NACHO is on, but memory chipmakers’ rally isn’t over

Shuli Ren, Bloomberg

The nothing-burger from the Xi–Trump summit underscored a new reality for global investors. The NACHO trade — “not a chance Hormuz opens” — is on. Prospects of prolonged inflation have risen, pushing global bond yields higher and strengthening the US dollar.

This shift in risk sentiment threatens to derail the AI stock frenzy. Before President Donald Trump’s visit to China, the MSCI World Semiconductor Index had rallied 47% this year, as if the Iran war and energy shortages did not matter. Trump said he did not press China’s Xi Jinping to push Tehran into reopening the Strait of Hormuz, disappointing investors hoping for a quick resolution.

Traders are beginning to compare today’s market to 1999. The best one-year rolling performance for the Philadelphia Semiconductor Index during the dot-com bubble was 264%. The same metric now stands at 135%. With borrowing costs rising and investors cutting leverage, fears are growing that the AI stock boom could implode.

But for bulls who still believe in an AI-fueled industrial supercycle, Asia’s memory chipmakers remain relatively safe havens. The key reason is earnings.

Asian manufacturers are making unprecedented profits. Samsung Electronics Co. and SK Hynix Inc., which produce high-bandwidth memory chips used alongside Nvidia Corp.’s GPUs, are expected to rank among the world’s most profitable companies this year, generating earnings comparable to Alphabet Inc. and Microsoft Corp. Yet both still trade at around six times forward earnings, despite their shares more than doubling this year.

Japanese flash-storage producer Kioxia Holdings Corp., spun off from Toshiba Corp. in 2018, offers another example. Its stock has surged 19-fold over the past year, while quarterly earnings surpassed Toyota Motor Corp.’s. The company is rapidly reducing debt and becoming a major profit engine. Management is even considering shareholder returns through dividends and buybacks.

China’s ChangXin Memory Technologies Inc., or CXMT, tells a similar story. First-quarter revenue jumped more than 700%, while profit exceeded 20 billion yuan ($2.9 billion). The results transformed the chipmaker from a loss-making venture into a profitable enterprise ahead of a planned Shanghai listing.

Granted, these stocks are also favorites among momentum traders. The Roundhill Memory ETF — heavily concentrated in the two Korean firms — has already attracted $8.7 billion in inflows since launching in April, making it the fastest-growing ETF ever. Kioxia, meanwhile, has become popular among retail traders and hedge funds exploiting its volatility.

Still, Asian chipmakers differ from US-listed AI infrastructure plays such as Intel Corp. or Arm Holdings Plc because of timing. Asian manufacturers are already generating record profits, while investors are still debating whether Intel can succeed in foundry manufacturing or whether Arm can secure enough suppliers for its CPU ambitions.

That does not mean the rally will last forever. Memory chip manufacturing is notoriously cyclical, with customers overstocking during booms before slashing orders in downturns. The biggest danger remains a sudden collapse in demand.

Much of the rally also depends on hyperscalers maintaining aggressive spending. During the latest earnings season, the four biggest US tech firms raised projected AI spending to as much as $725 billion this year, up from a pre-Iran-war estimate of $650 billion and roughly 90% above 2025 levels. If Big Tech cuts spending, the entire AI supply chain will feel the shock.

Nonetheless, in a world where uncertainty dominates and the Hormuz blockade has its own acronym, companies making real money today still stand out. Asia’s industrial supercycle may not be over yet. [Abridged]

Courtesy Bloomberg/Shuli Ren