A Pullback in the Semis: Healthy Profit-Taking, Not a Loss of Faith
The market is experiencing an interesting day, with a pullback in semiconductor names dragging down the broader market. The selling appears to have originated in overnight trading in Korea and carried over into the U.S. trading day, putting pressure across a wide range of AI-linked names.
Is this healthy profit-taking, or are investors finally questioning the assumptions behind the AI trade itself? This is the former — it is healthy profit-taking. A basket of mostly AI-linked names that I track — referred to as the TL20 — had risen more than 80% before this pullback. Notably, the day before the broad sell-off, even as some megacap names sold off, two large memory names — Micron and SanDisk — were actually up for the day. It took until the following day for people to begin dumping these names. A whole cluster of AI-linked stocks — especially Micron, SanDisk, Seagate, Vertiv, and Bloom Energy — had "gone parabolic," rising in a nearly straight line over the prior 30 to 60 days. That kind of run is precisely what now prompts investors to take profits.
Chasing the Next Derivative of the AI Trade
Are investors finally becoming more selective, separating companies that are returning AI profits today from those merely promising big future returns? Not exactly in that disciplined way. Instead, investors are continuing to hunt for the "next derivative" — the next undiscovered name positioned to benefit from AI. A telling example is the hope that a chip company hosting its analyst day in New York will become the next big mover, much the way Intel suddenly became a hot AI trade earlier in the year after sitting out the rally. The key insight is that this search is driven more by finding an undiscovered name than by rigorously scrutinizing actual cash flow. The bet is on something good happening to profits far down the road, and that long time horizon means investors are not always examining the underlying fundamentals carefully.
Qualcomm's Investor Day: The Need for a Concrete AI Data Center Number
Qualcomm hosts its analyst day in New York, and there is significant hope that this stock — which has largely sat out the AI rally — could become the next name to come along.
What does Qualcomm need to say to prove it can be a serious player in the AI ecosystem, given that most investors still associate the company with smartphones? The majority of Qualcomm's revenue still comes from smartphones, an area currently under pressure because the rising cost of memory is threatening this year's potential smartphone sales. To change the narrative, Qualcomm needs to do exactly what every other major chip company has already done. Nvidia, Broadcom, AMD, and Intel are all communicating a specific number tied to what they expect to earn from AI data center chip usage at some point in the future.
If Qualcomm can present a clear line item tomorrow — stating that at some future point, perhaps 2029 or 2030, it will generate a specific number of billions of dollars in annual revenue tied to AI data center-related chip sales — many investors will take that as a positive sign. It would give them something tangible to believe in: the idea that if they wait two to three years, they will receive a defined payoff, itemized and updated every quarter, in the same way investors have grown accustomed to receiving such updates from Broadcom, Nvidia, AMD, and Intel.
Nvidia's Shareholder Meeting: Cultural Proxy Battles and "In Jensen We Trust"
Nvidia is holding a shareholder meeting at a particularly interesting moment. The stock has lost a lot of momentum, trading down over the past month, and several governance and regulation items are up for vote that could draw public attention.
A striking feature of the proxy statement is that every single proposition opens by noting that Nvidia is the richest and biggest company in the world — a roughly $5 trillion company. Because of that status, a wide range of groups are pressuring Nvidia to represent many different values and perspectives. The items on the list include:
- A technical governance vote to reduce the requirement for passing propositions from a super-majority vote to a simple majority vote.
- A request for statements from the company on protecting employees' freedom of faith — framing risks to employees' religious beliefs within the workforce.
- A request for an investigation into whether DEI (diversity, equity, and inclusion) initiatives are holding back opportunity for employees.
- A demand for further disclosure regarding the company's greenhouse gas emissions.
These proxy arguments together represent three very large categories of cultural values and perspectives that activists believe the world's largest company should address.
Nvidia's earnings will not arrive until the end of August, placing it on the tail end of the reporting cycle, though Jensen Huang may speak publicly in the meantime, as he does whenever he chooses to.
Could any of these proposals become a meaningful distraction for management or a focus for the public? It is unlikely. Jensen Huang is so beloved and trusted by the shareholder base as a founder-CEO — a level of trust that is not true of every company, and notably not the case for the leadership of AMD and Intel at present — that the momentum strongly favors siding with the board. The board recommends voting against all four proposals, and the prevailing sentiment is essentially "in Jensen we trust." This is a company that keeps delivering, with estimates that keep rising even as the stock has lagged the broader AI trade.
Micron's Earnings: The Pressure to Finally "Open the Kimono" on Long-Term Agreements
Micron is reporting earnings. The notable pattern is that the company has delivered good — arguably great — numbers over the last several quarters, yet the stock has mostly moved to the downside in the 24 hours following each report.
What does Micron need to do differently this quarter to win a positive reaction, given that good numbers have already proven insufficient? For about three quarters in a row, there has been a recurring "tease." The CEO acknowledges that this is a cyclical industry and that everyone worries about the eventual falloff in prices. But he reassures investors that he has signed special deals — called long-term agreements (LTAs) — with customers to lock in prices and demand for years into the future. The catch is that he says he cannot disclose what is actually in those agreements.
Each quarter, analysts dutifully write up these LTAs, even though no one knows their contents. Expectations have been steadily building, and a great deal of anticipation is now attached to them. It may now be the case that the CEO finally needs to "open the kimono" and reveal what is genuinely contained in these agreements — their actual extent, and whether they can be pegged to something definite regarding the maintenance of prices and the assurance of demand in the future. In short, greater visibility could make a big difference in how the stock responds, and the key question is how closely those cards will be played to the vest.
A Track Record Worth Noting
It is worth noting that these semiconductor observations follow a series of accurate calls on the major software names. In a prior discussion ahead of big software earnings, the prediction was that if certain highlighted companies reported positive results and saw positive reactions, the prevailing "SaaS-pocalypse" conversation would largely dissipate — and that is precisely how events played out.
