(Bloomberg) — The sharp drop in Micron Technology Inc.’s shares after the company reported earnings was a reminder to global investors of the risks of investing in artificial intelligence (AI) chip makers.
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Just days after shares of major AI chipmaker Nvidia Inc. fell by nearly $500 billion, memory maker Micron Inc.'s shares fell about 8% in after-hours trading after the company gave guidance that fell short of its highest expectations.
Micron has been one of the companies rallying from the AI-stock frenzy. Its high-bandwidth memory is a candidate for use alongside industry-leading Nvidia chips to train large-scale language models. Its shares had more than doubled in the year before Wednesday's announcement, but the company was hurt by its failure to beat rising expectations despite outlook roughly in line with analysts' average estimates.
“The market has totally unrealistic expectations. A lot of stocks that are performing well above market expectations are still being sold off,” said Andrew Jackson, head of Japan equity strategy at Ortus Advisors in Singapore. “But I think the market is very aware that U.S. stocks are pretty overheated. There are just too many paper hands chasing quick and easy money.”
A surge in market capitalization can be prone to a sharp correction, as Nvidia shares rebounded earlier this week after a correction on Monday. A global index tracking semiconductor stocks has fallen about 5% since hitting an all-time high earlier this month. Taiwan Semiconductor Manufacturing Co. (TSMC), which makes Nvidia's most valuable chips and are critical for AI, is down more than 2% from its June 19 high.
The Micron news also sent shares of South Korea's two biggest memory makers, Samsung Electronics and SK Hynix, dropping, though both companies recouped their losses by the close of trading on Thursday. That means more uncertainty for the stocks of both companies, whose traditional production of memory for PCs, smartphones and more traditional data center uses is still recovering from last year's slump.
Tom Kang, director at Counterpoint Research, said the U.S. chipmaker's announcement fell short of what SK Hynix offered when it said its HBM capacity was nearly sold out through 2025. He added that Micron doesn't have the dominant AI memory position enjoyed by SK Hynix, or Samsung's lead in the broader memory industry.
“This brings to light a reality check the AI sector has been feeling like a bubble,” Kang said.
The relentless rally in U.S. large-cap stocks that are seen as benefiting from AI has propelled their shares to all-time highs. Micron's stock trades at 4.5 times projected sales over the next 12 months, compared with an average of 2.2 times over the past decade.
–With assistance from Abhishek Vishnoi and Tan Hwee Ann.
(Updated according to stock price trends)
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