Here’s Why the Simple Explanation for the Chip Selloff Makes No Sense
Chip stocks have sold down hard in the last couple of days. While Chinese competition is often cited as the motive, that’s a simplification that doesn’t add up.
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We’re seeing heavy selling in chip stocks, extending a savaging that started on Monday.
South Korean market’s two largest components are taking it on the chin. SK Hynix (SKHY) (KR:000660) has plunged 10.1% Tuesday in Seoul trade, for a two-day loss of 15.1%. Samsung Electronics (KR:005930) is down 12.1% over the last two days.
And that’s prompting selling in Micron Technology (MU), down 5.0% in premarket trading for an 8.7% loss so far this week. Yet as I explored in my last column, Asia’s largest companies have sold down even after delivering sunny forecasts.
What’s the cause?
Read Past the Headlines
If you skim the headlines, memory makers are down because they face intensified competition from cheaper rivals in China.
The boss of ChangXin Memory Technologies (SH:688825) said over the weekend that CXMT has made “key progress” on a new cell architecture that would boost the density of a memory chip. This “4F2” design, which Hynix and Samsung are also chasing, allows more cells to fit on a single chip.
CXMT plans to roll out a new chip product for servers incorporating the new technology by the end of the year. It would be an advance on the 6F2 tech that’s currently in use, with the 4F2 design roughly one-third smaller than current chip geometry.
The DeepSeek Moment for Chips?
Sounds like a “DeepSeek moment” for the memory sector, right? Hynix put 4F2 on its roadmap in 2025, but both it and Samsung are only likely to introduce that standard around 2028.
There’s no doubt CXMT poses a significant competitive threat. I explained in July that the Chinese government and its “Big Fund” have thrown their weight behind CXMT as a “critical national priority.” CXMT then saw its shares shoot up 466% on debut, in an $8.6 billion offer that is the largest mainland Chinese listing since 2010.
Hefei-based CXMT, now the largest listing in mainland markets, has been making rapid inroads in claiming market share, capturing 10% of the global DRAM market as of Q2, per the latest data from Counterpoint. That’s up rapidly from just 3% in Q1 last year.
But something doesn’t add up.
Chinese Chip Stock Is Down Too
For starters, shares in Shanghai-listed CXMT are down, too. The stock lost 2.8% Tuesday, and is down a hefty 14.3% so far in October.
Yes, those first-day gains were unsustainable. But CXMT shares actually peaked in mid-August, and have now given back 24.0% from that market top.
If it’s the frontrunner in developing the 4F2 square chip design, its shares should be racing ahead. Even if the August high was a step too far, Saturday’s news should have given the shares an injection of optimism.
They have not.
Will 4F2 Change the Competitive Picture?
There are also reasons to doubt whether CXMT can follow through on its claims. It hasn’t set a date or released any specs on the new chip structure, although it does say it has had to redesign key parts of its production process.
And are CXMT’s competitors really that far behind? Samsung says it intends to start mass production of tech 4F2 in 2028. CXMT isn’t saying it will be in mass production, just that it will have a sample or launch product ready by the end of this year.
Without product specs, verified production yields, successful testing use by customers, and the demonstrated ability to scale the tech up to commercial levels, it is as yet impossible for external analysts to evaluate CXMT’s claims.
Battery Prowess ≠ Commercial Success
Consider another tech advance: China’s electric-vehicle makers are able to make EVs that can be charged in about as much time as it takes to pump a gasoline model full of gas. BYD (BYDDY) (HK:1211) demonstrated that in March 2025, as I outlined at the time. Then CATL (CYATY) (HK:3750), the world’s largest maker of EV batteries, unveiled an even-better model a month later. Both companies have made batteries that can charge a car in five minutes.
But while the tech exists, it’s far from ready for commercial rollout. Such batteries require a bazooka of a charging gun to deliver enough power. Charging such a battery also generates intense heat and stress, meaning the lifespan of the battery is short. And such batteries are currently too expensive to make for mass-production cars.
