Chip Stocks Tumble to Start Q3 After Blockbuster Q2
Quick Look
- High-flying chip stocks experienced steep declines at the start of the third quarter, with Micron dropping 11% and Intel falling 9%.
- This follows a record-breaking second quarter where these companies saw significant market cap gains driven by AI buildout expectations.
- Concerns over AI processing supply catching up to demand, partly due to Meta potentially renting excess computing capacity, contributed to the downturn.
AI-generated summary
Why It Matters
High-flying chip stocks experienced steep declines to open the third quarter after a blockbuster three months on Wall Street. Investors had previously wagered that AI buildout would drive demand for memory and processors.
A day after closing out a blockbuster three months on Wall Street, high-flying chip stocks suffered steep declines to open the third quarter.
Memory maker Micron dropped 11%, wiping out $138 billion of market cap. Intel fell 9% and rival chipmaker Advanced Micro Devices dropped 7%.
Those three stocks boomed in the second quarter, adding $2 trillion in combined value, as investors wagered that the artificial intelligence buildout would require an ever-increasing amount of memory as well as more central processors, rather than just the graphics processors made by Nvidia .
The VanEck Semiconductor ETF (SMH), an index that tracks chip stocks, fell more than 5% on Wednesday, a day after closing out the fund's best quarter ever, jumping 71% from the start of April through the end of June.
Other big decliners on Wednesday included semiconductor equipment names Lam Research , KLA Corp . and Applied Materials which all more than doubled in the second quarter. They all fell at least 10%.
One drag on the market was a report that Meta , one of the biggest buyers of AI infrastructure, may be looking to rent out excess computing capacity. That raised fears that AI processing supply may be catching up to demand.
Meta is among a small group of so-called hyperscalers, internet companies that are spending hundreds of billions of dollars a year building out AI data centers. The move was viewed as a positive for Meta, which gained over 9% on Wednesday after a lackluster second quarter.
Analysts at KeyBanc Capital Markets who recommend buying the shares wrote in a note to clients that the move positions Meta "more into the enterprise side of the market, which could provide more immediate" return on investment.
Richard Saperstein, chief investment officer at Treasury Partners, said he would "stick with the hyperscalers" as the market recognizes their strength in the AI trade.
"Earnings are accelerating, yet multiples are compressing," Saperstein said on CNBC's "Closing Bell." "All I can attribute that to hyperscalers have been valued as capital intensive and asset-heavy versus asset-light."
Whatever concerns may be seeping into some of the infrastructure stocks, they have little to do with the most recent financial results. Micron last week reported a more than quadrupling of revenue in the latest quarter, while its gross margin, the profit left after accounting for the cost of goods sold, jumped to 84.9% in the third quarter from 39% a year earlier.
Open Questions
- Will AI processing supply continue to catch up to demand?
- How will Meta's strategy impact the AI infrastructure market?
- Will other hyperscalers follow Meta's lead in renting excess capacity?
