(Bloomberg) — The good news for makers of semiconductors and other artificial intelligence hardware: Tech giants plan to continue spending heavily. The bad news is that it will be harder to impress investors this earnings season.
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Shares of Advanced Micro Devices Inc. and Super Micro Computer Inc. sold off despite projections of higher sales from buyers of equipment used in data centers.
AMD fell as much as 8.1% on Wednesday after a higher revenue forecast for accelerator chips failed to convince investors. Super Micro, which makes servers, fell 17% despite quarterly showings that beat estimates. These moves caused shares of its peers, Nvidia Corp., to decline. falling 3.9%, Arm Holdings Plc 4.3% and Dell Technologies Inc. 4%.
Such declines are not overreactions, according to Peter Garnry, head of equity strategy at Saxo Bank. “It’s justified at this point. They meet the FY24 estimates but nothing more.
Hardware makers have seen their stocks rebound this year amid an arms race for AI computing power that has driven up sales and profits. The Philadelphia Stock Exchange’s semiconductor index rose 12% through Tuesday, led by Nvidia with a 74% gain. Super Micro Computer had more than tripled in size.
The gains raised expectations, as well as concerns that stocks may have pulled ahead in the near term. This was evident on April 19 when Nvidia and other AI winners unexpectedly fell ahead of earnings reports from big tech companies.
“Valuations in this space are clearly driven by several years of earnings growth, which always implies a higher degree of uncertainty,” said Joanne Feeney, partner and portfolio manager at Advisors Capital Management.
For AMD, some analysts question how well positioned the company is to deal with “the threat of own chip production from companies like Microsoft, Meta and Google,” Garnry said.
As for Super Micro, the title is “talking about him”. However, a quality long-term investor would likely pass up this opportunity, as it is questionable how deep their long-term moat really is. I think the market has pushed expectations too high.
While investors will have to wait several weeks for Nvidia to release its report on May 22, Qualcomm Inc. results are due Wednesday afternoon. Arm, up 35% this year, reports May 8.
The Philadelphia Semiconductor Index is valued at 26 times projected earnings, down from the March peak of around 30 times earnings, but well above the 10-year average of around 17 times , according to data compiled by Bloomberg.
The bulls will indicate positive signs of demand. Amazon.com Inc.’s cloud computing unit posted its strongest sales growth in a year on Tuesday, helped by demand for artificial intelligence services. Chief Financial Officer Brian Olsavsky said Amazon’s capital spending will increase “significantly” this year compared to 2023, primarily to support the growth of Amazon Web Services.
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