Shares of key players in the semiconductor and technology sectors experienced a notable rebound today, with leading chip manufacturers Micron Technology (MU 7.33%), Lam Research (LRCX 4.35%), and Arm Holdings (ARM 1.26%) showcasing impressive gains of 7.6%, 3.7%, and 3.6% respectively, as reported at 12:10 p.m. ET. This uptick signals a possible recovery in investor sentiment towards these tech-heavy stocks.
After experiencing significant price corrections driven by heightened valuations linked to artificial intelligence (AI) excitement over the past two years, semiconductor stocks faced a downturn recently due to growing concerns regarding recession risks and tariff implications. The market’s reaction indicates the volatility of investor confidence amid fluctuating economic indicators.
Fortunately, today’s inflation report, which came in milder than anticipated, provided a much-needed boost for the semiconductor sector. Additionally, there were some cautiously optimistic remarks made regarding Micron by analysts, which may have contributed to its market rally.
How a Positive Inflation Report Fuels Semiconductor Stocks, Especially Micron
Today, the Labor Department unveiled the February Consumer Price Index (CPI) report, a crucial indicator for tracking inflation trends over the previous month. The CPI showed a modest increase of just 0.2% month over month and 2.8% year over year, which was lower than market expectations. In a similar vein, the “core” CPI, excluding the more volatile categories of food and energy, also rose by merely 0.2% month over month and 3.1% year over year, reflecting a more stable pricing environment.
While both annual inflation figures remain above the Federal Reserve’s established target of 2%, their slight decline of 0.1 percentage points from projections is a glimmer of hope. This is particularly important as recent concerns have focused on the possibility of stagflation, characterized by slow economic growth coupled with persistently high inflation rates. Although fears surrounding tariffs and declining consumer confidence suggest that economic growth may stall, a decrease in inflation could enable the Federal Reserve to implement lower interest rates, thereby potentially mitigating the risk of a recession.
Though the semiconductor industry is poised for long-term growth, it is also inherently cyclical. No company exemplifies this cyclical nature more than Micron, which specializes in producing memory chips. The pricing of these commodity-like memory chips tends to be exceptionally volatile compared to logic chips, making it understandable that Micron is particularly responsive to indications of economic stabilization.
In addition, Wolfe Research released a report on Micron today, which could be positively influencing its stock performance. Interestingly, the analysts adjusted their price target downward from $175 to $150, citing anticipated short-term pricing pressures in mature sectors such as personal computers, smartphones, and automotive industries.
Despite the reduced price target, Wolfe’s analysis did reveal some optimistic insights. Analysts project a stronger recovery in the latter half of this year as demand for PCs and smartphones rebounds, with expectations that these devices will increasingly incorporate more memory to support AI applications, which are crucial for future advancements.
Furthermore, even with the lowered target price, analysts continue to regard Micron as “one of our favorite ideas in semiconductors,” primarily due to the promising growth opportunities in high bandwidth memory (HBM), a technology vital for AI training and inference, over the next two years. This suggests that investors may be looking past current challenges, encouraged by Wolfe’s reaffirmation of a positive long-term outlook.
Meanwhile, Lam Research operates within the semiconductor equipment sector and has a significant reliance on memory chip production, making its performance closely linked to Micron’s fortunes. Recently, Lam’s management participated in industry conferences, where they reiterated a positive growth trajectory. CFO Doug Bettinger projected mid-single-digit growth in wafer front-end equipment (WFE) this year, despite the overarching macroeconomic uncertainties, and anticipates a high-single-digit growth rate in the long term.
On the other hand, Arm Holdings has experienced an even more pronounced sell-off recently, likely attributable to its elevated valuation metrics. Similar to Micron, a substantial portion of Arm’s business is derived from the mature smartphone market. However, like Micron, Arm is also viewed as a potential frontrunner in the AI landscape, especially as its low-power CPUs find increasing applications in AI data centers. Hence, it is not surprising to observe Arm’s stock rallying alongside Micron, reflecting their shared market dynamics.
Investing in Semiconductors: A Long-Term Strategy for Resilient Investors
The semiconductor sector has consistently proven to be a strong performer over the long term, yet investing in chip stocks necessitates a willingness to endure considerable volatility. This volatility can arise from macroeconomic fluctuations or geopolitical tensions, particularly related to China. Unfortunately, investors are currently grappling with both factors simultaneously, creating an uncertain market environment.
However, with many semiconductor stocks experiencing declines of 30%-50% from their peaks earlier in 2024, now may present a prime opportunity to acquire competitively advantaged industry leaders while their valuations are favorable. Even if today does not mark the absolute bottom of the market, the prices of these leading companies appear significantly discounted, especially if a recession does not materialize.
Ultimately, the race in AI technology shows no signs of slowing down, and if inflation is indeed trending back toward target levels, the outlook for the semiconductor industry could be brighter than the recent past suggested.