This chip supercycle has one collective blind spot

Shuli Ren, Bloomberg

The chip industry seems to be the only game in town lately. The Philadelphia Semiconductor Index, known as the SOX, has risen 48% this year. Bourses in Taiwan, South Korea and Japan are riding the wave, brushing away potential energy shocks from the military conflict over Iran.

Investors can’t get enough of chips. The Roundhill Memory ETF, where SK Hynix Inc., Samsung Electronics Co. and Micron Technology Inc. make up about 65% of the portfolio, launched on April 2 and has already attracted $1.4 billion in net inflows.

Some are now talking about an industry supercycle. As AI development shifts from training large-language models to applications, beneficiaries will broaden beyond Nvidia Corp. to include CPU and memory makers, as well as equipment suppliers.

Unlike previous cycles driven by consumer electronics, today’s end clients are hyperscalers and cloud providers, whose commitments may be more stable and long-term. With better earnings visibility, one can argue the industry deserves higher valuations. Since the arrival of ChatGPT in late 2022, SOX has largely traded at a premium to the S&P 500, bucking historic trends.

This earnings season has strengthened that view. SK Hynix has pointed to excess demand over the next three years, while Taiwan Semiconductor Manufacturing Co. raised its full-year outlook. Of the six SOX companies reporting first-quarter results, all delivered positive surprises.

Still, while these are strong tailwinds, investors may be getting carried away.

The market appears to be rewarding every chip company, as if a healthy backdrop will lift all boats. But there will be winners and losers. Of the 30 stocks on SOX, only one — Qualcomm Inc. — is in the red this year.

The rise of CPUs is a good example. As agentic AI applications such as OpenClaw emerge, analysts suggest data centers may eventually require one CPU per graphics processing unit, compared with one for every four today. The server CPU market could expand to $60 billion by 2030, up from $26 billion last year, according to Arm Holdings Plc. Last Friday, Intel Corp.’s shares jumped 24% on an earnings beat, lifting peers such as Advanced Micro Devices Inc. and Arm.

However, the competitive landscape for data-center CPUs remains unclear. Nvidia has launched its Vera CPU for agentic AI. Days later, Arm — traditionally a licensing company — moved to produce chips itself. AMD remains a formidable rival.

Whether Intel or Arm can gain market share is still uncertain, yet valuations suggest investors have already decided. Intel trades at 54 times estimated 2027 earnings, while Arm, 87% owned by SoftBank Group Corp., trades at 109 times.

More likely, investors are chasing high-beta plays. Factor analysis shows chip stocks outperformed in April largely due to the broader market rebound. Believing the TACO trade remains intact, investors have rushed to position for the next phase of the AI rally, making stock picking less relevant.

Ultimately, chip manufacturing is complex. You can have a large pool, but only a few fish thrive — as Nvidia has shown in AI training chips. Markets are behaving as if there are no losers. That suggests a growing case of willful blindness. [Abridged]

Courtesy Bloomberg/Shuli Ren