Chip stocks hit rocky patch. What’s next?
July 13 (Reuters) – U.S. chip stocks’ rough start in July likely points to further volatility as investors grapple with high valuations and questions about the longevity of a surge in AI capital spending.
The Philadelphia Semiconductor index has lost more than 11 percent since reaching a record high in June. The index is still up 83% this year, which matters greatly in discussions about what happens next. These firms have enjoyed tremendous profit growth thanks to rising prices and supply-demand imbalances, but it means nothing unless markets are forward-looking.
“We’ve never seen this kind of extreme earnings growth before. But the question is, how long can we expect this to continue?” said Steve Sosnick, chief market analyst at Interactive Brokers. he said.
Let’s take a look at some charts where investors are weighing whether there is more room for the chip rally to continue:
SUGAR MOVEMENT ENDS
Funds tracking U.S. semiconductor stocks had their biggest weekly outflow this century, with outflows of nearly $11 billion in the week ending June 24, according to LSEG Lipper data.
Sentiment about the sector has been as variable as performance lately. Approximately $12 billion inflows were recorded into the funds in the previous two weeks.
Analysts generally think hyperscaler capex will remain high, and much of the concern for these stocks will stem from what-if scenarios involving stock declines and capex cuts.
Global cloud and AI infrastructure capital spending is expected to grow 40% to 50% annually to approach $1.5 trillion by 2027, according to a BofA Securities note this week.
TAURUS BROKER OPINIONS
U.S. brokerages have raised their price targets on expectations that insatiable AI demand will fuel earnings growth.
Among S&P 500 chipmakers, Micron has the largest expected upside of over 60% — reflecting its current price relative to consensus analysts’ targets. According to LSEG data, shares of memory chip manufacturer Sandisk are expected to increase by over 30%.
Rising memory prices due to supply shortages have hurt memory chip companies around the world, including SK Hynix, which jumped more than 10% in its U.S. trading debut on Friday following a $26.5 billion share sale.
Nvidia shares are expected to rise over 40%.
But the fact that other major semiconductor companies are trading around the average 12-month price target suggests that much of the upside may be priced in.
“I think the high price targets are a result of the incredible momentum in the half-year rather than a reliable indicator of future performance,” said Alexander Lis, chief investment officer at SD Ventures.
