April 15, 2024

AI drives rise of chipmakers, but doubts remain

The semiconductor industry has entered the year with growing confidence that it will leave its latest cyclical downturn behind in 2023, as analysts hail a “turning point” for the $600 billion market.

But behind forecasts of a double-digit recovery in chip spending this year lies uncertainty about how broad that recovery will be, as growing demand for high-priced processors designed for artificial intelligence is offset by a bleaker outlook. in other parts of the world. the technology sector.

The latest figures from the US-based Semiconductor Industry Association, which represents most of the world’s chipmakers, show that global sales rose to $48 billion in November, increasing both in terms annually as quarterly for the first time in more than a year. Monthly sales peaked at more than $50 billion during the first half of 2022.

John Neuffer, chief executive of SIA, said the data was “an indication that the global chip market continues to gain strength” after its Semiconductor World Trade Statistics unit forecast a “vigorous rebound” in 2024, with a Global revenue increase of 13 percent to $588. min.

However, Malcolm Penn, founder of chip consultancy Future Horizons, said the revenue growth figures, which were measured against a poor year for the sector, were not accompanied by an increase in unit shipments. .

“It is very difficult to see how unitary growth will be achieved until the second half of 2024,” he said. “This is not the beginning of the next recovery; we have a long way to go before we start to enter the shortage part of the cycle.”

The chip industry has oscillated between shortage and surplus for decades. The latest recession began in the summer of 2022, when the industry overcame supply problems exacerbated by the Covid-19 pandemic just as customer spending (both from consumers on PCs or smartphones and from cloud providers on new servers and switches) began to feel the pressure. of inflation.

Penn said the industry “bottomed” more quickly than in previous cycles, in less than a year. But the speed of the recovery remains in question at a time when rampant spending by cloud providers is offset by greater caution on the part of consumers and businesses.

The exception has been investment in artificial intelligence. A handful of deep-pocketed cloud and consumer internet companies have been buying high-performance chips as generative AI takes off following the breakout success of ChatGPT.

“Overall, we are definitely at an inflection point,” said CCS Insight analyst Geoff Blaber. “But we have to be realistic: if it weren’t for that strength in high-performance computing, we wouldn’t be talking so positively about a change in the semiconductor sector.”

Taiwan Semiconductor Manufacturing Company, the world’s largest chip maker, reported this week that fourth-quarter sales were flat from a year earlier but beat analysts’ expectations for a decline. TSMC has benefited from its position as a go-to supplier of the most advanced chips to companies like Apple and Nvidia, which are willing to pay more to gain a competitive advantage on products their own customers are willing to shell out for.

Although sales of Apple’s iPhone have been under pressure, like the rest of the smartphone market, Nvidia customers have been lining up to buy its high-powered AI processors. It’s just starting to catch up with demand.

Executives at Nvidia, whose stock value tripled during 2023, said at the Consumer Electronics Show in Las Vegas this week that they expected sustained demand to drive further sales growth throughout 2024 and into 2025.

“Market adoption of AI is just in the beginning stages,” Colette Kress, Nvidia’s chief financial officer, said in an interview with JPMorgan analysts at CES. “Yes, we can grow as we move towards calendar 2025.”

That confidence was echoed in mid-December comments by the head of Micron, the U.S.-based memory maker that is often seen as a semiconductor bellwether because it typically reports earnings a month ahead of others in the sector. The memory market has been particularly hard hit by the sector’s latest downturn, but analysts at HSBC now forecast year-on-year growth of 59 percent in 2024.

CEO Sanjay Mehrotra says Micron expected its prices to continue strengthening through 2024. © Reuters

“The improving supply and demand environment in the current calendar quarter gives us additional confidence in the trajectory of our business,” Micron CEO Sanjay Mehrotra said last month, noting “a strong inflection in industry prices this calendar quarter”.

“We expect our prices to continue strengthening throughout 2024,” he added.

Researchers at Taiwanese consulting firm TrendForce predict that average selling prices for Dram memory chips used in smartphones and other devices will rise by 18 to 23 percent this year. They rose between 13 percent and 18 percent in the fourth quarter.

During a year-long supply glut between 2022 and 2023, Korean memory chip makers SK Hynix and Samsung cut production as they suffered multibillion-dollar losses.

But now Kwak Noh-Jung, CEO of SK Hynix, which has pioneered the development of so-called high-bandwidth memory chips used in AI servers, is striking a more optimistic note. He said the South Korean memory chip maker aimed to double its market capitalization in the next three years, as it seeks to exploit demand for components in systems needed to train AI systems.

Kwak told reporters at CES that “we are considering a change in our production cut strategy in the first quarter” due to “signs of improvement in the Dram market.”

Samsung, which makes logic and memory chips, this month reported its smallest year-over-year profit decline in five quarters.

The share prices of some of the world’s largest chipmakers, including Intel, AMD and Nvidia, generated big gains during 2023 as investors anticipated the turn of the cycle.

“We model the semiconductor cycle that accelerates until 2024 until it reaches its peak in [the first half of] 2025, which will result in [roughly] 20 percent growth this year and about 10 percent growth in 2025,” Jefferies analysts said in a recent note to clients.

But at a time when unit volumes are languishing, an increase in average selling prices has been the decisive factor in the return to revenue growth, Future Horizons’ Penn said. “What’s not clear right now is why ASP’s growth is so strong,” he said. While Nvidia can charge tens of thousands of dollars for its AI systems, they are sold in relatively small volumes.

“AI is not a smartphone and that’s the problem,” he said. “They’re not big numbers in the grand scheme of things.”

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