Philadelphia Semiconductor Index surges 69% in two months, led by memory chip stocks; demand outlook remains solid amid expanding AI infrastructure investment

The Micron Technology logo. [Reuters]
The Micron Technology logo. [Reuters]

As share prices of Samsung Electronics and SK Hynix continue their sharp ascent, US rival Micron Technology has also sustained an extraordinary rally — and the surge across the semiconductor sector is reigniting debate over an AI bubble, Bloomberg reported Monday.

The Philadelphia Semiconductor Index, which tracks 30 major chipmakers listed on US exchanges, rose 69% over April and May.

The broader rally in semiconductor stocks has helped the S&P 500 repeatedly set all-time highs in recent weeks, even amid energy supply concerns stemming from the war with Iran.

Within the semiconductor sector, memory chips have led the advance, driven by an unprecedented surge in demand.

Micron's share price has more than tripled this year. SK Hynix has climbed 258% since the start of the year, while Samsung Electronics has risen 164% over the same period.

Samsung Electronics became the first South Korean company to surpass a $1 trillion market cap on May 6. Micron and SK Hynix followed, joining the $1 trillion club on May 26 and May 27, respectively.

AI is evolving beyond simple question-and-answer interactions into the AI agent stage, where systems carry out real-world tasks autonomously. Analysts say this shift will drive explosive growth in demand for memory chips capable of supporting large-scale computation.

Bloomberg said the current bubble debate centers on whether the surge in memory demand reflects a structural shift driven by the AI revolution or merely a temporary phenomenon.

There is broad consensus among experts that memory demand will keep rising for now, fueled by the massive AI spending of hyperscalers operating large-scale data centers. Some investors, however, remain skeptical about whether the memory chip sector's recent exceptional earnings improvement can be sustained over the long term.

"You can still expect further upside if you enter now, but you can't help thinking about how volatile the semiconductor sector is and how quickly things that looked great can change overnight," said Ed O'Gorman, CEO of Riverwealth Advisors.

On Wall Street, the memory chip industry has long been known for its sharp cyclical swings.

Micron posted net profit of $8.7 billion for 2022, riding a pandemic-era surge in demand for digital devices. The following year, a severe supply glut sent the company to a net loss of $5.8 billion in 2023.

That cyclicality has made investors cautious about valuations based on forward earnings estimates.

Micron's 12-month forward price-to-earnings ratio currently stands at around 10 times — well below the Philadelphia Semiconductor Index average of 27 times. Bloomberg noted, however, that this seemingly low valuation holds only if the current boom continues.

In practice, investors have repeatedly been burned: drawn in by rosy earnings forecasts and cheap-looking valuations, only to see share prices collapse when the cycle turned.

"Peak earnings in the semiconductor sector are only visible in hindsight," said Kai Wu, chief investment officer at ETF manager Sparkline Capital.

"Ultimately, the key question is how long AI infrastructure buildout will continue," he said. "If investment keeps up, semiconductors will probably keep performing well — but there's also a chance we're getting ahead of ourselves."

The SK Hynix logo. [Reuters]
The SK Hynix logo. [Reuters]

Meanwhile, Bloomberg noted that the traditional valuation framework for semiconductor stocks is shifting as the high-bandwidth memory (HBM) market expands in the AI era.

HBM is difficult to manufacture and carries relatively low yields. As memory chipmakers concentrate their resources on HBM production, supply of other memory chips has struggled to keep pace with demand.

Analysts also say the rise of long-term supply agreements, driven by intensifying competition to secure memory, could help dampen the severity of industry cycles.

UBS recently raised its price target for Micron sharply, saying it expects "the market to start ascribing a more 'normal' valuation multiple to Micron shares," and that the re-rating would continue as the structural changes AI has brought to the memory industry become more concrete.

"I'm not in the 'this time it's completely different' camp," said Jory Nodekhaer, head of global emerging and Asian markets at Polar Capital, invoking the phrase associated with dot-com bubble optimism. "But I firmly consider myself in the 'higher for longer' camp."

"The shift to HBM has brought meaningful change on the supply side, and demand remains solid," he said. "The emergence of long-term supply agreement structures also points to a scenario where the amplitude of downturns narrows and production and pricing management improves."

The four major hyperscalers — Amazon, Meta, Alphabet and Microsoft — have said they plan to pour up to $725 billion into capital expenditure this year, centered on AI infrastructure. Experts expect investment to grow further next year as AI infrastructure spending takes on the character of an arms race.

O'Gorman, however, pointed to the memory chip sector's history of sharp boom-and-bust cycles and said that "while capital expenditure is growing in absolute terms, at least the growth rate appears to be heading toward a plateau."


mokiya@heraldcorp.com