Bernstein analyst Stacy Rasgon says semiconductor stocks are suffering a crisis of confidence as investors question the sustainability of AI spending. He still sees room for the AI trade to run, pointing to cloud providers' spending plans.
The PHLX Semiconductor Index had fallen 30% from its June highs as of Friday's close, even after rising 50% on the year. According to Bernstein analyst Stacy Rasgon's Monday note: "suffering a crisis of confidence."
Valuations shrink while earnings expectations keep growing
Rasgon suggested the most telling sign that investors have grown weary of the AI trade may be sharp compression of chip valuations. The index traded at about 16 times forward earnings estimates at Friday's close, versus 28 times at its peak close in June, according to Dow Jones Market Data. That drop in valuation came despite expectations for earnings to keep growing.
Makers of semiconductor equipment and central processing units, which have seen stellar growth this year, have suffered the most recently, the analyst noted. The selloff followed earnings from big cloud companies that pointed to continued strong spending on AI infrastructure against dwindling cash flows. Investors also worry about delays in the buildout and the rising debt companies take on to fund their AI plans, Rasgon said.
Why Rasgon still sees room to run
In his view, the cloud earnings reports support the idea that the AI trade has more room to run. Rasgon said all the cloud providers have either kept or raised expectations for spending this year, and all appear to expect significant acceleration into next year.
Even Intel flashed a good sign for the AI trade, he said. The stock fell 29% Friday after Thursday's earnings report, wiping out $140 billion in market capitalization, because investors disliked its December-quarter outlook. But Rasgon noted that Intel's data-center and AI business delivered strong performance, and he attributed weakness in its PC chips to rising memory prices slowing shipments rather than to weak demand.
Nvidia and Broadcom hold up better
Analog-chip names, which mostly serve the automobile and industrial markets, have outperformed the broader sector as overall AI sentiment has soured, Rasgon said. Shares of Nvidia and Broadcom, which have traded at more of a discount, have also fared better than peers, likely helped by those lower valuations, he added.
For now, Rasgon is focused on Nvidia and Broadcom, which he views as the main drivers of the chip trade. He is also encouraged by AMD, though he noted it faces challenges in the PC market, and the company reports quarterly earnings on Tuesday afternoon.
Source: MarketWatch
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