Veteran analyst Malcolm Penn pushes back against the AI euphoria currently gripping the semiconductor market.
The semiconductor industry is on a roll. Revenues are exploding, quarterly records are being shattered and investors can’t get enough of anything remotely tied to AI. There’s talk of the industry reaching 1 trillion dollars this year, years ahead of previous expectations. Yet, beneath the headlines lies a market that looks unbalanced and fragile, says Future Horizons’ analyst Malcolm Penn in his latest market briefing.
According to the latest WSTS data, March semiconductor sales rose 88.1 percent year-on-year. Logic grew almost 39 percent. Memory surged 269 percent. But strip away the semiconductor categories that feed the AI data center boom, and the picture is quite different. Analog growth fell to 13.8 percent. Microcomponents grew 8.8 percent. Discretes rose 10.1 percent. Those are healthy figures, but hardly indicative of an industry in hypergrowth mode.
More importantly, unit shipments remain surprisingly weak. Penn argues the current revenue explosion is being driven primarily by soaring average selling prices rather than underlying demand. That distinction matters because ASP-driven booms rarely last. “IC ASPs will drop like a rock when the data center boom slows, and the memory market will crash once new capacity comes on stream,” Penn writes.
Penn isn’t dismissing AI itself. Quite the opposite. He compares it to transformational technologies such as automobiles, telecommunications, television and the internet. All fundamentally reshaped society and created enormous long-term semiconductor demand. But none did so overnight. Each went through waves of hype, overinvestment, corrections and eventual maturation. The current AI cycle may simply be compressing those phases into a much shorter timeframe.
One concern is that the industry narrative has become dangerously dependent on AI. Depending on how one counts them, AI chips may already account for between a quarter and half of total semiconductor revenue. Yet, they still represent less than 1 percent of total unit shipments.
Another alarming signal is the seasonality breakdown. The semiconductor industry has followed relatively predictable cyclical patterns for decades. The first quarter is traditionally weak, averaging a 3-percent sequential decline from Q4. Q1 2026, however, delivered 25 percent quarter-on-quarter growth – the strongest first-quarter performance in the industry’s 70-plus-year history and, according to Future Horizons, the strongest quarterly growth rate ever recorded.
Markets don’t normally behave like this for long, Penn asserts. The Brit is the only analyst who goes on record to forecast a downturn, “maybe this year, if not, next.”
For those unconvinced, he offers a simple calculation. The more optimistic chip forecasts currently grabbing the headlines would see the chip market increase its share of the world’s GDP from 0.6 percent to 1.5 percent by 2035, growing three times as fast as the historical GDP growth rate and twice as fast as the pre-AI industry average without slowing down. Penn calls that unrealistic.
Top image credit: Igor Omilaev on Unsplash
