Chapter 1: Are chip and memory stocks in a bubble or a super cycle?
Pushkin.
A new divide is opening up in stock markets between tech stocks and, well, other tech stocks. Investors still just cannot get enough of the whole AI thing. Stocks in the ecosystem of semiconductors or chips to their friends are still ripping higher, absolutely killing it. But software stocks have been getting clobbered. What does that tell you?
It's that AI will kill at least a large part of the industry that forged it in the first place. There's gratitude for you. Today on the show, chips and dips. We unpack these divergent fortunes and ask, are chips in a bubble or a super cycle? This is Unhedged, your friendly markets and finance podcast from the Financial Times and Pushkin.
I'm Katie Martin, a markets columnist at FT Towers in London, where it is aggressively hot. Joining me all the way from over there in New York City is Rob Armstrong, my partner in crime, on the Unhedged newsletter with his fancy new glasses. Rob, how's it going?
You know where else it's hot, Katie, is in the FT audio studio in New York.
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Chapter 2: What factors are driving the demand for chips in AI infrastructure?
I want all our listeners to imagine a large middle-aged man slowly turning into a puddle in here.
A large middle-aged man in quite a small box, actually. You could probably reach each wall, can you?
Yeah, just about touch the walls. Not quite, but just about. And today I'm a little sweaty.
Okay, that's a pleasant thought for all of us. So what's going on here? Chips are absolutely off to the races, right?
Yeah. So we all know that there is a mad rush in the United States to build as many data centers as possible as quickly as possible so that we can run AI models on them and do all sorts of wonderful, efficient things with those AI models. The bottleneck or one of several bottlenecks to building all those data centers is having enough chips to support them.
And it's like every kind of chip you need. It's not just NVIDIA's fancy GPUs, which are the kind of main central brain for training and using an AI. It's also old-fashioned CPUs.
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Chapter 3: How has the semiconductor industry changed in recent years?
It is very much memory chips. It's networking chips. It's, you know, it's the whole range.
All my favorite types of chips.
Yeah, exactly. Tortilla chips, corn chips, potato chips, through the roof. And so, like, there's been wild stuff. Like, you know, Micron, which makes memory chips, just to pick one example out of a hat. is up almost 1,000% this year.
Shut up. No, it's not.
Because they just can't... They cannot make... It's not almost 1,000, but it's in the 800s, and they can't make this stuff fast enough.
So this is like the one that's become a trillion-dollar company kind of from nowhere.
It has become a trillion-dollar company. And this raises a lot of interesting questions for the following reason, which is that...
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Chapter 4: What are the implications of rising chip prices for the economy?
In one very important respect, computer chips are like cows.
Sure.
So follow me here for a second. The hard thing about the beef industry, the cattle industry... is that production follows prices and production leads inevitably to gluts and then to lower prices. So the price of beef goes up. Everybody's like... holy crow, let's make more cows. And so you make loads of cows.
And that process of making more cows, which involves, you know, getting cows together and all this kind of, takes several years.
Mommy cow and daddy cow love each other very much.
And by the time you have more cows ready to be turned into hamburger, the price has changed, right? And it's similarly, in the chip industry, it is cyclical in exactly the same way. Prices rise. People are like, oh, let's add capacity.
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Chapter 5: How are chip stocks impacting software stocks?
Let's make as many chips as we can quickly, quickly. This is actually a process that takes a long time. And then by the time all that, all those chips are made, the prices have fallen. You have a huge gut. You don't have a huge gut. That would be that.
Well, you might do if you eat all the hamburgers.
It's true. Good point. You have a huge glut. So, you know, it's like the classic cyclical industry where if you look at price charts or revenue charts or whatever, profitability, it's like this sine wave. That rolls through. And so the question confronting us is, are we merely at the top of a chip cycle, an especially big chip cycle, and we're headed for a glut?
Or has the world economy changed in a permanent way such that demand for chips is permanently higher and the whole industry is going to re-rate for good and things are different now?
This time is different, folks.
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Chapter 6: What concerns are there about the sustainability of chip revenues?
Look, it's possible. And it's not just Micron, is it? There's all sorts of different stocks in this sector that have gone absolutely gaga. So the way that we tend to measure this in markets is the Philadelphia Semiconductor Index, the Philly Index to its friends. You wrote about this today, didn't you? It's up what percent over the past year?
160% in the last 12 months, if I have my numbers correct here. And, I mean, an interesting fact about this, and we talk about on this show a lot, What's driving that index, which is basically an index of all the big semiconductor manufacturers, the companies that make equipment that makes semiconductors, which are also all those equipment stocks are going bananas.
Right.
It's like a kind of big industry bucket. What is driving that index higher is earnings. The valuation of the Philly index, known affectionately as the SOX, has not gone up.
Right.
Earnings are growing so fast that that is what is pushing this up.
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Chapter 7: What social and political backlash is emerging against AI?
It's not excitement and exuberance saying, oh, let's pay more for these stocks now. It's just like we're struggling to keep up with the enormous amount of money that is flowing into this industry. Of course, there are stocks that have become very expensive, but there's a lot of others that have not. Micron, you know, it's just the, it's PE, it's price to earnings ratio hasn't changed.
It's just earning a lot more money.
Yeah.
This isn't just a vibes thing. That's what is really important about this. Sometimes when stocks go absolutely stratospheric, it's because something stupid is going on, like the whole GameStop thing or some sort of meme stock thing. A bunch of retail traders on Reddit have ganged up and decided to buy some stupid stock for some stupid reason. This is not that.
This is real companies making so much money they don't know what to do with it. And they've got a huge backlog of orders that they're struggling to stay on top of. And there's a whole bunch of these companies that are just doing unbelievably well. Yeah.
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Chapter 8: Is there a risk of a financial crisis due to AI advancements?
So we can say, wait, wait, let me just read. I think you've made an excellent point. I'll just reframe it like this. We know that the stocks aren't in a bubble. But the industry might be. In other words, it might be revenues or earnings that are in a bubble. So like it may be that like the revenues and the earnings back up the stocks. But is the revenue and the earnings sustainable?
Also, chips are unlike cows in several important respects. And one of them is you order a chip, chip version 1.0, right? At the time, it is the world's fanciest chip. And you say, I'm going to have a bunch of these chips and you order them. And then they take ages to arrive because everyone else is ordering the same chips. And so by the time they arrive, the world has moved on to chip 4.0.
But you've ordered chip 1.0. So they don't have the same sort of... You know, cows, pretty standard. Big ones, small ones. You know, you kind of get what you get with cows. But chips are really different over time.
I think there's a lot of variety in cows. And I don't know if you've seen Cow 4.0, Katie, but it's an awesome cow.
I grew up on a beef farm and I've seen a lot of cows.
Yeah, I'm sure you have.
Like I say, big ones, small ones, different colors. But I feel like we're going down a rabbit hole here that we don't need to go down.
It's actually a cow hole, technically speaking. No, but seriously, a serious point, if I might venture, is that there are, in addition to the point you just made about the generations of chips, meaning they obsolesce and you want newer, fancier, faster ones. There is also a very live debate in the industry and among people who are skeptical about.
about how long chips will last in data centers, especially GPUs. Like if you run these things hot, meaning you're running your data center 24 hours a day, how long does a high-end NVIDIA GPU last before it turns into a burnt piece of toast?
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