Key Points
- Driven by the AI secular growth story, the latest global semiconductor sales figures show that we are currently still in the semiconductor upcycle, and it is expected to last at least through the end of this year, dominated by strong demand for AI chips.
- While AI semiconductors tend to have better prospects than their non-AI counterparts, their revenues primarily stem from significant capital expenditures of a few major players, warranting investors’ caution regarding concentration risk.
- Given that geopolitical volatility driven by the global AI race has become the new norm, supply chain risks and the strategic self-sufficiency of individual countries may pose challenges to the semiconductor industry. While the US is expected to lead the AI race in the short term, investors should not underestimate the potential of other regions.
- Following the recent rally, the current valuation has risen to one standard deviation above the historical mean, with positive news related to earnings, the easing of certain export controls and potential tariff exemptions being likely priced in, thus further limiting the upside potential.
- Considering the above factors, we have decided to downgrade the semiconductor sector’s star rating from 3.5 stars to 3.0 stars, yet we would like to reiterate our long-term optimism for the AI-driven semiconductor industry, with a preference for companies that have direct exposure to AI infrastructure.
Since the beginning of the year, the semiconductor sector that we consistently highlight has been showing robust upward momentum. Back in February, the emergence of DeepSeek cast doubt on the market’s actual demand for high-end chips, causing a sharp decline in the MVIS US Semiconductor 25 Index. Although a brief rebound was triggered by the release of 4Q24 earnings reports from related tech stocks, recession fears fuelled by deteriorating US economic data and a series of tariff announcements ultimately led the semiconductor industry to hit its yearly low following ‘Liberation Day’ on 2 April 2025.
However, since the US announced the postponement of sweeping reciprocal tariffs, market optimism about AI has clearly rekindled. Driven by catalysts such as 1Q25 and 2Q25 tech stock earnings and expectations of rate cuts since mid-April, the MVIS US Semiconductor 25 Index has gained 17% YTD as of 3 Sep 2025, significantly outperforming the S&P 500's 9.9%. Since its April bottom, the index has risen by over 60%, primarily driven by heavyweight stocks such as Nvidia, TSMC, Broadcom, and AMD.
In general, the semiconductor industry has experienced a ‘fall-and-rise’ pattern over the past several months. After the recent rally, we have reassessed the sector’s valuation and fundamentals, deciding to downgrade its star rating from 3.5 to 3.0 stars ‘Attractive’. This downgrade is based on three primary reasons:
1. AI semiconductors offers prospect than their non-AI counterparts, but concentration risks warrant caution
2. Geopolitical volatility driven by the global AI race has become the new norm
3. Industry valuations are one standard deviation above the historical mean
AI semiconductors offer better prospects than their non-AI counterparts, but concentration risks warrant caution
Figure
1: Global Semiconductor Quarterly Sales YoY Growth (%)
The above chart provides investors with a sneak peek at the latest global semiconductor sales data. Sales in the second quarter of this year grew nearly 20% YoY, marking seven consecutive quarters of double-digit growth. This was primarily driven by strong demand for logic and memory chips, reflecting continued demand for data center infrastructure and emerging edge AI applications. Driven by the AI secular growth story, we remain in an upcycle for semiconductors.
However, for non-AI semiconductors, despite the rise of AI-enabled PCs, the inventory turnover cycle for consumer chips remains sluggish. In fact, companies like Qualcomm and MediaTek are facing challenges with low adoption rates for new PCs and mobile devices. Meanwhile, the recovery in automotive and industrial chips is still in its early stages, hampered by tariffs and macroeconomic uncertainties, resulting in a slower pace of recovery.
Overall, we believe the strong demand for AI semiconductors will continue to dominate overall sales performance. Looking ahead to the second half of the year, with no signs of a trend reversal in the latest data and the World Semiconductor Trade Statistics (WSTS) having upwardly revising its global semiconductor sales forecast for this year in August, demand for logic and memory chips is expected to remain the primary driver, sustaining the semiconductor upcycle at least through the end of this year.
