Stocks head into this week with the selloff among the semiconductor stocks that had been this year’s big winners having snowballed. The news Friday that China’s Moonshot AI launched a model that appears to rival Anthropic’s most powerful AI engine at lower cost only added to worries about the tech sector. At the same time, the renewed Iran war is again driving up oil prices.
These challenges come as second-quarter earnings are about to heat up. After some top-shelf reports from the big banks, the coming week will bring earnings from a varied list of names, including Charles Schwab SCHW, AT&T T, Verizon VZ, Tesla TSLA, and Alphabet GOOG.
We’ll also see results from ServiceNow NOW, which will provide some hints about how the AI threat is playing out in the battered world of software stocks. This will just be an appetizer for the following week, when more of Big Tech reports.
Semiconductors: The World’s ‘Most Crowded Trade’ Buckles
Over the last few months, we’ve documented eye-popping returns for semiconductor stocks and memory hardware names. These stocks were up well into the triple digits over the past year. That included South Korea’s Samsung 005930, which at one point in June was up more than 500% in local currency terms from a year earlier, and SK Hynix 000660, which was up more than 900% from a year earlier (all returns in this article are in US dollar terms).
More broadly, the Morningstar Global Semiconductors Index was up nearly 61% year-to-date through June 22 and up nearly 92% for the prior 12 months. Among exchange-traded funds, the widely followed iShares Semiconductor ETF SOXX had tripled year-to-date and was up 190% over 12 months.
While these rallies were ostensibly driven by the huge demand for AI-focused chips and other hardware, they had all the hallmarks of a momentum-driven overshoot. In the latest Bank of America global fund manager survey, 82% of respondents called global semiconductor stocks “the most crowded trade.” That’s up from 80% in June and 24% in May. (Betting on the Mag 7 was deemed most crowded by just 7%. Which, given how they have been struggling lately, isn’t too surprising.)
Now the tide has turned, and these stocks are rapidly heading south. Samsung has fallen 30% from its peak, and SK Hynix is down 37% from its high. (SK Hynix’s US shares, which started trading on July 10, are down 20% from their closing high.) The iShares Semiconductor ETF is down roughly 21%. Still, in the scheme of things, these stocks are up significantly from a year ago.
Morningstar’s Take on US Semiconductor Stocks
Morningstar senior equity analyst Brian Colello remains solidly bullish on the AI infrastructure buildout, even amid the wild price and valuation swings. “Semis have been shockingly volatile in recent weeks,” he writes. The industry swung from 18% undervalued on a median price/fair value estimate basis as of March 31, 25% overvalued as of June 23, and fairly valued as of July 6.
Meanwhile, Colello sees the massive capex spending on AI processors continuing in the coming years. “AI Processors are still in high demand as data centers are compute-constrained,” Colello says. Against this backdrop, Colello says that forward P/E multiples among stocks covered by Morningstar “are reasonable … given our expectations for strong ongoing AI buildouts.” From here, he says, “We believe earnings will continue to be stellar in the months ahead, given healthy AI demand and strong pricing, especially in memory.”
Colello offers four top semiconductor picks:
- Nvidia NVDA: Concerns of an AI bubble, and perhaps the progress of vertically integrated Google, have weighed on the firm’s stock price in recent months. However, we think these fears are overblown. Nvidia will inevitably lose some market share to custom ASICs, such as Google’s TPUs, for specific workloads. However, the bulk of AI runs on Nvidia today, and Nvidia still offers best-of-breed performance and flexibility in the fast-moving AI space.
- Broadcom AVGO: The stock trades at an attractive discount to our USD 650 per share fair value estimate. Broadcom is a major AI winner, in our view, with the second-largest AI processor business, trailing only Nvidia.
- NXP Semiconductors NXPI: This is one of our top picks in the analog and mixed-signal chip space. The company has outsized exposure to the automotive end market, where it obtains over 50% of revenue. NXP is well diversified in automotive, with a nice product portfolio of processors, microcontrollers, and analog parts.
- Monolithic Power Systems MPWR: This remains an attractive diversified growth story in power chips, taking a consistent share across end markets. Its growth from artificial intelligence infrastructure is very impressive and reflects best-of-breed power density, in our view.
SpaceX Sputters …
SpaceX SPCX has been public for just over a month. While that’s a very short time to judge any investment, it’s not off to a great start. The IPO priced at USD 135.00 and hit a closing high of USD 201.80 on its third day of trading. But since then, it’s been a fast and bumpy ride lower. Last week, the stock broke below the IPO price and finished Friday at USD 123.99, 40% loss for investors who paid that peak price.
Investors now await SpaceX’s first earnings report as a public company, expected sometime around Aug. 6. (There has been no official announcement.) Critically for the stock, not long after on Aug. 8, the window for pre-IPO shareholders to sell will open. The question is how much of a wave of selling that will create, and what that will mean for the stock.
… but SpaceX Weighs on Telecom Stocks
Meanwhile, SpaceX is casting a long shadow over the telecom industry. While sending rockets into space and colonizing Mars with a million people is its core mission, the company’s successful Starlink satellite communications business appears to worry telecom investors.
Morningstar director Michael Hodel notes that valuations on most telecom stocks have been punished this year. “We suspect the attention around SpaceX has been the biggest driver of this valuation shift,” he wrote in an industry report last week. Here’s more of what he had to say:
Still, while the threat from space to the business of terrestrial telecom companies may be overstated, Hodel thinks SpaceX still has a good chance of increasing their cost of business by driving up spectrum costs at the next federal auction in 2027. Against a generally difficult backdrop for these stocks, Hodel cut his fair value estimate on Charter Communications CHTR to USD 280 per share from USD 400 and for Comcast CMCSA to USD 36 from USD 41. Our Uncertainty Rating for Charter was also raised to Very High from High.
