Is the Bottom Falling Out of the AI Trade?
We’re seeing equity valuations collapse for semiconductor stocks, and bond yields for CoreWeave soar to distressed levels. Is the AI bubble bursting?
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Artificial Intelligence (AI) plays are plunging, sending shares in chipmakers and data-center operators south.
So are we witnessing the explosion of an AI bubble?
It certainly feels like that.
Equity strategists are divided about whether we are seeing a necessary correction, a temporary rotation out of tech, or something more sinister — the collapse of the weaker AI players leading to the deflation of a bubble.
Seven Days of Losses
It’s been seven straight trading days of weakness for chipmakers both in Asia, my main area of focus, and six and counting in the West. There has been a drastic selldown for the likes of SK Hynix (SKHY) (KR:000660), down a whopping 31.4% since Friday, Oct. 2, and Samsung Electronics (KR:005930), down 23.9% in the same timeframe.
That is sending the overall Korean market down 7.6% Thursday, for a 20.7% correction since the close on October 2. What’s more, it’s red virtually across the screen in Asia Thursday, with the Nikkei 225 down a hefty 4.9% in Japan.
TSMC’s Record Numbers No Support
Even record earnings from Taiwan Semiconductor Manufacturing Co. (TSM) (TW:2330), Asia’s largest company by market capitalization, aren’t enough. TSMC is Thursday reporting Q3 earnings per share of $4.60, up 68.7% year on year, and well ahead of the $4.42 forecast. Sales are coming in at $46.7 billion, up 50.9%, and ahead of the $45.4 billion analyst estimate.
TSMC management is sanguine heading into next year. CEO C.C. Wei says the company is being “prudent” in its planning, given macro uncertainties and the rising component prices that are pressuring consumer electronics prices. Still, the company walked its full-year sales guidance up to a 44% increase, from 40%, and says demand is “extremely robust” and that it sees no slowdown (yet) from the AI “mega-trend.”
Yet TSMC shares are down 2.0% Thursday in Taiwan, off 3.3% at the open in New York, and have shed 16.7% since the start of last week.
Confluence of Swirling Factors
What gives?
Yes, there is a rotation out of AI stocks.
Yes, there is a temporary correction, prompted by high U.S. inflation that puts an interest-rate hike at the U.S. Federal Reserve’s October 27-28 meeting back in the cards.
Yes, concerns surrounding the debt of CoreWeave (CRWV) indicate that markets are casting doubts over the pace and strength of the AI expansion.
It is notable that the “anti-AI play” of Indian equities is one of the few sources of optimism in October. The Sensex added 2.1% on Thursday, and is up 3.2% since the start of this month.
India’s Prospects Brighten?
It’s been an ongoing mystery why Indian stocks have not been rallying. The country is notching up the fastest economic growth among major nations, at 7.8%. But international investors have been fleeing the Mumbai markets.
I’ve been watching for a turning point in India, where information/technology (IT) outsourcing companies have suffered severe selling as investors bet they’ll lose out to automated AI-driven systems.
Infosys (INFY) (NSE:INFY), for instance, is also up 2.0% Thursday in Mumbai trade, and 11.7% since the end of last month. That nevertheless leaves it looking at a year-to-date pounding that leaves it down 31.9% in 2026.
Doubts surrounding AI would make the I/T outsourcing companies value plays. I’ve also argued that, just like the software-as-a-service sector, the smart operators in India’s $315 billion IT outsourcing sector will learn how to deploy AI to their advantage, rather than simply suffering as a result of AI advances.
No Bottom Falling Out of Chip Stocks
That said, I do not think we are seeing an implosion of memory-chip makers, or the bottom falling out of the AI market.
We’ve got a confluence of factors casting a long shadow over the tech sector, in particular. They are concerning.
The September reads on consumer prices Wednesday and producer prices Thursday are catalysts for the lurch lower. They feed into already high prices for fuel the world over, leading to inflation, and a shift to a tightening stance among central banks in the West and across most of Asia.
High bond yields are not helping. Western government debt yields have been soaring while there’s been the creation of a competing “AI nation” thanks to the $3 trillion in debt issuance from the AI hyperscalers: Alphabet (GOOG), Amazon (AMZN), Meta Platforms (META), Microsoft (MSFT) and Oracle (ORCL).
