The $530 billion semiconductor industry is increasingly divided between companies that are riding the wave of artificial intelligence (AI) and those that are not. And, judging by the first results of this earnings season, this chasm could deepen even further.
“Without AI, the market would be very sad,” said Christophe Fouquet, CEO of ASML Holding NV, during a conference call last week, after the Dutch chip production equipment maker cut its 2025 sales forecast due to weak demand in areas outside of AI.
The ASML results have raised new concerns about the health of the semiconductor industry, which faces weaknesses in key segments such as personal computers and automobiles. Furthermore, the industry has been impacted by growing geopolitical tensions between the US and China, which could cut off access to the Chinese market, the largest in the world.
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Taiwan Semiconductor Manufacturing Co. (TSMC), which counts customers including Apple and Nvidia, eased some of those fears by raising its revenue forecast to 2024. While its growth is driven by AI-related factors, overall demand for chips has “stabilized” and started to improve , according to CEO CC Wei.
The Philadelphia Stock Exchange’s semiconductor index, known by the symbol SOX, plunged last week, falling 5.3% on Tuesday alone, before paring losses following TSMC’s results on Thursday.
Highlighting the sector’s bifurcation, semiconductor equipment makers such as ASML and Lam Research were among the biggest decliners, while some chipmakers such as Marvell Technology managed to post gains.
“We should expect this divergence to continue, as it is correct to assume it is all due to AI,” said Ryuta Makino, an analyst at Gabelli Funds, who predicts these distinct paths will remain until at least 2025.
Global economic thermometer
The semiconductor sector is often seen as a bellwether for the global economy, as chips are essential for a wide range of products, from data center servers to washing machines. The companies that provide the equipment used to manufacture these chips are at the forefront of the industry.
Before semiconductor companies begin production, it takes months to build, install and test the machines needed to make chips. As a result, companies like ASML take an unusually long-term view of their customer sentiment. Right now they are issuing cautionary signals for everything except AI. For example, automotive and industrial suppliers are experiencing a drop in demand as customers still hold high inventories.
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Additionally, Intel is cutting costs and delaying the construction of new factories due to falling sales and increasing losses. Samsung Electronics apologized to investors this month after delays in the production of high-bandwidth memory chips resulted in disappointing financial results.
Investors will also be paying close attention to Texas Instruments’ results, due this Tuesday, as its analog chips are widely used by a variety of customers.
Taken together, it appears a difficult road ahead for equipment manufacturers, many of which saw their inventories reach record levels earlier this year. Some investors are already dumping these shares, anticipating what is to come.
ASML suffered its worst week since early September, with its US-listed shares falling 14%. Applied Materials, the largest U.S. maker of chip equipment, sank 9.1%, while KLA and Lam Research each fell more than 12%.
“We have been more cautious with other names in the semiconductor equipment sector,” Cantor Fitzgerald analyst CJ Muse wrote in a research note. “But we believed that a company with a longer term, like ASML, would outperform. Clearly, we were wrong.”
Following ASML’s results, the analyst stated that he expects further declines in the shares.
Investors will have more information this week when Lam Research releases its results on October 23. KLA will announce it on October 30th and Applied Materials on November 14th.
To dominate her
The situation is quite different for semiconductor companies that will benefit from Big Tech’s continued investment in AI development. Microsoft, Alphabet, Amazon.com and Meta Platforms invested more than $50 billion in the second quarter, with much of it going to component manufacturers. And many of these giants say they plan to spend even more in the coming quarters to expand their AI infrastructures.
AI semiconductor industry sales are expected to jump to $245 billion in 2025, compared with an estimated $168 billion this year, according to Solita Marcelli, chief investment officer at UBS Global Wealth Management. She recommended that clients increase their positions in AI-related chipmakers following the ASML results.
“We continue to see a strong growth outlook for AI-linked semiconductors and are closely watching companies’ guidance on future demand in the coming days and weeks,” Marcelli wrote in a research note last week.
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The main beneficiary of all this investment is Nvidia, whose chips dominate the AI accelerator market. The company’s shares hit a new record last week after CEO Jensen Huang said the new Blackwell chip is in full production and in strong demand. Nvidia shares are up more than 175% in 2024 and are on track to overtake Apple as the world’s most valuable company, with a market value of nearly $3.4 trillion.
Other companies expected to benefit from increased investment in AI include TSMC, Broadcom, ARM Holdings, Micron Technology and Advanced Micro Devices (AMD), which is trying to challenge Nvidia’s dominance in the accelerator market.
However, even some of the winners are not immune to weaknesses outside of AI. Broadcom, for example, saw its shares plummet last month after reporting disappointing results in non-AI segments.
“Eventually there will be a valuation case for chipmakers outside of AI, and at some point a strengthening economy will cause demand to recover,” said Tim Ghriskey, senior strategist at Ingalls & Snyder. “However, it is a matter of time. For now, AI will continue to be the focus.”
