Chips & AI infrastructure — year to date

Market backdrop

In the week to Friday Oct 2, chip stocks rose while the S&P 500 slipped and US interest rates kept climbing — the mix that decides how much investors are willing to pay for fast-growing chip companies.

The two chip funds rose 4.0% (SMH) and 2.8% (SOXX) in the week, while the S&P 500 moved -0.2% and the Nasdaq 100 +0.7%. The gap has built up all year: the Nasdaq 100 is up 22.0% since Dec 31 against 12.9% for the S&P 500 (9.1 percentage points apart), and SMH is up 75.1% — 62.2 points ahead of the S&P 500. A few large technology and chip stocks are carrying the index.

On Friday alone (1 day), the typical defensive blue-chip stock moved +0.1% while the typical large growth stock rose 1.91% — a gap of 1.81 percentage points in favour of growth. The typical semiconductor stock rose 2.32% that day, and the Magnificent Seven (the largest US tech stocks) +1.33%.

Interest rates are the headwind. The 10-year Treasury yield stood at 5.24% at its latest reading (Oct 1), up 0.45 points in a month; the 2-year at 4.78%. The high-yield spread — the extra yield investors demand to lend to riskier companies — was 3.24% (Oct 1), 0.59 points wider than a month earlier. Higher yields make future profits worth less today, which weighs most on the highest-valued stocks.

Chips — year to date

Since Dec 31, chip stocks have far outrun the broad market — the SMH chip fund is up 75.1% — and this week the gains came from the companies that sell chip-making machines, while memory and storage stocks fell.

All 28 of the 28 chip stocks with a full year of New York trading are up since Dec 31, and 15 of them have at least doubled. SanDisk leads with +624.6%; Broadcom trails with +2.6%. By group, memory & storage has done best (typical stock +208.3%) and analog & embedded chips least (+53.8%).

This week 21 of 29 rose. Chip-making equipment led (typical stock +10.2%; FormFactor +15.0%), while memory and storage fell (typical stock -2.0%), led lower by Western Digital at -9.1% and Seagate at -7.4%. Coverage in recent months has tied pullbacks in storage stocks to profit-taking after a steep run and to questions about the pace of AI spending (Motley Fool, Schwab Network); we found no single company announcement behind Friday's fall.

Chips — valuation & earnings

Prices as of the Oct 2 close set against analysts' profit forecasts show that memory makers look cheapest and design-licensing and test companies dearest — which matters because those forecasts get tested from Oct 14, when the reporting season starts.

The typical chip stock trades at 27.6 times next year's expected earnings (forward P/E). The memory makers are the cheapest — Micron at 5.2, SK hynix at 5.8 and SanDisk at 6.5 — because analysts expect record profits from high memory prices. The dearest are Arm Holdings (100.7) and Aehr Test Systems (77.5). 18 of the 28 with a PEG ratio sit below 1 on a one-year basis, which flatters fast-growing and recovering companies.

For the 13 chip companies with both figures, options traders expect a smaller move around the next report than their average move after past reports in 11 cases; only Arm Holdings (±9.2% vs ±6.1%) and ASML (±3.2% vs ±2.4%) are priced for bigger swings than usual. Western Digital's figure is from Oct 1, a day older than the rest.

Chips — price trends & signals

At the Oct 2 close most chip stocks still trade above their long-term trend line, and several look stretched after a strong month — useful to know before reports that can move prices sharply.

24 of the 28 chip stocks with enough trading history close above their 200-day average — the average closing price of the past 200 sessions, a common gauge of the long-term trend. The four below it: Amkor, Broadcom, Nova, NXP Semiconductors. SK hynix's New York shares are too new to have a 200-day average.

The RSI (relative strength index, 0–100) compares recent gains with recent losses; above 70 is usually read as overbought, below 30 as oversold. 5 chip stocks closed Friday above 70 — FormFactor (72.8), Analog Devices (72.1), TSMC (71.5), Texas Instruments (70.4), AMD (70.1) — and 4 more sit between 65 and 70 (Rambus, Applied Materials, Lam Research, KLA Corp). No chip stock is near oversold. The reading covers 2,005 of 2,007 US companies worth $10B or more.

In the five sessions to Oct 2, the clearest damage was in storage: Western Digital fell below its 150-day average on Friday on about 3.3 times its normal volume, and Seagate slipped below its 50-day average. On the other side, KLA climbed back above both its 50- and 150-day averages, and Applied Materials and Nova back above their 50-day lines.

Company deep dives

Four chip companies picked from this week's data — the year's best, the year's weakest, the week's sharpest faller and the first to report — show how wide the spread inside the group is, from a seven-fold gain to almost none.

All four picks still hold on Friday's data: SanDisk has the best year-to-date return of the 28 chip stocks with a full year of trading, Broadcom the weakest and is below its 200-day average, Western Digital fell the most over the week, and ASML reports first, on Oct 14.

