The semiconductor industry has seen a significant surge since early last year, though the likelihood of a short-term disruption has recently increased dramatically.
One of the key elements driving the current market rally, which started early last year, includes advancements in artificial intelligence (AI). These innovative algorithms and the semiconductors that support them are anticipated to propel a wave of increased productivity.
The prospect of capitalizing on these advancements has accelerated the adoption of AI, leading to a sharp rise in semiconductor purchases. However, the chip industry is now at risk of being one of the first sectors to feel the repercussions of the recently announced dockworkers’ strike.
Against this backdrop, AI chip specialist Nvidia saw its stock fall by 3.9%, memory and storage chipmaker Micron Technology dropped by 3.9%, semiconductor specialist Broadcom declined by 3.1%, and database and AI chipmaker Oracle experienced a 1.9% decrease in stock value as of 2:06 p.m. ET on Tuesday.
Analysis of typical indicators such as financial reports, regulatory filings, and analysts’ price targets indicated no significant company-specific news to account for these stock price decreases. This suggests that investor focus was on the work stoppage at major U.S. ports and its potential impact on the semiconductor industry and the broader market rally.
The International Longshoremen’s Association (ILA) commenced its first widespread strike in almost 50 years on Tuesday. According to the union, tens of thousands of its members began picketing at ports along the Atlantic and Gulf coasts from 12:01 a.m. Tuesday.
These ports receive more than half of the containerized products imported into the United States. Should the strike persist for more than a few days, it could have a ripple effect on supply chains and, consequently, the broader economy.
Delays in everyday products could trigger inflation, cause shortages, and drive prices higher. The longer the strike continues, the greater the likelihood of economic disruption.
In response, New York Governor Kathy Hochul reassured that “the food supply is secure right now,” urging consumers not to hoard essential items. While shortages of critical goods like food and household items are still weeks away, other sectors, including semiconductors, could feel the impact sooner.
The rapid adoption of AI has already led to shortages of advanced chips. Therefore, a semiconductor shortage caused by the dockworkers’ strike could materialize sooner rather than later.
In the short term, disruptions in the semiconductor supply chain could hinder revenue and profit growth for companies. However, over the long term, such impacts are likely to be minimal.
AI and semiconductor stocks have been driven up by investor fears of missing out on the next significant trend. If a chip shortage due to the strike occurs, it is expected to be temporary, with pent-up demand persisting after the strike ends.
Investors should remain focused on the long-term opportunities presented by AI, which will unfold over years rather than weeks or months. Advanced semiconductors are essential for this technology, ensuring a promising future for key industry players.
Nvidia produces the graphics processing units (GPUs) essential for AI systems’ computational power. Broadcom manufactures many semiconductors and related technologies used in data centers and cloud computing, critical for AI operations. Oracle, known for its database and cloud infrastructure services, also designs and engineers chips for AI. Micron Technology manufactures flash memory and storage processors crucial for the GPUs used in AI processing.
Although these stocks may seem expensive initially, their premium is warranted. Nvidia, Broadcom, Oracle, and Micron are currently trading at 41 times, 35 times, 27 times, and 11 times forward earnings, respectively. Given the accelerating AI adoption and corresponding growth of these companies, they are all rated as buys, despite the increased volatility and potential supply chain disruptions.
Investors should brace themselves for potential turbulence.
Danny Vena holds positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Oracle. The Motley Fool also recommends Broadcom. Further details are available through The Motley Fool’s disclosure policy.
