'It's crazy': chipmaker stocks break dot-com era records. Will the rally continue?

Chip maker stocks have seen their best start to the year since the dot-com bubble at the turn of the millennium. Investor enthusiasm for artificial intelligence and demand for AI hardware are driving a historic rally on Wall Street, writes the Financial Times (FT).

Since the beginning of the year, the Philadelphia Semiconductor index, which tracks the 30 largest traded US chipmakers, has soared about 75%. According to Bloomberg data cited by the FT, the indicator is on track for its best annual growth since 1999. For the first 100 days of the year, ending in mid-April, the index has already shown the best result in history (up 82%), draws attention to The Wall Street Journal. The previous record, the newspaper recalls, was set in 1995, a few years before the dot-com bubble burst.

Over the past two months, the market capitalization of companies in the Philadelphia Semiconductor index has jumped by more than $5 trillion - this is one and a half times the value of the entire British stock benchmark FTSE 100, the FT points out. The main driver of growth was the optimistic expectations of market participants regarding the future earnings of the industry.

Prices for AI chips as well as equipment to equip new chip manufacturing facilities around the world have soared as suppliers fail to keep up with soaring demand from Silicon Valley giants, writes the FT.

Although Nvidia retains its status as the world's largest public company with a capitalization of $5.1 trillion, since the beginning of the year its shares have added a modest 14% against the market. Nvidia's competitors - chipmakers Arm, AMD and Intel - have significantly outperformed the semiconductor giant in terms of growth. The surge in their shares has been driven, among other things, by the fact that the AI infrastructure market has begun to diversify, shifting focus away from scarce graphics processing units (GPUs) towards central processing units (CPUs) and alternative architectures, the FT explains.

Intel's stock (+230% YTD) hit an all-time high during the dot-com bubble after the release of an optimistic outlook for CPU demand in its April report. The company has improved dramatically since the US government bought 10% of its shares last year and Nvidia and SoftBank invested billions of dollars in the company.

AMD, Nvidia's main competitor, has soared more than 130% YTD on the back of major chip supply contracts for Meta and OpenAI. SoftBank-backed UK Arm's capitalization jumped more than 170% thanks to a bold strategic U-turn: the company began producing its own chips to compete with Nvidia, rather than just designing architectures for other vendors. Arm predicts that this move will give it a five-fold increase in revenue over the next five years.

Memory chip makers have also been the main beneficiaries of the global shortfall caused by demand from AI data centers. This week, Micron and SK Hynix, which specializes in high-bandwidth memory chips, joined the elite club of companies with a market capitalization of more than $1 trillion one day apart.

Semiconductor equipment suppliers Lam Research and KLA also posted growth of about 80% and 55% YTD.

To consolidate their leadership in the AI era, tech giants Meta, Alphabet, Amazon and Microsoft have combined to allocate a combined $725 billion this year to build data centers and buy the necessary equipment, the FT recalls. Charles Lemonides, founder of hedge fund ValueWorks, notes: "The demand from hyperscalers is fully secured. Companies in the semiconductor and memory sectors are literally raking in the money and look set to continue in the same vein for years to come."

Bank of America strategists this week also reiterated their "confidence in the continued growth of the AI infrastructure sector." In a research note, they emphasized that further growth in quotations will be driven by supply shortages, as well as "underestimated demand from governments, corporations and industry".

AI startups OpenAI and Anthropic, which have so far generated losses due to huge data center costs, are expected to have valuations of more than $1 trillion when they go public later this year.

"It's just crazy, folks," JPMorgan CEO Jamie Dimon said at a conference this week. - There's a real euphoria in the market. And so far, so good." But the banker recalled similar periods of euphoria on the eve of market crashes in 1972, 1986, 2000 and 2007. "That doesn't reassure me," he added.

"So far, demand [for AI chips] is really holding steady and keeping pace with price increases," emphasizes Nelson Yu, head of equities at AllianceBernstein. However, he warns that in the event of a recession, bigtechs will surely cut back on their investment programs: even such giants have a price endurance limit. "You can't just take a bubble and say whether it's a bubble or not," Yu argues, "We're seeing real, fundamental demand creation. But it is worth remembering the main rule of any commodity market: rising prices eventually lead to lower demand".

This article was AI-translated and verified by a human editor