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Chip Stocks Decline as ASML’s Weak Outlook Sparks Concerns Over Non-AI Chip Demand

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Semiconductor stocks in both the U.S. and Asia took a hit after ASML (ASML.AS), a prominent chip equipment maker, cut its annual sales forecast due to weak demand for non-AI chips. Despite strong demand for AI-related chips, such as those produced by industry giant Nvidia (NVDA.O), the broader semiconductor market is experiencing a slower recovery. This news sent ripples through the sector, dragging down major chip stocks.

Key Losses Across the Sector

Nvidia, which had recently surpassed Apple as the world’s most valuable company, saw a 4.5% drop in its stock price, wiping out approximately $158 billion from its market cap. This widened the gap with Apple, whose value sits at $3.56 trillion. Other major chip firms such as AMD (AMD.O), Intel (INTC.O), Arm, Broadcom (AVGO.O), and Micron (MU.O) fell between 3.2% and 5% by Tuesday’s close. The Philadelphia SE Semiconductor Index dropped nearly 5%, further weighing down the tech-heavy Nasdaq.

The sharp decline followed an apparent error by ASML, which prematurely released its quarterly results, revealing weak bookings and slower-than-expected recovery in chip demand, particularly outside the AI sector. This led to a 16% plunge in ASML’s U.S.-listed shares.

AI Demand vs. Broader Market Weakness

While the demand for AI chips continues to surge, fueled by growing interest in artificial intelligence and machine learning applications, other segments of the chip market remain tepid. Logic chip makers are delaying orders, and memory chip manufacturers are planning only limited new capacity expansions, which signals ongoing weakness in non-AI chip demand.

“ASML’s fat finger error isn’t cause for concern in itself, but the content of the release didn’t make comforting reading for investors,” noted Derren Nathan, head of equity research at Hargreaves Lansdown.

Asian Chipmakers Also Hit

Asian semiconductor companies, many of which are customers of ASML, also suffered losses. Taiwan Semiconductor Manufacturing Co (TSMC), Samsung Electronics, and SK Hynix all saw stock declines ranging from 2.2% to 2.5%. This further underscores concerns that the non-AI chip sector is slowing down, with chip factories having stabilized after racing to build extra capacity during the pandemic.

Samsung, which had earlier warned of disappointing third-quarter profits due to struggles in capitalizing on AI chip demand, continued to face pressure. On the other hand, TSMC, which supplies Nvidia, is expected to report a 40% jump in third-quarter profit, showcasing a more optimistic outlook for companies directly tied to AI chip production.

Geopolitical Tensions and Export Controls

Adding to market concerns, Bloomberg News reported that U.S. officials are considering placing a cap on AI chip export licenses to certain countries, particularly in the Persian Gulf. The move is driven by national security concerns that advanced American chips could be indirectly acquired by China, circumventing existing trade restrictions.

Danni Hewson, head of financial analysis at AJ Bell, remarked, “With the AI revolution expected to play such a huge part in upping productivity and enabling other technological advances, it’s not surprising the U.S. wants to do what it can to maintain its dominance.”

The combination of weak non-AI chip demand and increasing geopolitical tensions highlights the delicate balance chipmakers must navigate as they grapple with shifting market dynamics.

Cerebras IPO Faces Challenges as AI Chipmaker Tries to Rival Nvidia

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Cerebras Systems, an artificial intelligence (AI) chipmaker, is aiming to be the first major tech company in the U.S. to go public since April 2024. As the AI infrastructure market continues to boom, driven by the astronomical success of Nvidia, Cerebras hopes to ride the wave of investor enthusiasm for AI technologies. However, the company faces significant hurdles, particularly its heavy reliance on a single customer and the risks associated with foreign investment, which could hinder its IPO.

The Cerebras Opportunity

Founded in 2016 and headquartered in Sunnyvale, California, Cerebras has positioned itself as an innovative player in the AI hardware market. The company claims its chips outperform Nvidia’s GPUs in training large language models—an essential task in AI. In fact, Cerebras has seen impressive growth, with sales tripling to $78.7 million in 2023, and revenue reaching $136.4 million in the first half of 2024. The company has secured contracts to sell $1.43 billion in AI systems and services, a significant boost for its growth trajectory.

Cerebras’ most advanced chip, the WSE-3 (Wafer Scale Engine 3), is hailed as the fastest AI processor globally, boasting 4 trillion transistors. It’s designed to handle massive computational tasks with greater efficiency than competing chips, including Nvidia’s.

Customer Concentration and Foreign Investment Concerns

Despite its technological advances, Cerebras’ reliance on a single client raises red flags for investors. G42, a company based in Abu Dhabi, accounted for 87% of Cerebras’ revenue in the first half of 2024. G42, backed by Microsoft, has committed to purchasing $1.43 billion worth of systems from Cerebras. However, this heavy dependence on one customer leaves the company vulnerable to revenue fluctuations if G42 fails to meet its obligations.