Table 1: 2025 AI Capital Expenditure Forecasts by the US Government, Sovereign States, and Tech Giants
| Company | 2025 projected AI CAPEX |
| Microsoft | 80 billion USD |
| Amazon | 118 billion USD |
| Alphabet | Raised from 75 billion USD to 85 billion USD |
| Meta | Raised from 64-72 billion USD to 66-72 billion USD |
| Apple | USD 150 billion (Raised from 500 billion USD to 600 billion USD over next 4 years) |
| IBM | USD 30 billion (Assuming USD 150 billion over 5 years) |
| Stargate (SoftBank, OpenAI, Oracle) | USD 125 billion (Assuming USD 500 billion over 4 years) |
| Trump's administration | USD 70 billion (Time horizon TBC) |
| UAE | USD 140 billion (Assuming USD 1.4 trillion over 10 years) |
Table 2: Forecast Earnings of the Top 10 Constituents of the MVIS US Semiconductor 25 Index
| MVIS US Semiconductor 25 Index top 10 holdings | Weight (%) | 2025 forecast earnings growth | 2026 forecast earnings growth |
| Nvidia | 21.90% | 47.29% | 34.97% |
| TSMC | 10.60% | 27.09% | 17.97% |
| Broadcom | 9.50% | 36.61% | 24.20% |
| AMD | 6.40% | 20.85% | 50.58% |
| Lam Research | 4.50% | 6.88% | 13.66% |
| Applied Materials | 4.20% | 7.65% | 3.21% |
| Kla | 4.20% | 5.49% | 11.24% |
| Micron Technology | 4.20% | 516.38% | 58.16% |
| ASML | 4.10% | 23.81% | 6.26% |
| Analog Devices | 3.90% | 17.32% | 18.85% |
However, investors should note that not all participants in the AI semiconductor space are equally positioned to benefit.
As shown in Table 1, the US government, UAE, hyperscalers, and other tech giants continue to allocate substantial capital expenditures to AI, with Alphabet and Meta recently raising their forecasts in their latest earnings reports. This underscores the intensifying AI competitive landscape, driving unabated demand for top-tier AI chips from different stakeholders.
In view of this, we believe companies currently at the forefront of AI chip design and advanced manufacturing will be the primary beneficiaries. Among the MVIS US Semiconductor 25 Index constituents, Nvidia and AMD’s GPUs, Broadcom’s custom ASICs, TSMC’s advanced chip processes (7nm and below), Micron’s high-bandwidth memory (HBM) (and non-index constituent SK Hynix), as well as ASML’s EUV (extreme ultraviolet) lithography systems, all play critical roles in AI infrastructure. These AI-related essentials are used in cloud computing, data center construction, and edge AI applications, including smart sensors, autonomous devices, and industrial automation.
Therefore, while the AI structural narrative remains intact, we believe the AI enablers mentioned above will be the primary beneficiaries in the semiconductor sector. Other companies with relatively less AI exposure are expected to lag, and investors should be selective in semiconductor stocks, focusing on those maintaining leadership in their core AI products and services. These companies share common traits: strong moats, overwhelming competitive advantages, and high irreplaceability in their respective domains.
However, as our favoured semiconductor companies are concentrated in these categories and their revenues primarily stem from significant capital expenditures of a few major players, we believe investors should exercise caution regarding concentration risk, even though AI investments are expected to persist in the foreseeable future.
Geopolitical volatility driven by the global AI race has become the new norm
Furthermore, we believe geopolitical tensions have become a dominant factor impacting the semiconductor industry, with supply chain risks not to be underestimated.
