For over the past year, semiconductor manufacturers have pointed to the growing market for artificial intelligence and machine learning as the engine that would rescue the electronics sector from the post-COVID industry slump and propel the sector toward a new growth phase.

Judging from Commodity IQ Demand Index from market research firm Supplyframe, there is plenty of evidence that AI has led to a flurry of spending and development. The index rose by 8% sequentially in July, ending a three-month period of decline. However, Supplyframe’s overall index remained nearly 20 points below the 2020 baseline, indicating that sales have not yet recovered to the robust levels seen four years ago.

Supplyframe noted that the AI sector is the primary factor propelling growth in component demand, with the ChatGPT craze spurring soaring demand for GPUs and high-bandwidth memory (HBM) used in data center servers. But while demand from the AI sector is expected to continue to increase, some concerns have arisen regarding the sustainability of the current boom’s pace.

Will the AI Market Bubble Pop?

The firm noted that despite massive investments in AI infrastructure in pursuit of expected productivity enhancements, there are questions about the actual value delivered by artificial intelligence. In fact, there is speculation that the AI market bubble could at some point burst, creating a steep downturn in component demand similar to the dot-com bubble collapse in 2001.

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On Tuesday, the stock market displayed some of the schizophrenic behavior that worries analysts about the chip market. According to a CNBC report, prices of major chip makers such as Intel, Marvell, Broadcom, and AMD all fell by mid to high single digits. Worst yet, the Nvidia, which has been the darling of the industry and stock market in recent months,  saw its stock price fall too, by 9.5%

For Intel, the falling stock price is the latest in a series of setbacks for the chipmaker, which despite making massive investment in fabs and R&D has not seen the return from AI they might have expected. After recovering from a prolonged downturn, Intel posted steep losses in its most recent quarter, prompting the chipmaker to lay off 15% of its workforce and prompt more dire speculation about the company’s future.

For Nvidia, which has ridden the AI boom to jockey its way to become the second largest semiconductor supplier, behind Intel, the tumbling stock price could be a warning that even a chipmaker that has seemingly done everything right is not immune to the swings that have plagued the electronics industry for years.

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In a report Tuesday on the site Seeking Alpha, analyst Bill Maurer noted that while the company continues to show impressive growth, Nvidia will be challenged to meet future investor expectations. He noted the company faces margin pressures due to the production ramp-up of is much-ballyhooed Blackwell chip for AI.

Even AMD, which has posted some impressive gains in recent quarters, could face challenges trying to make headway in the AI market, as analysts question the degree to which the chipmaker can make inroads against AI chip market leader Nvidia.

Outlook Still Bullish

Despite mounting concerns, analysts remain bullish on the outlook for the AI boom, with the current hypergrowth phase in AI data center equipment continuing until 2026, according to multiple market researchers.

Supplyframe projects that demand should continue to uptick and perhaps even approach 2020 levels in the coming months. But the firm said buyers should prepare for more challenging purchasing conditions. Supplyframe also warned that buyers need to watch the demand situation for data center AI chips and prepare for purchasing opportunities that may arise if demand downshifts in the AI segment.

Mitigating concerns about AI growth are the increase in demand for components for other applications. Supplyframe noted that in July, most components recorded growth. This included a 17% sequential increase in sourcing actions for RF and microwave devices, a 14% expansion for lithium-ion batteries, an 11% upswing for standard logic, and a 10% gain for resistors.

Overall, the upturn in the index across all electronic component commodities by 7.7% comes amid a rising tide of positive indicators for electronics demand.

Other Reports Positive

Other market reports also noted an upturn in the electronics market. The Semiconductor Industry Association (SIA) reported recently that global chip industry sales rose to $149.9 billion during Q2, up 18.3% year-over-year and a 6.5% increase compared to Q1. Meanwhile, the July ECIA Electronic Component Sales Trend (ECST) survey showed that industry sentiment rose 4.5 points to 103.4, just above the trend baseline.

Electronic component demand is partly fueled by escalating product sales, including smartphones and PCs. The global PC and smartphone segments are expected to generate shipment growth in the mid-single digit percentages this year following significant declines in 2023. AI-equipped PCs and smartphones are expected to experience accelerating growth into the first quarter of 2025.