Highflying chip stocks have their mojo back

Rallies in Advanced Micro Devices, Nvidia have helped lift the technology sector.

  • By Amrith Ramkumar,
  • The Wall Street Journal
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A scorching run by two of the best-performing stocks in recent years has buoyed the broader market, helping the technology-heavy Nasdaq Composite (.IXIC) climb to fresh records and cross 8000 for the first time on Monday.

Advanced Micro Devices Inc. (AMD) surged 28% in the six sessions through Monday, while Nvidia Corp. (NVDA) jumped 13%, extending gains for this year. Both stocks edged lower on Tuesday, but their recent rally has helped lift the technology sector by showing strength outside such stalwarts as Apple Inc. (AAPL) and Google parent Alphabet Inc. (GOOG).

Earlier this year, semiconductor shares were caught in the crosshairs of escalating China-U.S. trade tensions. Trade between the world’s two biggest economies is crucial to the chip-making business. The strife led to volatility in the sector after the PHLX Semiconductor Index (.SX) hit an all-time high in March.

But more recently, investors have been encouraged by the plans laid out by China and the U.S. to resolve their spat. The PHLX index has risen in six straight sessions through Tuesday.

That is a sign of market strength, analysts say, because chip stocks often lead the broader market on the way up and the way down.

Investors’ faith in these companies can indicate confidence in the economy since their products are used in several hot areas of growth: data centers, gaming and artificial intelligence.

“When things calm down a little bit, they tend to rebound a lot further,” said Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital.

AMD is the S&P 500’s (.SPX) best-performing stock this year, with a gain of 144%. The company has also gotten a lift from bullish projections for data-center revenue and expectations that it will take server market share from rivals such as Intel Corp. (INTC). It reported last month that quarterly revenue rose more than 50% from a year earlier in the most recent period.

While weak revenue projections from cryptocurrency mining earlier this month caused Nvidia shares to slide after its most recent quarterly results, the company’s latest gaming chips have since boosted sentiment.

It still said overall quarterly sales climbed 40% and that growth in gaming revenue topped 50%, and Wall Street analysts expect the rise to continue.

The PHLX Semiconductor Index has rocketed 111% higher since the start of 2016. Meanwhile, the S&P 500 technology sector is up 82%, and the S&P 500 has climbed 42% in that span. While volatile stock swings can make it hard to determine exactly why AMD and Nvidia rise on a day-to-day basis, analysts say outsize moves can affect sentiment and the broader PHLX index.

“If they’re ripping higher, it’s going to push the index up,” said Stacy Rasgon, an analyst at Bernstein Research.

A further rally in semiconductor stocks could buoy a tech sector that is facing uncertainty.

Some investors worry that gains are too concentrated in the largest technology and internet firms, and Facebook Inc. (FB) and Alphabet are due to leave the S&P 500’s technology group next month for a newly created sector of so-called communication-services companies.

But some analysts are skeptical the recent climb will continue. Some think AMD’s rapid climb in recent sessions was driven by a so-called short squeeze, which occurs when investors betting that a stock will fall have borrowed shares hoping to buy them back at a cheaper price to score profits. If the stock rises, however, those investors often respond by buying back stock they have previously sold to minimize losses.

More than 15% of AMD shares outstanding are shorted, and its rally this year has cost investors betting against the stock more than $2 billion, according to S3 Partners, a financial technology and analytics firm.

AMD and Nvidia also look pricey to some investors. The stocks currently each trade at more than 35 times projected earnings for the next 12 months, compared with 17 times for the S&P 500 and 14 times for the PHLX Semiconductor Index.

Some investors also expect further complications to global trade negotiations ahead of November meetings between President Trump and Chinese counterpart Xi Jinping, which could spur more volatility.

“These stocks do whipsaw a little bit,” Mr. Bajaj said. “It goes both ways.”

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