Why Nvidia, Micron, Broadcom and other artificial intelligence (AI) and semiconductor stocks fell on Tuesday

Some of the biggest drivers of the ongoing market rally that began early last year are advances in artificial intelligence (AI). These cutting-edge algorithms and the semiconductors that power them could unleash a wave of increased productivity.

The potential to profit from these advances has fueled the rapid adoption of AI, which has caused semiconductor purchases to soar. However, the chip industry could be among the first to feel the impact of the just-announced pig strike.

With that as a background, AI chip specialist Nvidia (NVDA -3.66%) down 3.9%, maker of memory and storage chips Micron technology (MU -3.28%) fell 3.9%, semiconductor specialist Broadcom (AVGO -2.92%) fell 3.1 percent, and the maker of database and AI chips Oracle (ORCL -1.90%) was down 1.9% as of 2:06 p.m. ET Tuesday.

A check of all the usual suspects — financial reports, regulatory filings and changes in analyst price targets — turned up nothing in the way of any company-specific news to explain the drop in stock prices. That suggests investors have focused on the shutdown of work at some of the largest US ports and what that means for the semiconductor industry and market growth overall.

Image source: Getty Images.

Make hay while the sun shines

On Tuesday, the International Longshoremen’s Association (ILA) began its first full-scale strike in nearly 50 years. The union said tens of thousands of its members began hitting picket lines at ports along the Atlantic and Gulf coasts beginning at 12:01 a.m. Tuesday.

The ports on these two coasts are the destination for more than half of the containerized products imported into the country. If the strike drags on for more than a few days, there could be a ripple effect on the supply chain and, by extension, the wider economy.

Delays in everyday products could reignite inflation, cause shortages and push up prices. The longer the strike lasts, the more likely the chance of economic unrest.

Gov. Kathy Hochul of New York said “the food supply is secure right now,” urging consumers not to store items unnecessarily. While shortages of essential goods such as food and household items are still weeks away, other industries could be affected, including semiconductors.

The accelerated adoption of AI has already made many of the most advanced chips insufficient. Consequently, a shortage of semiconductors resulting from the hog strike could occur sooner rather than later.

Years, not weeks or months

So what is the potential impact on our quartet of companies? In the short term, a disruption in the semiconductor pipeline could slow revenue and profit growth. In the long term, however, any impact would be fleeting at best.

Many AI and semiconductor stocks have rallied since the start of last year as investors feared missing out on the next big trend. If a token shortage occurs due to this strike, it will likely be short-lived and the pent-up demand will remain once the strike has passed.

Investors should remain focused on the long-term opportunity of AI, which will develop over years, not weeks or months. It takes the most advanced semiconductors to power this technology, so the future remains bright for these mainstays of the chip industry.

• Nvidia created the graphics processing units (GPUs) that provide the computing power used in AI systems.
• Broadcom makes many of the semiconductors and ancillary technologies used in data centers and cloud computing, where much of AI occurs.
• Oracle is primarily known for its database services and cloud infrastructure, but it also designs and engineers chips used for AI.
• Micron Technology makes flash memory and storage processors, which are critical components of GPUs that are used for AI processing.

Some of these stocks might seem expensive at first glance, but any premium is well worth it. Nvidia, Broadcom, Oracle, and Micron currently sell for forward earnings of 41 times, 35 times, 27 times, and 11 times, respectively. However, given the accelerated adoption of AI and the corresponding accelerated growth of these companies (all of which offer components that are crucial to the AI ​​revolution), I would rate them all buys.

That said, each of these stocks has increased volatility, and the potential for supply chain disruption could further exacerbate this situation. Investors should brace themselves for a wild ride.