endeavor, despite being public for at least eight years since it changed its name from Mears. While it would be easy to take the $550k revenue as a sign that the company has finally crossed the threshold and is about to deliver on the promise of its novel technology, there was nothing on the conference call that left us with that impression, at least not any time soon. The $550k was a one time affair from ST Micro, and while that does bode well for future revenue growth once ST Micro starts building power semiconductors using Atomera’s technology, that doesn’t sound like it will happen for at least a year or two. And ST Micro is likely the first customer that will go to market with Atomera’s technology.

The company does have many other irons in the fire including a growing relationship with Soitec, but that will not likely lead to significant revenue for at least 1-2 years as they are in the early stages of co-development for RF silicon-on-insulator products. And we don’t want to leave you with the impression that we do not like the technology or see its promise, but the business is quite early-stage to be a public company. For March, there may be additional revenue, but not likely much more than $100k, so it doesn’t look like we’re at the beginning of sequential revenue growth. The company has an EBITDA net loss of approximately $3.5-$4.5 million per quarter and $19.5 million in cash and short-term investments, giving them little more than a year before they hit the end of the runway. Barring an extreme stroke of good luck, the company will have to raise additional cash to keep the party going, which will result in dilution for shareholders. We don’t want to take anything away from what management has achieved in terms of furthering the technology toward commercialization in CY23, as they have achieved quite a bit. Enough, in fact, that this could signal a transformative moment for the company. However, there is still a long road ahead, and the $213 million market cap seems a bit extreme given where they are from a technology development standpoint, a customer standpoint and a financial standpoint.

Global Foundries (GFS) reported yesterday before market open, but given its market position, there are a number of interesting takeaways to keep front and center. Automotive remains the strongest segment, although the growth rate is slowing. While automotive revenue was up 177% Y/Y to over $1.0 billion, it was only up 5% sequentially, signaling that GFS is in desperate need of a rebound in another segment or two if it wants to show growth in CY24. With persistently higher interest rates, end-user demand for autos is declining, and retailers are sitting on inventory after over-ordering through the pandemic. Management stated they believe they can continue to grow the top line in automotive in CY24, but admitted that demand will likely counter their new product introductions and design wins to great extent.

On a positive note, its personal computing segment was up 127% Q/Q to $84 million in revenue. While this segment is not large enough to benefit GFS significantly, it does signal potential strength returning to the PC market, which we have heard from others over the past two weeks. Much of this could be the result of optimism on the part of the PC vendors with the introduction of AI at the edge in new computers, and we will have to see if consumer and enterprise demand follows. Mobile device, communications and datacenter, home and industrial IoT revenue were lower Q/Q and Y/Y.

The company reported December revenue of $1.85 billion, in-line with consensus estimates, and EPS of $0.64, higher than the expected $0.58. For March, management guided lower than consensus to $1.52 billion in revenue at the midpoint, significantly lower than analyst expectations of $1.76 billion. EPS is now expected to be $0.24 at the midpoint, lower than consensus of $0.46. The March guidance was bleak, but not completely out of line given the company’s exposure to seasonally weak consumer markets outside of automotive. Management did state that they expect a return to sequential quarterly growth in the June quarter, but it does appear likely that GFS will have another year of declining revenue.

SiTime (SITM), a leading maker of precision timing semiconductors for multiple electronics markets, reported revenue at the higher end of its guided range at $42.4 million in the December quarter vs. analyst’ expectations of $41.7 million and non-GAAP earnings-per-share was $0.24 vs. consensus estimates of $0.20. Management did not miss the opportunity on the call to discuss how it will benefit from the artificial intelligence “super cycle” that is emerging, stating that the massive amount of data processing required for AI will require network infrastructure upgrades, which require precision timing. SiTime is working with two of the top cloud service providers and the top server provider that use its new clock and oscillator products. The company is also building two variants of its clock products for two of “the top AI companies.” Management expects the AI/datacenter segment to grow by 50% in 2024 off of a relatively small base. The Industrial, Aerospace and Defense business was up 19% Q/Q in December, with Communications and Enterprise up 64%, with Mobile, IoT and Consumer down 4% sequentially in the quarter.

For March, management is guiding revenue lower than consensus at $32.0 million at the mid-point vs. $36.6 million, but is guiding EPS higher at $0.145 vs. analyst consensus of $0.01. The company does believe it will experience sequential revenue growth each quarter for the remainder of the year, beginning in the June quarter. During the Q&A management stated that it expects every segment to grow other than communications.

The lower March guidance will potentially lead to pressure on the stock for the next day or two, which will likely create a great entry point for those on the sidelines.

Insider Activity

Since yesterday, there has been only one sale of note, another 400k shares in MTSI. The sale was executed by Susan Ocampo, the same director that sold 466k shares last week. Together the sales represent 6% of Susan’s ownership, roughly 15 million shares. However, Ms. Ocampo is likely exiting the stock after the passing of (her husband?) John Ocampo in November of 2023, the Chairman of the Board of Directors of MTSI since its inception in 2009. While the sale of potentially 15 million shares of stock may put pressure on the stock in the near term, and we don’t know that she is going to sell it all, it shouldn’t be viewed as a red flag for the business, as it is understandable that she may just want to move on.

In Other News

• The Wall Street Journal posted an interesting article yesterday after feedback from early adopters of Microsoft Copilot were less than impressed, questioning the $30/month price tag, putting the company’s $13 billion investment at risk. Link

• Apple researchers have unveiled a new AI tool called Keyframer, which uses large language models to animate still images with natural language prompts, bringing animation to the masses. Link

• AI girlfriends and boyfriends are more real than ever. Link

• The recent impact of AI on the financial markets is driving a shift in demand for workers. Employers are looking for AI-skilled workers, causing casualties for many, and opportunities for those with the latest skills. Link

• Microsoft says US rivals are beginning to use generative AI in offensive cyber operations. Link

Chart of the Day

SiTime (SITM) has had a tough couple of years given its involvement in the consumer electronics, automotive and communications markets. The stock is far below its all time high of $341.77, which was arguably too high. But the stock has been range-bound since hitting a low of around $73.00 in October of last year. It has experienced three successive lows of approximately $80.00, $90.00 and $101.00 since then, and while it will likely struggle a bit after the report last night given the weaker March guidance, it likely won’t get anywhere near the last low. The most likely next move, given what we’re seeing in the overall market and with the 50% projected annual growth in the company’s AI business, is higher. And SITM could see a significant price increase throughout calendar year 2024 given the pennant set-up this chart is displaying. We would be buyers on any weakness today.

Earnings Calendar