MediaTek Earnings: AI and Automotive Become Two New Drivers As Smartphone Recovery Stays Slow

Our MediaTek 2454 fair value estimate sheds 4% to TWD 1,400 per share after factoring in a weaker second-half 2023 outlook for all segments. We find MediaTek undervalued for its continued ability to defend prices and its automotive partnership with Nvidia slightly improves visibility of long-term growth. Smartphones are showing signs of recovery and could support the share price for the short term, and we observe the first mentions of automotive revenue improving sentiment for the company. The key upside to our forecasts is MediaTek selling more mobile chips due to demand induced by artificial intelligence, or AI, computing, and a potential business model of offloading computations from cloud providers.

MediaTek guides for September-quarter revenue to be up 7.5% sequentially to TWD 105 billion, gross margin to be 47%, and operating margin to be 15% at their respective midpoints. Both margins are flat from the June quarter. The revenue guidance is below our expectations and shows smartphone demand recovery is slower than we believe. Management did not provide updated estimates on industry-level shipments, but we reduced 2023 mobile chip sales forecasts by another 6% to reflect a more subdued recovery. Revenue estimates for 2023 of nonmobile segments decreased by 12%, as high-end additions like Wi-Fi 7 chips are not enough to offset overall weakness in home appliances.

The company views “edge” AI computing as a growth driver for its mobile chips, but says it is hard to quantify, as there are no dedicated AI chips on smartphones. Management gave an example of using voice prompts to create images (like Stable Diffusion), but computations will take place on a smartphone rather than on a cloud platform. While generative AI has huge potential, we have not factored this into our volume forecasts as smartphone chips rarely get used to their full capabilities, and supporting generative AI may drive chip prices higher and stifle replacements.