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Speaker 2: Armholding shares stumbled around eight percent after the chip designer
Speaker 2: gave what was termed a lukewarm revenue forecast. And what
Speaker 2: we say in our story is that this could raise
Speaker 2: concerns that AI spending is slowing. And we're joined here
Speaker 2: by Kunjohn Sabani, Bloomberg Intelligence Senior Semiconductor analyst on the earning.
Speaker 2: So we got a couple of things going there, the
Speaker 2: broader market and then ARM itself. First of all, did
Speaker 2: you read the forecast as somewhat lukewarm?
Speaker 3: I did. And the thing is, though we don't think
Speaker 3: the AI story for ARM had significant impact here, the
Speaker 3: likely drivers of sort of the myths versus what the
Speaker 3: street had. We're coming from networking and industrial IoT, which
Speaker 3: are not the AI markets, and this weakness has been
Speaker 3: very publicly has been visible across all other semiconductor companies
Speaker 3: coming into this earning. So this is something you know,
Speaker 3: market driven, not AI specific to ARM.
Speaker 1: So when you look at their exposure to the soft
Speaker 1: the smartphone industry, I mean, how does that look to you,
Speaker 1: coin John, Again, the long.
Speaker 3: Term story remains intact. Their percentage share of their V
Speaker 3: nine architecture, which have doubled. The royalty versus the prior
Speaker 3: gen continues to go up each quarter, growing five percent.
Speaker 3: The total person is the royalties every quarter, which we
Speaker 3: think they'll continue, and the biggest beneficiary that penetration coming
Speaker 3: from actually the smartphone markets. So most of the premium
Speaker 3: in fact, almost one hundred percent of the premium smartphones
Speaker 3: run on our architecture, and that is the segment that
Speaker 3: is seeing relatively robust strength over the rest of the
Speaker 3: smartphone market. So they're really benefiting that the unit growth
Speaker 3: is slowing, yes, but they are getting corresponding esp increases
Speaker 3: again due to higher royalties there.
Speaker 2: So the reason I asked you whether or not the
Speaker 2: revenue forecast was luke warm was that it was beyond
Speaker 2: the midpoint. It just wasn't over the high end of
Speaker 2: the range that they gave so you know, I think
Speaker 2: some people would say, well, it was sort of within
Speaker 2: the range, but we have to say that the stock
Speaker 2: maybe is not the best way to read really the
Speaker 2: health of the company, because stock was already up forty
Speaker 2: one percent this year following eight or nine percent. You know,
Speaker 2: is not the end of the world.
Speaker 3: Is it. I know you exactly got it right. Look,
Speaker 3: it was not that bad of a miss. What you
Speaker 3: have going is a combination of two things. Like you said,
Speaker 3: you know what we've seen this earning season, these high
Speaker 3: flying AI stocks who have benefited and from rich multiples
Speaker 3: because of their AI story, have just been priced for perfection,
Speaker 3: where every quarter investors are setting up high expectations of
Speaker 3: significant beats and rays and when that meets reality that look,
Speaker 3: which was again not AI driven, This is what you
Speaker 3: are seeing in terms of stock reaction, bringing them slightly
Speaker 3: back to earth and back close to reality.
Speaker 1: So we know that ARM is roughly ninety percent owned
Speaker 1: by soft Bank, and we had news tonight that soft
Speaker 1: Bank is in talks now to acquire this a British
Speaker 1: chip startup called Graphcore. Do you know anything about graph Core?
Speaker 1: And then kind of give me a sense, give us
Speaker 1: a sense of what's going on with soft Bank as
Speaker 1: it relates to semiconductors.
Speaker 3: I don't cover graph course I might not be the
Speaker 3: most modest person to talk about it. I can just
Speaker 3: quickly allude to it is one of you know it,
Speaker 3: Graphcore is an AI sort of chip or a massive
Speaker 3: chip manufacturing company, and it would make sense, right. Software
Speaker 3: always is looking to invest in the next sort of
Speaker 3: gen AI, whether it's some semi conductors or a hardware companies,
Speaker 3: So that align with that strategy. That makes sense.
Speaker 2: ARM has something of an unusual role in the semiconductor
Speaker 2: industry in that it licenses instructions that software uses to
Speaker 2: communicate with chips. Walk us through a little bit about
Speaker 2: what makes ARM unique.
