Semiconductor Stocks Face Volatility Amid AI Demand and Industry Concerns
Stocks and exchange-traded funds (ETFs) in the semiconductor sector have been experiencing ups and downs recently. While demand for artificial intelligence (AI) hardware fuels growth, investors are wary of a potential slowdown in demand.
NVIDIA (NVDA) reached a record closing price on Monday but fell by 4.7% on Tuesday before bouncing back with a 3.1% gain on Wednesday. Other companies in the AI chip and hardware space, such as Arm (ARM), Qualcomm (QCOM), Broadcom (AVGO), Super Micro Computer (SMCI), Astera Labs (ALAB), and Micron (MU), also saw stock price increases last week.
The PHLX Semiconductor Index rose by 4.3% over the past five days (as of October 14, 2024), outperforming the S&P 500, which increased by 2.5% in the same time frame. This positive movement in AI chip stocks is largely driven by robust spending on AI hardware.
ASML’s Warning Puts a Damper on Growth
However, a warning from ASML, a Dutch chipmaker, has stopped the recent market rally. The company’s shares dropped significantly this week, marking its biggest decline since 1998, after it revised its sales outlook downward, citing lagging demand outside of AI. ASML now projects total net sales in 2025 will be capped at €35 billion ($38 billion), down from a previous forecast of €40 billion.
What Investors Should Consider About ASML
Investors should note ASML’s substantial role in the chip-making industry, as it supplies critical tools used by companies such as TSMC, Intel, and Samsung Electronics. Analysts suggest ASML’s lowered outlook might indicate some overcapacity in chip factories rather than a complete downturn in the semiconductor sector.
Big Tech Giants Boost AI Spending
Leading technology firms including Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), and Meta (META) are expected to maintain strong investments in AI infrastructure through 2024. According to Goldman Sachs, these major players are set to collectively invest $215 billion in AI capital expenditures next year and $250 billion in 2025, benefitting companies like NVIDIA.
Future Projections for the Semiconductor Industry
JPMorgan analyst Harlan Sur projects the semiconductor industry will grow by 6% to 8% in 2024. This growth is anticipated due to better supply-demand dynamics in the latter half of 2024 and into 2025, alongside improved earnings trends.
Positive Sales Growth in Semiconductors
The Semiconductor Industry Association (SIA) recently reported that global semiconductor sales reached $53.1 billion in August 2024, marking a 20.6% increase compared to last year, and a 3.5% sequential rise. Notably, sales surged in the Americas (43.9%), China (19.2%), Asia Pacific (17.1%), and Japan (2.0%), although Europe lagged behind.
Furthermore, projections indicate that after the enactment of the CHIPS Act, U.S. semiconductor manufacturing capacity is on track to triple between 2022 and 2032, representing the highest growth rate globally during that timeframe. By 2032, the U.S. is expected to achieve 28% of advanced chip manufacturing capacity and capture a similar share of global capital expenditures, significantly up from an estimated 9% without the CHIPS Act.
Potential Slowdown in AI Investments
Despite current optimism, some analysts warn that AI chip stocks may be overvalued and could suffer if the big tech firms slow down their infrastructure spending. Unlike AI software, which typically offers recurring revenue through subscriptions, hardware sales are generally one-time purchases, making demand more susceptible to fluctuations.
Earnings reports from Google, Microsoft, and Amazon have recently reflected a weaker correlation between their elevated AI investments and stock performance, leading to declines over the summer months. Some analysts, including D.A. Davidson’s Gil Luria, speculate that AI infrastructure spending might peak as soon as next year, hinting at a potential downturn in expenditures.
Conclusion: ETF Strategies for Investors
In this context, investors looking to engage with the semiconductor sector may consider exchange-traded funds (ETFs) to diversify their holdings away from individual stocks. Notable ETFs include VanEck Semiconductor ETF (SMH), iShares Semiconductor ETF (SOXX), First Trust Nasdaq Semiconductor ETF (FTXL), and SPDR S&P Semiconductor ETF (XSD). As of now, these ETFs have demonstrated year-to-date gains of approximately 46.8%, 23.2%, 16.9%, and 8.9%, respectively.
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Alphabet Inc. (GOOG)
Amazon.com, Inc. (AMZN)
QUALCOMM Incorporated (QCOM)
Microsoft Corporation (MSFT)
Micron Technology, Inc. (MU)
NVIDIA Corporation (NVDA)
ARM Holdings PLC Sponsored ADR (ARM)
Broadcom Inc. (AVGO)
Super Micro Computer, Inc. (SMCI)
VanEck Semiconductor ETF (SMH): ETF Research Reports
iShares Semiconductor ETF (SOXX): ETF Research Reports
SPDR S&P Semiconductor ETF (XSD): ETF Research Reports
First Trust NASDAQ Semiconductor ETF (FTXL): ETF Research Reports
Meta Platforms, Inc. (META): Free Stock Analysis Report
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