SanDisk (SNDK). Up 624.6% this year, the best of any US company worth $10B or more, on surging prices for the flash memory used in AI data centres. It still fell 3.3% this week (3.8% on Friday) and sits 27% below its 52-week high. It trades at 6.5 times expected earnings and reports on Oct 29 after the close; options price a ±5.4% move against ±9.3% on average after its last 4 reports.

Broadcom (AVGO). Up only 2.6% this year and 28% below its 52-week high, it closed 3.4% under its 200-day average ($367.50). At 18.3 times expected earnings it is one of the cheaper large chip stocks. It does not report until Dec 9, so options prices for that report are not available yet.

Western Digital (WDC). Down 9.1% this week and 10.2% on Friday alone, on about 3.3 times normal volume; it fell below its 150-day average the same day. It is still up 141.1% this year and 3.8% above its 200-day average ($400.02). It reports on Nov 5; options price ±5.0% (Oct 1 data).

ASML (ASML). Up 74.5% this year and 7.1% this week, ASML reports before the New York open on Oct 14 — the same morning as the September consumer-price report. Its US-listed shares (quoted in dollars here; the main listing is in euros in Amsterdam) closed at $1,867.31, right at a price zone where it turned lower before. Options price a ±3.2% move, above its ±2.4% average after the last 4 reports. Investors read its orders as an early guide to chip-equipment demand next year.

AI infrastructure — year to date

The companies that run AI computing — cloud giants, data-centre landlords and GPU renters — have risen far less than the chip makers that supply them this year (typical stock +9.0% vs +106.6%), which shows where investors think the profits are landing so far.

20 of the 29 AI-infrastructure companies are up since Dec 31. The GPU cloud providers lead (typical stock +190.1%; DigitalOcean +191.1%, Nebius +190.1%), while the Asia-Pacific group lags (-18.7%; Baidu -35.5%). Among the US cloud giants, Oracle (-27.0%) and IBM (-24.8%) are down; Microsoft, Alphabet, Amazon and Meta are up between 7.0% and 10.3%.

Optics & networking

The companies that link chips and data centres together — optical parts, cables and network switches — had a strong week: 19 of 20 rose and the typical stock gained 6.4% (Viavi +15.8%, Lumentum +15.3%, Applied Optoelectronics +14.0%). Year to date the typical stock is up 65.6%, with Applied Optoelectronics (+231.6%) and Lumentum (+194.5%) in front.

AI infrastructure — valuation, earnings & signals

The latest quarterly filings show the AI build-out now costs some cloud giants more cash than their businesses bring in, which makes their Oct 28–29 reports and the cost of borrowing the two things to watch.

Microsoft, Alphabet, Meta and Oracle together spent $127.3B on buildings and equipment in their latest quarter. Alphabet (−$5.9B) and Oracle (−$1.9B) spent more than their operations earned, leaving free cash flow negative; Meta was close to break-even ($1.7B). On Aug 10, Nvidia and six asset managers announced financing platforms meant to raise over $500B for Nvidia's customers (Nvidia announcement) — the chip maker helping its buyers borrow.

Trend check at the Oct 2 close: 12 of 29 AI-infrastructure companies with enough history sit above their 200-day average, against 17 of 20 in optics & networking and 24 of 28 in chips. In the five sessions to Oct 2, CoreWeave's 9-day average crossed above its 20-day and it climbed back above its 50-day line; Baidu's RSI fell to 29.9, below the oversold mark of 30. In optics, Coherent crossed above its 50- and 150-day averages, and Viavi's RSI reached 72.6.

Earnings ahead

Between Oct 14 and Oct 30, 28 of the chip, AI-infrastructure and optics companies in this report publish results — the first real test of this year's gains against actual orders and profits.

ASML opens the season on Oct 14, followed by Ericsson and TSMC (the world's largest contract chip maker) on Oct 15. The busiest stretch is the week of Oct 26, with 20 reports, including Microsoft, Alphabet and Meta on Oct 28 and Amazon and SanDisk on Oct 29. The boards cover only US-listed companies worth $10B or more; ±% is the move options traders expect, where available.

Not on the boards: 20 companies in this report have no report date in the earnings calendar used here, which covers US-listed companies worth $10B or more — AEHR, CAMT, KLIC, SIMO, 018260.KS, APLD, CIFR, CORZ, GDS, GLXY, GMG.AX, IOS.DE, MRL.MC, NTTYY, NXT.AX, RIOT, TCEHY, WULF, AAOI, CIEN. Dropped as stale: Range Intelligent (300442.SZ, last close Sep 30) and the Defiance Connective Tech fund (FIVG, last trade Jul 17).

Scenarios

Three ways the next four weeks could go for chip stocks, each tied to a level in this week's data — conditions to watch, not forecasts.