"AI is 'fundamentally reshaping the chip industry'; does this round of the 'semiconductor cycle' still have 'ample room'?"
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AI is fundamentally reshaping the semiconductor industry, becoming the most crucial variable in this semiconductor cycle.
On October 5, according to Hard AI news, Citi stated in its latest research report that in just five years, AI-related sales have grown from zero to account for more than 25% of the entire semiconductor market, driving the semiconductor industry to achieve its first accelerated growth in 25 years.
Citi analyst Christopher Danely pointed out that although global semiconductor sales are expected to grow 16% to $731 billion in 2025, reaching a record high, this round of revenue growth is entirely driven by price, while shipment volume remains well below its peak. This suggests low inventory levels and plenty of room for further industry growth.
Analysis shows that the current average semiconductor price has risen from about $0.72 in 2019 to about $1.26 in 2025, an increase of 75%. Since 2022, prices have surged by 45%, the largest increase in 30 years. This continuous four-year price hike is the first occurrence since 1992-1995.
Citi expects AI data center semiconductor sales share to rise from less than 5% in 2022 to about 27% in 2025, and further to 40% in 2028. Driven by AI demand, the semiconductor industry’s revenue growth rate is expected to increase from a historical average of 7% to 10%.
AI Drives Semiconductor Pricing to 30-Year Highs
Citi data shows that this round of semiconductor industry revenue growth is mainly driven by the price increase of logic chips.
Citi states that average pricing of logic computing chips (including AI accelerators) has grown 24% in the past three years, far exceeding the 2% increase in the previous decade. The share of logic computing chips in total semiconductor sales has also risen from 27% in 2020 to 39% in 2025.
Among them, logic computing revenue is growing rapidly at a 53% compound annual growth rate, rising from about $29.6 billion in 2022 to about $106.4 billion in 2025, with its share of total semiconductor sales jumping from 5% to 15%.
The average price of logic computing chips has risen sharply from $7.80-8.50 during 2018-2022 to an expected $26.40 in 2025, with a compound annual growth rate of 47%.
Citi said Nvidia's rapid data center business expansion is the key driver of this change. This business's share of logic chip sales jumped from less than 10% in 2021 to 66% in 2025, and its share of total semiconductor sales rose from less than 3% in 2021 to 24% in 2025.
Shipment Volume Still Below Peak, Inventory Levels Low
Although revenue has hit a new high, Citi’s analysis shows semiconductor shipments still have significant room for growth.
Current total semiconductor shipments are still about 11% below the previous peak, growing only 18% in this cycle, far below the historical average growth of 60%.
By product category, microcontroller shipments are still 27% below their 2021 peak, logic computing chips are down 15%, and microprocessors are down 12%.
Citi believes this gap between shipments and the peak indicates low supply chain inventory, leaving ample space for future growth.
Citi analysts pointed out that in an industry with an average 50% peak-to-peak unit growth, the current 11% shipment gap “gives us confidence that this cycle has more room to rise.”
Significant Profit Margin Divergence, Most Companies Still Have Room for Improvement
Citi’s analysis of 18 covered companies shows an obvious divergence in industry profit margins.
Data shows weighted average gross margin reached 59% in Q2 2025, close to the Q4 2024 peak of 60%, but mainly pushed up by the high margins of Nvidia and Broadcom.
If a simple average is used, the gross margin is only 52%, significantly lower than the historical peak.
The profit margin of covered companies is on average 7.8% below their respective peaks. The gaps for Intel, Microchip Technology, and AMD are the largest, at 18.7%, 14.5%, and 12.8% below their respective profit margin peaks, respectively.
Eight out of 18 companies have gross margins more than 10% below peak, and 9 have operating profit margins more than 10% below peak. Citi believes this means as the semiconductor cycle progresses, profit margins still have considerable room to rise.
Valuation Premium Is Reasonable, AI Effect Supports High Growth
Although the semiconductor SOX index is now trading at a forward P/E of 31, a 34% premium over the S&P 500 index, Citi believes this valuation level is reasonable.
Since the launch of ChatGPT in November 2022, the SOX has averaged a 31% premium over the S&P 500.
Citi emphasizes that the semiconductor industry has a gross margin over 50% and an operating profit margin over 25%, significantly higher than the S&P 500's 30%-35% gross margin and 10%-15% operating margin.
In terms of growth, the semiconductor industry is significantly faster than the S&P 500 over 3, 5, and 10-year periods.
Regression analysis shows that operating profit margin (excluding equity incentives) is the biggest driver of valuation, explaining 66% of forward price-to-sales ratio changes.
Citi expects as long as the AI cycle continues, overall semiconductor demand will remain robust, supporting industry valuation premiums.
This article is from WeChat Official Account "Hard AI". For more AI frontier information please go here
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