Reading the artificial intelligence (AI) headlines, investors could easily be misled into thinking that the entire semiconductor industry is healthy. In fact, across the market, demand is struggling to recover from the post-pandemic slump.

During the Covid-19 pandemic, there has been unprecedented demand for consumer goods, including phones, laptops and cars. Initially, this led to shortages, but then the semiconductor industry caught up, creating an oversupply.

Slow recovery

The emergence of ChatGPT in late 2022 created a countercyclical market for AI chips, but during this period the rest of the semiconductor market remained modest. In terms of end markets, sales of computer and smartphone semiconductors have declined – by 14% and 3.5% respectively in 2023 and are expected to grow by only 4% in 2024, according to Deloitte. This would leave them below their 2022 level.

This slow recovery is reflected in the company’s results. Last week, the Dutch manufacturer of photolithography machines ASML (NL:ASML) announced that its net bookings fell 53% quarter-on-quarter in the three months to September to €2.6bn (£2.2bn). As a result, ASML now expects 2025 net sales to be between €30 billion and €35 ​​billion, down from analysts’ previous expectation of €36 billion.

This reduction in the order book came from a combination of a slower recovery in non-AI markets and concerns about Chinese demand. ASML chief executive Christophe Fouquet blamed the “slow recovery of end markets such as mobile phones and PCs” for customers “pushing” some of their new manufacturing plants.

So cyclical

The semiconductor industry has always been a notoriously cyclical business, and even ASML is reluctant to predict when demand for its lithography machines will rebound. “Really, we’re seeing our customers basically delaying their (manufacturing facilities), we’re not seeing customers changing their minds about these factories,” Fouquet said. “But there is still a long way to go until 2026.”

After ASML’s results, its share price fell 20 percent, while equipment manufacturers Lam Research (US:LRCX) and Applied Materials (USA:AMAT) their stock prices fell 13%, respectively.

Semiconductor supply chains are extremely complicated and require a lot of cooperation and long-term planning. Designers like Nvidia (US: NVDA), Qualcomm (US: QCOM) and AMD (US: AMD) will be in constant negotiation with producers such as TSMC (TW:2330) and Intel (US:INTC) around their capacity.

Manufacturers will then plan how much to invest in their manufacturing plants, known as factories, to meet this future demand. Once this planning has been done, chipmakers will place an order with equipment manufacturers such as ASML and Lam Research.

Since all of this takes quite a while, the concern is that ASML’s disappointing results are a portent for the industry’s near-term future. “Readings from ASML’s earnings call point to a slower recovery in logic and memory, with some customers seeing a slower ramp,” Jefferies analyst Blayne Curtis warned.

However, these “specific customers” do not appear to include TSMC. The Taiwanese company reported immediately after ASML and its annual net profit rose 54% to NT$325bn (£7.8bn). This was driven by “extremely robust” AI-related demand. “For PCs and smartphones, unit demand growth remains in the low single digits, but TSMC is benefiting from increased smartphone content driven by high-end AI demand,” Curtis said.

As the most advanced chip maker, TSMC is the most exposed to the AI ​​boom, and on its earnings call announced that it has no plans to cut growth spending. This means that ASML’s reduced order book is most likely the result of order cuts by manufacturers such as Intel.

Unlike TSMC, Intel makes almost no money from AI and instead relies on the PC and server markets. In the three months to June, its revenue fell slightly to $12.8 billion, while net income swung from a profit of $1.5 billion to a loss of $1.6 billion . In response, Intel announced that it would cut gross capital expenditures in 2024 by more than 20% from previous forecasts and that there would be no significant increase in spending in 2025. It also suspended its dividend.

Green shoots

Similarly, Texas Instruments (US:TXN) he fought too. The company manufactures analog semiconductors for the automotive and industrial sectors. Instead of doing logic, analog chips turn real-world signals into data, making them useful for sensors. Those chips aren’t in high demand right now, and Texas Instruments saw its revenue fall 8 percent year-on-year in the three months to September.

This was driven by a continued decline from industrial customers, but there were some signs of recovery, with other end markets, including automotive, growing sequentially. “December’s lower guidance was largely expected, but the recovery and broader auto growth was better than expected,” Jefferies analyst Curtis said.

The world is inevitably becoming more and more digitized, but not at a constant pace. However, even if ASML can’t tell us if it will be in 2025 or beyond, the recovery should come eventually as the cycle turns again.