The News: Apple and NVIDIA led a sell-off in technology stocks on Monday as US recession fears and Berkshire Hathaway’s decision to cut its stake in the iPhone maker punctured a month-long rally in the sector,” reported Aditya Soni for Reuters Monday. “High-performing shares of Alphabet, Amazon, Meta Platforms, Microsoft and Tesla, as well as Apple and NVIDIA, fell as much as 6.5%,” Aditya wrote. “The losses in the Magnificent Seven stocks were set to wipe out nearly $900 billion from the combined market value of the companies.” On Tuesday, however, Taiwan stocks appeared to be rebounding, with contract chipmaker TSMC up 8%. Investors remained cautious about the outlook for tech companies and the US economy in general. Read the story here.
8 Reasons Why This Summer’s Tech Stock Selloff Trend Makes No Sense
Analyst Take: As there seems to be some confusion about what is actually happening in tech from chip to cloud, I thought this might be a good opportunity to answer a few pertinent and time-sensitive questions.
1. “What’s going on with all of the big tech stocks?”
Both investor confidence and investor panic can be contagious: Momentum in either direction along the confidence spectrum tends to create its own wake, as scores of investors often follow sudden market shifts more out of fear of missing out (FOMO) than out of any cogent, critical analysis. The problem is that investors, like all decision-makers, can sometimes mistake the need to move quickly for the need to make a decision quickly, and no, these are not at all the same things: The ability to make an informed decision quickly, not the ability to blindly follow the herd, is what every decision-maker should prioritize.
More often than not, making these kinds of decisions comes down to fluency with the technologies, companies, and industry segments they are betting on or against. Without it, it is easy for individuals pressed to make a decision to feel a little blind, and start taking cues from the crowd. That works well when the crowd is working off good information and insights, but not so much when the crowd is basing its decisions on poor analysis or a fundamental flaw in its overall logic.
This brings us to recent (and ongoing) nervousness about the Magnificent Seven, and semiconductor stocks in general: I believe that we can at least partly blame the jerky string of tech sell-offs plaguing this summer on an incomplete understanding of what these tech companies are doing and why, the trajectories that they are on, and the fundamentals of their business models. Let’s see if we can help correct that a little.
2. “Are the fundamentals of these tech companies strong?”
The question I find myself answering almost as much as “what’s going on with tech stocks?” is “Are the fundamentals of xyz company’s business strong?” The answer is the same for almost all of these companies: yes.
On the semiconductor side, NVIDIA, AMD, Qualcomm, and MediaTek, among others, are having a solid earnings cycle so far with almost all either meeting or beating analyst expectations. AI is driving an enormous amount of demand for chips (particularly 3nm and 5nm process nodes) and Asian contract chipmakers (e.g. TSMC) are either at capacity or close to running at capacity. New manufacturing and packaging facilities are scheduled to start going online in the near term, particularly in the US (in great part, thanks to the CHIPS and Science Act), which will relieve some of the capacity bottlenecks applying upward pressure on lead times and pricing.
The broader point though is that the semiconductor industry is booming right now, and is showing no signs of a slowdown.
To get a sense for how well things are going for the semiconductor segment, bear in mind that demand for advanced AI chips is still in the early phases of its expansion from the data center to the edge and devices: the automotive sector, Mobile handsets, PCs, XR, and the rest of the IOT. Looking at the pace of technology and UX transformation driven by AI, both in the cloud and on devices, I see nothing but upside for any semiconductor company selling competitive products to those segments, which is why watching companies such as TSMC, NVIDIA, AMD, Qualcomm, MediaTek, Broadcom, and Arm generate anything less than enthusiasm from investors is a bit puzzling to me. There is an unbelievable amount of growth on the way for these companies, especially given how well they are performing already, in these turbulent early days of the AI reset of tech.
Same for Alphabet/Google, Amazon/AWS, Microsoft/Azure, and their ecosystem partners, which will be instrumental in scaling the next waves of transformative AI-enabled services. Same with device and UX companies such as Apple, Samsung, Meta, HP, Dell, Lenovo, Sony, Microsoft again, and their ecosystem partners: The ripple effect of AI moving into devices and becoming ubiquitous with cloud services layers through everyday interfaces creates a tide that raises all tech boats, and particularly the incumbent brands already demonstrating leadership in this new technological era.
This should be a no-brainer. The opportunity and business fundamentals of almost all of the big tech companies are strong, very strong.
3. “Should we worry about Berkshire Hathaway pulling away from Apple?”
