Chip stocks are closing back in on a bull market, fueled by optimism around recent corporate earnings. But some analysts caution that the results don't necessarily warrant widespread enthusiasm.
It was a strong day for the semiconductor sector on Wednesday, with shares of Sandisk $(SNDK)$ and Micron Technology $(MU)$ gaining about 6% and 5%, respectively. SK Hynix, another major beneficiary of memory-chip demand, saw its American depositary receipts rise 9%.
The stocks of artificial-intelligence chip makers Nvidia and Advanced Micro Devices $(AMD)$ rose 3% and 2%, respectively.
The PHLX Semiconductor Index SOX was moving closer toward bull-market territory, finishing the day at 12,399.38. The SOX would have to reach 12,536.99 to enter a new bull market, according to Dow Jones Market Data. A bull market is defined as rising 20% or more off a recent low.
The rally comes on the heels of Tuesday afternoon's earnings results from CoreWeave, Super Micro Computer $(SMCI)$ and Lumentum Holdings $(LITE)$, which indicated that AI spending remained robust. Those are companies further down the AI chain that connect and install chips for use, according to Dan Kemp, founder of investment consultancy Portfolio Thinking. He said their reports therefore gave investors a real view of chip demand that further supported enthusiasm for the sector.
"The caution is the scale of the commitments funding that demand," Kemp told MarketWatch in emailed comments.
He pointed to neocloud provider CoreWeave, which raised its capital-spending plans for the year to between $35 billion and $39 billion from $31 billion to $35 billion, while its revenue outlook came in "far more modestly." The company also reported a net interest expense of $640 million for the quarter, while its adjusted operating income was $128 million, Kemp noted.
"We have yet to see the consumer and corporate spending that would justify commitments on that scale," Kemp said.
Both CoreWeave and Super Micro also touted growing backlogs, with the latter reiterating that its new orders reached more than $60 billion in the June quarter.
Kemp said he remains skeptical of those figures given the possibility that some orders could eventually be cancelled or delayed.
"Investors are entitled to read a large backlog as a positive signal, but they should price it as a range of outcomes rather than as revenue that has already happened," he said.
He thought Wednesday's chip-stock rally could also be tied to the consumer-price index report earlier in the day that was broadly in line with Wall Street's forecast.
CoreWeave's stock rose 19% on Wednesday, as did Super Micro's stock. Lumentum Holdings, which provides optical components for data centers, saw its stock move more than 13% higher.
But Brian Mulberry, chief market strategist at Zacks Investment Management, said the earnings reports "help confirm that the AI trade is getting wider, not just bigger."
As CoreWeave confirmed demand for graphics processing units is still strong, Lumentum showed how that is driving a need for infrastructure to power and run those chips, he said in emailed comments.
Mulberry said not all chip companies will benefit the same, however, so "fundamentals will ultimately matter more." Investors are now looking for accelerating growth, he said, "not just pure price momentum."
In his view, Nvidia, Broadcom and optical networking provider Coherent (COHR) have the strongest fundamentals.
Kemp shared a similar view that the question for long-term investors is whether demand is growing faster than a stock's price implies.
"On that, the evidence is far less comfortable," he said.
Comments