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AI DREAMS, MEMORY NIGHTMARES: WHY BEARS ARE CIRCLING SMALL CHIP STOCKS

Smaller U.S. chip stocks have been swept up in Wall Street’s artificial intelligence semiconductor boom, even as rising memory costs threaten earnings forecasts and spur short sellers to ramp up bearish bets.

The AI euphoria has gripped equities markets from Asia to North America over the past few weeks. And despite the rally cooling a bit on Wall Street, the Philadelphia SE Semiconductor Index .SOX is up about 50% this quarter, putting it on track for its biggest quarterly gain since the turn of the millennium in January 2000.

While analysts continue to back the rally, gains have spilled over onto chip stocks that have little to do with AI, some of which have seen their market value more than double in this quarter alone.

For instance, Wolfspeed WOLF.N, which emerged from bankruptcy last year, is up 190% this quarter and bears are taking notice.

Short interest in free-float shares of the chip company has jumped 44.8 percentage points to 72.5% over the past three months, according to data analytics company Ortex.

In addition, Everspin Technologies MRAM.O is up more than 300% this quarter, while Penguin Solutions PENG.O and Navitas Semiconductor NVTS.O have jumped over 100% each.

Short interest in these three stocks has increased by about 1-5.4 percentage points each over the past three months, as per Ortex data, and is at 9.3%, 18.8% and 20.9%, respectively.

Soaring memory costs, spurred by companies prioritizing AI chip manufacturing, were initially seen to benefit larger players, such as SanDisk SNDK.O and Seagate STX.O.

Reflecting the demand, fund manager Roundhill launched earlier this year an exchange-traded fund that invests only in memory stocks DRAM.N.

The ETF is popular among retail investors. It had $55.6 million in retail net buys on Monday alone, according to Vandatrack data, making it the second retail favorite behind Intel INTC.O.

However, higher memory costs could soon turn into a headwind for smaller players as rising inflation pressures overall could make the consumer more sensitive to price hikes.

Companies such as Nintendo 7974.T, Sony 6758.T and Apple AAPL.O have suggested that prolonged elevated costs could weigh on their forecasts as they resort to product price hikes or to absorbing costs.

(Johann M Cherian)

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