I have heard different theories of the case for that decision, and most of them sound legitimate: A need for portfolio diversification; Apple’s growth, albeit healthy, isn’t necessarily worth the cost; Apple’s innovation engine seems unlikely to produce a new market opportunity where Apple will establish overwhelming leadership in; despite a lot of media noise around Apple’s AI play – Apple Intelligence – Apple entered the AI opportunity late and now finds itself in an awkward position relative to competitors both in the Mobile Handset space (Android) and in the PC space (Windows); Apple’s growth in China looks stalled. All legitimate concerns for investors looking to maximize their ROI, and perhaps finding more attractive opportunities elsewhere.
This doesn’t mean that Apple is on a losing streak or that Apple is about to go through a rough patch. Quite the contrary: I believe that Apple is already rallying, and having its own in-house silicon will enable it to bring on-device AI capabilities on par with competitors such as Qualcomm, both on phones and PCs, as early as next year. The fundamentals of Apple’s business remain strong even if other tech companies may be on stronger growth trajectories. One theory of the case is that, looking at Apple’s product and services roadmap, it appears to be on an incremental growth trajectory, while other tech companies appear to be on much more aggressive growth trajectories. The binary math here isn’t good vs bad, or winner vs loser, but rather good vs better.
All of this to say, let’s be careful not to make the mistake of confusing jumping on more attractive opportunities with a loss of confidence in Apple’s business fundamentals. Let’s also not make the mistake of assuming that Apple having fallen behind in AI is somehow reflective of a broad industry-wide miss when it comes to AI or its potential. Apple is a critical tech company, but its performance doesn’t necessarily reflect the tech sector as a whole in the way it once did.
4. “What about Intel?”
Intel is a bit of an outlier in the semiconductor segment right now, in that it continues to struggle to perform as well as its peers even in the throes of a semiconductor boom. Intel’s headwinds are complex enough to deserve their own research note but the problem as I see it is essentially that Intel hasn’t quite finished climbing out of the hole it had dug for itself before Pat Gelsinger took over the company again. Intel’s latest rounds of earnings suggested that it may take a bit more time for the company to find the momentum it needs to thrive again, but since investors aren’t known for their patience, here we are.
Earnings misses and product roadmap hiccups aside, I feel good about Intel’s prospects though: Its expanding fab business in the US is going to transform the company, will be critically important to US chip production, and is desperately needed as demand for AI chips pushes current global manufacturing capacity to its limits. Intel also has a massive incumbent advantage in virtually every segment it continues to focus on. And as critical as I am about Intel’s ability to quickly deliver a competitive next-gen AI PC platform to the Copilot+ PC ecosystem (and defend its market share in the segment against Qualcomm’s Snapdragon X and AMD’s AI platforms), I have no doubt that Intel will get there soon. I believe that Intel will continue to enjoy an enviable share of the PC chipset market, both in the consumer and the commercial segments, and that even if Intel loses share to Qualcomm and AMD, the company will nonetheless successfully leverage the PC segment’s reset to drive revenue growth.
Bear in mind that Intel’s critical importance to the US technology ecosystem, including the US defense apparatus, also insulates the company fairly well from competitive and economic threats. Intel isn’t going anywhere. It’s still in rebuild mode. Is the process taking a bit longer than some feel comfortable with? Yes. But that’s okay. IIncremental wins are underway, but it is important to remember that Intel is playing a long game.
The most important takeaway should be that Intel’s current challenges are unique to Intel, and in no way reflect the trajectory or hurdles of other major semiconductor companies. Intel’s rough patch (more of a mixed bag, really) shouldn’t be mistaken for an industry-wide trend.
5. “What about fears of a recession?”
Whether we are about to experience one or not won’t have much of an impact on AI investments, semiconductor demand, or device shipments. The scale and pace of AI’s disruption and opportunity are such that it would take a massive economic crisis to even make a dent in the momentum that tech companies are hitting.
Caveat: The only tech-related segment where the possibility of a recession would have a visible impact is the automotive sector, which still struggles to meet demand for affordably-priced EVs, and in some cases also fails to find the EV segment profitable at all. The silver lining here for tech companies is that the majority of their IP in the automotive segment touch on Software Enabled/Defined Vehicle solutions: ADAS, cockpit, telematics, connectivity, content, and services regardless of the drivetrain. We see consistent growth in these areas independent of the EV segment’s ups and downs, and see no reason for that to change.
In summary: I don’t see a realistic case for an impending recession, let alone a major one, but even if some recessionary pressures returned for an encore in the next year, I doubt that the Magnificent Seven would find themselves significantly impacted. The momentum they’re on would carry them through.
6. “What if Donald Trump becomes President next year?”
Question: Why should anyone lose confidence in tech companies in July and August on the off chance that Donald Trump might take office again in January of next year? All other considerations aside, even the timing doesn’t make sense.
