AMD, Super Micro Dip Amid AI Spend; Sector Faces Nvidia Shadow

Key Takeaway

• AMD and Super Micro stocks fell 6.7% and 13% respectively, despite strong AI hardware demand from tech giants.
• Semiconductor sector faces high expectations after Nvidia's 74% rally, raising concerns over valuations and sustainability.
• Tech firms' increased capital expenditures on AI highlight growth but also pose a threat with potential in-house chip production.

Semiconductor Sector's Mixed Fortunes

The semiconductor industry is experiencing a dichotomy of outcomes as tech giants continue to invest heavily in artificial intelligence (AI) computing hardware, driving up sales and profits for hardware makers. Despite this, shares of companies like Advanced Micro Devices Inc. (AMD) and Super Micro Computer Inc. have seen declines following their earnings reports. AMD's stock dropped 6.7% in premarket trading after its raised revenue forecast for accelerator chips failed to impress investors, while Super Micro slumped 13% despite quarterly projections that exceeded estimates. This has led to a reassessment of expectations within the sector, with Peter Garnry of Saxo Bank noting, "They are meeting the FY24 estimates but nothing more than that."

Investor Expectations and Valuations

The semiconductor industry's rally, particularly led by Nvidia Corp. with a 74% gain, has heightened investor expectations, contributing to volatile stock performances. The Philadelphia Stock Exchange Semiconductor Index's increase has brought attention to valuations and the sustainability of such growth. Joanne Feeney of Advisors Capital Management highlighted the uncertainty inherent in projecting multiple years of earnings growth. Concerns have also been raised about companies like Microsoft, Meta, and Google potentially producing their own chips, posing a threat to firms like AMD.

Capital Expenditures and AI Demand

Tech giants such as Amazon, Meta Platforms Inc., and Microsoft Corp. have announced significant increases in their capital expenditures to support growth in AI services and data center expansions. Amazon's cloud computing unit, for example, reported its strongest sales growth in a year, driven by AI demand. These investments underscore the ongoing arms race in AI computing power, which has been a boon for semiconductor and hardware manufacturers.

Market Challenges and Treasury Yields

Beyond the sector-specific dynamics, broader market factors are influencing investor sentiment. High Treasury yields, which affect the discount rates used in valuing stocks, are presenting a challenge for equity investors. Russ Mould of AJ Bell pointed out the impact of Treasury yields on the theoretical value of equities, suggesting that investors might need to focus more on macroeconomic indicators than on quarterly earnings results to understand market movements.

Street Views

• Peter Garnry, Saxo Bank (Neutral on semiconductor and AI computing hardware stocks):

  "It is warranted at this point. They are meeting the FY24 estimates but nothing more than that."

• Joanne Feeney, Advisors Capital Management (Cautiously Optimistic on the sector):

  "Valuations in this space are clearly being driven by multiple years of earnings growth and that always embodies a higher degree of uncertainty."

• Russ Mould, AJ Bell (Neutral on US market equity):

  "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... 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."

Management Quotes

• Brian Olsavsky, CFO of Amazon:

  "Amazon’s capital expenditures would increase 'meaningfully' this year, compared with 2023, primarily to support growth at Amazon Web Services."

• Amy Hood, CFO of Microsoft:

  "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."