(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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Shares of memory maker Micron fell about 8% in after-hours trading after the company gave an outlook that fell short of its highest forecast, just days after leading AI chip maker Nvidia fell by nearly $500 billion.In a sign of the extreme volatility in AI stocks, the Micron news also dragged down shares of Samsung Electronics and SK Hynix, the two biggest South Korean suppliers of memory chips that feed into the AI supply chain.
Micron is one of many companies whose shares have risen on the frenzy over AI stocks. 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 hit by its failure to beat rising expectations despite outlook roughly in line with the average of analysts' projections.
“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.”
The global AI frenzy took a hit earlier this week when Nvidia shares rebounded after a correction on Monday. The global index tracking semiconductor stocks is down about 5% since hitting an all-time high earlier this month.
For a company like Micron, whose traditional production of supplying memory for PCs, smartphones and more traditional data center uses is still recovering from last year's slump, that means a lot of uncertainty for its stock price.
Tom Kang, director at Counterpoint Research, said U.S. memory maker Micron's explanation fell short of what SK Hynix offered when it said its HBM capacity was nearly sold out through 2025. Micron does not have the dominance in AI memory that SK Hynix enjoys, nor does Samsung have the dominance in the overall memory industry, he added.
“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.
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