Looking at comments that Presidential candidate Trump made recently about Taiwan, which triggered a bit of a selloff of Taiwan-based (and dependent) tech stocks, let me bring the temperature down a bit.
My first point is that political candidates make a lot of promises during their campaigns that they never deliver on once in office – assuming they win.
My second point is that this is not an unfamiliar refrain from Donald Trump. He launched similar threats at the US NATO allies during his first term, and while some European NATO members boosted their defense spending as a direct (and indirect) result of their diminished faith in a Trump-led US honoring their joint defense agreements, the US has shown no signs of actually abandoning the alliance.
My read on Donald Trump’s similar comments about Taiwan can be broken down into two parts.
First, Donald Trump sees himself as an aggressive negotiator, and as such, likes to kick off negotiations from a position of maximum power. Once you understand this, you can safely interpret his statements about wanting to extract more defense spending from Taiwan as a pre-negotiation tactic.
Second, given how critical the Taiwan semiconductor industry is to US economic, defense, and strategic interests, I find it highly unlikely that his comments will translate into a radical policy shift. It simply wouldn’t be aligned with US interests, let alone play well politically for a President conscious of not being seen as “weak” with regard to China.
More broadly, a case can be made for a Trump win resulting in positive outcomes for US tech companies, with deregulation, tax regimes, and protectionist policies topping the list of pros.
In other words, the panic around Trump’s comments about Taiwan and tech is unwarranted.
7. What about regulatory rulings against some of the Magnificent Seven?
Dealing with antitrust and anticompetition probes has been a cost of doing business for well over a century. The world’s biggest tech companies are routinely targeted by anti-competition regulators around the world, most notoriously in the US, China, Europe, Korea, and Japan. While many of these probes generate little more than noise, some occasionally result in financial penalties and corrective action, some significant, some not. To date, no single anticompetition case successfully brought against any major tech company has resulted in the kind of financial or competitive punch that would warrant concern, however, and I don’t see that changing anytime soon.
Perhaps more to the point, I don’t see how any single judgment against any tech company, no matter how severe, could warrant a panic about the rest of the technology sector’s health.
8. “What are we missing?”
Ironically, the one thing that the tech press should be talking about that could take inattentive investors by surprise is hardly being mentioned at all: Incoming price hikes from semiconductor contract manufacturers (targeting 3nm and 5nm process nodes specifically).
Rumors of price increases have been circulating for months now, and conditions are ripe for them: High demand versus limited capacity. Assuming that TSMC joins the fray, these price increases could impact big names such as NVIDIA, AMD, Qualcomm, MediaTek, Arm, Broadcom, and Apple.
Quantifying that impact may be a bit premature at this juncture, but it is realistic to expect somewhere from a 5% to 15% bump range. How this will trickle down remains to be seen – higher sticker price at the component level, for instance – but one can assume that this adjustment may turn up in upcoming earnings. I expected to see the first hints of it in the April-June quarter but didn’t. Keep a close eye on the July–September quarter, however.
TMy main takeaway is that the price hike is normal (and overdue, in my view), so there is no cause for worry. Again, the fundamentals of these companies are strong, momentum from the chip-to-cloud AI boom looks solid, and I don’t see anything derailing this train anytime soon. As more fabs and packaging facilities come online in the near term (many of them in the US), the demand-to-capacity ratio should ease off enough to tap the brakes on any subsequent price hikes, and may work as a price stress relief valve when demand finally levels off.
In Closing
The opportunity and business fundamentals of almost all tech companies with leading AI, AI-enabled, and AI-adjacent solutions – from chip to cloud and across hardware and software – are strong in the short and long term. Very strong. A very small handful of exceptions aside, nothing in the product roadmaps, demand pipelines, and opex data I am digging through suggests storm clouds on the horizon, or any reason to doubt that the AI-driven tech boom will lose steam or stall out, let alone falter, anytime soon. Furthermore, I see no logical reason for anyone to feel nervous about the Magnificent Seven or the AI chip companies that help deliver scale at speed to the sector.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other Insights from The Futurum Group:
Qualcomm FYQ3 2024 Earnings – The Futurum Group
AMD Q4 2023 Earnings Highlight a Strong Finish – The Futurum Group
Intel’s Q2 2024 Earnings: Navigating Challenges & Strategic Shifts – The Futurum Group
Author Information
Olivier Blanchard has extensive experience managing product innovation, technology adoption, digital integration, and change management for industry leaders in the B2B, B2C, B2G sectors, and the IT channel. His passion is helping decision-makers and their organizations understand the many risks and opportunities of technology-driven disruption, and leverage innovation to build stronger, better, more competitive companies. Read Full Bio.
