AI Hardware Stocks Get Pummeled Even as Big Tech Keeps Spending

(Bloomberg) — The good news for makers of semiconductors and other artificial intelligence computing hardware: tech giants plan to keep spending heavily. The bad news is that investors are harder to impress this earnings season.

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Shares of Advanced Micro Devices Inc. and Super Micro Computer Inc. have sold off despite projections of rising sales from buyers of equipment used in data centers.

AMD fell 6.7% on Wednesday after a raised revenue forecast for accelerator chips didn’t win over investors. Super Micro, which makes servers, slumped 15% despite quarterly projections that beat estimates. The moves dragged down Nvidia Corp., which fell more than 3%.

Such declines aren’t overreactions, according to Peter Garnry, head of equity strategy at Saxo Bank. “It is warranted at this point. They are meeting the FY24 estimates but nothing more than that.”

Hardware makers have seen their shares rally this year amid an arms race for AI computing power that’s lifting sales and profits. The Philadelphia Stock Exchange Semiconductor Index was up 12% through Tuesday, led by Nvidia with a 74% gain. Super Micro Computer had more than tripled.

The gains have raised expectations — as well as concerns that the stocks may have gotten ahead of themselves in the short term. That was evident on April 19 when Nvidia and other AI winners tumbled out of the blue ahead of Big Tech earnings reports.

“Valuations in this space are clearly being driven by multiple years of earnings growth and that always embodies a higher degree of uncertainty,” said Joanne Feeney, partner and portfolio manager at Advisors Capital Management.

For AMD, some analysts question how well the firm is placed to deal with “the threat of own chip production coming from companies such as Microsoft, Meta, and Google,” said Garnry.

As for Super Micro, the stock is “the talk of the town. However, a long-term quality investor would likely pass on this opportunity as it is questionable how deep their moat really is in the long run. I think the market has pushed expectations too high.”

While investors will have to wait several weeks for Nvidia to report on May 22, Qualcomm Inc. earnings are due on Wednesday afternoon. Arm Holdings Plc, which is up 35% this year, reports on May 8.

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The Philadelphia semiconductor index is priced at 26 times projected profits, down from a March peak of about 30 times profits but well above the 10-year average of about 17 times, according to data compiled by Bloomberg.

Bulls will point to positive signs of demand. On Tuesday, Amazon.com Inc.’s cloud computing unit posted its strongest sales growth in a year, aided by demand for artificial intelligence services. Chief Financial Officer Brian Olsavsky said Amazon’s capital expenditures would increase “meaningfully” this year, compared with 2023, primarily to support growth at Amazon Web Services.

Last week, Meta Platforms Inc. raised its forecast for capital spending in 2024 by billions of dollars. Microsoft Corp.’s capital expenditures were $14 billion in the most recent quarter and Chief Financial Officer Amy Hood said spending will continue to rise. Alphabet Inc.’s capital expenditures were $12 billion in the first quarter and management expects similar spending for the remainder of the year.

Still, beyond high investor expectations lies another major issue at play, with 10-year Treasury yields currently around the highest levels since November.

“The higher Treasury yields go, the higher discount rates go and the lower the present value of cash flows and thus the lower the theoretical value of the equity goes,” said Russ Mould, investment director at AJ Bell.

“Equity investors may be better off looking at the big wood of Treasury yields rather than the trees of quarterly results if they are to discover why the US market equity has just thrown out its worst month since September,” he said. “Even if the quarterly results season has been benign and generally lived up to high expectations.”

Top Tech News

• Tesla Inc.’s pivotal partnership with Baidu Inc. in China may amount to a U-turn of sorts for Elon Musk, who’s long claimed his company can eventually offer self-driving without high-definition maps.

• Amazon.com Inc.’s cloud unit posted the strongest sales growth in a year, a sign that the retailer’s most profitable unit is recovering from a slump as businesses resume spending on technology projects, including artificial intelligence services.

• Microsoft Corp.’s motivation for investing heavily and partnering with OpenAI came from a sense of falling badly behind Google, according to an internal email released Tuesday as part of the Justice Department’s antitrust case against the search giant.

• The prospect of higher-for-longer interest rates is weighing on crypto, underlined by deepening Bitcoin losses after the token’s worst monthly drop since the collapse of Sam Bankman-Fried’s FTX empire in November 2022.

• The internationally recognized government of Yemen is nearing a licensing deal with Elon Musk’s Starlink to provide satellite internet service to the war-torn country, according to a senior government official.

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(Updates chart and stock moves.)

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