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AI Winners Versus Everyone Else
(Bloomberg) — There’s a growing divide in the $530 billion semiconductor industry between the companies that are riding the artificial intelligence wave and those that aren’t. And looking at the early returns from this earnings season, that gulf could soon widen into an abyss.
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“Without AI, the market would be very sad,” Christophe Fouquet, chief executive of ASML Holding NV, said last week on a conference call after the Dutch chip production equipment maker cut its sales forecast for 2025 due to sluggish demand in everything other than AI.
ASML’s results sparked a new round of worries about the health of the chip industry, which is being hurt by weakness in key businesses like personal computers and automobiles. It also has been caught up in the rising geopolitical tensions between the US and China that could cut off access to the Chinese chip market, which is the biggest in the world.
Taiwan Semiconductor Manufacturing Co., which includes Apple Inc. and Nvidia Corp. among its customers, assuaged some of those fears after lifting its revenue forecast for 2024. While its growth is being fueled by AI-related drivers, overall chip demand has “stabilized” and is starting to improve, Chief Executive Officer C.C. Wei said.
The Philadelphia Stock Exchange Semiconductor Index, better known by its symbol SOX, tumbled last week, losing 5.3% on Tuesday alone before paring its losses following TSMC’s results on Thursday. To highlight the bifurcation, semiconductor equipment makers like ASML and Lam Research Corp. were among the leading decliners, while several chipmakers, including Marvell Technology Inc., managed to rise.
“We should expect this kind of divergence to continue, since it is completely correct to assume it is all AI,” said Gabelli Funds research analyst Ryuta Makino, who sees the separate paths remaining until at least 2025.
Chip Creators
The semiconductor business is often viewed as a barometer for the global economy since chips are vital for a range of products, from data center servers to dishwashers. The companies that provide the equipment used to create these chips are on the industry’s front lines.
Before semiconductor companies can begin production, it takes months to build, install and test the machines used to manufacture the chips. As a result, companies like ASML have unusually long-range views of how their customers are feeling. At the moment, they’re flashing a caution signal for everything other than AI. For example, automotive and industrial suppliers are experiencing a demand slump as clients sit on elevated inventories.
In addition, Intel Corp. is cutting costs and delaying new factories as it grapples with falling sales and mounting losses. Samsung Electronics Co. apologized to investors this month after delays in high-bandwidth memory chips led to disappointing financial results. And investors will be monitoring Texas Instruments Inc. this week, with its earnings due on Tuesday, since the company’s analog chips are used by a wide range of customers.
Taken together, it appears there’s a tough road ahead for equipment makers, many of which saw their stocks hit record highs earlier this year. Some traders aren’t waiting around to see how this plays out and are already dumping the stocks.
ASML just suffered its worst week since early September, with its US-listed share price dropping 14%. Applied Materials Inc., the biggest US maker of chip equipment, sank 9.1%, while KLA and Lam Research each fell more than 12%.
“We have been more cautious on other semi equipment names,” CJ Muse, an analyst at Cantor Fitzgerald, wrote in a research note. “But had thought a longer lead time player like ASML would outperform. Clearly we were wrong with this assumption.”
After ASML’s results, the analyst said he expects more downside for the stocks.
Investors will get more insight this week when chip equipment maker Lam Research reports on Oct. 23. KLA is due to release results on Oct. 30, followed by Applied Materials on Nov. 14.
AI Spending Bump
Things are very different for the semiconductor companies that will benefit from Big Tech’s continued heavy spending on AI development. Microsoft Corp., Alphabet Inc., Amazon.com Inc. and Meta Platforms Inc. pumped more than $50 billion into capital expenditures in the second quarter, with much of that going to computing component makers. And many of these behemoths say they plan to spend even more in coming quarters to expand their AI infrastructures.
Overall AI semiconductor industry sales are expected to jump to $245 billion in 2025 from an estimated $168 billion this year, according to Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management. She advised clients to add to AI-related chipmakers in the wake of ASML’s results.
