AI Bubble?

The currently strong semiconductor market is being driven by AI applications. A McKinsey survey showed 88% of businesses used AI in 2025 compared to just 55% in 2023. According to Inc.com, 306 of the S&P 500 companies mentioned AI in their third quarter 2025 earnings conference calls, up from only 53 citations three years earlier in third quarter 2022.

The WSTS December 2025 forecast called for 22% semiconductor market growth in 2025 and 26% in 2026, following 20% growth in 2024. This growth has been driven by the memory and logic categories. Memory is forecast to grow 28% in 2025 and 39% in 2026. Logic is predicted to grow 37% in 2025 and 32% in 2026. Excluding the memory and logic categories, the remainder of the semiconductor market declined 3% in 2024 and is projected to grow only 6% in 2025. The memory companies have all cited AI as their major growth driver in the last two years. Nvidia, the largest AI semiconductor company, grew its revenue 114% in 2024 and is guiding for 63% growth in 2025. Most Nvidia AI semiconductors are included in the logic category.

How long will the AI boom last? What will happen to the semiconductor market? We can look at previous bubbles in the semiconductor market for clues.

PC Bubble

The introduction of the IBM PC in 1981 led to a boom in the PC market. With IBM setting a standard for PC hardware and software, businesses felt safe investing in PCs. PC unit shipments grew 85% in 1983 and 29% in 1984. The PC boom led to a boom in the semiconductor market, especially for memory and Intel microprocessors. However, the PC boom came to an abrupt halt in 1985, as PC unit shipments fell 11 percent. The weakness in 1985 was due to several factors. Clones of IBM PCs from Compaq, Dell and HP disrupted the market. U.S. GDP growth slowed from 7% in 1984 to 4% in 1985.

The PC bust in 1985 led to a 17% decline in the semiconductor market. Memory fell 38% and Intel revenues dropped 16%. The decline was short-lived. In 1986 PC unit shipment grew 22% and semiconductors grew 23%. Memory and Intel revenues returned to strong growth in 1987.

Internet Bubble

Internet use began to explode in the 1990s as major businesses established links and the World Wide Web created standards and enabled browsing. The number of Internet users roughly doubled each year in 1995 and 1996. Users grew around 50% a year from 1997 through 2000. In 2001, growth in Internet users slowed to 21%. The rapid growth of the Internet led to the creation of numerous dot-com companies fueled by venture capital. By early 2000, rising interest rates and the lack of profitability of most dot-com startups led to a slump in investment. The NASDAQ-100 index, which was heavily weighted with dot-coms, dropped 78% from March 2000 to October 2002.

The collapse of many dot-com companies resulted in telecommunications companies having over capacity in Internet infrastructure. Cisco, the largest provider of Internet infrastructure hardware, saw revenue change from 50% plus growth in 1999 and 2000 to a 23% decline in 2001. In 2001, the semiconductor market dropped 32% with memory down 49%. The semiconductor and memory markets returned to double-digit growth in 2003.

AI Bubble?

The chart below shows the change in the semiconductor market during the PC bubble (blue line), the Internet bubble (red line) and the current AI period (green line). In the PC and Internet bubbles, the semiconductor market had two years of strong growth in the 19% to 46% range followed by major declines when the bubbles burst. In the current cycle, semiconductor growth was 20% in 2024 and is projected at 23% in 2025 and 26% in 2026.

The question is not if the AI bubble will burst, but when. Basically, all major new technologies go through a period of strong growth in the first few years. Many new companies emerge to try to take advantage of the new technology, largely driven by investments from venture capital funds. Eventually, the growth of the new technology slows or declines. Investment funds then begin to dry up. The revenues of hardware companies enabling the new technology fall, leading to semiconductor market declines. History suggests a possible bursting of the AI bubble in the next year or two.

The bubbles are not the end of the new technologies, but an adjustment. Certainly, PCs and the Internet are major economic drivers which have transformed the way of life for both business and consumers. AI also promises a major transformation. How smoothly the transformation is implemented remains to be seen.

Semiconductor Intelligence is a consulting firm providing market analysis, market insights and company analysis for anyone involved in the semiconductor industry – manufacturers, designers, foundries, suppliers, users or investors. Please contact me if you would like further information.

Bill Jewell
Semiconductor Intelligence, LLC
billjewell@sc-iq.com

Also Read:

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U.S. Electronics Production Growing

Semiconductor Equipment Spending Healthy

 

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