AI stocks lost momentum on Monday as key geopolitical risk factors came into focus.
Artificial intelligence (AI) stocks fell on Monday due to geopolitical risk factors. Shares of Intel (INTC -2.00%), Broadcom (AVGO -4.05%) and Arm (ARM -4.96%) closed down 2%, 4.1% and 5%, respectively, according to data from S&P Global Market Intelligence. Meanwhile, Nvidia closed down 2.3% and Micron closed down 3.8%.
Semiconductor investors were hit with bearish news on multiple geopolitical fronts today, with China sidestepping U.S.-imposed restrictions on AI technology, but that wasn't the most surprising news of the day.
A Chinese military plane violated Japanese airspace this morning, an unprecedented violation after several incidents involving Chinese aircraft in the Philippines raised concerns, and Poland said a Russian plane appeared to have entered its airspace, adding a new source of geopolitical uncertainty.
Geopolitical risks took center stage on Monday
The United States has introduced restrictions to prevent the sale of advanced chips and semiconductor manufacturing equipment to China, aiming to thwart the technological advances of its arch geopolitical rival. However, The Wall Street Journal published a story this morning claiming that China is using third-party AI processing services to get around these export bans.
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Leadership in artificial intelligence has become a key economic and national security priority for both the United States and China, and the pursuit of dominance in the field could further increase tensions between the rivals.
While recent news of Chinese aggression in Japan and the Philippines immediately raises concerns about territorial disputes, a bigger concern for investors is the possibility of China invading Taiwan in the not-too-distant future. While many companies are designing their own artificial intelligence chips and processors, Taiwan Semiconductor Manufacturing Co. (TSMC) is currently responsible for manufacturing approximately 80% of the semiconductors used in advanced AI applications. If TSMC's chip production were to be interrupted or seized, it would likely have a devastating effect on the supply chain and the global economy as a whole. It could also be the catalyst for a broader escalation of conflict.
In addition to China-related developments, investors should also consider other geopolitical risk factors. Poland reported that a Russian aircraft had entered its airspace en route to Ukraine, raising concerns of an escalating conflict in the region. And news broke last week that security concerns at a NATO military base in Germany were sparked by intelligence reports that Russia may be trying to use drones to destroy the base.
What does the future hold for Intel, Broadcom, Arm, and other AI chip stocks?
News from China has repeatedly been a bearish driver for chip stocks over the past year, and geopolitical risks will likely remain one of the main drivers of near-term volatility. In particular, companies that rely heavily on TSMC for chip manufacturing could experience significant weakness if the possibility of conflict in Asia increases. This development explains why Intel suffered a smaller decline today than Broadcom, Arm, and other AI stocks.
Although Intel relies on TSMC to manufacture its most advanced chips, it also has significant in-house manufacturing resources. Intel is currently the world's third-largest chip manufacturer, behind the Taiwan-based market leader and Samsung. Amid growing fears that China may encroach on Taiwan, the US-based company has been investing heavily in improving its manufacturing capabilities and positioning itself as an alternative to TSMC. However, even Intel would find it difficult to avoid further large-scale divestitures if China were to seize control of Taiwan and TSMC.
But while geopolitical risk factors continue to impact valuations for semiconductor and other AI companies, the next big catalyst for moving the market is likely to come in the much closer future. Nvidia is scheduled to report second-quarter results after the market closes on Wednesday, in what is expected to be one of the most influential financial reports of 2024.
NVIDIA's performance and stock price movements have frequently influenced trading in other AI stocks this year, and the company's upcoming earnings report will likely have a ripple effect on other artificial intelligence companies. If the AI leader's quarterly results and future outlook beat Wall Street expectations, it could significantly boost the valuations of other artificial intelligence stocks. However, expectations are building leading up to the report, and even a slight shortfall could cause significant volatility.
Keith Noonan invests in Micron Technology. The Motley Fool invests in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends short Intel's November 2024 $24 call options. The Motley Fool has a disclosure policy.