“We continue to see a strong growth outlook for AI semis, and are closely watching managements’ guidance on future demand in the days and weeks ahead,” she wrote in a research note last week.
The chief beneficiary from all the spending is Nvidia, whose chips dominate the market for AI accelerators. The stock hit a fresh record last week after assurances from Chief Executive Officer Jensen Huang that its new Blackwell chip is in full production and seeing strong demand from customers. Nvidia shares are up more than 175% in 2024 and within striking distance of overtaking Apple as the world’s most valuable company with a market value of nearly $3.4 trillion.
Other companies that should get a lift from the rising tide of AI spending include TSMC, Broadcom Inc., Arm Holdings Plc, Micron Technology Inc. and Advanced Micro Devices Inc., which is attempting to loosen Nvidia’s grip on the accelerator market.
However, even some of the winners aren’t immune from non-AI weakness. Just look at Broadcom. Its custom chips and networking semiconductors are used in data centers, but its stock price tumbled last month after posting disappointing results from parts of its business not tied to AI.
“There will eventually be a value case to be made for non-AI chipmakers and a point when a strengthening economy means demand flips back,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder. “However, it’s a question of timing. AI will remain a focus in the meantime.”
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Sales of existing homes fell in September as house hunters remained on the fence about buying a home despite mortgage rates easing during the month.
Existing home sales slipped 1.0% from August’s tally to a seasonally adjusted annual rate of 3.84 million, the National Association of Realtors said Wednesday. That marked the lowest rate since October 2010. Economists polled by Bloomberg expected a pace of 3.88 million in September.
On a yearly basis, sales of previously owned homes were 3.5% lower in September. The median home price rose 3.0% from last September to $404,500, marking the 15th consecutive month of annual price increases.
“Home sales have been essentially stuck at around a 4 million-unit pace for the past 12 months,” NAR chief economist Lawrence Yun said in a press release.
There have been significant challenges that have weighed on sales activity, including a lack of inventory, escalating prices, and elevated mortgage rates. Last month, however, those factors turned around.
The Federal Reserve cut its benchmark rate by half a percentage point in September. While the central bank doesn’t set mortgage rates, its actions influence their direction of movement.
Mortgage rates hit the lowest level since February 2023 ahead of the Fed decision to ease, while listing inventory picked up.
But overall, that hasn’t been enough to entice buyers.
“Some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election,” Yun said.
Tesla (TSLA) reported mixed third quarter results after the bell on Wednesday, but the stock jumped in after-hours trading as investors cheered the earnings beat, higher gross margins, and news that Tesla’s cheaper EV is on track for production next year.
For the quarter, Tesla reported revenue of $25.18 billion vs. $25.4 billion per Bloomberg consensus, higher than the $25.05 billion it reported in Q2 and also topping the $23.40 billion Tesla reported a year ago. Tesla posted adjusted EPS of $0.72 vs $0.60 expected, on adjusted net income of $2.5 billion and free cash flow of $2.9 billion.
The closely watched gross margin figure came in at 19.8%, much higher than the 16.8% expected.
Tesla shares were up nearly 8% in after hours trade.
“We delivered strong results in Q3 with growth in vehicle deliveries both sequentially and year-on-year, resulting in record third-quarter volumes,” the company said in its earnings deck. “Preparations remain underway for our offering of new vehicles — including more affordable models — which we will begin launching in the first half of 2025.”
Earlier this month, Tesla (TSLA) announced third quarter deliveries that slightly missed expectations, sending the stock lower.
Tesla said it delivered 462,890 vehicles in Q3, up 6.4% quarter over quarter, to mark the first quarter of delivery growth this year. The numbers also came in ahead of the 435,059 EVs the company delivered in the year-ago period. But Wall Street had expected Tesla to deliver closer to 463,897, according to Bloomberg.
