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

On January 21, 2025, J.P. Morgan released its latest semiconductor industry research report, conducting an in-depth analysis of the current status and future trends of the global semiconductor market. The report stated that global GDP is expected to grow by 2.7% in 2024, and by 2.4% in 2025. Against this backdrop, it is expected that semiconductor shipment trends will continue to improve in 2025. Semiconductor industry revenue turned positive year-on-year in the fourth quarter of 2023, continued to improve in 2024, and is expected to further improve in 2025. However, the recovery of cyclic demand in different end markets and companies is not uniform, with companies possessing strong product cycles and winning design slopes expected to be in a favorable position in 2025, driving growth. J.P. Morgan is optimistic about the semiconductor industry in 2025, expecting the industry to continue benefiting from strong demand for AI and data centers, while the non-AI market will also gradually recover. Despite potential fluctuations due to macroeconomic uncertainties, global tariff risks, and export restrictions, 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 move into the first half of the year, it is expected that the book-to-bill ratio will trend towards 1 or greater. In general, fourth quarter performance (revenue, profit margins, earnings per share) is expected to meet expectations, and first quarter outlook is also in line with expectations, benefiting from the continued strong demand in accelerated computing and artificial intelligence fields. In specific areas, cloud capital expenditures are expected to grow by 57% year-on-year in 2024, and by a further 30% in 2025. J.P. Morgan believes that companies such as NVIDIA Corporation (NVDA.US) and AMD (AMD.US) will dominate the AI GPU market, while companies such as Broadcom Inc. (AVGO.US) and Marvell Technology, Inc. (MRVL.US) will benefit from custom ASIC solutions. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSMC.US) is expected to see its AI accelerator revenue double in 2025, and grow at a moderate 40% compound annual growth rate over the next five years. Additionally, J.P. Morgan expects a steady recovery in the smartphone and IoT markets. Global smartphone shipments are expected to grow by 2%-3% in 2024, and by a further 4%-5% in 2025. 5G smartphone shipments are expected to reach 750 million units in 2024 (a 7% increase year-on-year), and 810 million units in 2025 (an 8% increase year-on-year). 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 cyclic dynamics of the automotive and industrial markets remain mixed. J.P. Morgan states that after hitting a bottom in the first half of 2024, the recovery process for the automotive and industrial markets has been slow. Global automotive production declined by 1% in 2024, and is expected to grow by 2% in 2025. While the overall market recovery is slow, some companies that have not implemented long-term agreements (LTA/PSP), such as Texas Instruments Incorporated (TXN.US) and Analog Devices, Inc. (ADI.US), are gradually recovering, while companies that have implemented LTA/PSP, such as Microchip Technology Incorporated (MCHP.US), NXP Semiconductors NV (NXPI.US), and ON Semiconductor (ON.US), may need an additional 1-2 quarters to absorb customer inventory. The report also mentions the increasing complexity of semiconductor manufacturing, the impact of emerging technology transformations, and advanced packaging on wafer fab equipment (WFE) demand. It is expected that WFE will grow by 4% in 2024, and continue to grow by over 5% in 2025, thanks to the offsetting effects of reduced spending in China and the increase in manufacturing capital intensity driven by next-generation technology inflection points (such as surround gate, backside power distribution, higher layer 3D NAND, quasi-logic DRAM architecture, low-resistance interconnects, transition from tungsten to molybdenum, and advanced packaging). In the chip design software/electronic design automation (EDA) field, it is expected that revenue will achieve a compound annual growth rate (CAGR) of 13%-15% with the strengthening of EDA intensity and design activities. Additionally, as edge applications become more widely adopted in the industrial, IoT, and automotive sectors, and as content volumes increase, the fundamentals of IoT-related companies are recovering from the bottom, with long-term demand trends remaining unchanged. J.P. Morgan expects that its coverage of semiconductor equipment companies, such as Applied Materials (AMAT.US), KLA Corporation (KLAC.US), and Lam Research Corporation (LRCX.US), will achieve higher growth (300-700 basis points) through SAM expansion and flexible service businesses than WFE. It is anticipated that revenue in the chip design software/EDA field will grow at a compound annual growth rate of 13%-15% in the coming years, mainly benefiting from increased EDA intensity and strong design activities. The report also highlights the performance of specific companies. For example, Marvell Technology, Inc. maintains over 80% market share in the optical transceiver PAM4 DSP chipset market, and drives companies such as Alphabet Inc. Class C, Amazon.com, Inc., Meta, and Microsoft Corporation in their transition to 200/400G optical connectivity in their data centers. Meanwhile, Broadcom Inc.'s Tomahawk 5 (Continued...)The interchangeable chipset has entered mass production and is expected to produce its next generation 3nm Tomahawk 6 chipset in 2025/26 to support a switch throughput of 102.4Tbps.In terms of investment prospects, JP Morgan believes that long-term investors should continue to focus on the semiconductor/ semiconductor value chain stocks' excellent track record over the years (3 years, 5 years, 10 years, 15 years, 20 years). The performance of these stocks is benefited from the crucial role of semiconductors in the technology value chain. However, it is also important to note the increased risks such as political uncertainties of GEO Group Inc, potential global tariff risks, and additional export restrictions, which may suppress recovery and exacerbate stock market volatility.