Shares of most semiconductor stocks, including sector leaders Broadcom (NASDAQ:AVGO), Arm positions (NASDAQ:ARM)And Lam Research (NASDAQ:LRCX) rose today, with these three up 5.2%, 5.3% and 4.6% respectively as of 12:50 PM ET on Wednesday.
These three chip leaders are players in the artificial intelligence (AI) race, and their stocks have seen solid price appreciation in 2024. But that growth stalled last month as recent inflation reports in April were warmer than expected.
But today, more positive AI news continued to pour in. Meanwhile, there was a softer-than-expected May jobs report on Wednesday. That fueled hopes that lower inflation was ahead and boosted the prospects for Federal Reserve rate cuts this year.
Bad news is good news?
This morning the Automatic data processing (ADP) The May employment report came out and showed that 152,000 jobs were added last month, below expectations of 175,000.
In addition, the April result was adjusted downwards to 188,000 new jobs. The report also found that wage increases for job changers fell to 7.8%. The report fitted in nicely with yesterday’s Research into vacancies and labor turnover report, which also showed declining vacancies.
What does this have to do with semiconductor stocks, and why would it be a good thing? With lower-than-expected job numbers and moderate but still solid wage growth, it suggests that services inflation could start to decline, as wage pressures and labor shortages have been a key factor in the services inflation we’ve seen over the past few years.
A moderating economy that doesn’t enter a recession would be an ideal scenario, allowing the Federal Reserve to cut the fed funds rate this year without the need for a recession — what’s called a “soft landing.”
High interest rates in particular weigh on growth stocks, which often trade at high prices, but also on cyclical stocks that can be sensitive to an economic slowdown. And semiconductor stocks have both qualities, especially as many have seen their valuations rise on expectations of strong AI-driven growth.
Broadcom and Lam Research, for example, have seen their price-to-earnings (P/E) ratios more than double in the past year to 52 and 35 respectively. Meanwhile, Arm Holdings has traded at an extremely high valuation since going public in September, with a price-to-earnings ratio of 460.
So the prospects for lower interest rates seem to be lifting the entire chip sector today, especially as the AI ​​growth story remains intact.
A report that Taiwanese semiconductor manufacturing (TSMC) this year would invest in the most advanced type of extreme ultraviolet lithography (EUV) machine, called high NA, suggesting the world’s largest foundry will quickly adopt the latest chip-making technology.
That suggests that the demand for AI and the related competition is continuing unabated and possibly even gaining momentum, which would be great for these three companies. TSMC makes chips for Broadcom, as well as many chips based on the Arm-based architecture. In fact, it is TSMC’s largest customer Applethat designs Arm-based chips for its smartphones and PCs.
Qualcomm has also started producing Arm-based chips for AI-enabled PCs and possibly even servers in an effort to expand its market beyond just handsets. Those chips will also be made by TSMC fabs. So, TSMC’s investment news could mean strong growth for Arm.
A greater investment in EUV would also benefit Lam Research, whose etching and deposition machines are used alongside EUV lithography machines as part of the chip manufacturing process.
Lam has developed a new technology that will likely need to be used alongside high-NA EUV machines, such as the one TSMC is reportedly purchasing, to avoid defects that occur more easily at extremely small molecular sizes. Existing processes struggle to maintain design integrity at extremely small sizes, so accelerating the adoption of high NAs could also mean good things for Lam Research.
Is the chip cycle getting long in the tooth or is it just starting?
The semiconductor sector has largely recovered from the 2022 lows, with many stocks now up multiples of their 2022 bottom prices. However, their businesses are only just starting to see a recovery in sales and profits, driven by AI and a recovery in older sectors such as smartphones and PCs.
But while the rebound is about 18 months old, AI-enabled growth could see the boom last longer than previous cycles. And if the Fed can achieve a soft landing with falling interest rates and no recession, so much the better.
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Billy Duberstein and/or his clients have positions at Apple, Broadcom, Lam Research and Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Apple, Lam Research, Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Why Semiconductor Stocks Broadcom, Arm Holdings and Lam Research Rallied Today were originally published by The Motley Fool
