Global semiconductors have been driving stock markets for more than a year but are now in a volatile sell-off.
The sharp declines in these stocks have raised fears of an AI bubble that, if it were to burst, could throw the tech industry and the entire market into disarray. Major semiconductor stocks have been hit hard on the stock market in the past month: Nvidia is down 14%, Advanced Micro Devices (AMD) is down 19%, TSMC, which has its own geopolitical problems, is down 15%, and British chipmaker Arm is down 31%, with 24% of that decline since the start of the week. Intel shares fell 27% on Friday, their worst day in 50 years, following news that they would suspend their dividend and lay off 15,000 employees.
Semiconductor stocks could fall another 15% to 25%, according to Sandeep Rao, an analyst at investment firm LeverageShares Inc. He added that Nvidia and Arm would be near the higher end of that range, with TSMC somewhere in the middle.
The problem with the AI hype, Rao argues, is that it took too long for it to become reality. Investors were promised the world’s best technology that would revolutionize personal electronics and business. But they were forced to face higher valuations and longer investment horizons than they had originally planned. “Only now is this common sense realization beginning to permeate the investor sphere as FOMO fades and economic considerations are taken into hard scrutiny,” Rao told Fortune.
The market for AI stocks isn’t being helped by the fact that investors are now preparing for another big macroeconomic story: an impending interest rate cut. With the assumption that the Federal Reserve will cut interest rates as early as September, investors are starting to rebalance their portfolios, which means rotating out of expensive, large tech stocks and into smaller caps that typically benefit most from lower interest rates.
Despite the industry-wide sell-off, individual semiconductor companies have performed well, providing further evidence that broader market trends explain the stock price declines, rather than issues with the manufacturers themselves.
After a year and a half of record-breaking performance, many of these companies had little room to go any further. At the same time, their biggest customers — hyperscalers like Amazon, Meta, Microsoft, and Alphabet — all gave vague guidance on their AI spending upside, which did little to excite investors.
Tech Stocks Are Just Perfect
And those same investors weren’t helped by recent reports that manufacturing continues to shrink, which is hardly a good sign for B2B companies. The Institute for Supply Management, which assesses U.S. manufacturing, reported on Friday that factory production had fallen for a fourth straight month in its July report. Weaker manufacturing demand could mean a shaky future for semiconductor companies, which have advanced chip-making plants around the world. “This tends to be a more forward-looking indicator,” said Richard de Chazal, equity researcher at William Blair.
There were other factors this week making investors nervous about tech companies that were already on the brink of overvaluation.
Tech companies are so priced so high that if their earnings reports aren’t stellar, their stock prices could fall. Many of them are trading at “perfect” prices, De Chazal said, meaning that at current valuations there is virtually no room for any issues or bad news, no matter how minor.
“Over the past year or so, the Magnificent Seven’s continued strong performance has justified these valuations,” de Chazal wrote in a note to analysts on Friday, “but now a slightly disappointing end to activity has put these large tech companies in a tough spot.”
And all of these semiconductor companies have faced some disappointments over the past month. At the industry level, they have been hit hard by reports that some of their biggest customers, including Meta, Amazon and Microsoft, have admitted that while they plan to continue investing billions of dollars in chip-powered AI, it will be a long time before they see any meaningful benefits.
During Meta’s earnings call earlier this week, an analyst asked CEO Mark Zuckerberg how long it would take for the company to monetize its new AI product suite, and he preached patience. “I don’t think anybody will be surprised that I expect it to take years,” Zuckerberg said.
Arm CEO Rene Haas offered a clearer, but still lengthy, timeline during the company’s earnings call on Wednesday. Haas said it will take the company roughly four years to realize a windfall from its new AI server chips. Many of the company’s chips are used in smartphones, where embedded AI has yet to make meaningful progress, which works against Arm.
Meanwhile, investors were hoping for guidance promising faster gains. “People are also wondering about the impact of AI and how quickly it will start to have a material impact on revenue, and the answer doesn’t seem to be as soon as they thought,” De Chazal said.
Investors want to buy tech stocks when they fall
Promises from tech CEOs to “overinvest” in AI haven’t calmed investors, with many worried that big spending now will inevitably lead to a slowdown in the future, says Morningstar technology analyst Brian Colello.
But some are questioning that logic, wondering why increased spending on AI should bode poorly for companies that offer AI-related products and services.“I don’t understand the contradiction,” said Paul Meeks, a tech investor and professor at Citadel’s Baker School of Business.
Some companies have become victims of their own success, but nowhere is that more true than Nvidia, the poster child for soaring AI stocks, with many investors hoping to sell off to take profits. “Nvidia’s stock price has risen substantially over the past 18 months, so profit-taking alone may explain some of the share price decline in recent weeks,” Colello said.
Some saw the recent share price drop as an opportunity to make further gains. In a UBS report published on Friday, analysts saw that very opportunity. “We maintain a constructive view on the AI growth story and view the recent share price correction as an opportunity,” the report said.
Meanwhile, Meeks further clarified his intentions for stocks like Nvidia and TSMC: “I already own all of these shares, but I’m going to buy more,” he joked.
