Micron Technology Inc. (MU) saw its stock plunge by about 8% in after-hours trading, reflecting the inherent risks in AI chipmaker investments. This comes shortly after Nvidia Corp. (NVDA) experienced a significant market correction, emphasizing the volatility in AI-related stocks.
Despite a doubling of its share price over the past year, Micron’s latest forecast failed to exceed the highest analyst expectations, leading to a selloff. This decline also impacted Samsung Electronics Co. and SK Hynix Inc., both of which supply memory to the AI sector.
Micron’s shares had benefited from the AI hype, with its high-bandwidth memory positioned as a complement to Nvidia’s leading AI chips. However, the company’s inability to outperform elevated expectations resulted in a market backlash. Andrew Jackson of Ortus Advisors noted the market’s unrealistic expectations, contributing to selloffs even for companies beating estimates.
Nvidia’s recent dip into correction territory and the 5% drop in a global semiconductor index reflect the broader market’s unease. Micron, still recovering from a slump in its traditional memory markets, faces significant share price uncertainty.
According to Tom Kang of Counterpoint Research, Micron lacks the dominant market position held by SK Hynix in AI memory or Samsung in the broader memory sector. This situation underscores the bubble-like conditions in the AI market. Micron’s shares, trading at 4.5 times projected sales, are notably high compared to the past decade’s average of 2.2 times.
Risks in AI Stocks
Market Volatility
- High Expectations: AI stocks are often priced based on future growth potential rather than current earnings, leading to high volatility.
- Corrections: Stocks can experience significant price corrections if growth expectations are not met or if there are negative market sentiments.
echnological Uncertainty
- Rapid Changes: The AI landscape evolves quickly, and companies may struggle to keep pace with new technologies and competitors.
- Research Risks: Investment in AI involves substantial research and development costs with uncertain returns.
Regulatory and Ethical Concerns
- Data Privacy: AI relies on large datasets, raising concerns about data privacy and security.
- Ethical Use: There are growing concerns about the ethical implications of AI, including bias and job displacement.
Competitive Pressure
- New Entrants: The AI sector attracts numerous startups, increasing competition and potential disruption.
- Big Tech Dominance: Large companies like Google and Microsoft dominate the market, making it difficult for smaller firms to compete.
Geopolitical Risks
- Trade Policies: Tariffs and trade restrictions, particularly between major economies like the US and China, can impact the global AI supply chain.
- Investment Restrictions: Regulations on foreign investments in AI technology can limit growth opportunities.
