Chip Stocks That Doubled in Q2 Tumble 5-11% to Start Q3

A day after closing out a blockbuster three months on Wall Street, high-flying chip stocks suffered steep declines to open the third quarter.

Memory maker Micron dropped 11%, wiping out $138 billion of market cap. Intel fell 9% and rival chipmaker Advanced Micro Devices dropped 7%.

Those three stocks boomed in the second quarter, adding $2 trillion in combined value. Investors wagered that the artificial intelligence buildout would require an ever-increasing amount of memory as well as more central processors, rather than just the graphics processors made by Nvidia.

The VanEck Semiconductor ETF (SMH), an index that tracks chip stocks, fell more than 5% on Wednesday. A day earlier the fund closed out its best quarter ever, jumping 71% from the start of April through the end of June.

Other big decliners on Wednesday included semiconductor equipment names Lam Research, KLA Corp. and Applied Materials. All three more than doubled in the second quarter. They each fell at least 10%.

One drag on the market was a report that Meta, one of the biggest buyers of AI infrastructure, may be looking to rent out excess computing capacity. That raised fears that AI processing supply may be catching up to demand.

Meta is among a small group of so-called hyperscalers, internet companies spending hundreds of billions of dollars a year building out AI data centers. The move was viewed as a positive for Meta, which gained over 9% on Wednesday after a lackluster second quarter.

Analysts at KeyBanc Capital Markets who recommend buying the shares wrote in a note to clients that the move positions Meta "more into the enterprise side of the market, which could provide more immediate" return on investment.

Richard Saperstein, chief investment officer at Treasury Partners, said he would "stick with the hyperscalers" as the market recognizes their strength in the AI trade.

"Earnings are accelerating, yet multiples are compressing," Saperstein said on CNBC's "Closing Bell." "All I can attribute that to hyperscalers have been valued as capital intensive and asset-heavy versus asset-light."

Whatever concerns may be seeping into some of the infrastructure stocks, they have little to do with the most recent financial results. Micron last week reported a more than quadrupling of revenue in the latest quarter. Its gross margin, the profit left after accounting for the cost of goods sold, jumped to 84.9% in the third quarter from 39% a year earlier.

For traders watching the sector, the question is whether the selloff is a rotation out of crowded trades or the start of a deeper reassessment. The SMH ETF's 71% Q2 gain was built on expectations that AI demand would keep outstripping supply. Meta's rental plan challenges that assumption directly. If other hyperscalers follow, the margin expansion story for chipmakers could narrow. For now, the earnings are still accelerating. The market is just paying less for each dollar of them.