Why Shares of Nvidia, AMD, Arm Holdings, and Other Artificial Intelligence (AI) Stocks Plunged on Tuesday.
Since the beginning of last year, investors have been excited about the potential of artificial intelligence (AI), picking up shares of companies that are well-positioned to benefit from this next-generation technology. However, as the bull market passes the two-year mark, many are taking a step back to assess the situation, and others are looking for any excuse to take a profit.
With that as the background, the chip designer Arm Holdings (NASDAQ: ARM) down 6.7%, the AI chip maker Nvidia (NASDAQ: NVDA) down 4.9%, the chipmaker Advanced Micro Devices (NASDAQ: AMD) sank 4.8%, a semiconductor device supplier Broadcom (NASDAQ: AVGO) down 3.7%, and chip foundry Taiwan Semiconductor Production (NYSE: TSM) dipped 2.6%, as of 12:50 pm ET Tuesday.
The catalyst that drove down these AI stocks were reports that the US government is considering new ways to issue chips.
To prevent exports?
The Biden administration is considering limiting sales of advanced AI processors from Nvidia, AMD, and other companies, according to a report that first appeared in Bloomberg, citing “people familiar with the matter.” This would mark the latest move by regulators to address concerns that advanced technologies such as AI could be used against the US and its interests.
The government is discussing a limit on the number of export licenses for certain countries, citing national security as the reason for this possibility. It is important to note that the US already has strict restrictions on level of AI chip technology that allows it to be exported to other countries, including China and 40 other countries in Asia, the Middle East, and Africa.
Currently, US chipmakers are required to obtain government licenses to sell advanced semiconductors to customers in certain countries. Current negotiations will expand existing restrictions, which can be set on a country-by-country basis, with an emphasis on countries within the Persian Gulf region.
These considerations are still in the early months, and no final decision has been reached, but plans have been “expanding in recent weeks,” according to the report.
Possible effects
Limiting the sale of advanced AI chips to certain countries has potential implications for all of these AI-centric stocks:
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Nvidia is a leading supplier of graphics processing units (GPUs) used to facilitate AI applications. The company controls about 98% of the data center GPU market, according to semiconductor analyst firm TechInsights. Therefore, it has a lot of losses.
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AMD has long been fighting Nvidia for GPU supremacy and recently decided to prioritize AI processors, with its legacy gaming chips taking a back seat. Curbs on advanced processors can alleviate those urges.
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Arm Holdings provides the intellectual property and chip designs used for some of the world’s most advanced chips, including those used by Nvidia and AMD. If sales of these processors are curbed, Arm Holdings’ income may suffer.
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Broadcom offers a number of products that work in conjunction with GPUs in the data center, including Ethernet switches and application-specific integrated circuits (ASICs), to accelerate data transmission. If sales of GPUs decline, sales of related products such as Broadcom may suffer.
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Taiwan Semiconductor Manufacturing, also called TSMC, is a world leader, responsible for 62% of the world’s semiconductors and an estimated 90% of advanced processors used for AI. Any restrictions on processor sales will trickle down to TSMC, eliminating revenue.
While investors fear being sold by Nvidia (and others), history suggests they may be overreacting. There have been similar concerns on many other occasions when the US government has considered or announced measures to ban chips from countries like China. Despite those fears, Nvidia has continued to generate triple-digit growth for five consecutive quarters. In addition, recent reports suggest that the company’s Blackwell chips are sold in the next 12 months. This suggests that, potential barriers aside, demand for AI chips remains strong.
Then there are the dimensions to consider. Arm Holdings, AMD, Nvidia, Broadcom, and TSMC trade at 96 times, 46 times, 46 times, 36 times, and 28 times forward earnings, respectively of them. For those looking for good value, TSMC is probably the only one worth buying, but this does not account for the rapid growth trajectory from AI. Using the most appropriate forward price/earnings-growth (PEG) ratio — which factors in that growth — reveals that each of the remaining stocks boasts a multiple of less than 1, which is the standard for unstarted stocks.
It’s still early days for productive AI adoption, and while some experts peg the market value at $1.3 trillion, others believe the total could be much higher. For investors looking to profit from AI, the best strategy is to buy the best AI stocks you can find and hold for the long term.
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Danny Vena holds positions in Nvidia. The Motley Fool has positions and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a policy of disclosure.
Why Nvidia, AMD, Arm Holdings, and Other Artificial Intelligence (AI) Stocks Sank Tuesday was first published by The Motley Fool.
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