A model of an SK Hynix Inc. wafer at the SK AI Summit in Seoul, South Korea on Nov. 3.
(Bloomberg) — This year’s frenetic rally in global semiconductor stocks hit a setback on concerns that valuations for some of the biggest winners have soared too quickly and that gains have been excessive.
Shares of Advanced Micro Devices Inc. were more than 4% lower in premarket trading Wednesday, after the chipmaker’s guidance failed to meet investors’ high expectations. AMD’s results followed a 4.1% decline in the Philadelphia Semiconductor Index on Tuesday, the sharpest drop in more than three weeks.
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The chip stock slump spread to other markets on Wednesday. In Asia, Taiwan Semiconductor Manufacturing Co. declined 3%, while losses in Samsung Electronics Co. dragged South Korea’s Kospi benchmark down 2.9%. In Europe, Dutch chip equipment makers ASML Holding NV and ASM International NV each fell 2%.
The pullback underscores investors’ growing unease over the sector’s sky-high valuations, even though big tech firms are still pouring billions into infrastructure for artificial intelligence. Chipmakers have added trillions of dollars in market value since a low in April as investors bet on soaring demand for computing power.
“There’s been a lot of concerns about the AI trade,” Morgan Stanley strategist Marina Zavolock said in a Bloomberg TV interview. “We think we will pass this storm and there’s more to go in the AI trade, but this isn’t the first time that you have weakness and bubble concerns.”
A warning from Wall Street chief executives of an overdue correction have weighed on the market this week, alongside reduced expectations for Federal Reserve rate cuts and a prolonged US government shutdown. Hedge fund manager Michael Burry added to the the negative tone with his disclosure of bearish wagers on Palantir Technologies Inc. and Nvidia Corp.
Palantir’s outlook on Monday failed to meet the most bullish expectations after the stock already more than doubled this year. A similar reaction to AMD’s post-market results influenced trading in Asia and Europe on Wednesday.
WATCH: AXA’s Ecaterina Bigos says the AI story is “still intact” and that the pullback is a “moment of reassessment.Source: Bloomberg
“I wouldn’t say buy the dip now — much of the rally wasn’t about fundamentals so it makes no sense to say it’s a value buy now,” said Chauwei Yak, chief executive officer at multi-strategy hedge fund GAO Capital in Singapore. “But if some of the big tech names drop 15%, 20% then maybe we can consider.”
Valuation is a chief concern for many investors. The Philadelphia Semiconductor Index is priced at 28 times next year’s earnings, well above the 10-year average of 19 times.
Another question is whether big tech firms like Amazon.com Inc. and Meta Platforms Inc. will keep spending on computing capacity even though returns on these investments aren’t showing up so far. An increasingly complex and interconnected web of transactions between key AI companies has also raised eyebrows.
Some see the pullback as a good thing, letting some steam out of a rally that had gotten ahead of itself, and making stocks a bit cheaper.
Vikas Pershad, an Asian equities portfolio manager at M&G Investments, was essentially up all night in Singapore tracking the sharpest declines on Wall Street since Oct. 10.
“I followed until I went to bed, which is when the US closed at 4 a.m., took a short nap and then got ready for Asia,” he said. “We’ve come so far, so fast, investors shouldn’t be surprised if this continues tomorrow and the day after,” he said, adding that it’s a good time to watch for buying opportunities.
–With assistance from Sangmi Cha.
(Updates with context, prices throughout.)
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