“Refreshed Model 3 ramp continued successfully in Q3 with higher total production and lower cost of goods sold quarter-over-quarter. Cybertruck production increased sequentially and achieved a positive gross margin for the first time,” Tesla said in its report.
Tesla said it expects vehicle deliveries to achieve “slight growth” in 2024.
Ahead of Tesla’s Q3 disclosure, shares were down approximately 11% since Tesla revealed its robotaxi, dubbed the Cybercab, at its showy “We, Robot” event from the Warner Bros. studio lot in Burbank, Calif., on Oct. 10.
The debut and release of a cheaper EV is what many analysts and industry watchers believe will spur the next leg higher of EV sales, as even CEO Elon Musk has said before. During its Q2 report, Tesla and Musk said the company remains on track for the production of new vehicles, likely including a cheaper EV, in the first half of next year.
Investors and analysts were left wanting more details from Tesla’s “We, Robot” event on the Cybercab itself and detailed testing plans, along with questions about the development of Tesla’s sub-$30,000 EV, dubbed the Model 2.
Transak disclosed a data breach affecting over 92,000 users after a phishing attack compromised an employee’s laptop.
CryptoCurrency
The Dow plummets more than 600 points and is on track for its worst day in more than a month
The Dow Jones Industrial Average and other major indexes suffered a steep decline Wednesday afternoon as the yield on the benchmark 10-year U.S. Treasury note continued its upward climb, reaching 4.23%—a level not seen since July.
In the afternoon, the Dow dropped 631 points, or 1.4%, heading for its worst day in over a month. Meanwhile, the tech-heavy Nasdaq and the S&P 500 declined by 2.2% and 1.4%, respectively. However, there was some relief for investors as oil prices eased, with West Texas Intermediate (WTI) futures trading around $70.65 per barrel.
The Federal Reserve’s Beige Book, released in the afternoon, reported that economic activity remained largely unchanged across the 12 Federal Reserve Districts, with the Southeast significantly impacted by a harsh storm season.
On Wednesday, all eyes are on Tesla (TSLA) as the company prepares to release its latest earnings report. Analysts expect earnings per share to be 60 cents, down from 66 cents a year ago but an improvement from 52 cents in the previous quarter, according to FactSet estimates. Revenue is projected to hit $25.4 billion, compared to $23.3 billion in the third quarter of 2023 and $25.5 billion in the preceding quarter.
Apart from Tesla, investors are closely monitoring earnings reports from other major corporations, including AT&T (T), Boeing (BA), and Coca-Cola (KO).
McDonald’s stock plunges over 5%
McDonald’s (MCD) shares took a sharp hit, falling over 5% after the Centers for Disease Control and Prevention (CDC) linked the chain’s Quarter Pounder burgers to an E. coli outbreak. The outbreak has led to 10 hospitalizations and one death, driving a significant decline in McDonald’s stock during the afternoon trading session.
As of now, 49 cases have been reported across 10 states between Sept. 27 and Oct. 11, with a majority of illnesses occurring in Colorado, Nebraska, Utah, and Wyoming. The CDC noted that most of those affected had eaten a Quarter Pounder. Investigators are working swiftly to identify the contaminated ingredient.
Spirit Airlines stock soars 30%
After a failed attempt at merging with JetBlue (JBLU-0.80%), ultra-low-cost carrier Spirit Airlines (SAVE+28.01%) is reportedly turning back to a familiar partner. The Wall Street Journal (NWSA-0.34%), citing people familiar with the matter, reports that Spirit and Frontier Airlines (ULCC+3.05%) are in early talks over a potential merger. The news sent Spirit’s stock soaring nearly 30% on Wednesday.
–Francisco Velasquez and Rocio Fabbro contributed to the article
The semi-autonomous region of Tanzania is taking advantage of a sandbox regulatory framework adopted in July.
Bitcoin’s correction ignited selling in altcoins, which are slipping below critical support levels.
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