In the current global race for autonomous AI, US-China trade disputes, stringent export controls, and escalating military activities in the Taiwan Strait have not only caused temporary disruptions in the supply of certain chips, but have also fundamentally reshaped the global semiconductor supply chain. This pressure is accelerating regionalisation and “de-risking” trends, prompting countries and regions (e.g. the US, EU, Japan, India, and Middle Eastern nations) to invest heavily in domestic semiconductor manufacturing and R&D capabilities to enhance economic competitiveness and address national security and resilience concerns.
It is also notable that recent developments, including the US government’s July approval for Nvidia and AMD to export H20 and MI308 chips to China respectively, the requirement that both companies remit 15% of their sales revenue from these chips, and DeepSeek’s plan to transition to a domestic AI chip ecosystem, highlight the constantly evolving geopolitical landscape. In this sense, we expect geopolitical volatility to become the new norm for the semiconductor industry.
Regarding the closely watched semiconductor tariffs, most of our favoured AI infrastructure-related companies have investments or commitments to build factories in the US. Coupled with the substantial cash flows of tech giants and government investment pledges, demand for AI semiconductors is likely to remain resilient. Hence theoretically, tariffs (whether 100% or 300%) on these companies should have limited impact. However, given the unpredictability of the Trump administration and its use of tariffs as a negotiation tool, further developments regarding more details of the Section 232 semiconductor tariffs should be closely monitored.
Overall, while the US is expected to lead the AI race in the short term, China and the EU are accelerating their progress in AI-specific applications and local infrastructure development. In the current geopolitical landscape, supply chain risks and the strategic self-sufficiency of individual countries have posed challenges to the semiconductor industry. Therefore, investors should not underestimate the potential of other regions.
Industry valuations are one standard deviation above the historical mean
Figure
2: MVIS US Semiconductor 25 Index Forward PE Multiple (X)
Following the aforementioned rally in the semiconductor industry, its current valuation has risen to one standard deviation above the historical mean, and we believe recent positive news related to earnings and the easing of certain export controls have been priced in. While current valuations are relatively low compared to the levels seen following the launch of ChatGPT in 2023-2024, they are still expensive.
As of 20 Aug 25, seven of the top ten index constituents have 2025 forward PE multiples above their 10-year average, yet we believe the valuations of our preferred major AI beneficiaries (such as Nvidia, TSMC, and Broadcom) are supported by consistently robust earnings growth and fundamentals. However, for companies with less direct AI exposure or non-AI consumer chip businesses, elevated valuations may be sentiment-driven by AI hype and may not be sustainable in the long term.
Downgrade Semiconductor to 3.0 Stars
On the whole, considering that the current outlook of the semiconductor sector is primarily supported by a few AI infrastructure leaders, that geopolitical volatility driven by the global AI race has become the new norm with ongoing tariff and supply chain risks, and the fact that the industry’s current valuation is above its historical mean, we have decided to downgrade the semiconductor sector’s star rating from 3.5 stars to 3.0 stars.
We reiterate our long-term optimism for the AI-driven semiconductor industry, with a preference for companies with direct exposure to AI infrastructure. Amid current macroeconomic uncertainties and geopolitical volatility, semiconductor stocks may experience near-term volatility due to various news headlines. However, investors may consider this as an opportunity to increase their exposure.
Long-term investors who remain optimistic about the semiconductor sector's potential may consider the VanEck Semiconductor ETF (NASDAQ:SMH), which tracks the MVIS US Semiconductor 25 Index.
Table 3: Valuation analysis for VanEck Semiconductor ETF
|
2024 |
2025E |
2026E |
2027E |
|
|
Earnings Per Share (EPS) |
287.10 |
411.3 |
509.0 |
607.4 |
|
Earnings Growth YoY |
- |
43.3% |
23.8% |
19.3% |
|
PE Ratio (X) |
43.6 |
30.4 |
24.6 |
20.6 |
|
5Target Price for Index (based on a fair PE of 24X) |
14,578 |
|||
|
Upside Potential |
16.5% |
|||
|
Target Price for SMH ETF (USD) |
358 |
|||
|
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 15 Sep 2025 |
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