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Why Advanced Micro Devices, Taiwan Semiconductor Manufacturing, and Dell Technologies Plunged Today

What happened

Shares of semiconductor giants Advanced Micro Devices (AMD 0.95%)Taiwan Semiconductor Manufacturing (TSM -0.31%), and Dell Technologies (DELL -2.45%) were all falling on Wednesday, down 5.2%, 3.7%, and 5.3%, respectively, as of 3:42 p.m. ET.

None of these three companies had any company-specific news today, but one — or actually, two — of their main rivals reported earnings last night, casting a pall over any chip stock leveraged to the PC or server markets.

Moreover, the entire semiconductor sector has been on fire in the month of May, in the wake of Nvidia‘s (NVDA -0.50%) blowout guidance on May 25 and hype around artificial intelligence. So, it wasn’t a surprise to see these stocks have a pullback as news from a non-Nvidia peer underwhelmed.

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So what

Yesterday, both HP Inc. (HPQ -2.86%) and Hewlett Packard Enterprise (HPE 0.03%) reported earnings that disappointed. Both companies were each part of the old HP, which split into two companies back in 2015. Today, HP Inc. holds the printer and PC businesses, while Hewlett Packard Enterprise holds the enterprise server and services businesses.

Unfortunately, both companies reported downbeat earnings and guidance last night, taking the steam out of some of the recent AI-related enthusiasm for chip stocks.

HP Inc. reported a rather sizable 21.7% decline in revenue last quarter on the back of a brutal 29% decline in PC sales, as the historic post-pandemic PC slump continues. Revenue missed expectations, while earnings managed to beat expectations on the back of management’s cost-cutting efforts. Meanwhile, HP Enterprise also surprised to the downside, with a 3.9% increase in revenue missing expectations. Its full-year outlook was also underwhelming, with revenue projected between $6.7 billion to $7.2 billion, much lower than consensus estimates of $7.24 billion.

All three of the above companies are highly leveraged to both the PC and server segments of the economy, so it’s not surprising each fell on the back of the HP companies’ underwhelming news. Advanced Micro Devices makes both CPUs and GPUs for both PCs and enterprise servers, and Dell is configured like the old “united” HP, with both a PC and enterprise-server division under one roof. Meanwhile, as the largest outsourced foundry in the world, and with a lead in manufacturing leading-edge chips, TSMC is also highly exposed to PCs and servers as well. Last quarter, TSMC’s high-performance computing division, spanning both PC and server chips, comprised 44% of revenue, the foundry’s largest overall segment.

In addition to the HP companies’ news, investors also appeared to take a break from focusing on AI and shifting back to macroeconomic storm clouds. This morning, the April Job Openings and Labor Turnover Survey, or JOLTS report, came out, showing an unexpected rise in the number of openings to 10.1 million, while the March numbers were revised higher from 9.59 million to 9.75 million.

Normally, more jobs would be a good thing, but since the Federal Reserve is desperately trying to contain inflation, a hot economy is actually not what most would like to see. That’s because a tight jobs market could continue to bolster inflation, which could lead the Federal Reserve to hike interest rates more than thought. Tech stocks tend to be grouped in the “growth stock” camp, so they tend to sell off when inflation rears its head and expectations for rate hikes move upward.

Now what

With their recent run-up, some profit-taking in semiconductor stocks was somewhat inevitable, and HP’s results along with the surprise JOLTS number seemed to give investors an excuse to sell today.

It’s an odd time for the semiconductor sector, as there are severe headwinds across a large part of the industry. However, that is running into the beginning of the AI era, which could lead to a boom in chip stocks leveraged to that trend. For instance, while AI should boost servers, AI-related servers only make up a little less than 10% of all servers sold today, according to Trendforce. So, there are bound to be mixed signals from industry leaders in the near term.

On the other hand, looking beyond this downturn, the chip industry should broadly benefit from AI. For instance, even both HP companies noted AI as a potential tailwind longer term. HPE’s management highlighted revenues for intelligent edge servers grew 50% last quarter, even as general compute servers fell. Meanwhile, HPQ’s management noted it was working on a new AI architecture for PCs to run high-performance workloads outside the cloud. Those new models should be available in 2024.

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