Investors in chip stocks grapple with the potential impact of DeepSeek, a Chinese startup's cost-efficient AI model, on semiconductor demand. While Meta and Microsoft's recent earnings calls provided some reassurance, Alphabet and Amazon's upcoming reports are anticipated to shed further light on the situation. Jim Cramer advises caution, recommending a slight reduction in Nvidia holdings ahead of the next week's earnings releases.
Investors in chip stocks, which were battered this week due to concerns surrounding DeepSeek, a Chinese startup's cost-effective artificial intelligence model, found some solace in the statements made by Club names Meta Platforms and Microsoft during their post-earnings conference calls on Wednesday evening. Both companies reaffirmed their commitment to their capital expenditure spending plans, offering a degree of reassurance to investors.
However, with Alphabet and Amazon scheduled to report earnings next week, the near-term outlook on how DeepSeek's advancements might impact semiconductor demand remains uncertain. This ambiguity prompted Jim Cramer to advise Club members on Thursday that he would have trimmed his position in Nvidia, the leading AI chipmaker, if not restricted. While Cramer maintains that Nvidia should be 'owned, not traded', he acknowledged the potential for a decline in demand for Nvidia semiconductors, considered the gold standard in the AI industry, if clients like Club holdings Alphabet and Amazon choose to scale back their orders. He explained during Friday's Morning Meeting, 'Amazon is a frenemy of Nvidia. They use a lot of Nvidia chips, but they also make their own.' He further added, 'I fear Amazon says, 'You know what? We want to wait. We don't want to order as many,' choosing instead to focus on its in-house chips and 'explore third-party' options. As of late Friday, Nvidia shares had declined by 15% for the week, while fellow Club stock Broadcom, a third-party chip designer, had dropped by 9.5% over the same period.Throughout the week, there has been speculation regarding the validity of DeepSeek's claims about cost-efficiency. An industry publication, SemiAnalysis, released a report on Friday suggesting that these claims may not be as robust as advertised. However, Broadcom was able to recover more ground from Monday's plunge compared to Nvidia, thanks to Meta CFO Susan Li's statement on Wednesday's call about anticipating 'further ramp adoption of MTIA,' the Meta Training and Inference Accelerator, co-developed with Broadcom. An increased emphasis by Meta on its own custom chips would significantly benefit Broadcom, according to Jeff Marks, director of portfolio analysis for the Club, during Thursday's Morning Meeting. In a post-earnings analysis of Meta and Microsoft, Goldman Sachs expressed optimism about both Broadcom and Nvidia on Thursday. Similar to Marks, the Goldman analysts highlighted Meta's commentary on its MTIA chip, concluding that it 'bodes well for Broadcom's custom compute franchise.' They added, 'Sustained capital spending by Microsoft and Meta will benefit Broadcom's Networking business.' During Monday's Morning Meeting, amidst the selling frenzy, Jim correctly predicted that Broadcom would eventually be the stock the market rallied around, citing the company's diversified portfolio spanning networking solutions to infrastructure software. Regarding the implications of hyperscaler AI spending on Nvidia, Goldman analysts stated, 'The reiteration of near-term capex budgets by Microsoft and Meta as well as their long-term thinking on scaling laws will be perceived positively by the market.'While this positive sentiment hasn't materialized yet, the Club also remains confident in Nvidia, even as it recommends investors slightly reduce their exposure ahead of Alphabet and Amazon's upcoming earnings reports. Alphabet will report earnings after the closing bell on Tuesday, while Amazon will disclose its quarterly results on Thursday evening.
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