THERE’S a growing divide in the US$530 billion semiconductor industry between the companies that are riding the artificial intelligence (AI) wave and those that are not. And looking at the early returns from this earnings season, that gulf could soon widen into an abyss.
“Without AI, the market would be very sad,” Christophe Fouquet, chief executive of ASML Holding, said last week on a conference call after the Dutch chip production equipment maker cut its sales forecast for 2025 due to sluggish demand in everything other than AI.
ASML’s results sparked a new round of worries about the health of the chip industry, which is being hurt by weakness in key businesses such as personal computers and automobiles. It also has been caught up in the rising geopolitical tensions between the US and China that could cut off access to the Chinese chip market, which is the biggest in the world.
Taiwan Semiconductor Manufacturing Company (TSMC), which includes Apple and Nvidia among its customers, assuaged some of those fears after lifting its revenue forecast for 2024. While its growth is being fuelled by AI-related drivers, overall chip demand has “stabilised” and is starting to improve, chief executive officer C C Wei said.
The Philadelphia Stock Exchange Semiconductor Index, better known by its symbol SOX, tumbled last week, losing 5.3 per cent on Tuesday (Oct 15) alone before paring its losses following TSMC’s results on Thursday. To highlight the bifurcation, semiconductor equipment makers such as ASML and Lam Research were among the leading decliners, while several chipmakers, including Marvell Technology, managed to rise.
“We should expect this kind of divergence to continue, since it is completely correct to assume it is all AI,” said Gabelli Funds research analyst Ryuta Makino, who sees the separate paths remaining until at least 2025.
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Chip creators
The semiconductor business is often viewed as a barometer for the global economy since chips are vital for a range of products, from data centre servers to dishwashers. The companies that provide the equipment used to create these chips are on the industry’s front lines.
Before semiconductor companies can begin production, it takes months to build, install and test the machines used to manufacture the chips. As a result, companies such as ASML have unusually long-range views of how their customers are feeling. At the moment, they are flashing a caution signal for everything other than AI. For example, automotive and industrial suppliers are experiencing a demand slump as clients sit on elevated inventories.
In addition, Intel is cutting costs and delaying new factories as it grapples with falling sales and mounting losses. Samsung Electronics apologised to investors this month after delays in high-bandwidth memory chips led to disappointing financial results. And investors will be monitoring Texas Instruments this week, with its earnings due on Tuesday, since the company’s analogue chips are used by a wide range of customers.
Taken together, it appears there’s a tough road ahead for equipment makers, many of which saw their stocks hit record highs earlier this year. Some traders are not waiting around to see how this plays out and are already dumping the stocks.
ASML just suffered its worst week since early September, with its US-listed share price dropping 14 per cent. Applied Materials, the biggest US maker of chip equipment, sank 9.1 per cent, while KLA and Lam Research each fell more than 12 per cent.
“We have been more cautious on other semi equipment names,” CJ Muse, an analyst at Cantor Fitzgerald, wrote in a research note. “But had thought a longer lead time player such as ASML would outperform. Clearly we were wrong with this assumption.”
After ASML’s results, the analyst said he expects more downside for the stocks.
Investors will get more insight this week when chip equipment maker Lam Research reports on Oct 23. KLA is due to release results on Oct 30, followed by Applied Materials on Nov 14.
AI spending bump
Things are very different for the semiconductor companies that will benefit from Big Tech’s continued heavy spending on AI development. Microsoft, Alphabet, Amazon.com and Meta Platforms pumped more than US$50 billion into capital expenditures in the second quarter, with much of that going to computing component makers. And many of these behemoths say they plan to spend even more in coming quarters to expand their AI infrastructures.
Overall AI semiconductor industry sales are expected to jump to US$245 billion in 2025 from an estimated US$168 billion this year, according to Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management. She advised clients to add to AI-related chipmakers in the wake of ASML’s results.
“We continue to see a strong growth outlook for AI semis, and are closely watching managements’ guidance on future demand in the days and weeks ahead,” she wrote in a research note last week.
The chief beneficiary from all the spending is Nvidia, whose chips dominate the market for AI accelerators. The stock hit a fresh record last week after assurances from chief executive officer Jensen Huang that its new Blackwell chip is in full production and seeing strong demand from customers. Nvidia shares are up more than 175 per cent in 2024 and within striking distance of overtaking Apple as the world’s most valuable company with a market value of nearly US$3.4 trillion.
Other companies that should get a lift from the rising tide of AI spending include TSMC, Broadcom, Arm Holdings, Micron Technology and Advanced Micro Devices, which is attempting to loosen Nvidia’s grip on the accelerator market.
However, even some of the winners are not immune from non-AI weakness. Just look at Broadcom. Its custom chips and networking semiconductors are used in data centres, but its stock price tumbled last month after posting disappointing results from parts of its business not tied to AI.
“There will eventually be a value case to be made for non-AI chipmakers and a point when a strengthening economy means demand flips back,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder. “However, it’s a question of timing. AI will remain a focus in the meantime.” BLOOMBERG