Notably, the shares of the hyperscalers remain steady during this week’s selloff. The worst showing comes from Oracle, the most vulnerable in terms of debt load, which is up 1.8% in early trade Thursday but still down by almost half (46.4% to be precise) from its June highs.
CoreWeave the Greatest Concern
So we can see that investors are sniffing for signs of distress. The concern surrounding the likes of CoreWeave (CRWV) is the issue that gives me greatest concern.
CoreWeave bonds are trading just above 75 cents on the dollar, at yields of around 16% that signal distress. The loss-making company’s shares are down 21.9% so far this week. Shares in neocloud-computing rival Nebius Group (NBIS) is down a similar 20.1%.
If we start to see dominoes like CoreWeave fall, will we see the entire AI stack topple?
My read is that we won’t. The well-capitalized hyperscalers essentially remain intact as investment plays (for now). That certainly doesn’t look like the end of the AI trade as a whole.
Chip Earnings to Come
I’m also reassured that the valuations of the likes of TSMC, Samsung, Hynix and Micron Technology (MU) are backed up by very real earnings. Besides TSMC’s numbers, we are due to get earnings from Hynix on October 27 and Samsung on October 29. Micron already reported record Q4 and full-year earnings on September 30, for its fiscal year ending September 3.
The share prices of those companies are not particularly expensive, as I noted in my last column. I also don’t think the explanation given earlier this week that chip stocks are losing ground due to heightened competition from China holds water.
For starters, the purported source of that competition — Chinese chipmaking upstart ChangXin Memory Technologies (SH:688825) or CXMT — is also suffering a market selldown. If it’s at the heart of the problem, its shares should be booming.
They are selling down, too. CXMT shares are down again Thursday, off 5.2% to take its losses this week to 14.5%. That’s after its president said over the weekend that it has made “key progress” on “4F2” chip design, architecture that would allow for greater density on memory chips.
CXMT’s competitors are also chasing the 4F2 tech, with Micron and Samsung predicting they will have it ready for commercial rollout in 2028.
A Good Problem to Face
The current production of the memory makers is already pre-sold into 2028. They literally cannot make chips fast enough to keep up with demand. That is a problem, but a very positive problem to face.
I’m adding to my TSMC position today, my favorite Asia equity play. I’m confident that it retains its commanding market share in the physical chip-foundry production of chips. It’s agnostic where those chips go — if neocloud operators no longer demand semiconductors, somebody else will.
The memory makers are more of a worry. DRAM and NAND chips are commoditized, and if demand dries up, there will be a flood of supply that will push prices back lower. We have seen prices of cheaper chips race higher almost exclusively because of AI demand.
DRAM Shares Down Hard
My largest position is in the Roundhill Memory Exchange Traded Fund (DRAM). That ETF is taking a hammering, quite honestly, and one that is very concerning. It listed at $27 in April this year, peaked at $81 in June, and now is down a drastic 40.6% from its highs. Since the start of this month alone, it is down 22.2%.
The ETF is trading at $48.32. Twice before it has dipped below $50, in late July and in early August. Both lows have been followed by a rapid rebound.
The chart does not look pretty at the moment. It continues lower, and there may be more for that ETF to give back. But any purchase point below $50 has proven very attractive in the second half of this year, while it’s been wise to take profits north of $60.
I have yet to see anything from the memory-chip makers that suggests their earnings will weaken. Markets may be indicating that the pace of growth will slow, but aggressive investors could add to DRAM positions at these levels. These current earnings haven’t led to the share-price increase we might expect under normal conditions.
The interest-rate decision in October, the war in the Middle East, high oil prices all make for a difficult backdrop for growth stocks. South Korea has been this year’s strongest-performing market, and is highly concentrated in tech and heavy industry. So it is also seeing the heaviest degree of selling. Cautious investors are taking money off the table in areas where they’ve made the most profits this year.
The most-worrying trends for Asian semiconductor stocks stem from the shaky finances of speculative AI plays like CoreWeave — which started out as a crypto play. Yes, such loss-making companies face significant challenges in raising future funds. Some may even collapse. The chipmakers, however, are backed by very real profits that continue to set records. I still believe that makes for a solid underpinning for semiconductor stocks, despite this week’s savaging.
At the time of publication, McMillan was long TSM and DRAM.
