Since early last year, investors have been bullish on the potential of artificial intelligence (AI) and have been snapping up stocks of companies best positioned to benefit from this next-generation technology. However, as the bull market crosses the two-year mark, many are taking a step back to survey the landscape, and some are looking for an excuse to take profits.
With that as background, chip designer Arm positions (NASDAQ:ARM) fell 6.7%, AI chipmaker Nvidia (NASDAQ: NVDA) fell 4.9%, chipmaker Advanced micro devices (NASDAQ: AMD) fell 4.8%, supplier of semiconductor equipment Broadcom (NASDAQ:AVGO) fell 3.7%, and chip foundry Taiwanese semiconductor Production (NYSE: TSM) was down 2.6% as of 12:50 PM ET on Tuesday.
The catalyst that sent these AI stocks lower was reports that the US government is considering new restrictions on chip exports.
A brake on exports?
The Biden administration is considering restricting sales of advanced AI processors from Nvidia, AMD and other companies, according to a report first appearing in Bloomberg, citing “people familiar with the matter.” This would be the latest move by regulators to address concerns that advanced technology such as AI could be used against the US and its interests.
The government is discussing a cap on the number of export licenses for certain countries, citing national security as the reason for the possible move. It’s worth noting that the US already imposes strict restrictions on the level of AI chip technology makes it possible to sell it to some countries, including China and 40 other countries in Asia, the Middle East and Africa.
Currently, U.S. chipmakers are required to obtain government licenses to sell advanced semiconductors to customers in certain countries. The current deliberations would expand existing restrictions, which could be set on a country-by-country basis, with a focus on countries within the Persian Gulf region.
Considerations are still in the early stages and no final decision has been made, but the plans have “gained increasing traction in recent weeks,” according to the report.
The possible implications
Restricting sales of advanced AI chips to certain countries has potential implications for all of these AI-focused stocks:
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Nvidia is the leading provider of graphics processing units (GPUs) used to power AI systems. According to semiconductor analyst firm TechInsights, the company has a whopping 98% of the data center GPU market. As such, she has the most to lose.
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AMD has long battled Nvidia for GPU supremacy and recently decided to prioritize AI processors, putting its older gaming chips in the background. Restrictions on high-end processors could undermine these ambitions.
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Arm Holdings provides the intellectual property and chip designs used for some of the world’s most advanced chips, including those from Nvidia and AMD. If sales of these processors are severely curtailed, Arm Holdings’ earnings could take a hit.
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Broadcom offers a number of products that work side by side with GPUs in the data center, including Ethernet switching and application-specific integrated circuits (ASICs), to accelerate the movement of data. If GPU sales falter, sales of complementary products like Broadcom’s could also suffer.
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Taiwan Semiconductor Manufacturing, also known as TSMC, is the world’s largest foundry, responsible for 62% of the world’s semiconductors and an estimated 90% of the advanced processors used for AI. Any restrictions on processor sales would trickle down to TSMC, reducing revenues.
While investors fear that Nvidia’s (and others’) sales will take a hit, history suggests they may be overreacting. Similar concerns were raised on several other occasions when the US government considered or announced a chip ban for countries like China. Despite these concerns, Nvidia generated triple-digit growth for five straight quarters. Furthermore, recent reports suggest that the company’s Blackwell chips will sell out in the next twelve months. This suggests that, aside from the potential limitations, demand for AI chips remains robust.
Then there are valuations to take into account. Arm Holdings, AMD, Nvidia, Broadcom and TSMC are selling at 96 times, 46 times, 46 times, 36 times and 28 times forward earnings, respectively. For those looking for good value for money, TSMC is probably the only one worth buying, but this doesn’t take into account the accelerating growth trajectory due to AI. Using the more appropriate price-to-earnings-growth (PEG) ratio – which takes that growth into account – it turns out that each of the remaining stocks has a multiple of less than 1, the standard for undervalued stocks.
It’s still too early for the adoption of generative AI, and while some experts estimate the market value at $1.3 trillion, others think the total could be much higher. For investors looking to profit from AI, the best strategy is to buy the best AI stocks you can find and hold them for the long term.
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Danny Vena has positions at Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Why Nvidia, AMD, Arm Holdings and Other Artificial Intelligence (AI) Stocks Sank Tuesday was originally published by The Motley Fool
