AI Revenue Forecasts Drag Semiconductor Stocks Down

Semiconductor stocks retreated during the first week of October, reversing earlier gains. The shift in sentiment was largely triggered by a Financial Times report indicating that AI company OpenAI's annualized revenue was nearing $50 billion as of late September, falling short of previous media estimates around $70 billion.

The valuations of semiconductor firms are closely linked to anticipated spending on AI infrastructure. The revised revenue outlook from OpenAI raised concerns about the sector's future growth, exerting downward pressure on key players. The PHLX Semiconductor Index concluded the week lower, while the broader market showed more resilience.

Prior to this downturn, the sector had seen substantial gains. As of late September, the PHLX Semiconductor Index had risen 73% year-to-date, with several major constituents achieving triple-digit percentage increases. Midweek, rising long-term Treasury yields and increasing crude oil prices also added pressure, as higher discount rates typically weigh on companies valued on long-term growth expectations.

Company-specific developments also influenced individual stock performance. Taiwan Semiconductor Manufacturing Company (TSMC) reached a record high early in the week amid discussions about its potential involvement in Elon Musk's planned Terafab chip complex. NVIDIA continued its strong performance, announcing a significant share buyback authorization and releasing new open-source AI management tools.

Intel and Arm Holdings faced challenges during the week. Intel's role in Musk's chip project became less clear, and Arm's stock declined due to an ongoing lawsuit where Qualcomm alleges breach of licensing agreements. Micron Technology's shares followed other memory producers downward.