(Bloomberg) — There’s a growing divide in the $530 billion semiconductor industry between the companies that ride the artificial intelligence wave and those that don’t. And looking at early returns this earnings season, that gap could quickly grow into an abyss.
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“Without AI, the market would be very sad,” Christophe Fouquet, CEO of ASML Holding NV, said on a conference call last week after the Dutch chip manufacturing equipment maker cut its 2025 sales forecast due to sluggish demand in everything but AI.
ASML’s results sparked a new round of concerns about the health of the chip industry, which has been hurt by weakness in key sectors such as personal computers and automotive. The country has also been caught up in rising geopolitical tensions between the US and China, which could cut off access to China’s chip market, the world’s largest.
Taiwan Semiconductor Manufacturing Co., which includes Apple Inc. and Nvidia Corp. among its customers has allayed some of these fears after it raised its 2024 revenue forecast. Although growth is fueled by AI-related factors, overall chip demand has “stabilized.” And things are starting to improve, said Chief Executive Officer CC Wei.
The Philadelphia Stock Exchange Semiconductor Index, better known by the symbol SOX, plunged last week, losing 5.3% on Tuesday alone before paring its losses after TSMC’s results on Thursday. To emphasize the split: semiconductor equipment manufacturers such as ASML and Lam Research Corp. were among the major decliners, while several chipmakers, including Marvell Technology Inc., managed to rise.
“We should expect these kinds of differences to continue, as it is completely correct to assume it is all AI,” said research analyst Ryuta Makino of Gabelli Funds, who sees the separate paths lasting until at least 2025.
Chipmakers
The semiconductor industry is often seen as a barometer for the global economy, as chips are essential for a range of products from data center servers to dishwashers. The companies that supply the equipment used to make these chips are on the front lines of the industry.
Before semiconductor companies can start production, it takes months to build, install and test the machines used to manufacture the chips. As a result, companies like ASML have an unusually long-term view of how their customers are feeling. Right now they’re raising a red flag for anything but AI. For example, suppliers from the automotive and industrial sectors are experiencing a drop in demand as customers have higher inventories.
In addition, Intel Corp. is cutting back. on costs and postpones new factories, because the company is struggling with declining sales and mounting losses. Samsung Electronics Co. apologized to investors this month after delays in high-bandwidth memory chips led to disappointing financial results. And investors will appreciate Texas Instruments Inc. Keep an eye on this week, with earnings on Tuesday, as the company’s analog chips are used by a wide range of customers.
All things considered, it looks like there’s a tough road ahead for equipment makers, many of which saw their shares reach record highs earlier this year. Some traders are not waiting to see how this plays out and are already dumping the shares.
ASML has just had its worst week since early September, with the US-listed share price falling 14%. Applied Materials Inc., the largest U.S. chip equipment maker, fell 9.1%, while KLA and Lam Research each fell more than 12%.
“We have been more cautious with names of other semis,” CJ Muse, an analyst at Cantor Fitzgerald, wrote in a research note. “But I would have thought that a player with a longer lead time like ASML would perform better. Clearly we were wrong in this assumption.”
Following ASML’s results, the analyst said he expects more downside for the shares.
Investors will get more insight this week when chip equipment maker Lam Research reports on October 23. KLA will release results on October 30, followed by Applied Materials on November 14.
AI spending increase
Things are very different for the semiconductor companies that will benefit from Big Tech’s continued high spending on AI development. Microsoft Corp., Alphabet Inc., Amazon.com Inc. and Meta Platforms Inc. pumped more than $50 billion into capital expenditures in the second quarter, much of which went to makers of computer components. And many of these giants say they plan to spend even more in the coming quarters to expand their AI infrastructure.
According to Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management, the AI semiconductor industry’s total revenue is expected to rise by 2025 from an estimated $168 billion this year. She advised clients to add AI-related chipmakers in the wake of ASML’s results.
“We continue to see strong growth prospects for AI intermediates, and are closely monitoring management guidance on future demand in the coming days and weeks,” she wrote in a research note last week.
The main beneficiary of all the spending is Nvidia, whose chips dominate the AI accelerator market. The stock hit a new all-time high last week following assurances from Chief Executive Officer Jensen Huang that the new Blackwell chip is in full production and seeing strong customer demand. Nvidia’s shares are up more than 175% in 2024 and are within striking distance of overtaking Apple as the world’s most valuable company with a market value of nearly $3.4 trillion.
Other companies that should get a boost from the rising tide of AI spending include TSMC, Broadcom Inc., Arm Holdings Plc, Micron Technology Inc. and Advanced Micro Devices Inc., which is trying to loosen Nvidia’s grip on the accelerator market.
But even some winners are not immune to non-AI weakness. Just look at Broadcom. Its custom chips and semiconductors for networking are used in data centers, but its share price tumbled last month after disappointing results from parts of its business that weren’t linked to AI.
“There will ultimately be a value case to be made for non-AI chipmakers, and there will come a point where a strengthening economy means demand returns,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder. “However, it is a matter of timing. AI will remain a focus in the meantime.”
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