The semiconductor industry has continued to make incredible progress since the beginning of last year. The risk of short-term disruption will only increase exponentially.
Some of the biggest drivers of the ongoing market rally that began early last year are advances in artificial intelligence (AI). These next-generation algorithms and the semiconductors that power them could spark a wave of productivity improvements.
The potential to profit from these advances is driving rapid adoption of AI and driving up semiconductor purchases. But the semiconductor industry could be the first to feel the effects of the just-announced dockers’ strike.
Against this backdrop, AI chip specialist Nvidia (NVDA 1.55%) Memory and storage chip maker Micron Technology fell 3.9%. (MU -0.09%) Semiconductor specialist Broadcom fell 3.9%. (AVGO 2.87%) Database and AI chip maker Oracle fell 3.1%. (ORCL 0.64%) The stock was down 1.9% as of 2:06 p.m. ET on Tuesday.
A check of all the usual suspects, including financial reports, regulatory filings, and changes in analyst price targets, showed no company-specific news to explain the decline. This suggests investors were focused on work stoppages at some of the nation’s largest ports and what that means for the semiconductor industry and the market rally generally.
Image source: Getty Images.
Strike while the iron is hot
On Tuesday, the International Longshoremen’s Association (ILA) began its first major strike in nearly 50 years. The union said tens of thousands of its members began storming picket lines at ports along the Atlantic and Gulf coasts starting at 12:01 a.m. Tuesday.
Ports on these two coasts are the destination for more than half of the containerized goods imported into the country. If a strike lasts more than a few days, it could have a ripple effect on the supply chain and, by extension, the economy as a whole.
Delays in everyday items could reignite inflation, cause shortages and drive up prices. The longer the strike lasts, the more likely it is that economic chaos will ensue.
“The food supply is safe at this time,” New York Governor Kathy Hochul said, urging consumers not to stock up on food unnecessarily. While shortages of essential goods such as food and household goods are still weeks away, other industries such as semiconductors may also be affected.
Due to the accelerated adoption of AI, many of the most advanced chips are already in short supply. As a result, a semiconductor shortage due to a dockworker strike may occur sooner or later.
Years, not weeks or months
So what are the potential implications for our quartet companies? In the short term, disruptions to the semiconductor pipeline could slow sales and profit growth. But in the long run, any impact will be temporary at best.
Many AI and semiconductor stocks have rallied since the beginning of last year as investors feared missing out on the next big trend. If the strike does cause a chip shortage, it will likely be short-lived and the pent-up demand will remain even after the strike ends.
Investors need to remain focused on the long-term opportunity in AI, which unfolds over years rather than weeks or months. The future remains bright for these pillars of the chip industry, as cutting-edge semiconductors are needed to power this technology.
Nvidia has developed graphics processing units (GPUs) that provide the computing power used in AI systems. Broadcom makes many of the semiconductors and ancillary technologies used in data centers and cloud computing, where much of AI takes place. Oracle is primarily known for its database and cloud infrastructure services, but it also designs and engineers chips used in AI. Micron Technology makes flash memory and storage processors, which are key components of GPUs used for AI processing.
Some of these stocks may seem expensive at first glance, but the premium is worth it. Nvidia, Broadcom, Oracle, and Micron currently trade at forward price/earnings ratios of 41x, 35x, 27x, and 11x, respectively. However, given the accelerating adoption of AI and the correspondingly accelerated growth of these companies (all of which are providing critical components to the AI revolution), I would call them all I rate it as “buy”.
Still, each of these stocks has experienced increased volatility, and potential supply chain disruptions could make the situation worse. Investors should be patient with the sudden rise in prices.
Danny Vena holds a position at Nvidia. The Motley Fool has positions in and recommends Nvidia and Oracle. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
