Cracks grow across the AI trade as memory-chip stocks tumble

The global artificial intelligence trade is facing mounting challenges, as chip stocks continue to plummet and raise doubts about the sector's long-term viability. Shares tied to the AI boom have been hit by concerns over intensifying competition from China, rising interest rates, stretched valuations, and the high costs of building AI infrastructure.

South Korea's Kospi Index fell 5.5% on Tuesday, while the Philadelphia Semiconductor index has dropped more than 7% from its recent high. As the earnings season begins, investors are closely examining whether the billions being invested in chips, data centers, and computing infrastructure will generate sufficient returns to justify the sector's rapid growth, especially amid warnings from market veterans like Ray Dalio.

Investors are feeling jittery and looking for reasons to take profits on AI-related stocks, particularly memory stocks, according to Vey-Sern Ling, a managing director at Union Bancaire Privee. "The excuses are familiar, but no one wants to stand in front of a stampeding herd. Sell first, ask later is the mood now," he added. The latest sell-off was triggered by China's CXMT Corp announcing a breakthrough in chip technology that had long eluded rivals, which weakened the case for bullish sentiment in its global memory peers.

Adding to investors' concerns were remarks from Broadcom CEO Hock Tan, who likened some investors' enthusiasm for the AI boom to gambling and warned that the sector could face funding constraints. Hao Hong, chief investment officer at hedge fund Lotus Asset Management, echoed these concerns, stating that the outlook for the AI trade is challenging. Market participants are worried that CXMT's increased capacity could spark a price war, according to Hao Hong.

Kospi Index suffered the most significant loss in Asia, with shares of memory giants Samsung Electronics and SK Hynix dropping about 7% and 10%, respectively. The index is now down a third from its June record high and below its 200-day moving average. Taiwan's Taiex gauge also fell about 2%. While similar concerns have previously driven down AI stocks before rally rebounded, the risks surrounding the AI trade have continued to mount, prompting questions about the sector's future.