Is AI demand real or a bubble? And what it means for Asia's chipmakers

Is AI demand real, or is this all one giant bubble waiting to burst?

It's the single most-asked question in markets today, and for good reason. Most of that scepticism boils down to one thing: hyperscaler spending is increasingly funded by debt against returns that remain uncertain. Headlines about circular financing arrangements between chipmakers, cloud providers, and AI labs keep multiplying as a result.

We do not know whether hyperscalers like Alphabet, Amazon, Meta, and Microsoft will ever earn back the hundreds of billions of dollars they are pouring into data centres — and we're not going to pretend otherwise.

But here's what we know. Demand for the physical hardware underneath AI — the memory chips, the equipment, the foundries — is real. That's not even up for debate anymore. The evidence is coming from the companies making these chips and the companies buying them, on their own earnings calls, in their own words, describing a shortage that shows no sign of resolving.

This is where our conviction sits, and it is why we remain positive on Asian semiconductors even as headlines about an “AI bubble” grow louder by the week.

AI demand is strong. Here's the proof.

Start with the results themselves.

TSMC's July revenue rose 44.7% year-on-year, running ahead of the company's own full-year guidance of slightly above 40% growth. That followed a second-quarter report that beat expectations outright, with revenue at the top of TSMC's guidance range and gross margin above it. Chairman C.C. Wei told analysts AI-related demand "continues to be extremely robust."

Samsung's second quarter operating profit surged roughly 19-fold year-on-year, an extraordinary number by any standard, driven almost entirely by the semiconductor division. Samsung also confirmed on the same call that management expects the shortage to persist through 2028.

While SK Hynix earnings modestly missed expectations, operating profit still rose 557% year-on-year. A miss is not the same thing as weak results. SK Hynix's own management pushed back directly on the idea that this signalled softening demand. Asked whether hyperscalers exploring more efficient AI models might mean less infrastructure spending ahead, the company's response was blunt: 'our major customers are still requesting more memory supply.'

Equipment makers add a further layer of confirmation. Lam Research, whose customers include Samsung, SK Hynix, Micron, and TSMC, recently raised its 2026 industry-wide equipment spending forecast to the low USD 150 billion range, and separately expects between eight and ten new fabs from its largest customers to come online between now and the end of 2027. ASML, the sole global supplier of the most advanced chipmaking machines, raised its own 2026 revenue guidance to a range of EUR 43–45 billion.

Table 1: Q2 results across the chip supply chain: strong across the board

Even the buyers say memory is scarce

Tim Cook called this year's memory market "a 100-year flood." Apple's own CFO later confirmed more than 100% of that quarter's gross margin decline was explained by memory cost alone. Apple raised Mac and iPad starting prices by at least USD 100 this year — some models by more than USD 1,000.

Elon Musk does not have an incentive to talk up memory demand either. As the buyer of enormous quantities for SpaceX's AI build-out, he'd rather talk it down. Yet on SpaceX's earnings call, asked what was constraining compute expansion, his answer was blunt: "The limiting factor currently is memory." Memory output is growing around 20% a year, he said, while demand is growing 200% or more.

Qualcomm is raising prices across its range from September, citing higher costs "across wafer fabrication, assembly, test, advanced packaging, memory and other materials." Nintendo raised the Switch 2's US price from USD 449.99 to USD 499.99 — an 11% increase — after absorbing nearly JPY 100 billion of higher component and tariff costs, driven in large part by memory.

Global smartphone shipments fell to their lowest quarterly level since 2013, and MediaTek has guided the smartphone market to decline around 15% in units this year. Even though AMD delivered a strong Q2 overall, its own consumer division shows some of the damage. Gaming revenue fell year-on-year — driven mainly by the end of a console cycle, though rising component costs also weighed on graphics card demand — and AMD's client and gaming margin dropped to 15% from 21%.

The memory shortage is severe enough to force buyers to raise prices and push smartphone shipments to a 13-year low — demand is still outpacing supply, and that's a real, physical constraint. Admittedly, this won't last forever. But it hasn't shown up in supplier margins yet — Samsung's chip division just posted a record operating margin, and SK Hynix's sits at an all-time high even after a quarter that missed consensus — and until it does, buyer pain is supplier gain.

This AI boom has two very different kinds of exposure

AI demand is real — that much we've just shown you. Whether hyperscalers actually earn back what they're spending on it is a separate question, and we still don't know the answer. So let's assume, for a moment, that they can't. Who's exposed if that turns out to be true?

The hyperscalers themselves carry that risk directly. They're spending hundreds of billions of dollars before knowing whether any of it pays off. Alphabet posted negative free cash flow for the first time in its history in its most recent quarter. Meta's free cash flow fell 91% year-on-year, to just USD 784 million. Amazon is burning cash too, on track to consume around USD 13 billion this year and USD 28 billion in 2027, according to Visible Alpha estimates. If the returns disappoint, they'll bear the pain first.

Asia’s chipmakers are a different story. They are getting paid today for demand that’s already real. Whether or not the hyperscalers' bet ever pays off has no bearing on the cash already in the door. 

