Chip Stocks Fell About 10% on Rates, a Memory Scare and AI Debt. TSMC Expects Sales 14% Higher.
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| By Al Qureiyeh |
If you own artificial intelligence (AI) stocks, you're probably asking what a lot of investors are searching for right now: is it time to sell?
On Oct. 15, Taiwan Semiconductor Manufacturing (TSMC, TSM) gave its answer. The company that manufactures chips for other companies' designs reported what CNBC called a record profit and told investors to expect fourth-quarter sales about 14% above the third quarter's. "We did not see any sign of slowdown," Chief Executive C.C. Wei said.
Yet if you own a chip fund like the VanEck Semiconductor ETF (SMH), you lost almost 10% in a week.
The companies that see chip orders first say people haven't stopped buying AI. Chip stocks fell alongside hot inflation, a memory-chip scare out of China and worries about the debts of companies building AI data centers. I'd buy the company making the chips its customers keep ordering.
What Happened
First, inflation. On Oct. 14, the Labor Department said consumer prices rose faster than economists expected, with no revisions to earlier months and no change in method. Short-term Treasury yields rose, and traders raised the odds of a Federal Reserve (Fed) rate hike at the Oct. 28 meeting, by CME Group's FedWatch measure, while the 10-year yield closed slightly lower.
Chip stocks fell more than 4% that day by the Philadelphia Semiconductor Index of chip stocks, far more than the S&P 500.
Second, memory chips. On Oct. 13, South Korea's big memory makers, SK hynix and Samsung Electronics, fell sharply on reports that a Chinese rival is close to selling advanced server memory. Micron (MU) fell with them.
Third, debt. The companies that borrow to build AI data centers, such as CoreWeave (CRWV), Nebius (NBIS) and Oracle (ORCL), fell first and fell hardest. The price of insuring CoreWeave's debt against default now implies better-than-even odds that it defaults within five years by S&P Global's estimate, Reuters reported.
The market shrugged off TSMC's report; its shares kept falling.
On my scorecard, if you skipped CoreWeave when I said to on Oct. 13, you sidestepped an 18% fall. If you bought Valero (VLO), "B+," a BUY, on Oct. 14, you're ahead of the market.
Nvidia (NVDA) is down about 4% since I suggested it on Oct. 8, and Alphabet (GOOGL) is slightly behind the market. We hate losses, but neither BUY rating has changed.
Why the Sellers Are Half Right
Most investor talk about AI stocks is bearish; in the American Association of Individual Investors' survey for the week ended Oct. 14, bears outnumbered bulls. Two of the worries are real.
First, debt. If the borrowers can't raise money, they buy fewer chips.
Second, interest rates. With inflation running hot, a Fed hike is back on the table, and chip stocks fell far more than the market on the day of the report.
Where the crowd overreaches is demand. TSMC's chief executive said demand is still higher than supply.
ASML (ASML), which makes the machines chip factories use, told investors on Oct. 14 that its customers "continue to increase their short- and medium-term equipment demand forecasts."
Weiss Rates the Chip Makers BUYs and the Borrowers Lower
Weiss rates TSMC "B," a BUY. Every other big U.S.-listed chip maker I checked is a BUY too: Nvidia and Micron "B+," Broadcom (AVGO) and ASML "B," and Advanced Micro Devices (AMD) "B-." The VanEck Semiconductor ETF is "B-," a BUY.
The borrowers rate lower: Oracle "C" and Nebius "C-," both HOLDs.
A Weiss Ratings Daily piece on Oct. 12 warned that AI's borrowing could end badly. I agree the danger sits in the debt. Where I differ: TSMC is paid for chips it ships now. Another piece, "The Real Cost of AI's Replacement Cycle," argued short chip lives keep the platforms spending and borrowing; that spending is TSMC's order book.
Avoid CoreWeave, which Weiss rates "D-," a SELL.
Related story: AI's 'Circular Financing' Will End in Tears
The Borrowers Fell First. The Chip Makers Followed This Week.
Over the past month, the borrowers fell while chip makers rose. In the week through Oct. 14, the selling reached the chip makers, while the AI platforms, Alphabet, Microsoft (MSFT), Amazon (AMZN) and Meta (META), barely moved.
TSMC's sales show the other side. They have risen every quarter for the past year, and the company expects another jump this quarter.
That's why I'd own TSMC rather than add to Nvidia here: Nvidia owns stakes in CoreWeave and Nebius, its SEC filings show.
This "B" BUY Makes the Chips Its Customers Keep Ordering
Buy Taiwan Semiconductor (TSM) at the next close; the stock closed Wednesday at $430.
TSMC manufactures chips for the companies that design them, and chips for AI and other high-powered computers are now its biggest business.
Weiss rates it "B," a BUY, with Growth, Efficiency and Solvency, its ability to pay its debts, all rated Excellent. Its Risk grade is "D," Weak, a sign the stock can swing sharply.
The average Wall Street target runs from about $528 to $580, depending on the data provider. Needham raised its target to $560 on Oct. 15. That's $130 above Wednesday's close, a potential gain of about 30%.
TSMC pays you a little to wait: about $1.10 per U.S.-listed share each quarter, a yield of about 1%. Give it a year, with the first checks at Microsoft's report on Oct. 28 and TSMC's October sales report on Nov. 10.
In each of the last three big chip sell-offs, TSMC fell more than the S&P 500 while the selling lasted. In the three months that followed, it beat the index twice. So it has tended to lag while the selling lasts and catch up after.
What could work against it: if the borrowers can't raise money, they order fewer chips. A Fed hike on Oct. 28, which traders put at better than a one-in-three chance by CME FedWatch after the inflation report, would weigh on every chip stock.
The Takeaway
What happened: Chip stocks fell about 10% in a week alongside hot inflation, a memory-chip scare and AI borrowers' debts, while TSMC reported a record profit the market shrugged off.
What it means: The worry is who pays for AI data centers and how high rates go, not whether customers want chips.
If the borrowers' troubles spread to the big platforms, TSMC would fall with the rest of AI; that is the risk we take.
TSMC is the kind of idea my process surfaces; my AI Profit Accelerator portfolio holds the ones that pass its stricter, fundamentals-first test.
What to do today: Buy Taiwan Semiconductor (TSM) at the next close; the stock closed Wednesday at $430. Avoid CoreWeave (CRWV), which Weiss rates "D-," a SELL.
What We're Watching
First, the platforms' spending. Meta reports on Oct. 21 and Microsoft on Oct. 28. If either cuts AI data-center spending, I would sell TSMC, and I will say so.
Second, TSMC's October sales on Nov. 10. To reach the low end of its own outlook, monthly sales need to run near 554 billion Taiwan dollars, above September's pace. If October falls well short, I would sell.
Take care,
AL Qureiyeh
