Artificial intelligence (AI) stocks fell on Monday amid geopolitical risk factors. Intel‘S (NASDAQ: INTC), Broadcom‘S (NASDAQ: AVGO)And Arm‘S (NASDAQ: ARM) stock prices closed the daily session down 2%, 4.1% and 5%, respectively, according to data from S&P Global Market Intelligence. Meanwhile, Nvidia closed the day down 2.3%, and Micron fell by 3.8%.
Semiconductor investors were hit with bearish news on multiple geopolitical fronts today. China is skirting AI technology restrictions imposed by the U.S., but that wasn’t the most surprising story of the day.
A Chinese military plane violated Japanese airspace this morning — an unprecedented intrusion that follows multiple incidents involving Chinese aircraft in the Philippines that have raised concerns. Poland added to a source of geopolitical uncertainty by saying it believed a Russian plane had entered its airspace.
Geopolitical risks took center stage on Monday
In a bid to halt the technological advances of its main geopolitical rival, the US has imposed restrictions to prevent the sale of advanced chips and semiconductor manufacturing equipment to China. But The Wall Street Journal published a report this morning showing that China is using third-party AI processing services to circumvent these export bans.
Leadership in the artificial intelligence space has become a major economic and national security priority for both the U.S. and China. Pursuing supremacy in space could further inflame tensions between the rivals.
Recent news of Chinese incursions into Japan and the Philippines immediately raises territorial concerns, but the bigger specter highlighted for investors is the possibility that China could invade Taiwan at some point in the not-too-distant future. While many companies are designing their own artificial intelligence chips and processors, Taiwanese semiconductor production is currently responsible for manufacturing about 80% of the semiconductors used in advanced AI applications. If TSMC’s chip production were to be disrupted or seized, the impact on supply chains and the broader global economy would likely be catastrophic. It could also be the inciting incident that could spark the spread of a wider conflict.
In addition to developments related to China, investors had to consider other geopolitical risk factors. Poland reported that a Russian plane had entered its airspace en route to Ukraine, raising concerns that the conflict in the region could escalate. News also emerged that a security alert at a NATO military base in Germany last week was triggered by an intelligence report that Russia may be preparing to sabotage the base with drones.
What’s Next for Intel, Broadcom, Arm, and Other AI Chip Stocks?
China news has been a recurring bearish catalyst for chip stocks over the past year, and there’s a good chance that geopolitical risks will remain a key driver of near-term volatility. In particular, companies that rely heavily on TSMC for chip manufacturing could see outsized bearish moves if the perceived likelihood of conflict in Asia increases. This dynamic could explain why Intel saw a smaller pullback today than Broadcom, Arm and other AI stocks.
While Intel uses TSMC to produce some of its most advanced chips, it has significant manufacturing resources of its own. Intel is currently the third-largest chipmaker in the world, trailing only the Taiwan-based market leader and Samsung. With concerns mounting that China could invade Taiwan, the U.S.-based company is investing heavily to upgrade its manufacturing capabilities and position itself as an alternative to TSMC. But even Intel would likely not be able to avoid even more big sales if China were to take control of Taiwan and TSMC.
While geopolitical risk factors continue to play a role in the valuation of semiconductor companies and other AI players, the next big market-moving catalyst is likely much closer. Nvidia is expected to report its second-quarter earnings after the market closes on Wednesday, in what is set to be one of the most influential financial reports of 2024.
Nvidia’s business performance and stock price movements have often influenced trading in other AI stocks this year, and there’s a good chance that the company’s upcoming earnings report will have a ripple effect across other AI players. If the AI leader’s quarterly results and outlook beat Wall Street expectations, other AI stocks could benefit from significant valuation increases. But expectations are high heading into the report, and even the smallest shortfalls could cause significant volatility.
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Keith Noonan has positions in Micron Technology. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Why Intel, Arm, Broadcom and Other Artificial Intelligence (AI) Stocks Dropped Today was originally published by The Motley Fool
