Erste Asset Management

Semiconductor Industry Picking up Speed Again: AI Chips Are Booming

Semiconductor Industry Picking up Speed Again: AI Chips Are Booming
Semiconductor Industry Picking up Speed Again: AI Chips Are Booming
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After a period of declining sales, the semiconductor industry is expected to get back on track and return to growth in 2024. In particular, chips developed specifically for AI applications are a big driver of the boom. During the pandemic, the industry had to contend with supply chain problems, most recently compounded by a weakening global economy and thus weaker demand for electronics products. For 2023, the industry association World Semiconductor Trade Statistics (WSTS) forecasts a continuing decline in total industry sales of about 10 per cent to USD 515.1bn; however, for 2024, the WSTS expects an increase of around 12 per cent to just under USD 576bn.

The growth in sales of AI chips, meanwhile, is unbroken and very likely to increase even further. Consulting firm Gartner experts expect sales of AI components to increase by around 21 per cent this year and by an even stronger 25.6 percent in 2024. By 2027, according to Gartner forecasts, the market volume for AI chips is even expected to more than double from currently USD 53.5bn to USd 119.4bn.

Nvidia Benefits From Quasi-Monopoly in AI Chips

At present, Nvidia is the main beneficiary of this boom – a semiconductor company that has become virtually synonymous with AI in the industry. Nvidia’s chips are used, among other things, to teach AI software such as the chatbot ChatGPT. Thanks to the AI boom, the Silicon Valley chip company was able to double its revenue year-on-year to USD 13.5bn last quarter, with profits increasing from USD 656m to just under USD 6.2bn. Nvidia’s figures were well received on the stock market, with its shares already up 232 per cent on the Nasdaq since the beginning of the year.

Nvidia’s CEO and co-founder Jensen Huang sees a new computer era dawning. In the world’s data centers, a “long-term shift” from classic processors to the chip architectures offered by Nvidia is currently taking place, Huang emphasized. The demand is huge, he said.

With its know-how in the AI field, Nvidia currently virtually holds a monopoly position. The company has a long history in the development of graphics processors (GPUs) for graphics cards and video games. Chips based on this architecture are much better suited for AI applications and especially the computationally intensive AI training than conventional CPUs. Given the AI boom, Nvidia is currently barely managing to keep up with the explosively rising demand.

Other Chip Manufacturers With Mixed Quarterly Figures, Recovery in Sight

Other industry giants recently reported mixed quarterly figures. While semiconductor giant Intel did return to profitability in the last quarter, posting a profit of USD 1.48bn after a loss of USD 454m in the previous year, sales dropped 15 per cent to USD 12.95bn. The silver lining here is that the decline Intel’s PC processor business is at least slowing down. The division’s sales dropped 12 per cent YoY to USD 6.8bn, while revenue fell by 38 per cent in Q1 in accordance with the general decline in PC sales. Intel expects a recovery in the second half of the year.

The world’s largest chip contract manufacturer TSMC recently reported its first profit decline in four years, although the drop was not as strong as previously feared. Net income fell by 23.3 per cent to approximately EUR 5.2bn in the past quarter. Sales declined by 13.7 per cent to just under EUR 15.0bn according to expectations.

Chip manufacturer Qualcomm continued to suffer from the global weakness in smartphone sales this year, reporting a 23 per cent drop in revenue to around USD 8.5bn for the current quarter. Profits dropped by about half to USD 1.8bn.

Other industry players also expect a recovery this year. This could be driven by further growth in cloud computing and thus more data centers, demand for renewable energies and the associated requirements, and the trend towards electromobility. In addition, the other major players in the AI business also want a bigger slice. Intel plans to launch “Sierra Forest” next year, a new generation of superchips that are expected to deliver more than twice the computing power per watt of power consumed, Intel announced. In addition to the industry giants, however, Nvidia’s success is also attracting many startups to the market.

European manufacturers benefit to a certain degree from their specialization in certain markets. Semiconductor manufacturer STMicroelectronics was able to increase sales by 13 per cent in the past quarter thanks to the fairly strong demand from the automotive industry; sales in the automotive sector even increased by a third.

Highly Anticipated ARM IPO

The planned IPO of chip developer ARM could also well bring a breath of fresh air to the industry. ARM is owned by Japanese technology investor Softbank, which is seeking a valuation of USD 50bn to USD 55bn for the well-established chip manufacturer. According to insiders, companies such as Apple and Nvidia each plan to invest between USD 25m and USD 100m in the IPO. The tech groups wanted to secure at least small stakes in the company for strategic reasons, media reports said, citing people familiar with the IPO.

Meanwhile, China and its tense relationship with some Western countries remain a driver of uncertainty for the industry. Existing and planned US sanctions and export bans on semiconductors and semiconductor manufacturing machinery could not only put a damper on the industry’s growth perspective, but also provoke counter-reactions – for example, in the export of raw materials essential for the industry. In addition, China’s currently faltering economy is also adversely affecting demand for PCs and consumer electronics.

ERSTE FUTURE INVEST – the fund for all megatrends

Not every hype or trend turns into a megatrend. AI has the potential to effect important long-term changes in technology. The development of AI does not only influence our daily lives, but it also opens up new investment opportunities.

If investors recognise megatrends early and invest in equities of those respective fields at an early stage, they may earn significant returns. Therefore, the equity fund ERSTE FUTURE INVEST invests in five potential megatrends that we regard as attractive for investors – healthcare, lifestyle, technology & innovation, environment & clean energy, and emerging markets.

In addition to the income opportunities listed, the risks associated with investing in growth stocks must also be taken into account when making an investment.

CONCLUSION: The semiconductor industry could return to growth in 2024. The chip manufacturers listed on the stock exchange could benefit from this. ERSTE FUTURE INVEST offers the opportunity to participate in this boom with a broadly diversified fund.

Legal note:

Prognoses are no reliable indicator for future performance.



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