Semiconductor shares plunge as Lam flags supply constraints

US semiconductor stocks plummeted on Thursday, erasing billions of dollars in market value following Lam Research's warning of supply-chain bottlenecks limiting shipments despite robust demand for artificial intelligence infrastructure. The Philadelphia Semiconductor Index plummeted 6.72% on October 22, with all 30 constituent companies falling.

The sell-off stemmed from investor worries about manufacturers' capability to meet ambitious expansion plans amid production constraints, escalating costs, and rising profit expectations. Lam Research shares plummeted 11.8% to $230.15 after missing revenue forecasts. The firm reported record sales but admitted component shortages would delay fulfilling some orders.

CFO Doug Bettinger told analysts higher revenue guidance would have been achievable without near-term supply issues. Some shipments initially expected in the December quarter might be recognized in the March quarter, though the financial impact wasn't quantified. Lam projected December revenue of roughly $8.6 billion, slightly above the market's $8.57 billion expectation.

Investors had anticipated stronger forecasts following increased spending on advanced semiconductor manufacturing equipment. September revenue of $8.22 billion, a 54% year-over-year increase, demonstrated robust underlying demand but underscored manufacturers' struggle to convert orders into immediate revenue. CEO Timothy Archer remained optimistic about the industry's long-term outlook, projecting global spending on wafer fabrication equipment to surpass $200 billion by 2027.

Bettinger warned suppliers needed to address shortages as manufacturers completed clean-room facilities and hired trained staff. He identified 10 major fabrication plants set to open in 2027, but their impact would unfold gradually. The outlook also reflected changing demand from China, which accounted for about 35% of September revenue and was expected to decline sharply in the December quarter.

Selling pressure spread across major semiconductor companies, with Nvidia down 4.4%, Micron Technology falling 6.3%, and Advanced Micro Devices and Intel dropping about 8% each. Nvidia's push for AI infrastructure provided a contrasting industry signal. The company unveiled a container-sized data centre reference design at its GTC Berlin conference, signaling ongoing investment in acceleration systems.

However, investors questioned whether infrastructure spending could generate rapid enough returns to justify high tech valuations. Meta Platforms increased its 2023 capital expenditure forecast to $135-145 billion, downgrading its shares by about 7% as investors weighed the financial implications of expanding AI operations. The broader sell-off pushed the Nasdaq Composite down 2.6% and the S&P 500 1.2%.

The Dow Jones Industrial Average finished slightly higher, highlighting concentrated pressure on AI-focused companies. Market participants also examined financing requirements for infrastructure expansion through debt and equity issuance, adding to concerns about technology sector performance. Despite stronger quarterly results and an improved outlook driven by industrial, automotive, and data-center demand, Texas Instruments shares fell 1.8%.

Goldman Sachs analysts maintained a positive outlook on Lam Research, keeping a buy rating and $380 price target, while Evercore ISI cut its target to $315 from $355 while retaining an outperform rating. Lam Research stated it was collaborating with suppliers to resolve component shortages and remained open to additional investment if needed.