We don’t know if CXMT’s smaller, higher-density chips will result in cheaper chip costs. These are also advances for “regular” DRAM chips that go into servers, rather than the High Bandwidth Memory (HBM) chips that Hynix, Samsung and Micron make to power AI accelerator racks. Chinese chipmakers don’t have access to top-flight chipmaking equipment or technology, so at this stage CXMT, the chip unit of Alibaba Group Holding (BABA) (HK:9988) and a consortium led by Huawei are all testing the technology.
Commodity Chip Prices to Fall?
Still, DRAM chip prices are unusually high, with both DRAM and NAND chips in chronically short supply. These are commoditized chips that typically see their price go down over time.
CXMT is quickly capturing DRAM business while its privately held Chinese peer Yangtze Memory Technologies Corp. (YMTC) is quickly capturing market share in NAND chips. YMTC now has 14.0% of the NAND market, according to Counterpoint, up from 4.8% in 2021.
For now, the entire memory-disk sector is selling down, with the prospective competition from CXMT typically cited as the cause. I think the real motive revolves more around broader doubts surrounding AI, and the chipmakers are simply the easiest way to express those doubts. OpenAI, Anthropic and the like after all have yet to list.
In Tokyo trade Tuesday, SoftBank Group (SFTBY) (T:9984) sold down 8.5%. The OpenAI-backer and venture-capital investor’s shares have lost 16.2% since last Wednesday’s close. Chip-equipment manufacturer Tokyo Electron (T:TELWY) (T:8035) shares fell 7.2%.
It looks a lot like investors are simply growing weary of the AI trade. Memory chips have sold off all summer since setting June all-time highs. Just as they appeared to be gathering a head of steam again in mid-September, we have another selldown.
Broadcom Comments Also Influential
I think it was as impactful to have Broadcom (AVGO) CEO Hock Tan come out on Monday and state that he feels “a lot of investors” into AI “have no clue what they are investing in.” They “set very extreme expectations only to find out that it’s almost like they are in a casino,” Tan said at a conference in Singapore.
As I noted in my last column, Samsung set a sunny sales forecast for Q3 ahead of its earnings due on October 29. Chip-foundry production leader Taiwan Semiconductor Manufacturing Co. (TSM) (TW:2330) also gave us September sales figures that demonstrate it set a record for revenue in Q3. Its earnings are due on Thursday.
Yet those stocks sold off even on the promise of record earnings. Micron and Samsung say they’ve essentially sold out their potential supply through 2028, but investors are looking past the supply constraints and attempting to factor in future price trends for chips. If significant Chinese supply comes online, it would pressure the lower end of the chip market. Among major multinationals, Apple (AAPL) is reportedly lobbying to use CXMT chips. But the vast majority of Chinese semiconductor production would be absorbed at home with China currently accounting for around 60% of chip demand.
While the share prices of the memory makers have shot up, the stock valuations are still supported by sales and profits. Samsung and Micron are both trading around 13 times trailing earnings (about half the S&P 500 average), while Hynix is around 9 times by that measure. For forward guidance, Micron is the most expensive of that trio at 8 times projected earnings, less than half the 19.1 average for the S&P 500.
My largest holding is in the Roundhill Memory Exchange Traded Fund (DRAM). It is well down from its June highs, like its component stocks, with around 75% of assets in those three biggest memory chipmakers. While any purchase point around $60 has proved a solid trade in the past, the ETF has made a decided lurch lower. It fell below $50 in both July and August. I’m confident that the memory earnings remain strong, supporting valuations.
Still, we have seen AI skepticism filter through Asian Pacific and U.S. markets. Australian data-center operator Firmus on Friday withdrew its plans for a $5 billion initial public offering, stating it would seek a private fundraising round instead, given the challenges for AI-hardware equities at the moment. Instead of listing in Sydney, Firmus may reportedly seek a Nasdaq listing down the line.
At the time of publication, McMillan was long DRAM.