Speaker 3: Yeah, what makes this unique is it has this unique
Speaker 3: position within the industry where almost every player needs ARM,
Speaker 3: and it has a friendly relationship, which is not what
Speaker 3: you see across the board. Give you an example, most
Speaker 3: of the semiconductor companies use ARMS IP, so they are
Speaker 3: their customers and they prefer ARM. You know, that's good
Speaker 3: for ARM. Most of these semiconductor companies customers and customers,
Speaker 3: which are your cloud guys, your hyperscalers, also are ARMS customers.
Speaker 2: So it.
Speaker 3: Enjoys this really friendly sort of neutral position within the
Speaker 3: ecosystem which no other company has, and to be honest,
Speaker 3: in a lot of market there is no other option,
Speaker 3: like for example, smartphones, they have one hundred percent share.
Speaker 3: When you think about anything not X eighty six architecture,
Speaker 3: whether it's in PCs, whether it's in server CPO, there's
Speaker 3: only one name almost which is ARMED. So it just
Speaker 3: has this really good unique positioning across the ecosystem.
Speaker 1: Do you think that there is still a little bit
Speaker 1: I want to say market access but maybe a little
Speaker 1: too much enthusiasm when it comes to semiconductors visa VI
Speaker 1: artificial intelligence, or do you think the market has it
Speaker 1: about right?
Speaker 3: I think from a fundamental perspective, most of the estimates
Speaker 3: the market has it right. I can't speak to allusion
Speaker 3: because here Bloomberg Intelligence, we don't give price target, so
Speaker 3: I leave that up to it if the market has
Speaker 3: it right when it comes to the richness of the
Speaker 3: multiples that the some of these names are trading.
Speaker 2: Atkonjohn, thanks so much for joining us, Kunjohn Sabani, Bloomberg Intelligence,
Speaker 2: Senior Semiconductor analyst. Taking a closer look at ARM earnings,
Speaker 2: well China's trade data for April are likely to show
Speaker 2: exports and imports swinging back to year on year increases
Speaker 2: after being negative in the last print. Joining us now
Speaker 2: is Eric Ju, Bloomberg economist on China and Hong Kong. Eric,
Speaker 2: why why do we swing back to positive?
Speaker 4: I think so far this year we have seen some
Speaker 4: improving size on export and the March was actually, you know,
Speaker 4: probably a one off blip because we had a very
Speaker 4: strong growth lust and the much last year, so that's
Speaker 4: a very challenging basis fat. So we saw drop in
Speaker 4: the exports last months, but I think now the basil
Speaker 4: fat would be more favorable for April, and usually on
Speaker 4: seasonal you know factors, April would typically you know pick
Speaker 4: up slightly from March. So both factors will support a
Speaker 4: better headline in April, and we would expect to see
Speaker 4: a small increase young year. So in this year's albunctionmen.
Speaker 1: So when you look at exports, Eric, there are two components.
Speaker 1: In my mind, one is kind of the overall global
Speaker 1: economy and the extent to which they're a strong external demand.
Speaker 1: And in the case of China right now, as though
Speaker 1: it's been struggling with a weak currency. When you're dealing
Speaker 1: with an export part of the economy a week currency
Speaker 1: is going to be a big benefit.
Speaker 4: Right, It's some benefit, but I won't say it's a
Speaker 4: big benefit because I think even from policy makers view,
Speaker 4: I think that the fundamental think driving export was still
Speaker 4: the external demand. It's not really the currency issue unless
Speaker 4: you have very you know, a big depression in UM.
Speaker 4: But I think it's marginally it's going to help, but
Speaker 4: I think it's not a fundamental driver.
Speaker 2: We saw a big jump in South Korea's exports, right,
Speaker 2: is that sort of presage what's happening here?
Speaker 4: Yeah, but you have to remember South Korea, it's kind
Speaker 4: of different in terms structure of the exports. You know,
Speaker 4: for health career, it's more on the chips, I think
Speaker 4: their strands this year it's it's more driven by a
Speaker 4: big rebound in the chips shouldment. But I think China
Speaker 4: is a more broad, you know, a goods basket, so
Speaker 4: I think it's more depending on the overall you know,
Speaker 4: a stabiliation of the manufacturing in demand.
Speaker 1: So when we look at Chinese imports, how is domestic
Speaker 1: demand right now?
