In May of this year, Taiwan Semiconductor stated during its 2024 Q1 earnings conference call that it had lowered its chip business growth expectations from "over 10%" to 10%. One reason is that TSMC has lowered its 2024 automotive chip demand expectations. This has also raised concerns in the market about the future of automotive chips. As the world's leading automotive chip company, NXP Semiconductors has obviously been the first to feel the market's chill.

According to the Smart Finance app, after the US stock market closed on July 22, the automotive chip giant NXP Semiconductors announced its Q2 2024 financial report. The data shows that in Q2, NXP Semiconductors' total revenue declined by 5% year-on-year to $3.13 billion; during the reporting period, NXP Semiconductors' non-GAAP operating profit was $1.071 billion, a decrease of 7% year-on-year and 1% sequentially. The above data clearly reflects NXP Semiconductors' main business - the automotive chip business is still in a slump.

The stagnation in NXP Semiconductors' performance was almost immediately reflected in the secondary market. On July 23, NXP Semiconductors' stock price fell sharply by 7.58%, with a trading volume of 66.6543 million shares and a transaction value of as high as $1.733 billion, bringing the turnover rate for the day to 2.6%. Since NXP Semiconductors hit a new high of $296.08 in stock price during the trading session on July 17, this significant decline reflects to a certain extent the shift in investor sentiment from aggressive to conservative.

The slowdown in performance was expected.

Many market views believe that the decline in NXP Semiconductors performance may become a barometer for the global automotive chip industry. From the data, in Q2 2024, sales of NXP Semiconductors' largest business unit - the automotive chip unit - fell by 7% year-on-year to $1.728 billion, a sequentially decrease of 4%.

In fact, the market had expected the decline in NXP Semiconductors performance this quarter. According to Smart Finance, NXP Semiconductors had already experienced a significant slowdown in performance in Q1 of this year.

Looking at the key financial data disclosed in NXP Semiconductors' Q1 2024 financial report, NXP Semiconductors' revenue for that period was $3.126 billion, an increase of 0.2% year-on-year, and a decrease of 9% sequentially; non-GAAP operating profit was $1.08 billion, a decrease of 0.5% year-on-year and 11% sequentially; non-GAAP operating profit margin also fell from 35.6% in Q4 of last year to 34.5% this year, and is lower than the same period last year of 34.8%. In terms of division performance, its automotive market revenue, which generates the most revenue, was $1.804 billion, a decrease of 1% year-on-year and 5% sequentially.

Behind the slowdown in revenue growth, there was an obvious increase in inventory for NXP Semiconductors' automotive market division during Q1. According to the data, NXP Semiconductors' Q1 channel inventory was 1.6 months, flat year-on-year and up by 0.1 months sequentially; ending inventory amount was $2.102 billion, an increase of 6.3% year-on-year, a decrease of 1.5% quarter-on-quarter. Inventory turnover days were 144, an increase of 12 days compared to the previous quarter and 9 days compared to the same period last year.

Looking at the key financial data for Q2, NXP Semiconductors' current revenue was $3.13 billion, a 5.2% decrease year-on-year, which roughly meets analyst expectations; non-GAAP diluted earnings per share for the quarter was $3.20, down 6.7% year-on-year and 1.2% sequentially, which also met expectations.

On a non-GAAP basis, NXP Semiconductors' Q2 gross profit was $1.833 billion, down 5% year-on-year, and the current gross profit margin was 58.6%, slightly higher than the same period last year of 58.4%; Non-GAAP operating profit was $1.071 billion, down 7.3% year-on-year, with an operating margin of 34.3%, lower than last year's Q2 of 35.0%. At the same time, the inventory value of NXP Semiconductors further increased to $2.148 billion, an increase of 1.95% year-on-year and 2.19% sequentially on a non-GAAP basis.

If inventory changes continue to be a significant cash outflow and the driving force brought by the increase in accounts payable is reversing, NXP Semiconductors' free cash flow may encounter significant obstacles in the future.

Is the global automotive chip industry facing its darkest hour?

NXP Semiconductors' decline in performance is just a microcosm of the decline in the global automotive chip industry. In fact, the decline in the automotive chip industry is closely related to the market supply and demand conversion in the downstream automotive industry.

From the perspective of the industry chain, the key driving factors for the growth of the automotive chip market are electric vehicles (EVs) and in-car intelligent auxiliary systems. But now both of these markets are experiencing a slowdown in growth or overcapacity.

According to statistics previously released by research company Canalys, global sales of electric vehicles will reach about 13.7 million units in 2023, with a predicted growth rate of 29%, and a penetration rate of 17.1%. By 2024, the growth rate of the global electric vehicle market will decrease to 27.1%. North America's electric vehicle market is expected to grow by 26.8%, but compared to the Greater China region, the penetration rate of electric vehicles in the North American market is the lowest, at 12.5%. It can be seen that compared to 2023, this year there are obvious signs of slowing demand for electric vehicles worldwide, especially in the European and American markets.

On the other hand, on the chip side of in-car intelligent assisted driving, overcapacity is also affecting the growth of the automotive chip industry.

Looking at the development of the global semiconductor industry in recent years, after strong growth of 26% in 2021 due to the pandemic, the overall semiconductor market has been weak over the past two years. According to data from WSTS, the semiconductor market will only grow by 3.3% in 2022 and decrease by 8.2% in 2023. WSTS's forecast in May 2024 is that the strong growth in 2024 and 2025 will be 16.0% and 12.5%, respectively.

In the past two years, automotive chips have been the only bright spot in the semiconductor market. IDC estimates that automotive semiconductors will grow by 17% in 2022 and 10% in 2023. Earlier, IDC predicted that the growth of the automotive chip market in the next three years will slow to a range of 5% -7%.

In fact, the negative impact of the industry slowdown can be seen from the Q1 financial reports of major automotive chip manufacturers this year. In addition to NXP Semiconductors, Mobileye's Q1 revenue fell 48% year-on-year, mainly due to a decrease in chip orders and excessive inventory. As one of the contract manufacturers behind Mobileye, STMicroelectronics significantly reduced its performance expectations for 2024 after the Q1 quarter this year. Data shows that STMicroelectronics sales in Q1 this year were US $3.47 billion, a year-on-year decrease of 18.4%; net profit for the period fell 50.9% to US $0.513 billion. At the same time, the company expects full-year revenue to be about 11% lower than its expected target.

In addition, as one of the world's leading suppliers of automotive CIS chips, ON Semiconductor's Q1 revenue fell 5% year-on-year this year; among them, revenue from the ISG business under the automotive CIS category fell by 16% year-on-year. The main influencing factors are weak downstream markets and excessive inventory.

At present, the "darkest moment" of global automotive chip manufacturers will continue in the second half of this year. According to NXP Semiconductors' outlook for Q3 of this year, the revenue range up to September is expected to be between US $3.15 billion and US $3.35 billion. According to expected data compiled by institutions, the midpoint of this revenue range is lower than the average forecast of analysts of US $3.35 billion.

Although NXP Semiconductors' stock price has cumulatively risen 15% this year from the beginning to now in the US stock market, because the future development of the overall automotive chip industry is not clear, Citigroup's current rating for NXP Semiconductors is still "sell", indicating that it has significant downside risk.