Why Are Chip Stocks Contracting?

Chip stocks have had a rough couple of weeks with Q2 earnings, geopolitical tensions, and Donald Trump’s remarks on Taiwan deteriorating the investor sentiment toward the high-flying semiconductor sector. When rumors surfaced of an increase in government levies on chip exports to China and former President Trump questioned the need to support Taiwan’s defense, chip stocks lost more than $500 million collectively on July 17 alone. Qualcomm Incorporated (QCOM), despite being named as a top pick in the AI chip sector by Baird analyst Tristan Gerra, has also lost 13% of its market value in the last month, which highlights the extent of the downturn faced by the chip sector as a whole.

Why Semiconductors Matter

The chip industry has been thriving in the last decade as semiconductors have grown in importance alongside the rising demand for advanced technological developments. The surging demand for AI-enabled smartphones, the expansion of IoT, the increasing usage of generative AI applications, the growth of the autonomous driving market, and the deployment of 5G networks are some of the reasons that have created robust demand for high-performance chips. The growth of the cloud sector has also been a major driver of the chip industry’s growth. In addition to this, advanced manufacturing capabilities enjoyed by chipmakers which have led to the development of 7nm and 5nm chips have also played a key role in the growth of this sector.

Too Big To Fail?

Growth is far from over for the chip sector, according to many analysts. For example, Statista projects the worldwide semiconductor market to grow at a CAGR of 10% through 2029, lifting the industry to almost a trillion-dollar valuation. McKinsey also expects the semiconductor industry to reach a valuation of $1 trillion by 2030, supported by the strong demand for AI applications. Despite these rosy growth projections, investors need to keep in mind that the chip sector is highly cyclical, which results in non-linear growth. In addition, it is important to keep an eye on a few key macroeconomic headwinds as well, such as the increasing tensions between the U.S. and China which may disrupt global supply chain operations, raw material shortages that may increase production costs, and rapid technological advancements that may force chipmakers to incur billions of dollars in R&D expenses.

Neither Dilantha DeSilva nor Stocks.News have positions in any of the companies mentioned in this article.