CNA Explains: Why are AI stocks tumbling when demand is still booming?

Semiconductor stocks are experiencing a sharp sell-off despite a booming demand for artificial intelligence (AI) chips. The Philadelphia Semiconductor Index has fallen for eight straight days, losing approximately 16% over the past week. Major players like Samsung Electronics, SK hynix, and Taiwan Semiconductor Manufacturing Company (TSMC) have all seen significant declines in their stock prices.

Experts attribute the sell-off to several factors. One major trigger was higher-than-anticipated US inflation, which has reignited expectations of further interest rate hikes by the Federal Reserve. These higher rates make future profits less valuable in today's terms and increase financing costs for companies investing heavily in AI infrastructure.

However, interest rates alone do not fully explain the scale of the market reaction. AI companies have already seen their valuations soar due to years of strong demand. Now, investors are becoming more cautious about whether these companies can generate enough returns to justify the massive investments they are making.

TSMC, despite reporting a record profit, has also been affected by the market downturn. The company's shares fell alongside other tech stocks, reflecting the broader concerns about the sustainability of AI stock prices. This contradiction between strong demand and falling share prices highlights the market's growing skepticism about the returns investors can expect from AI-related investments.

Moreover, there is a risk that the expensive AI chips and infrastructure being developed today may become obsolete as technology advances rapidly. Companies may need to continue investing heavily to stay competitive, even before they have fully recovered their earlier costs. The current AI boom is primarily concentrated in tasks like drafting, summarizing, and assisting programmers, with limited adoption in core operations across industries such as manufacturing and healthcare.

In summary, while AI demand remains strong, the sell-off in semiconductor stocks is driven by concerns about the sustainability of returns on massive investments. Investors are questioning whether the spending on AI chips and infrastructure will generate sufficient profits in the long run, and how companies can put AI to practical use in various industries.