AI boom drives gains for chip stocks

Investors are gripped by a fear of missing out on chip stocks.

The Philadelphia Semiconductor Index, an index tracking 30 of the world’s biggest semiconductor manufacturers, surged this week to its highest level in 14 months on the back of Nvidia’s blowout earnings.

The gains have sent the index up 38 per cent so far this year, far outstripping the tech-heavy Nasdaq Composite. The latter, which includes Apple and Google parent Alphabet, has risen by a quarter over the same period.

Nvidia has led the charge because of its dominance in supplying the chips able to handle the vast computing power that can quickly create humanlike text, images and content.

The US group’s market capitalisation soared by more than $184bn this week to nearly $1tn after it projected $11bn worth of sales over the next three months, nearly $4bn ahead of consensus expectations. “This is the largest raise we have seen in our coverage”, said analysts at Bank of America.

But companies such as AMD, Marvell Technology and Applied Materials have also soared this year, up around 95 per cent, 70 per cent and 40 per cent respectively.

“Nvidia is the clear leader, but two-thirds of [the Philadelphia Semiconductor Index’s] components are outperforming the S&P 500 year-to-date and more than a third are up triple the rate of the S&P 500,” noted analysts at Bespoke Investment Group in New York.

Demand from institutional investors appears to have underpinned the chipmakers’ recent rally. They are the “primary source” of demand for AI stocks, with only a “marginal increase” in retail investor interest, 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 many executives’ minds. A record 110 of the S&P 500 companies cited the term “AI” during their earnings call for the first quarter, according to FactSet.

“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 don’t see the AI-related rally as unsustainable”.