Even the AI gold rush can't stop the chip industry's boom-bust cycle, warns Morningstar

The relentless pursuit of AI supremacy has ignited a global frenzy in the semiconductor market, but Morningstar analysts are sounding alarms about a potential downturn in the industry. They caution that both foundries and memory manufacturers are vulnerable to the inherent cyclicality that characterizes the chip sector. In a report released on Tuesday, Morningstar outlined that a typical cycle in the semiconductor industry spans approximately four years. However, the current uptrend, largely driven by demand for AI technology, may be extending beyond its natural limits. The analysts remarked, "We believe that robust sales and investments related to AI are enabling the sector to sustain this upcycle for longer than usual." Since the explosive rise of ChatGPT in late 2022, there has been a significant increase in AI investments, leading to soaring valuations for chipmakers. While industry giants such as Microsoft, Amazon, and Meta are ramping up their AI expenditures, Morningstar suggests that market optimism regarding long-term AI growth may be overly enthusiastic. According to the firm's analysis, semiconductor billings growth—a key indicator of industry vitality—has begun to decelerate, hinting that the sector might be nearing its zenith. Outside the realm of AI, sluggish sales in smartphones and consumer electronics are further dampening demand for traditional chips. Looking ahead, Morningstar projects that AI spending could peak in 2025, with potential slowdowns arising in 2026 as macroeconomic challenges mount and consumer demand remains tepid. Although there is a scarcity of cutting-edge AI chips, the demand for older memory products may decline. While a slowdown would pose challenges for chipmakers, foundries appear to be in a relatively stronger position. Morningstar highlights Taiwan Semiconductor Manufacturing Company's technological advancements and significant U.S. investments as protective factors against these risks. Nevertheless, even industry leaders like TSMC are still susceptible to the cyclical fluctuations that frequently impact the sector. This warning comes at a time when investors are grappling with a critical question: to what extent will AI translate into corporate profits? A record number of S&P 500 companies mentioned AI during their earnings calls in the second quarter, yet according to Goldman Sachs, the proportion of firms quantifying AI's contribution to their earnings remains limited. The bank also indicated that government data may underestimate AI's economic impact, as semiconductor costs often appear as intermediate inputs rather than being fully represented in GDP figures.