It’s been a bad week for the stock market, but it’s been an even worse week for tech companies and an even worse week for semiconductor stocks.
Share price of Taiwan Semiconductor Manufacturing Co., Ltd. (TSM -4.20%)Micron Technology (MU -3.37%)ASML Holdings (ASML -5.38%) They all fell again today, down 4.2%, 4.1% and 5.2%, respectively, as of 12:38pm ET.
It’s been a terrible week for stocks in general, and artificial intelligence (AI) trades in particular, mainly due to macroeconomic concerns. Of note, the semiconductor industry has long been considered highly cyclical. The sector has been one of the strongest over the past decade due to its exceptional secular growth, but the prospect of a slowdown or recession has investors fleeing these industry leaders at the moment. This is especially true after the AI craze drove these stocks’ share prices up substantially from November 2022 to July 2024.
Today’s weaker than expected jobs report, combined with a somewhat disappointing earnings report from AI tech peer Broadcom last night, is sending shares of all AI-related stocks lower again today.
Weak employment data fuels fears of economic slowdown
This morning the Labor Department released the August jobs report. This was big news for many investors, as the much weaker than expected July employment report had raised concerns that the Federal Reserve was getting too late in cutting interest rates.
The jobs report released today showed employment increases and a slight decrease in the unemployment rate in August compared to July, but slightly less than expected. 142,000 new jobs were added in August, up from a downwardly revised 89,000 in July but below the 161,000 expected. The unemployment rate fell to 4.2% from 4.3%.
It’s a little hard to understand why investors took this report so badly, given that the Federal Reserve seems certain to cut interest rates when it meets on September 17 and 18. But the “weaker than expected” numbers and downward revisions to job gains in June and July increase uncertainty that the Fed is slow to cut rates or will not cut them enough when the committee meets, potentially tipping the economy into recession.
Either way, the market has been in a very emotional mood this week, especially following the weak manufacturing data released earlier in the week on Tuesday morning.
Making matters worse was Broadcom’s earnings report released last night: The semiconductor and software giant beat analyst expectations for its third-quarter results, but chip revenue may have disappointed, and management’s fourth-quarter guidance was also slightly lower than analysts expected.
As its name suggests, Broadcom’s portfolio spans many areas, including iPhones, enterprise networking and storage, as well as the custom artificial intelligence accelerators that it manufactures for the in-house designs of major tech companies.
Broadcom primarily makes its chips at TSMC, likely using ASML’s EUV tools, and Micron’s memory permeates every tech application, so it’s no surprise that all three companies reacted to Broadcom’s results.
Notably, Broadcom CEO Hock Tan said on a conference call with analysts that the AI business is doing very well, with custom AI accelerators up 3.5x year-over-year, Ethernet switching for AI data centers up 4x year-over-year, and optical lasers up 3x. So it’s hard to tell if the slightly weaker-than-expected forecast was conservative, if demand for AI products is slowing more quickly than investors think, or if Broadcom’s other non-AI products — iPhone chips, communications connectivity, non-AI networking — continue to be weaker than expected. Notably, those non-AI products have already suffered big declines but are expected to recover.
Either way, even if AI continues to perform well, a weaker-than-expected overall chip sales figure will hurt TSMC, Micron and ASML. These companies are also big beneficiaries of AI growth, but each also has significant exposure to the broader semiconductor industry. ASML received a disappointing downgrade from analysts on Wednesday, who noted that ASML’s exposure to AI may not be as large as some think relative to the broader industry, adding to the decline in its stock price.
This could be an opportunity
Semiconductor investors should know that even if the sector proves to be a long-term winner, stocks in this sector are extremely volatile, so to profit from these stocks you either need to hold them through a major downturn like this one, or buy them when the news looks terrible during a major downturn.
The economy may be slowing, but all three of these companies are at the forefront of innovation and AI growth opportunities. Despite the market reaction, the majority of technology executives on this quarter’s earnings calls said AI growth remains strong and will continue into next year and likely beyond. With these stocks now well off their July highs, it may be time to consider adding to these leaders during the volatile months ahead.
