Since early last year, investors have been bullish about the potential of artificial intelligence (AI), scooping up shares of companies best positioned to profit 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 any excuse to take profits.
With that as a backdrop, chip designer Arm Holdings(NASDAQ: ARM) slumped 6.7%, AI chipmaker Nvidia(NASDAQ: NVDA) tumbled 4.9%, chipmaker Advanced Micro Devices(NASDAQ: AMD) sank 4.8%, semiconductor device supplier Broadcom(NASDAQ: AVGO) fell 3.7%, and chip foundry Taiwan Semiconductor Manufacturing(NYSE: TSM) dipped 2.6%, as of 12:50 p.m. ET on Tuesday.
The catalyst that sent these AI stocks lower were reports the U.S. government is considering new curbs on chip exports.
Image source: Getty Images.
A curb on exports?
The Biden administration is considering limiting sales of advanced AI processors from Nvidia, AMD, and other companies, according to a report that first appeared in Bloomberg, citing "people familiar with the matter." This would mark the most recent step by regulators to address concerns that advanced technology like AI could be used against the U.S. 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 potential move. It's worth noting that the U.S. already has strict limits on the level of AI chip technology it allows to be sold 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 extend the existing curbs, which might be set on a country-by-country basis, with an emphasis on countries within the Persian Gulf region.
The considerations are still in the early stages, and no final decision has been reached, but the plans have been "gaining traction in recent weeks," according to the report.
The potential implications
Limiting the sales of advanced AI chips to certain countries has potential implications for all of these AI-centric stocks:
- Nvidia is the leading provider of the graphics processing units (GPUs) used to facilitate AI systems. The company controls as much as 98% of the data center GPU market, according to semiconductor analyst firm TechInsights. As such, it has the most to lose.
- AMD has long battled with Nvidia for GPU supremacy and has recently decided to prioritize AI processors, with its legacy gaming chips taking a back seat. Curbs on advanced processors could dent those ambitions.
- Arm Holdings provides the intellectual property and chip designs used for some of the world's most advanced chips, including those used by Nvidia and AMD. If sales of these processors are severely curbed, Arm Holdings' revenue could take a hit.
- Broadcom provides 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 sales of GPUs falter, sales of complementary products like Broadcom's could suffer as well.
- Taiwan Semiconductor Manufacturing, also called TSMC, is the world's leading foundry, responsible for 62% of the world's semiconductors and an estimated 90% of the advanced processors used for AI. Any curbs on the sale of processors would trickle down to TSMC, crimping its revenue.
While investors fear a hit to Nvidia's (and others') sales, history suggests they may be overreacting. There were similar concerns on multiple other occasions when the U.S. government considered or announced curbs on chips to countries like China. Despite those fears, Nvidia went on to generate triple-digit growth for five consecutive quarters. Furthermore, recent reports suggest the company's Blackwell chips are sold out for the next 12 months. This suggests that, potential curbs aside, demand for AI chips remains robust.
Then, there are valuations to consider. Arm Holdings, AMD, Nvidia, Broadcom, and TSMC are selling for 96 times, 46 times, 46 times, 36 times, and 28 times forward earnings, respectively. For those looking for a good value, TSMC is likely the only one worth buying, but this doesn't account for the accelerating growth trajectory resulting from AI. Using the more appropriate forward price/earnings-to-growth (PEG) ratio -- which factors in that growth -- reveals that each of the remaining stocks boasts a multiple of less than 1, the standard for undervalued stocks.
It's still early days for the adoption of generative AI, and while some experts peg the market value at $1.3 trillion, others believe 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 tight for the long term.
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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