Speaker 4: I think if you look at iports so far this year,
Speaker 4: it's it's still so so so we haven't seen a
Speaker 4: very clear sign that domes demanded picking up. So we
Speaker 4: still expect a small year on year creamy imports in April.
Speaker 4: But overall we'll say we haven't seen a very good
Speaker 4: sign of some coming point in the domestic demand. I
Speaker 4: think that's still something is confusing departy makers. They have
Speaker 4: to do more, you know, to try to estimulate domestic demand.
Speaker 2: We've heard a lot from the United States and from
Speaker 2: Europe about overcapacity in various industries in China. I'm interested
Speaker 2: in your take on that and the impact that it
Speaker 2: has on, say, the domestic economy.
Speaker 4: Yeah, and I think for this question, I think there
Speaker 4: are two sides both arguments, I think, But from a
Speaker 4: e commics view, I think sometimes it's it's it's not
Speaker 4: really about overcapacity because right, it's it's just a free
Speaker 4: trade that's a two hundred years of theory. Right, It's
Speaker 4: not like every country producing based on your domest demand. Right,
Speaker 4: we have a free trade word. So if there's a
Speaker 4: demand outside of countries, so that doesn't mean you cannot produce,
Speaker 4: You still can produce.
Speaker 1: Well, I hear what you're saying, although we just were
Speaker 1: talking about this new move from the government in China,
Speaker 1: new rules drafted it slowing the expansion of the domestic
Speaker 1: battery industry. So, I mean, I hear what you're saying
Speaker 1: in terms of free trade, but are there perhaps segments
Speaker 1: of the manufacturing economy in China that that have a
Speaker 1: strong issue here when it comes to overtire past.
Speaker 4: I think it's it's sometimes it's also you know, even
Speaker 4: within China there could be some over compathitive problem, you know,
Speaker 4: UV or batteries, because I heard from industry that the
Speaker 4: domest demand for electrick vehicle is really you know, it's
Speaker 4: close to four So every producer that are trying to
Speaker 4: go outside because there's no much more demand new demand
Speaker 4: left in China. So I think in terms of that,
Speaker 4: you can say, yeah, we are producing more than what
Speaker 4: domestic consumers can buy, but there's still a big, huge
Speaker 4: overseas market. But the thing is now they face more
Speaker 4: and more trade proper frictions on that front.
Speaker 2: Yeah, the reason I asked you just briefly is that
Speaker 2: I wonder whether or not it kind of adds to
Speaker 2: deflationary considerations when you overproduce at home.
Speaker 4: Yeah, it's uh, but I think the disflationary story. I
Speaker 4: think we did look at the inflation data well decompos
Speaker 4: into supply or demand factors. I think since the second
Speaker 4: half of this year, the weak inflation was still mostly
Speaker 4: driven by the weak demand side. It's not supply side.
Speaker 4: So I think it's still for China, it's the main
Speaker 4: reason is to people are not willing to spend. The
Speaker 4: consumption is too two week.
Speaker 2: Thanks very much for joining us here in our studios,
Speaker 2: Eric Juwe Bloomberg economists covering China and Hong Kong. Joining
Speaker 2: us now on the program is Julia Wong, executive director
Speaker 2: and global market strategists at JP Morgan Private Bank. Julia,
Speaker 2: thanks very much for coming into our studios. So when
Speaker 2: in a bull market, it would take a brave person
Speaker 2: I suppose to say, well it's over now we're going
Speaker 2: the other direction. But I put this question to you,
Speaker 2: are are traders at the moment are we seeing from
Speaker 2: the caution in markets? Are they driven more by FOMO
Speaker 2: than they are about having confidence in the fundamentals?
Speaker 5: Well, I think that if you think about the incredible
Speaker 5: gains for the aquity market in the US and also
Speaker 5: you know some parts of the world, since basically late
Speaker 5: last year is you know, many markets were up ten
Speaker 5: twenty percent over the last three four months, so I
Speaker 5: think that it was it was it was natural, almost expected,
Speaker 5: a healthy adjustment as we had, you know, into April
Speaker 5: to have to see a pullback in resentiment. We saw
Speaker 5: some rebalancing our flows. We saw some investors adjusting their
Speaker 5: positions here and they're just to make sure they're not
Speaker 5: overly uh, you know, attached to one one sector or
Speaker 5: one theme. But we do think that the fundamental thesis
Speaker 5: for equities have not really changed and they're still quite positive.
