Why Nvidia, Micron, Broadcom and other artificial intelligence (AI) and semiconductor stocks tumbled on Tuesday | The heterogeneous madman

Some of the biggest drivers of the ongoing market rally that began early last year are advances in artificial intelligence (AI). These next-generation algorithms and the semiconductors that power them could spark a wave of productivity gains.

The potential to profit from these advances has fueled the rapid adoption of artificial intelligence, which has sent semiconductor purchases soaring. However, the chip industry could be among the first to feel the impact of the newly announced dock workers’ strike.

With this as background, AI chip specialist Nvidia (NVDA -3.66%) Memory and storage chip maker falls 3.9%. Micron technology (MU -3.28%) fell 3.9%, semiconductor specialist Broadcom (AVGO -2.92%) fell 3.1% and the maker of databases and AI chips Oracle (ORCL -1.90%) fell 1.9%, as of 2:06 pm ET on Tuesday.

A check of all the usual suspects – financial reports, regulatory filings and changes to analysts’ price targets – showed nothing in the way of company-specific news to explain the decline in stock prices. This suggests that investors have been focused on the work disruption at some of the largest U.S. ports and what that means for the semiconductor industry and the overall market rally.

Image source: Getty Images.

Strike while the iron is hot

On Tuesday, the International Longshoremen’s Association (ILA) began its first widespread strike in nearly 50 years. The union said tens of thousands of its members began picketing ports along the Atlantic and Gulf coasts starting at 12:01 a.m. Tuesday.

The ports of these two coasts are the destination of more than half of the containerized products imported into the country. If the strike drags on for more than a few days, there could be a ripple effect on the supply chain and, by extension, the wider economy.

Delays in the supply of everyday products could reignite inflation, cause shortages and push up prices. The longer the strike lasts, the greater the possibility of economic upheaval.

Gov. Kathy Hochul of New York said the “food supply is secure right now,” urging consumers not to hoard items unnecessarily. While shortages of essential goods like food and household items are still weeks away, other sectors could be affected, including semiconductors.

The increasingly rapid adoption of artificial intelligence has already caused many of the most advanced chips to be in short supply. As a result, a semiconductor shortage resulting from the longshoremen’s strike could arrive sooner rather than later.

Years, not weeks or months

So, what is the potential impact on our quartet of companies? In the near term, a disruption in the semiconductor pipeline could slow revenue and profit growth. In the long term, however, any impact would be fleeting at best.

Many artificial intelligence and semiconductor stocks have surged since the start of last year as investors feared missing out on the next big trend. If a chip shortage occurs due to this strike, it will likely be short-lived and pent-up demand will remain once the strike passes.

Investors should remain focused on the long-term opportunities in AI, which will develop over years, not weeks or months. The most advanced semiconductors are needed to power this technology, so the future remains bright for these pillars of the chip industry.

• Nvidia created graphics processing units (GPUs) that provide the computational power used in artificial intelligence systems.
• Broadcom creates many of the semiconductors and ancillary technology used in data centers and cloud computing, where much of the artificial intelligence occurs.
• Oracle is primarily known for its database and cloud infrastructure services, but it also designs and engineers chips used for artificial intelligence.
• Micron Technology makes flash memory and storage processors, which are crucial components in GPUs used for AI processing.

Some of these titles might seem expensive at first glance, but any premium is well deserved. Nvidia, Broadcom, Oracle, and Micron currently trade for 41 times, 35 times, 27 times, and 11 times forward earnings, respectively. However, given the increasingly rapid adoption of AI and the corresponding accelerated growth of these companies (all of which provide crucial components to the AI ​​revolution), I would rate them all as Buys.

That said, each of these stocks carries greater volatility, and the potential for supply chain disruption could further exacerbate this situation. Investors should hold out for a wild ride.