Shares of semiconductor leaders Taiwan Semiconductor Manufacturing (TSM 2.79%), Micron Technology (MU 4.89%), and ASML Holdings (ASML 3.60%) were all down again today, falling 4.2%, 4.1%, and 5.2%, respectively, as of 12:38 p.m. ET.
It was a terrible week for stocks generally and the artificial intelligence (AI) trade specifically, mostly due to macroeconomic concerns. Of note, the semiconductor industry has long been regarded as highly cyclical. While the sector has actually been the best-performing over the last decade due to its outsize long-term growth, the prospect of a slowdown or recession is causing investors to flee these industry leaders at the moment. This is especially true after artificial intelligence enthusiasm has lifted shares of these stocks by a large amount since November 2022 through July 2024.
It appears that a combination of today's weaker-than-expected jobs report, along with AI tech peer Broadcom's mildly disappointing earnings report last night, are causing shares of all closely related AI-focused stocks to fall again today.
NYSE: TSM
Key Data Points
Weak jobs report fuels slowdown fears
This morning, the Labor Department reported the jobs figure for August. This was a big deal to many investors, as July's much weaker-than-expected jobs report had fueled fears that the Federal Reserve was behind the curve in cutting interest rates.
While today's jobs report showed an increase in August relative to July, and the unemployment rate fell slightly, it was still a bit below expectations. August saw 142,000 new job additions, up from the downwardly revised 89,000 added in July, but below the 161,000 that was expected. The unemployment rate ticked down to 4.2% from 4.3%.
It's a bit hard to figure out why investors took this report that poorly, as it seems assured the Federal Reserve will cut interest rates at its meeting on Sept. 17 and 18. However, the "miss" as well as downward revisions of both the June and July job growth numbers fed uncertainty that the Federal Reserve is late in cutting rates, or won't do enough cutting when its committee meets, which could potentially tip the economy into recession.
In any case, the market is in a very emotional mood this week, especially after the weak manufacturing data that came out to start the week on Tuesday morning.
Not helping matters was last night's earnings report from Broadcom. While the chip and software giant beat analyst estimates for its fiscal third quarter, its semiconductor revenue may have disappointed, while management's guidance for the fourth quarter also came in a bit lighter than analyst expectations.
As its name indicates, Broadcom's portfolio spans many areas, including the iPhone, enterprise networking and storage, as well as custom artificial intelligence accelerators it makes for the in-house designs of several big tech giants.
Broadcom makes its chips largely at TSMC, likely using ASML's EUV equipment, and Micron's memory permeates all tech applications. So it's not surprising all three reacted to Broadcom's results.
Of note, Broadcom CEO Hock Tan said on the conference call with analysts that the AI business was very strong, with custom AI accelerators up 3.5 times year over year, Ethernet switching for AI data centers up 4 times year over year, and optical lasers up threefold. So, it's hard to tell if the slightly weaker-than-expected forecast was conservative, if demand for AI products is decelerating faster than investors thought, or if Broadcom's other non-AI products, whether iPhone chips, telco connectivity, or non-AI networking, continue to be weaker than anticipated. Of note, those non-AI products have already been in a big downturn, but are expected to recover.
Regardless, the overall lighter-than-expected chip revenue, even if AI remains strong, would affect TSMC, Micron, and ASML. While these companies are also benefiting handily from AI growth, each is also exposed to the entire broader semiconductor industry. ASML caught an unfortunate analyst downgrade on Wednesday, with the analyst pointing out that ASML's AI exposure may not be as large as some have thought relative to the broader industry, perhaps adding to the downside in its shares.
This could be an opportunity
Semiconductor investors should know that the stocks within the sector are incredibly volatile, even if the sector has proven to be a long-term winner. So, benefiting from these names entails holding through big downturns such as these, or buying amid what seems like awful news in big downturns.
While the economy may be slowing, all three of these names are at the forefront of innovation and the AI growth opportunity. Despite the market's reaction, the vast majority of tech executives this earnings season have said AI growth remains strong and should continue into next year, and likely beyond. With these stocks now well off their July highs, it may be time to think about adding to these leaders over the next rocky couple of months.
