Semiconductors are the world's most valuable manufactured good. These tiny, intricately engineered pieces of silicon can perform more calculations in a second than a single person could complete in 30,000 years. This year has brought a semiconductor boom for the ages. The US PHLX chip index has nearly doubled over the past 12 months. Investors, noticing that big US tech firms are planning nearly $1 trillion in spending on AI data centres next year, followed the money to the chip stocks that provide AI hardware.
The global semiconductor supply chain is very concentrated. A handful of manufacturers and designers – Taiwan's TSMC, South Korea's Samsung and SK Hynix, America's Nvidia – capture the lion's share of profits. Yet expectations have run ahead of reality. This week, SK Hynix reported a 557% surge in operating profit, with margins of more than 80%. That Midas-like profitability still wasn't good enough for investors in Korea, who sent the shares tumbling 19%. The Korean Kospi slumped 11% on Tuesday and a further 6% on Wednesday. America's Nasdaq 100 technology index has fallen 9.7% from its peak, says Eva Roytburg for Fortune.
The immediate trigger was talk of new competition from China, where chipmaker CXMT listed on Monday. Those fears are probably overdone – China still doesn't have access to the cutting-edge extreme ultraviolet lithography machines required to make the world's best chips. But the chip stock selloff isn't irrational; for months, the “going trade” has been to sell the hyperscalers – firms such as Microsoft and Meta that appear to be overspending on data centres – and “buy the semis”, companies such as Samsung that are profiting from Silicon Valley's profligacy. Now investors have realised the obvious contradiction: if Big Tech's AI investments really are as wasteful as they think, then at some point that spending will be cut, which would be a disaster for chip stocks, too.
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The semiconductor boom is based on very real profits, says Moses Sternstein for a16Z. Rising earnings have come alongside falling valuations – an unusual symptom for an alleged bubble. Micron, whose earnings are poised to rise 60% year on year, trades on a mere six times forward earnings. The wider US semiconductor complex trades on about 21 times forward earnings, a slight discount to the five-year average of 23.8.
The semiconductor industry is infamously cyclical
So are semiconductors cheap? In one sense, yes, but the industry is infamously cyclical. An acute shortage during the pandemic turned into a big bust in 2023 as demand returned to normal levels. “Investors are wondering whether semis can keep it up” this time. As laptop buyers will be well aware, dynamic random-access memory (DRAM), which is used for computer memory, is in acute shortage this year.
Samsung and SK Hynix have joint plans to invest as much as $1.5 trillion to double Korea's DRAM output within five years, say Song Jung-a and Michael Acton in the Financial Times. Yet there are risks of the chip cycle turning again. Should AI demand disappoint or Chinese supply surge, there could be a glut as soon as 2028.
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