Samsung's chip division posted operating profit up roughly 19-fold year-on-year. SK Hynix's operating profit rose 557% year-on-year on record revenue. Kioxia's numbers are the most extreme of all: a single quarter's operating profit exceeded its entire prior fiscal year's, with revenue up 415.5% and profit up more than 2,800% year-on-year. TSMC's own capital expenditure — raised to USD 60–64 billion for 2026 — is funded entirely from its own record operating cash flow, proof the cash is real enough to reinvest without borrowing.

Samsung and SK Hynix go a step further. Not only are they getting paid today — they're also locking in cash from future orders. Samsung's long-term agreements require customers to make substantial upfront payments as a condition of the contract. Management has disclosed that a quarter of those payments have already landed on Samsung's books, years before the corresponding chips are delivered. SK Hynix's roughly ten long-term agreements work the same way, backed by customer deposits — cash committed years before the product ships. A customer only puts up an advance deposit if they're certain they'll need the product for years.

To be clear, we don't think hyperscalers are heading for a bust. Alphabet's cloud operating margin expanded from roughly 21% to 36% in the second quarter of 2026, compared with the same quarter a year earlier, with backlog rising to USD 514 billion over the same period. Amazon's AWS margin reached 39% in the same quarter, up roughly 5 percentage points year-on-year excluding a one-off accounting gain, with its backlog now growing at a triple-digit pace. The odds, in our view, favour hyperscalers eventually earning an adequate return on this spending.

Either way, Asia’s chipmakers get paid.

Cash-rich — and the balance sheet is doing more than sit there

Getting paid today and locking in tomorrow's revenue are two layers of protection. There's a third: the balance sheet itself.

Samsung and SK Hynix together hold a combined KRW 237 trillion in net cash as of their latest quarterly results — approximately USD 167 billion at current exchange rates — more than the entire Magnificent Seven combined. That's not spare cash sitting idle. It's insurance. A balance sheet that size can absorb a genuine downturn without the company being forced into distress.

Chart 1: Samsung and SK Hynix's combined balance sheet outweighs the entire Magnificent Seven

Kioxia has already demonstrated exactly this, in real time. The Japanese NAND maker rebuilt its balance sheet over two quarters, repaying a JPY 407.5 billion senior loan in full and moving its net debt-to-equity ratio from 80% to negative 8%. It did this specifically to create that kind of buffer. Its own CFO explained the logic directly: strengthened cash flow gives the company flexibility such that, in his words, "even if there is a big downturn, we will be able to cope." That's not a claim that margins are protected. It's a claim that the company can absorb a shock without being forced into a fire sale or a halted investment plan.

Not only are Asia’s chipmakers getting paid today for their order, they are locking in future demand with long-term contracts, armed with a balance sheet large enough to absorb any potential downturns. This is genuine downside protection that a typical cyclical business usually lacks.

There's a bonus on top of the insurance: this much cash also leaves real scope for higher shareholder returns. At present, both Samsung and SK Hynix target payouts equivalent to roughly half of free cash flow — well behind Micron, which pledged to return 100% of free cash flow in June. That gap hasn't gone unnoticed. Investors wanting a greater share of excess cash via dividends or buybacks have been calling upon Samsung Electronics and SK Hynix to lift that target.

Both companies have now signalled they've heard it. Samsung said it is "exploring ways to enhance shareholder returns in a sustainable manner" and expects to share details soon. SK Hynix went further, saying it is preparing concrete plans by the end of the year and expects to "meaningfully expand shareholder returns while maintaining investments and financial soundness." Neither has disclosed a size or a firm date yet — but for a business already this well insured, a bigger payout is well within reach.

This is why we’re still buying Asian semiconductors

If you're still worried, here's one more piece of evidence. On its most recent earnings call, Samsung's EVP of memory sales stated that "the supply constraints are expected to become even more severe in 2027 than 2026, reinforcing our view that the supply shortage will persist through 2028." Lam Research corroborates this independently: it expects meaningful new capacity from its largest customers only by the end of 2027 at the earliest. That means 2028 is still likely to be a shortage year, not the trough the market is pricing in — any real easing could get pushed out to 2029.

Asia's chipmakers aren't waiting for orders to come. They've already been paid, the revenue is already contracted, and the balance sheets are already strong enough to absorb whatever comes next. And because so much of that new capacity is being built against contracts already signed, rather than a guess at future demand, the kind of oversupply that ended past memory booms is less likely to repeat.

For investors seeking exposure to this sector, we recommend the Global X Asia Semiconductor ETF (HKEX: 3119), with a target price of HKD 334, implying approximately 96% upside from current levels of HKD 170.15 (as of 11 August 2026). The ETF gives you diversified exposure across TSMC, SK Hynix, Samsung Electronics and other key names throughout the AI hardware supply chain — reducing the impact of any single company's earnings surprise or share price swing on your overall position, which matters given how sharply individual names have moved this year.

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in Global X Asia Semiconductor ETF.