Morgan Stanley has an optimistic outlook on the semiconductor industry: continuing to benefit from AI and data center demand, while the non-AI market will also recover

According to the Zhitong Finance APP, on January 21, 2025, JP Morgan released its latest semiconductor industry research report, providing an in-depth analysis of the current state and future trends of the global semiconductor market.

The report indicates that global GDP is expected to grow by 2.7% in 2024 and by 2.4% in 2025. Against this backdrop, the trend of semiconductor shipments is expected to continue improving in 2025. Semiconductor industry revenue turned positive year-on-year in the fourth quarter of 2023 and is expected to continue improving in 2024, with further improvement anticipated in 2025. However, the recovery of cyclical demand in different end markets and companies is not balanced, and companies with strong product cycles and winning design slopes will be in a favorable position in 2025 to drive growth.

JP Morgan holds an optimistic view on the semiconductor industry in 2025, expecting the industry to continue benefiting from strong demand in AI and data centers, while the non-AI market will gradually recover. Although factors such as macroeconomic uncertainty, global tariff risks, and export restrictions may bring volatility, the acceleration of AI infrastructure construction and the widespread application of related technologies will continue to drive industry growth.

Overall industry bookings continue to grow quarter-on-quarter, and as we gradually enter the first half of the year, the book-to-bill ratio is expected to trend towards 1 or greater than 1. Overall, the fourth-quarter performance (revenue, profit margins, earnings per share) is expected to meet expectations, and the outlook for the first quarter is also in line with expectations, thanks to the sustained strong demand in accelerated computing and artificial intelligence.

In specific areas, cloud capital expenditures are expected to grow by 57% year-on-year in 2024 and by another 30% in 2025. Morgan Stanley believes that companies like NVIDIA (NVDA.US) and AMD (AMD.US) will dominate the AI GPU market, while companies like Broadcom (AVGO.US) and Marvell Technology (MRVL.US) will benefit in custom ASIC solutions. TSMC (TSMC.US) is expected to see its AI accelerator revenue double year-on-year in 2025 and grow at a moderate compound annual growth rate of 40% over the next five years.

Additionally, Morgan Stanley expects a stable recovery in the smartphone and Internet of Things (IoT) markets. Global smartphone shipments are expected to grow by 2%-3% in 2024 and further by 4%-5% in 2025. Shipments of 5G smartphones are expected to reach 750 million units in 2024 (a year-on-year increase of 7%) and 810 million units in 2025 (a year-on-year increase of 8%). The IoT market is also gradually recovering, with related shipments expected to reach 155 million units in 2024 and 350 million units in 2025.

However, the cyclical dynamics of the automotive and industrial markets remain mixed. Morgan Stanley states that the automotive and industrial markets are recovering slowly after bottoming out in the first half of 2024. Global automotive production is expected to decline by 1% year-on-year in 2024, with a growth of 2% anticipated in 2025. Despite the overall market's slow recovery, some companies that have not implemented long-term agreements (LTA/PSP), such as Texas Instruments (TXN.US) and Analog Devices (ADI.US), are gradually recovering, while companies that have implemented LTA/PSP, such as Microchip Technology (MCHP.US), NXP (NXPI.US), and ON Semiconductor (ON.US), may need an additional 1-2 quarters to digest customer inventory The report also mentioned the increasing complexity of semiconductor manufacturing, the transformation of emerging technologies, and the impact of advanced packaging on wafer fab equipment (WFE) demand. WFE is expected to grow by 4% in 2024 and continue to grow by more than 5% in 2025, thanks to the offsetting effect of weakened spending in China and the increased capital intensity driven by next-generation technology inflection points (such as FinFET, backside power distribution, higher-layer 3D NAND, logic-like DRAM architectures, low-resistance interconnects, the transition from tungsten to molybdenum, and advanced packaging).

In the chip design software/electronic design automation (EDA) sector, a compound annual growth rate (CAGR) of 13%-15% in revenue is expected as EDA intensity and design activities increase. Additionally, with the widespread adoption of edge applications in industrial, IoT, and automotive sectors, as well as the increase in content volume, the fundamentals of IoT-related companies are recovering from the bottom, with long-term demand trends remaining unchanged.

JP Morgan expects that the semiconductor equipment companies it covers, such as Applied Materials (AMAT.US), KLA (KLAC.US), and Lam Research (LRCX.US), will achieve higher growth (300-700 basis points) than WFE through SAM expansion and resilient service businesses. Revenue in the chip design software/EDA field is expected to grow at a compound annual growth rate of 13%-15% in the coming years, primarily benefiting from increased EDA intensity and strong design activities.

The report also focused on the performance of specific companies. For example, Mellanox Technologies maintains over 80% market share in optical transceiver PAM4 DSP chipsets and has facilitated the transition of companies like Google, Amazon, Meta, and Microsoft to 200/400G optical connectivity in their data centers. Meanwhile, Broadcom's Tomahawk 5 switching chipset has entered mass production and is expected to produce its next-generation 3nm Tomahawk 6 chipset in 2025/26 to support 102.4Tbps switching throughput.

In terms of investment outlook, Morgan Stanley believes that long-term investors should continue to focus on semiconductor/semiconductor value chain stocks that have demonstrated excellent performance records over many years (3, 5, 10, 15, 20 years). The performance of these stocks benefits from the critical role of semiconductors in the technology value chain. However, it is also important to note the increased risks from geopolitical uncertainties, potential global tariff risks, and more export restrictions, which could suppress recovery and exacerbate market volatility