There's no doubt that the hard-charging market recovery this year has been spurred on by recent advancements in the field of artificial intelligence (AI). The potential for widespread productivity gains resulting from generative AI has captured the imagination, lifting the companies best positioned to benefit from this trend.
With that as a backdrop, several of the biggest chipmakers suffered setbacks today. Nvidia (NVDA 6.18%) tumbled 3.5%, Broadcom (AVGO 3.84%) slumped 1.7%, and Intel (ASML 2.04%) slipped 1%, as of 12:10 p.m. ET. Bucking the trend was Taiwan Semiconductor Manufacturing (TSM 1.26%), which initially fell before gaining 0.3%.
The catalyst that added volatility to these semiconductor stocks was additional rules imposed by the Biden Administration to further the export of high-performance processors to certain foreign countries.
Image source: Getty Images.
Why advanced AI chips are in the spotlight
At a briefing late Monday, the U.S. Department of Commerce imposed significantly expanded restrictions on the types of advanced semiconductors and chip-making equipment that could be exported to China, Iran, and Russia. The new rules were designed to curb the ability of these countries to use AI for military applications.
The new rules will require Nvidia and other companies to obtain licenses from the U.S. government before selling the most advanced processors to customers in China, as well as 40 other countries that are under U.S. arms embargoes. The restrictions also apply to equipment used in the manufacture of high-end AI chips.
Commerce Secretary Gina Raimondo addressed the additional measures. While she acknowledged the possible benefits of AI, she was also wary of the potential for the technology to be misused:
Artificial Intelligence is probably the most obvious example of the kind of transformational technology that we have to assess and control. It's true that AI has the potential for huge societal benefit. But it also can do tremendous and profound harm if it's in the wrong hands and in the wrong militaries.
These latest rules reinforce and expand the restrictions implemented last year, which limited the sale of the most advanced processors. Nvidia and Intel both responded to the export controls by developing redesigned chips that fell within the limits of the restrictions.
Nvidia reduced the speed of its flagship processor, releasing the A800 and H800 chips for customers in China. At the same time, Intel introduced its Gaudi2 processor, which also skirted the rules.
Unlike the previous restrictions, the new rules focus less on processor speed and more on computing performance. This would also effectively ban the sale of the redesigned processors to China.
Here's what semiconductor investors should do now
Considering the widespread implications of these measures, it would be easy for investors to panic -- but that could be a costly move. While the overall impact of the new regulations is still being assessed, the immediate impact will likely be negligible. Furthermore, some of these chipmakers have already responded to the new curbs.
In a statement released early on Tuesday, Nvidia sought to downplay the effect of these additional restrictions on its results:
We comply with all applicable regulations while working to provide products that support thousands of applications across many different industries. Given the demand worldwide for our products, we don't expect a near-term meaningful impact on our financial results.
For its part, Taiwan Semiconductor Manufacturing announced it has been granted a waiver to continue supplying equipment to manufacturing locations in China. The company has two fabrication facilities that supply the country with semiconductors, though none of its most advanced chips are made there.
There's been no specific statement from Intel or Broadcom, so investors should keep an eye out for a response.
While these recent developments bear watching, the sell-off today is merely a knee-jerk reaction. The adoption of AI will continue to gain ground in the months and years to come, which will open up new markets while expanding existing ones. Investors should resist the temptation to panic sell, as the new rules will likely have minimal impact on the long-term success of these top-notch companies.
