Investors cool on red-hot chip stocks
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Investors are rethinking their fondness for AI picks and shovels: the chipmakers, particularly memory makers, that make up the backbone of the new tech buildout.
Why it matters: The chip stock frenzy pushed the U.S. market to all-time highs earlier this year.
By the numbers: Now, you can see the pullback across a bunch of indicators — broad and narrow.
- The tech-heavy Nasdaq 100 briefly flirted with correction territory Tuesday — a drop of 10% or more, before finishing down 9.5% below its June 2 record closing high.
The Philadelphia Semiconductor Sector Index is down 4.5% over that time period.
- Sandisk, a flash-memory and storage company emblematic of the boom, is off 36%. (Still up near 300% for the year, though.)
"In markets these days, it seems like years happen in months, and the month of July has been a disaster for the semis," Bespoke Investment Group noted on Tuesday afternoon.
- South Korea's KOSPI stock index — Exhibit A of the memory boom — is down 34% in the last 25 trading days.
- Case in point: Chip darling SK Hynix reported a six-fold surge in quarterly profit earlier Wednesday, but its stock later dropped 19%, Bloomberg reports.
Reality check: Most of these stocks are still up for the year, and the broader market remains near all-time highs.
The big picture: Semiconductor and memory stocks got crazy high — parabolic increases — so some of what's happening now is momentum reversing. Beyond that, a couple major factors appear to be at play:
Skittishness over spending. This surfaced last week, when Alphabet reported results for the second quarter.
- The search giant reported negative free cash flow — it spent $44.9 billion in capital expenditure in excess of the $39.1 billion in cash generated from its operations. Most of that went to AI infrastructure spending.
Chinese competition. New challengers from China are forcing investors to reconsider pricing power across sectors.
- Moonshot AI's Kimi K3 may disrupt the dominance of U.S. AI companies.
- And the blockbuster IPO of ChangXin Memory Technologies, or CXMT, suggested that memory chips may be in greater supply than previously understood.
Between the lines: Market psychology may have shifted here.
- "We flipped from all news being good news for AI to a 'let's look under some rocks and see what the risks are' mindset," Steve Sosnick, chief strategist at Interactive Brokers, tells Axios.
What to watch: Meta and Microsoft report earnings Wednesday — it'll be telling to see how investors react to the companies' AI capex spending levels.
