Shares of semiconductor and technology names were mostly bouncing back today, with chip leaders Micron Technology (MU 7.23%), Lam Research (LRCX 3.80%), and Arm Holdings (ARM 0.82%) rallying 7.6%, 3.7%, and 3.6%, respectively as of 12:10 p.m. ET.
Coming off of higher valuations due to artificial intelligence (AI) enthusiasm over the past two years, semiconductor stocks were slammed over the past few weeks as recession and tariff-related fears emerged.
However, today’s milder-than-expected inflation report gave some relief to the group. In addition, there was some mildly positive commentary on Micron from the sell-side analyst community.
A cooler inflation report lifts chips, especially Micron
Today, the Labor Department released the February Consumer Price Index (CPI) report, which monitors inflation for the preceding month. Encouragingly, the CPI was up just 0.2% month over month and 2.8% year over year, which was milder than expected. Meanwhile, on a “core” basis excluding food and energy, prices also rose just 0.2% month over month and 3.1% year over year.
While both annual readings are still above the Federal Reserve’s long-range target of 2%, each annual reading was 0.1 percentage points lower than expected. That was encouraging, as the biggest concern over the past few weeks has been stagflation — a combination of low economic growth, but with still-high inflation. While it appears that the economy may slow down due to fears over tariffs and plunging consumer sentiment, as long as inflation comes down, the Federal Reserve should be able to counter with lower interest rates, which could help to stave off a recession.
While semiconductors are a long-term growth industry, it’s also very cyclical as well. And perhaps no semiconductor stock is as cyclical as Micron. Micron produces memory chips, and the prices of commodity-like memory chips can fluctuate wildly, much more so than logic chips. So, it’s perhaps no surprise to see Micron reacting especially well to signs of economic relief.
Wolfe Research also published a note on Micron today, which may be adding to its gains. Oddly, the analysts lowered their price target from $175 to $150, citing short-term pricing headwinds in the mature PC, smartphone, and auto sectors.
However, there were a couple of silver linings in Wolfe’s note. The analysts still expect a stronger second-half recovery this year as PC and smartphone sales recover, while these devices also grow memory content as consumers and enterprises look to “future-proof” AI applications.
And despite the lower target price, the analysts still call Micron “one of our favorite ideas in semis” due to the growth prospects for high bandwidth memory (HBM), which is used for AI training and inference, over the next two years. Therefore, it’s possible investors are looking through near-term headwinds, which were already known to some extent, and were encouraged by Wolfe reiterating its optimistic longer-term take.
Meanwhile, Lam Research is a semiconductor equipment company with an outsized exposure to memory chip production. So, its fortunes are somewhat tied to Micron’s. Lam management also appeared at industry conferences over the past two days, reiterating a positive picture. CFO Doug Bettinger projected mid-single-digit growth in WFE (wafer front-end equipment) this year, despite macroeconomic fears, and a high-single-digit growth rate over the longer term.
Finally, Arm Holdings has seen an even bigger recent sell-off, perhaps due to its higher valuation. Like Micron, a majority of its business is in the mature segment of smartphones. But also like Micron, Arm is seen as a potential future AI winner, as its low-power CPUs are increasingly used in AI data center applications. Therefore, it’s no surprise to see Arm rallying in a similar manner to Micron, due to its similar exposure.
Semiconductors should be long-term winners, if you can stomach owning them
The semiconductor sector has been a long-term outperformer, but owning chip stocks requires investors holding through lots of volatility. That volatility can come from macroeconomic swings or geopolitical concerns tied up with China. Unfortunately, we are seeing both of those at once right now.
However, with many of these stocks now down 30%-50% from their 2024 highs, now may be a good time to scoop up competitively advantaged industry leaders while they’re on sale. While today may not signal the bottom, the stock prices of best-of-breed names seem heavily discounted if there isn’t a recession.
After all, the AI races don’t appear to be slowing down, and if inflation is finally getting back to target, the future may be sunnier than the recent past.