Moreover, G42 is also a significant investor in Cerebras. The Middle Eastern company has agreed to purchase a $335 million stake by April 2024, which would make it Cerebras’ largest shareholder. G42 can buy an additional $500 million in shares if it commits to spending $5 billion on Cerebras’ computing clusters. This foreign investment has raised concerns with U.S. regulators. Cerebras is currently seeking approval from the Treasury Department’s Committee on Foreign Investment in the U.S. (CFIUS) to ensure there are no national security risks associated with G42’s involvement.

The CFIUS review could potentially delay Cerebras’ IPO, as reported by sources familiar with the matter. Adding to the uncertainty, U.S. lawmakers have expressed concerns about G42’s previous business ties with Chinese companies, raising further scrutiny of its involvement.

Skepticism Among Wall Street Banks

Major Wall Street banks have been noticeably absent from Cerebras’ IPO deal, which is being led by Citigroup and Barclays. Banks such as Goldman Sachs, JPMorgan Chase, and Morgan Stanley, which typically dominate tech IPOs, have stayed away, reportedly due to the risks tied to Cerebras’ customer concentration and foreign investment concerns. The absence of these banks may further erode investor confidence.

In addition, Cerebras’ auditor, BDO, is not part of the Big Four accounting firms, which typically audit the largest tech IPOs. This adds another layer of uncertainty for potential investors.

Competitive Landscape and Financial Struggles

Cerebras is entering a highly competitive space dominated by Nvidia, which controls 95% of the AI chip market, according to Mizuho Securities. Nvidia’s chips are critical to training models like OpenAI’s GPT-4, and the company is seen as a cash machine in the AI boom. Nvidia’s strong market position and profitability present a significant challenge for Cerebras, which is still not profitable.

In the second quarter of 2024, Cerebras posted a net loss of $51 million. Although it is approaching breakeven on an operating basis (excluding stock-based compensation), the company still faces financial headwinds as it tries to scale up.

Investor Outlook

Despite these challenges, some investors are intrigued by Cerebras’ potential. For instance, Jim Fitch, a retired investor, sees promise in the company’s AI chip technology. Fitch, who sold his Nvidia stock years ago, is excited about the WSE-3 chip, believing it could revolutionize AI computing.

While Cerebras has hurdles to overcome—including regulatory scrutiny, customer dependence, and competition from Nvidia—the excitement surrounding AI technologies keeps the door open for a successful IPO. If the company can navigate these challenges and tap into the growing demand for AI infrastructure, it may still find a path to Wall Street, despite the risks involved.

Samsung Reports Disappointing Q3 Profit Guidance Amid AI Chip Challenges

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Samsung Electronics, the world’s largest memory chip producer, reported lower-than-expected third-quarter profits on Tuesday, despite a year-on-year surge. The South Korean tech giant estimated operating profits of around 9.10 trillion won (approximately $6.7 billion) for the quarter ending in September. While this figure represents a massive 274% increase from the same period last year, it fell short of the 11.456 trillion won ($7.7 billion) forecast by analysts polled by LSEG.

Samsung’s projected revenue for the quarter stood at 81.96 trillion won ($61 billion), also missing expectations. The disappointing guidance comes amid the company’s struggles to manage its memory chip business and delays in shipments of its advanced high-bandwidth memory (HBM3E) chips.

In an unusual move, Jun Young-hyun, Samsung’s Vice Chairman and new head of the Device Solutions Division, issued a public apology following the release, acknowledging the company’s challenges. The performance of Samsung’s memory business has been negatively affected by “one-time costs and negative effects,” including inventory adjustments by mobile customers and increased competition from Chinese memory producers.

The company also noted that delays in shipments of its cutting-edge HBM3E chips to major clients added to its difficulties. These high-performance chips are critical for artificial intelligence applications, a growing sector where Samsung is trying to gain ground.

Despite being the dominant player in memory chips used in devices such as laptops, servers, and PCs, Samsung has seen weakened demand for legacy chips in these sectors. This trend, coupled with a less aggressive market share strategy, has hurt the company. “Samsung is not taking that market share as aggressively as we have seen in the past,” remarked Daniel Yoo, head of global asset allocation at Yuanta Securities Korea.

Macquarie Equity Research analysts warned that the fall in demand for conventional DRAM (dynamic random access memory) chips could have a more significant impact on Samsung than on its smaller rivals. DRAM chips are essential for PCs and workstations, and Samsung has traditionally relied on their steady demand.

In response to the market challenges, Samsung has reportedly instructed its subsidiaries to reduce staff by up to 30% in certain divisions, according to sources cited by Reuters. The company’s shares, which are down 22% year-to-date, fell by another 0.98% after the release of the third-quarter profit guidance. Samsung is expected to release more detailed financial results later this month.