Semiconductor Industry Sees Dramatic Shift: AI Boom Creates ‘Haves’ and ‘Have Nots’ in 2024, with Predictions for 2025

The semiconductor industry experienced a significant divergence in 2024, with companies exposed to artificial intelligence (AI) flourishing while those serving traditional markets faced headwinds. Needham analyst N. Quinn Bolton’s recent report highlights this stark contrast, predicting a potential market shift in 2025 as the AI boom cools and other sectors begin to recover. This analysis reveals a fascinating tale of two semiconductor markets – one booming with AI-driven growth, and the other struggling with sluggish demand and inventory overhang. The key takeaway is a predicted shift in investment opportunities from AI-focused companies to those in more traditional sectors which are poised for recovery.

Key Takeaways: A Semiconductor Market Divided

• **Dramatic Performance Divergence:** AI-focused semiconductor stocks soared in 2024, achieving an average return of 147%, significantly outpacing the S&P 500’s 23% return and the -17% average return of non-AI semiconductor stocks in Bolton’s coverage.
• **The Rise of AI:** The surge stems from robust demand for AI infrastructure, driving substantial revenue and earnings growth for companies in this sector.
• **Shifting Sands: Mean Reversion Predicted:** Bolton anticipates a “mean reversion” in 2025, with AI growth decelerating and a recovery within analog/mixed-signal and cyclical semiconductor segments.
• **Top Picks for 2025:** Needham’s top pick for 2025 is **Allegro MicroSystems Inc (ALGM)**, added to their Conviction List, alongside positive outlooks for **Silicon Laboratories (SLAB), Lattice Semiconductor (LSCC), and ON Semiconductor (ON)**.
• **Connectivity in AI Data Centers:** Strong investment opportunities are predicted in companies servicing AI data center connectivity, such as **Astera Labs (ALAB), Credo Technology (CRDO), MACOM Technology (MTSI),** and **Semtech Corp (SMTC).**

2024: The Year of the “Haves” and “Have Nots”

Bolton aptly described 2024 as the year of the “haves” and “have nots” in the semiconductor industry. While AI-related companies thrived, experiencing explosive growth fueled by the insatiable demand for AI infrastructure, other segments faced significant challenges. Semiconductor suppliers catering to the PC, smartphone, industrial, and automotive sectors wrestled with weak demand and the need to digest substantial excess inventory.

The AI Boom: A Force to Be Reckoned With

The phenomenal success of AI-driven semiconductor stocks reflects the explosive growth of the AI market. The accelerating deployment of AI infrastructure across various sectors created a voracious appetite for specialized chips, resulting in a surge in revenue and earnings for companies capable of meeting this demand.

Traditional Sectors Face Headwinds

In stark contrast, companies supplying the traditional markets grappled with sluggish demand and inventory overhang. The combination of these factors created a difficult operating environment, leading to revenue and earnings declines for many in the sector. The average return for non-AI-driven semiconductor companies in Bolton’s coverage universe plummeted to an alarming -17%, highlighting the significant disparity between the AI-driven and traditional segments.

2025: A Potential Shift in the Semiconductor Landscape

Bolton’s prediction of a “mean reversion” in 2025 suggests that the current market dynamics might begin to shift. The decelerating growth in AI spending, which may lead to multiple contractions, coupled with anticipated improvements in the fundamentals of the analog/mixed-signal and cyclical sectors, points towards a potential rotation in investor interest.

The Potential for Recovery in Traditional Markets

Several factors could contribute to the recovery of the traditional semiconductor markets. The completion of inventory digestion is crucial for clearing the backlog and creating space for new orders. A general improvement in end-market demand would also significantly boost revenues and earnings. The enduring trend towards autonomy and electrification in the automotive sector promises to be a significant driver of semiconductor growth in the coming years.

Attractive Valuations of Non-AI Stocks

Furthermore, the valuation of some stocks in the analog/mixed-signal and cyclical segments are seen as more compelling compared to the current valuations of overheated AI-driven stocks. This could lure investors seeking equilibrium in their portfolios and a balanced approach to semiconductor investments which were tilted heavily towards AI during 2024. This, combined with the potential for recovery, may present attractive investment opportunities.

Needham’s Top Picks and Investment Strategies

Based on this projected shift, Bolton identifies several semiconductor companies that are particularly well-positioned for success in 2025. **Allegro MicroSystems (ALGM)**, a leading player in power management and sensor technology, stands out as Needham’s top pick, highlighting their strong fundamentals which remained robust even in the weaker 2024 market conditions.

Beyond Allegro: Needham highlights other promising companies.

**Silicon Labs (SLAB)**, is highlighted for its unique position, less dependent on macroeconomic recovery due to new design wins in various high-growth areas like smart meters in India. **Lattice Semiconductor (LSCC)** is expected to recover in the latter half of 2025 after clearing inventory corrections. Finally, **ON Semiconductor (ON)**, although anticipated to perform weaker in the first half of 2025, is placed for a strong recovery in the second half, riding the cyclical recovery tide.

Playing the AI Connectivity Trend

Bolton has also provided investment recommendations within the AI sector itself, with a focus on companies well-situated to benefit from the ongoing demand for connectivity within AI data centers. This includes **Astera Labs (ALAB), Credo Technology (CRDO), MACOM Technology (MTSI), and Semtech Corp (SMTC).** These companies are central to handling the increased data flow, processing speeds, and communication needs within the ever-expanding AI infrastructure space.

Nvidia, Broadcom, and Marvell: Continued Strength

Additionally, Bolton maintains a positive outlook on **Nvidia (NVDA), Broadcom (AVGO), and Marvell Technology (MRVL)**, forecasting continued benefits from strong unit growth of XPUs (both general-purpose GPUs and hyperscaler custom ASICs) in the years to come. These companies represent the cutting edge of AI processing capabilities, and their continued success remains a significant growth engine within the current market dynamics.

Conclusion: A Dynamic and Evolving Landscape

The semiconductor industry is far from static. While AI has undeniably driven a period of remarkable growth in 2024, creating a strong divide within the market, the future promises a significant shift in dynamics. Needham’s analysis, highlighting both the present realities and the future outlook, provides invaluable insights for investors navigating this dynamic and compelling market. Bolton’s predictions for 2025, while acknowledging the continued momentum in AI, signal a significant opportunity to rebalance portfolios and diversify investments as certain key traditional semiconductor sectors are poised for a substantial recovery.