The semiconductor industry has seen a flurry of activity over the past year or so. There has been generally positive momentum for stocks in the space, thanks in large part to recent developments in artificial intelligence (AI). The rise of these advanced algorithms is dependent on the most advanced processors, providing a lift for the entire sector.
However, stocks in the space have risen rapidly over the past year, sometimes outpacing fundamentals. In recent weeks, investors have taken a step back and are watching for positive catalysts from their favorite chip companies before fueling their next leg higher.
That appeared to be the case today, and despite surprisingly positive news, semiconductor stocks were decidedly mixed. Initially, Arm Holdings (ARM 1.26%) was up 4.8%, Taiwan Semiconductor Manufacturing (TSM 0.14%) climbed 3.8%, and Micron Technology (MU -0.42%) rose 2.6%. However, as the day wore on this trio of stocks lost momentum and as of 1:07 p.m. ET, Arm and Micron were down 2.1% and 0.2%, respectively, while Taiwan Semiconductor was up just 0.8%.
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A flurry of activity
Taiwan Semiconductor, commonly called TSMC, continued to ride the updraft from yesterday's big reveal. As part of the CHIPS Act, the U.S. government announced that the company would receive up to $6.6 billion to help with the construction of its manufacturing facility in Phoenix. TSMC has also agreed to expand its plans by adding a third factory to the sprawling complex.
Additional large grants are expected to be announced in the near future, with Micron being one of the possible recipients, according to a report in The Wall Street Journal.
There was additional good news for Micron. Reports emerged Tuesday that the company is planning to raise prices on its memory (DRAM) and storage (NAND) chips by as much as 25% in the second quarter, according to a report in DigiTimes. The story cited "sources at memory module houses" but noted that negotiations were ongoing and there had been no official announcement regarding price hikes. Industry watchers have expected price increases following the earthquake that hit Taiwan earlier this month, so this isn't too surprising.
Furthermore, during Micron's most recent earnings call, CEO Sanjay Mehrotra said he expected "DRAM and NAND pricing levels to increase further throughout calendar year 2024 and ... record revenue and much improved profitability now in fiscal year 2025."
There was also positive news for Arm Holdings. Microsoft is poised to unveil a line of AI-centric laptops at a special event next month that will run on Arm-based processors. The company is increasingly confident that the performance of these laptops will surpass that of Apple's MacBook Air, which runs on its own M3 AI chip, according to a report by The Verge. These devices are being billed as "next-gen AI Copilot PCs," referring to Microsoft's AI-fueled line of digital assistants.
Data by YCharts
To buy or not to buy
In the wake of significant gains over the past year, two of the three were mired in negative territory (at the time of this writing), despite the positive developments. This helps to illustrate an important lesson for investors: While it's important to keep up with news -- both good and bad -- for the companies you own, it's equally important to ignore the day-to-day fluctuations in stock prices, as they can be both volatile and unpredictable.
In terms of valuations, Taiwan Semiconductor is selling for just 23 times forward earnings, making it a steal at this price. Micron is trading for less than 4 times forward sales, an equally compelling proposition.
Arm is a bit more complicated, thanks to its impressive growth prospects. The stock is selling for 83 times forward earnings and 27 times forward sales, which would seem at first glance to be prohibitively expensive. However, this fails to take into account the company's growth trajectory. In terms of its price/earnings-to-growth (PEG) ratio, Arm stock has a multiple of less than 1, the standard for an undervalued stock.
It's still early days for the adoption of AI, which will likely continue to fuel gains in the chip sector. Generative AI is expected to be a $1.3 trillion market by 2032, suggesting there's plenty of upside for semiconductor stocks in the months and years to come.
