Chip sector enters correction territory on demand concerns

The semiconductor industry has come under significant pressure in recent months, with chip stocks such as Nvidia (NVDA) and the broader Philadelphia Stock Exchange Semiconductor Index (^SOX) declining more than 10% from their record highs. This selloff has pushed the overall chip sector into correction territory.

The downturn in chip stocks comes from growing concerns about the long-term demand outlook for semiconductors.

Yahoo Finance's Seana Smith and Madison Mills breaks down the details.

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Angel Smith

Video transcript

- Well, as rate cut bets shift, so have moves in one sector in particular. We're talking chips. Shares of AMD and Intel both down over 15% in the last month, NVIDIA falling 10% from its all-time high in March. The Philadelphia Semiconductor Index also dropping over 10% from record highs, entering what we would call correction territory today, meaning just over a 10% decline.

And, Seana, it's really interesting given what we were talking about earlier with the TSMC earnings because they were such a huge beat across the board-- huge profits, record-breaking profits, seeing that continued AI demand, and yet that name is also down in the premarket this morning. So perhaps we're seeing this indication that the analysts that have been saying, that chips can sometimes be a one-time purchase. There's a little bit of concern about whether or not there's going to be long-term demand for the amount of supply out there.

- Yeah. I think when it comes to TSMC, at least what we heard from them this morning, yes, it was very strong for that company, especially given the fact that the role that they play with Apple, with NVIDIA, clearly very, very well positioned, even with AMD within the chip space.

But then, when you take a look at their commentary, and it seemed to be at least a little bit less upbeat about the overall market and where things stand. I think that really speaks to that move lower that we have been seeing in a number of those chip stocks, specifically that move lower that we have been talking about this morning in the Philadelphia Semiconductor Index, really, over the last several days.

When you talk about a drop falling more than 10% from that recent peak really just points to some of that weakness within this space. So when you look past some of those larger players that are holding up well and do have that pricing power within this current environment, you are still seeing a number of names, a number of the smaller names continue to struggle just a bit on that pricing front.

They're also dealing with the demand impact, what exactly that is going to look like. And also, there certainly is a lot of uncertainty, at least in the immediate term and the short term over the next several quarters. So I think that really has been weighing on the broader index itself.

So outside some of those larger player names, we have been seeing weakness underneath the surface, and I think that really points to that downward move that we've been seeing in the index.

- And that's such a great point, that the CEO did say on the call that they are concerned about the overall semiconductor market in general moving forward. And they talked a lot about the decline in iPhone sales being part of that. But I also have to wonder whether or not an NVIDIA would come in and take any chips they can get, and that might be the thing that can boost this market moving forward.

- Exactly, and I think that's why there's a lot of unknowns, and there's still many out there on the street who are extremely bullish on a number of chip names. And that's exactly why given the outsized demand that we're seeing right now for AI, the technology, and, obviously, so much of that CapEx investment that is still being deployed right now is going towards technology, is going towards AI, and we have seen that demand reflected in many of these results as of late.