Speaker 5: You know, you talked about the fat. The fat is
Speaker 5: you know, maybe they're not going to cut so soon,
Speaker 5: but they're not hiking. The direction of monetropolo still unchanged,
Speaker 5: so that factor is still there. And then you have
Speaker 5: the structural changes in the global economy artificial intelligence. I mean,
Speaker 5: you can debate the speed and who's going to Wigan
Speaker 5: and who's going to lose, but the structural change is there.
Speaker 5: So we still think that. And of course the economy globally,
Speaker 5: particularly in the US, continue to hold up and the
Speaker 5: rest of the world is a little bit softer, but
Speaker 5: it's not quite recessionary. So we do think that the
Speaker 5: overall map backdrop it's still there, and that's why we
Speaker 5: do think that the risk asset equity market in particular
Speaker 5: will probably recover from this consolidation phase.
Speaker 1: Julia, can we talk a little bit about what's happening
Speaker 1: to the Chinese equity markets. I mean, this has been
Speaker 1: a pretty remarkable recovery so far. This here, how are
Speaker 1: you reading this? What do you understand it's about?
Speaker 5: So we think it's a tactical recovery from an oversold position.
Speaker 5: So if you think about coming into the year, Chinese
Speaker 5: market were down. You know, Homesong market was down to
Speaker 5: nearly below fifteen thousand in late January, when the rest
Speaker 5: of the world was powering ahead, and of course then
Speaker 5: the investor were after three months of very strong gains
Speaker 5: in the US and the rest of the world, investors
Speaker 5: wanted to take some position away to diversify, and China
Speaker 5: meantime did not fall further because the economy seems like
Speaker 5: it was holding up, even though we debate the the
Speaker 5: sustainability of that. So I think that led to a
Speaker 5: return of flows to this part of the world, which
Speaker 5: is the reason, alongside and demanding valuation that drove over
Speaker 5: recovery in markets. So we do agree that, you know,
Speaker 5: the recovery probably was overdue. It was an oversold market
Speaker 5: in January. But we do think that fundamentally the economy
Speaker 5: still does face challenges. There are still uncertainty you had,
Speaker 5: So we do think that it's probably the rally. Probably
Speaker 5: most of that probably already happened, and that's where we are.
Speaker 2: So it's not on your conviction call list. You're talking
Speaker 2: about buying on the dip in Japanese equities and US
Speaker 2: equities as well. And then as you already talked about
Speaker 2: some of the secular themes like artificial intelligence and semiconductors,
Speaker 2: let's pivot quickly to Japan, although I do actually let
Speaker 2: me ask you about Hong Kong first, and then perhaps
Speaker 2: you can pivot if Doug is willing. There was an
Speaker 2: interesting story that we looked at today that's tied to
Speaker 2: a conference that is actually today that Hong Kong is organizing,
Speaker 2: Hong Kong Exchanges and Clearing is organizing with the Saudidol
Speaker 2: group and they're looking for, you know, some extra support
Speaker 2: for the Hong Kong market. Do you see Hong Kong
Speaker 2: as having the ability perhaps to move ahead if China doesn't.
Speaker 5: I think from an economic cycle perspective, is increasingly tied
Speaker 5: to China's economic cycle, so I think that. But I
Speaker 5: do think from a market structure perspective, there are all
Speaker 5: these longer term adjustments that you know, the regulators here
Speaker 5: can make that will make that will you know, further
Speaker 5: make the market more resilient. I do think that these are, however,
Speaker 5: quite long term, and they're probably not the factor that
Speaker 5: really explained why the market rebounded the way it did.
Speaker 5: I do think that to see a more sustain the
Speaker 5: recovery in the market from in this part of the world,
Speaker 5: you do need to see a turnaround in China's growth
Speaker 5: outlook or a clarity or turnaround in China's policy direction,
Speaker 5: and neither of these two things have really changed at
Speaker 5: this point.
Speaker 1: Before we get to Japan, and we'll get there in
Speaker 1: a moment, I want to talk about the earnings that
Speaker 1: were likely to get next week Big Now Games out
Speaker 1: of China tencent Ali Baba JD dot com by do
Speaker 1: what what is your sense of what we're likely to
Speaker 1: get next week?
Speaker 3: So I'm not.
