Five Reasons I’m Real Nervous About the Chip Sector
Cheap Chinese computing, sagging artificial intelligence use and data center backlash are among the reasons I’m wary of the semiconductor sector.
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The chip sector are up as the week starts. So are the “picks and shovels” of the AI/data center spend. This rise is primarily on optimism that fighting in the Middle East will cool. I am very nervous that we have only seen the beginning of a pullback in the stocks, as I see multiple issues facing the industry.
Let’s go through some of the obstacles ahead:
Cheap Chinese Compute. The rise of cheap Chinese compute is occurring more rapidly than many thought it would. The Chinese companies allegedly “distill” their models – making it cheaper and faster to get them trained (to “distill” basically means they train their models on existing U.S. models). There is no concept of NIMBY in China, so building is easier. They don’t make the highest quality chips, but they make a lot of chips and their energy grid is better prepared for the demands of compute.
NIMBY. The data center build out is facing a “not in my back yard” movement. Even the Governor of Texas seems to be pushing back on compute build-outs.
Braggawatts. I saw this term and I like it. Basically it argues that a lot of planned spending will be difficult to get completed. Access to the chips? Access to the regulatory approvals? Access to electricity and water? We are seeing cost and time over-runs on projects. It is getting more expensive to get compute build in a timely manner.
Earnings Don’t Compute. Intel (INTC), Adanced Micro Devices (AMD) and Oracle (ORCL) all had announcements/earnings that on the surface seemed likely to propel their stocks higher. The stocks did not go higher. That is pretty good evidence that the hurdle is set very high and positioning is skewed to being overweight/overbought.
The inflows into the semiconductor space have been quite incredible.
Inflows along with the rebalancing of leveraged ETFs in the space (the Direxion Daily Semiconductor Bull 3X ETF (SOXL) is $20 billion, representing $60 billion of risk) amplify moves in both directions.
Are AI users getting the benefit? Anecdotally, I am getting far more feedback that companies are looking at reducing their AI spend at the moment, rather than growing it.
Frustration on the rapid cost increase while still generating mistakes that need to be identified and corrected by humans is real.
Bottom Line
From an investment standpoint: I would buy “completed projects.” Companies with projects that are completed or nearly completed, will have a competitive advantage if we see any slowdown.
I would also be cautious on equities in the space. All are great companies. Almost all fit into our ProSec narrative. But valuations may be questioned, and as we’ve seen in these markets, prices move fast, when they start to move.
Also, Iran is my biggest concern for Treasuries. Not just the energy price inflation, but the need for countries to spend more on defense. Even in the Middle East, countries that once gobbled up Treasuries, are facing their own economic slowdown, while seeing their need to spend increase. If we do see spending on the AI / Data Centers slow at all, that will help on the inflation front and will put a question mark on jobs, as so much of what has been driving the economy on the positive side is related to capital spending in this area.
At the time of publication, Tchir had no position in any security mentioned.
