Chipmakers poised for growth in 2025 and beyond

Recognising the vast potential of AI, big tech firms have ramped up spending, purchasing billions of dollars’ worth of AI chips 

by IFAST RESEARCH TEAM 

THE past five years has been nothing short of spectacular for chip stocks. Beyond share prices, the fundamentals also reveal a strong outlook for the chip industry. 

Despite an impressive performance, we believe chips stocks can continue to deliver and we reiterate our view that semiconductors will be one of the top-performing sectors of this decade. Here’s why. 

Higher silicon content, increasing applications and AI megatrend driving chip demand

Semiconductors are the foundation of modern technology and we expect chip demand to increase exponentially as the world continues its path of digital transformation. Aside from the growing number of semiconductor applications (such as artificial intelligence (AI), electric vehicles and smart devices), their rising silicon content is also another important factor contributing to the robust demand for semiconductors. 

Take for instance in one of Micron Technology Inc’s recent earnings calls, the company shared that PC manufacturers are beginning to introduce new PCs equipped with AI capabilities. These AI-enabled PCs require additional DRAM content, with a minimum of 16GB for entry-level PCs and 24GB and above for higher-end segments, compared to the current average of 12GB. 

Similarly, AI-enabled smartphones continue to be a strong driver for mobile DRAM content growth. The two latest generations of Apple iPhones (15 & 16) feature Apple Intelligence and have significantly larger DRAM capacities compared to their predecessors. The iPhone 17 Pro, slated to be released this year, is rumoured to have 12GB of DRAM, 1.5 times more than the iPhone 16. 

From a broader perspective, rising chip demand is likely to be bolstered by structural megatrends such as AI, which is arguably the biggest development the sector has seen since the arrival of smartphones in the late 2000s. 

Recognising the vast potential of AI, big tech companies have ramped up spending, purchasing billions of dollars’ worth of AI chips. This surge has contributed immensely to the fortunes of companies like Nvidia Corp, which saw its data centre revenue reach a record high of US$30.8 billion (RM138.63 billion) in the third quarter of 2024 (3Q24), a 112% increase from a year ago. 

The good news? Global spending on AI does not appear to be slowing down. Big tech companies are still pouring massive amounts of money into AI. The combined capex of the four largest Internet companies is expected to grow by 15% this year, even after rising more than 45% in 2024. 

That is not all. Besides buying directly from chipmakers, big tech companies such as the likes of Microsoft Corp and Meta are also developing their own custom AI chips, which could be beneficial to foundry players like Taiwan Semiconductor Manufacturing Co Ltd in the long run. 

Just like the Internet and smartphone revolutions in the past, we expect the AI revolution to create significant opportunities for chipmakers in the foreseeable future. 

Generous govt support adds to the positive outlook

In addition to these structural megatrends, semiconductor companies are also benefitting from significant support from the public sector. Governments worldwide are committing substantial funding and resources to bolster the industry, recognising its strategic importance in terms of economic growth and even national security. 

In the US, Biden’s administration initiated the CHIPS and Science Act as part of a broader effort to bolster US competitiveness in semiconductor manufacturing, particularly in advanced semiconductors. The country aims to produce 20% of the world’s most advanced chips by 2030. As of August 2024, the White House reported that US$30 billion of the US$39 billion in direct funding had already been disbursed and that it remains on track to allocate the remaining budget by the end of 2024. 

Over in Asia, China has made the development of its domestic semiconductor capabilities one of its biggest national priorities, after enduring years of intensifying sanctions by the US. Support from the central government comes mainly from the China Integrated Circuit Industry Investment Fund, which has raised a combined total of over US$40 billion in its first two phases. Phase three is expected to come with a hefty investment of US$47.5 billion and will run from now till 2039. 

Japan is also undergoing its own chip renaissance, marked by renewed investments 

from both the public and private sector. The government, in collaboration with major Japanese corporations, have established Rapidus Corp, a homegrown chipmaker with an ambitious goal of producing 2nm chips by 2027. Alongside other structural factors mentioned earlier, the extensive government support serves as another important catalyst for the semiconductor industry. 

Why downcycles should be viewed as opportunities

What goes up must come down — a principle that holds true for the semiconductor cycle as well. 

While the chip industry is currently basking in its moment of glory, seasoned investors will know that it is no stranger to cycles of ups and downs. 

To recap, semiconductor cycles are essentially driven by fluctuating sales growth numbers, which stems from imbalances in supply and demand dynamics. There are a few factors, but for the most part, these imbalances can be explained by over-and under-estimations in production levels. 

When times are good, chipmakers tend to overestimate demand, invest heavily in capacity and produce more than what the market can absorb. Over time, the high level of production eventually becomes unsustainable as inventory starts to build, leading to an oversupply. When this happens, chipmakers slash prices and cut down on production as they work through excess inventory, causing sales growth to fall — even as demand remains relatively stable. 

But just like how chipmakers tend to over-produce when times are good, they also have the tendency to under-produce when times are bad. Put simply, it is the excessive adjustments in production levels that lead to fluctuating sales growth numbers, a characteristic that defines the cyclical nature of the semiconductor industry. 

There are, however, silver linings that investors should take note of.

Firstly, the semiconductor industry has evolved to become less cyclical and more structural. Recent down cycles have also shown milder declines in sales compared to the past, with growth during upcycles far outpacing these contractions. 

Unlike the past where chips were found in only a handful of applications (eg PCs) and in relatively small amounts, semiconductors have practically become ubiquitous these days and are featured abundantly in numerous different applications (eg self-driving vehicles, data centres and Internet-of-Things devices). The diverse range of end use products helps to mitigate the impact of a downturn in any single segment, effectively making the industry less cyclical than before. 

The second piece of good news is that down-cycles are unlikely to last forever. History has shown that after every single downturn, chip sales have continued to forge higher highs and lower lows, which again is most likely due to the structural tailwinds behind the industry. Ultimately, we are confident that the long-term growth story for semiconductors remains intact, and chip sales will only continue to trend higher as the years go by. 

We believe chip stocks can continue to deliver 

With such a promising long-term outlook, we believe that chip stocks can continue to deliver. While valuations have become more expensive this year following their impressive share price performance, they are still not overly expensive especially if we consider the level of earnings growth they can deliver — which is roughly 30% each year on average. 

  • The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board. 

  • This article first appeared in The Malaysian Reserve weekly print edition