AI boom boosts earnings for chip stocks

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Investors are gripped by fears of losing chip stocks.

The Philadelphia Semiconductor Index, an index that tracks 30 of the world’s largest semiconductor manufacturers, rose this week to its highest level in 14 months on the back of Nvidia’s gains.

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The gains have sent the index up 38% so far this year, far outpacing the Nasdaq Composite. The latter, which includes Alphabet, the parent company of Apple and Google, has increased by a quarter over the same period.

Nvidia has led the charge due to its dominance in supplying chips that can handle the vast computing power that can rapidly create text, images, and human content.

The U.S. group’s market cap jumped more than $184 billion this week to nearly $1 trillion after it forecast $11 billion in sales over the next three months, nearly $4 billion higher than consensus expectations. “This is the largest increase we’ve seen in our coverage,” Bank of America analysts said.

But companies like AMD, Marvell Technology and Applied Materials also grew this year, by 95%, 70% and 40%, respectively.

“Nvidia is the undisputed leader, but two-thirds of [the Philadelphia Semiconductor Index’s] constituents have been outperforming the S&P 500 since the beginning of the year and more than a third are up three times the S&P 500,” noted analysts at Bespoke Investment Group in New York.

Demand from institutional investors appears to have supported the recent rally by chip makers. They are the “primary source” of demand for AI stocks, with only a “marginal increase” in interest from retail investors, according to VandaTrack.

Despite the hype, “the latest AI trend is still relatively small compared to the meme stock bubble” of 2021, the data provider said.

Even so, AI is the topic on the minds of many executives. According to FactSet, a record number of 110 S&P 500 companies mentioned the term “AI” during their first-quarter earnings call.

“The rally in AI-related companies, in particular, has raised concerns that this segment is now in a bubble,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. At the same time, “we do not consider the rally linked to artificial intelligence unsustainable”.