Speaker 5: Equity expert by far, but I think that you know
Speaker 5: from what we can what we can see from a
Speaker 5: broad perspective, I do think that investors sentiment towards big
Speaker 5: tech in China has already warmed quite a bit or
Speaker 5: particularly you know, you mentioned Tens and all these big names.
Speaker 5: There are things that we know, like gaming, for example,
Speaker 5: the regulatory process worked a little better. So all of
Speaker 5: that gradually has you know, dripped through to market and
Speaker 5: probably are enterprice at this point. So we do think
Speaker 5: that earnings, of course are important, but you know, we
Speaker 5: do need to see a sustained turnaround in their guidance
Speaker 5: over the next few years of the market to do
Speaker 5: even better from where it is today.
Speaker 2: Okay, to Japan, we we do have a little bit
Speaker 2: of a mix in the market. I've heard recently a
Speaker 2: few commentators saying that they don't really buy into, you know,
Speaker 2: the structural reform and the whole bull market story on
Speaker 2: Japan that you know, they've made all these improvements and such.
Speaker 2: Others are sticking with that and see a lot of
Speaker 2: potential for the Japanese market going forward.
Speaker 5: Your thoughts there, Yeah, so I think that there are
Speaker 5: two big structural changes. One is actually what's happened in
Speaker 5: the global economy, the global supply chain shifts the rival
Speaker 5: of AI, and as I said earlier, we can debate
Speaker 5: the pace of it, but it probably is a secular
Speaker 5: change that will be with us for next five, ten,
Speaker 5: type or even a decade. So that's one thing that
Speaker 5: japan industry is just in a position to benefit from.
Speaker 5: They didn't create this, but you know, they're on the
Speaker 5: supply chain, they're monopolies, they can benefit from it. The
Speaker 5: second thing is we do think the reflation story is
Speaker 5: taking hold. There is a rise in household and business
Speaker 5: expectations for prices and wage growth for the first time
Speaker 5: in thirty years. You can see that in the range
Speaker 5: of data. So I think that this will take time
Speaker 5: to play play out. It's not a one night or
Speaker 5: you know, even one year story. But they move away
Speaker 5: from reflation since seems surreal. So for those two reasons,
Speaker 5: both of which are very structural and are not so
Speaker 5: tied with the day to day moving the effects market
Speaker 5: or resentiment, we do think that Japan is an investable
Speaker 5: market again for thirty years, and that's a very different
Speaker 5: position from where it was in the last decade. So
Speaker 5: globally invested in so underweight this market, but suddenly it's investible,
Speaker 5: So we think that this is this is a real
Speaker 5: shift that's happening.
Speaker 1: Julia, how do you understand the reliance that Japan has
Speaker 1: on a strong Chinese economy? Is that still the case
Speaker 1: right now?
Speaker 5: So if you look at bilateral trade, you know, China
Speaker 5: is to the biggest trade partner for Japan. Japan is
Speaker 5: maybe third or fifth biggest trade partner for China. So
Speaker 5: bilateral trade is strong, and China imports a lot of
Speaker 5: robotics in high end equipment from Japan. And while China
Speaker 5: has this long term goal to be self sufficient and
Speaker 5: move up the value chain, in the process through which
Speaker 5: they get there, they rely a lot on Japanese technologies
Speaker 5: and businesses. So I think that the ties will stay
Speaker 5: and that is actually a small positive for Japan as well,
Speaker 5: because that's you know, an area of demand that they
Speaker 5: will see for the next couple of years.
Speaker 2: So if you really boil it down with what's happening
Speaker 2: in China, is it's safe to say that we've seen
Speaker 2: a cyclical upturn, but we still have secular headwinds.
Speaker 5: That's one way to one way to put it. I
Speaker 5: think cyclical stability is another way to put it. In
Speaker 5: a sense. The stability allows investor to take the tail
Speaker 5: risk off the table or at least reduce the probability
Speaker 5: of that happening. Together with what's happening globally with the
Speaker 5: diversification of flows, is what I think drove the market recovery.
Speaker 5: But we think that the concerns, you know, next six
Speaker 5: to twelve months are you know, housing market is still
Speaker 5: declining by sharp right every month, and there is a
Speaker 5: constraint of what policymakers can do on a stimulus front.
Speaker 5: All of these are still concerns.
Speaker 2: All right, Julia, thanks very much for joining us. Julia Wong,
Speaker 2: Executive director of Global Market Strategist at JP Morgan Private Bank.
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