Shares of technology hardware and chip names Arm Holdings(NASDAQ: ARM), Indie Semiconductor(NASDAQ: INDI), and Logitech Holdings(NASDAQ: LOGI) fell this week, down 16.9%, 13%, and 10.1%, respectively, through Thursday trading, according to data from S&P Global Market Intelligence.
The technology sector, in general, ran into resistance this week as long-term interest rates rose to yearly highs on the back of last week's "sticky" inflation readings. Moreover, technology bellwethers ASML Holdings and Taiwan Semiconductor Manufacturing(NYSE: TSM) had their earnings reports this week, throwing some cold water on the sector's early-year optimism.
AI tailwinds couldn't save the rest of the tech sector
Artificial intelligence (AI) chips are still going gangbusters, at least within data centers. However, for those expecting the AI revolution to spark an immediate surge in smartphone, PC equipment, and auto sales, where these three stocks play, you might have to wait a bit longer.
ASML, which makes the key machines needed to make all leading-edge AI chips, reported lower-than-expected bookings on Wednesday. That was perhaps disappointing to some who thought the AI revolution would lead to outsized growth in the near term.
The following day, TSMC reported very strong numbers above analyst expectations but lowered its full-year outlook for the semiconductor industry in general. While the company initially thought the industry would recover over 10% in 2024 after a down year in 2023, TSMC now sees the overall industry growing just around 10%.
Arm Holdings has rocketed higher on the prospect of Arm-based CPUs making their way more and more into the data center, especially as Nvidia uses Arm-based chips for its Grace CPUs. However, the vast majority of Arm chips are still used in smartphones today. And the smartphone industry isn't recovering as strongly as some thought. TSMC C.C. Wei noted on the conference call with analysts that they "expect the overall semiconductor market, excluding memory, to experience a more mild and gradual recovery in 2024."
While Arm has a high concentration in smartphones, Logitech mainly sells accessories that go with new PC sales and other gadgets. So, the less-optimistic forecast for technology sales outside of AI data center chips will likely mean a more muted PC recovery as well.
Image source: Getty Images.
However, the most troublesome commentary from TSMC was regarding auto semiconductor sales. Since last summer, the auto market, especially the chip-heavy EV market, slowed markedly. On the call, TSMC noted the most significant part of its guide-down for the year was due to auto semiconductor sales. Last quarter, the company projected the auto chip sector would grow in 2024 over 2023.
Given that the EV downturn hasn't yet shown signs of recovery, TSMC now expects auto-related semiconductor sales to decline year over year. That's bad news for Indie Semiconductor, which specializes in sensing, computer vision, and other connected and autonomous auto chips and solutions.
But what's especially bad for stocks like Indie is that this muted outlook came in combination with the past week's increase in interest rates. After last week's hotter-than-expected inflation report, the 10-year Treasury bond yield has risen near yearly highs at 4.65%. Given that investors base their equity discount rates on long-term Treasury yields, this had the effect of lowering the net present value of future earnings.
That especially hurts high-multiple growth stocks like these three. Indie is currently growing fast but also inking large net losses in the process, so all of its earnings power is well out into the future. Arm Holdings trades at an eye-watering P/E ratio over 1,000 and more than 76 times this year's earnings estimates. And Logitech, which is a lower-growth company, still trades over 25 times earnings, which isn't exactly cheap.
Out over their skis?
There has been a lot of chatter lately, given the hypergrowth of AI chip sales to data centers, that the AI revolution will soon make it into other devices such as AI PCs and AI-enabled smartphones.
However, those first products will just be hitting the market later this year. And with higher interest rates and inflation remaining sticky, consumers still appear reluctant to shell out for a new phone or computer. With above-target inflation persisting and long-term interest rates creeping back up toward their October highs, it's no wonder these high-multiple tech stocks were hit, as reality put the brakes on the AI-fueled optimism to begin the year.
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Billy Duberstein has positions in ASML and Taiwan Semiconductor Manufacturing. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends ASML, Logitech International, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
