Key facts
- Memory stocks have experienced a significant downturn, with the Roundhill Memory ETF down 25% from its peak.
- Samsung's recent earnings report, despite record revenue, failed to impress investors, contributing to the sell-off.
- Concerns about companies overspending on AI infrastructure and elevated memory chip prices are cited as reasons for the decline.
- Rising interest rates and inflation fears have also contributed to the broader market downturn affecting chip stocks.
- Despite the volatility, some analysts believe memory stocks still have strong fundamental stories and represent a buying opportunity.
Memory stocks, which had been the market's hottest trade for much of the year, have recently experienced a significant downturn. The Roundhill Memory ETF, tracking various memory companies, is down 25% from its late June peak. Major gainers like SanDisk and Western Digital Corp have also seen substantial declines.
The recent selling pressure appears to have been initiated by Samsung's second-quarter earnings report. Despite achieving record revenue, the results narrowly met investor expectations, leading to a sell-off in the electronics maker's shares. According to Jose Torres, a senior economist at Interactive Brokers, this reaction suggests that the market perceives booming profits as a potential indicator of companies overspending on the AI buildout.
Torres also noted that complaints about elevated memory chip prices and traders' awareness of high valuations in the memory space are contributing factors to the current rotation. The broader chip trade has also been affected, with the Philadelphia Semiconductor Index down 12% in five days.
Profit-taking intensified early Wednesday, partly driven by expectations of higher inflation and interest rates, which have contributed to a general market decline. The 10-year US Treasury yield rose above 4.5%, and the 30-year yield surpassed 5.07%, making it difficult to find dip-buying opportunities, according to Torres.
Despite the recent pullback, some Wall Street forecasters view the situation as a potential buying opportunity. Strategists at JPMorgan's markets intelligence desk believe memory stocks still possess an "exceptional fundamental story" and that current price action is bringing positioning closer to a buy signal. Luke Lango, a tech strategist at Navellier & Associates, remains strongly bullish on the memory complex, citing favorable statistical evidence from both technical and fundamental standpoints.
The current market weakness comes at a challenging time for South Korean chip giant SK Hynix, which is preparing to offer $29 billion in American depositary receipts. This offering is expected to be the third-largest stock sale ever. Despite the volatility in the memory trade, the ADR issuance is anticipated to be heavily oversubscribed.