AI Stocks Take Hit Amid Potential Export Restrictions

Investor enthusiasm for artificial intelligence (AI) continues, but recent news has caused concerns among key players in the tech industry. As the bull market for AI approaches two years, some investors are opting to cash out.

Market Declines Triggered by Export Talks

Shares for major companies such as Arm Holdings (NASDAQ: ARM), Nvidia (NASDAQ: NVDA), Advanced Micro Devices (NASDAQ: AMD), Broadcom (NASDAQ: AVGO), and Taiwan Semiconductor Manufacturing (NYSE: TSM) have all declined significantly as of 12:50 p.m. ET on Tuesday. Arm Holdings dropped 6.7%, Nvidia fell 4.9%, AMD decreased by 4.8%, Broadcom went down by 3.7%, and TSMC dipped 2.6%. The primary reason for this downward trend appears to be reports that the U.S. government is mulling new restrictions on chip exports.

Image source: Getty Images.

Potential Restrictions on AI Chip Exports

According to a Bloomberg report, the Biden administration is contemplating limitations on the sale of advanced AI processors from companies like Nvidia and AMD. Authorities express concerns that advanced technologies could potentially pose a threat to U.S. national security. The administration is considering a cap on export licenses for specific countries, extending existing restrictions that already apply to nations such as China and numerous others in Asia, the Middle East, and Africa.

Currently, U.S. chipmakers must obtain government licenses to sell these semiconductors to certain countries. The proposed new measures seem to aim at expanding existing rules, particularly focusing on those countries in the Persian Gulf region. These discussions are still in preliminary stages with no final decision reported, but interest has reportedly increased in recent weeks.

Impacts of Export Controls on AI Companies

Restricting the sales of AI chips could have a significant effect on several key players:

• Nvidia dominates the market for graphics processing units (GPUs), controlling up to 98% of data center GPU sales according to TechInsights. This means Nvidia stands to lose the most if sales are limited.
• AMD has been competing closely with Nvidia and is now focusing on AI processors, sidelining certain gaming chips. Export restrictions could hinder its plans.
• Arm Holdings provides essential designs and intellectual property for advanced chips used by Nvidia and AMD. A significant decline in sales could impact Arm’s revenue.
• Broadcom produces various products that complement GPUs, such as Ethernet switches. A slowdown in GPU sales could negatively affect its business as well.
• TSMC is the world’s largest semiconductor foundry, responsible for 62% of the global semiconductor market and about 90% of advanced AI processors. Restrictions on processor sales would impact TSMC’s revenue streams.

While investors express concern regarding possible impacts on Nvidia and others, history suggests reactions may be overstated. Past discussions of curbing chip sales to countries like China raised similar alarms. Ultimately, Nvidia reported triple-digit growth for five consecutive quarters despite prior restrictions. Furthermore, reports indicate that Nvidia’s Blackwell chips have sold out for the year ahead, pointing to sustained high demand for AI technologies.

Investor sentiment should also consider current valuations; Arm Holdings, AMD, Nvidia, Broadcom, and TSMC are trading at forward earnings multiples of 96, 46, 46, 36, and 28, respectively. Among these, TSMC appears the most appealing for value-based investors, though this doesn’t capture growth from AI advancements. When using the forward price/earnings-to-growth (PEG) ratio, all of these stocks show multiples less than 1, which generally indicates they are undervalued.

The generative AI market is still evolving, with estimates suggesting its worth could be around $1.3 trillion or more. Long-term investors may find value in holding onto shares of the strongest AI companies available.

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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.