US Chip Stocks Plunge as AI Selloff Ripples Across From Asia

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2:24This week's daily podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. Bruising sell-off in several tech giants, fueling concern that the AI frenzy that has powered the equity bull market might be overblown.

2:38Carol Massar:Yeah, well, we saw the Nasdaq 100 sinking about 3 % earlier. The Sox, the key gauge of trip makers that had doubled from war-driven lows, sliding about 7 % losses. Now it's down 8.3 % since I wrote that earlier. So it's really come under a lot of pressure. And if you take a look at what happened in terms of the trade overnight, especially in Asia, South Korea's cost be plunging 10 % from a record. But that market is so reliant on really two, a couple of big names. That's K-Hynix among them, yeah. Yeah, again, that trade, the chip trade, and the tech trade. So you're wondering, is it a reset, a new narrative?

3:11Carol Massar:I don't know. We'll see what Amanda Lyons has to say. Amanda Lyons is head of research at Energy Group Capital. It's a hedge fund manager focused on energy, natural resources, and power. Amanda covering technology there. She joins us from London. So is it a fundamental change to the AI story? Hi, thanks for having me on. I don't think we're seeing a change in that fundamental AI story, but we have to be a little bit more cautious and a little bit more nervous as these things happen. I mean, if we look at what's happened today, the fundamentals regarding AI haven't really changed. We've had a few headlines out of Korea beyond all of the concerns with the leveraged ETFs.

3:52So we've sort of seen some headlines with Samsung managing to get their HBM4 revenues up, which then has some questions on supply and demand dynamics. But fundamentally, things aren't falling off a cliff. It's more a positioning issue than a fundamental issue at this point.

4:12Carol Massar:But what does it mean if SK Hynix, according to a local media report, let's give it some attribution there, was slowing expansion of AI memory chip production and shifting emphasis to the cheaper commodity DRAM? Like, is that just maybe normal? Like, you know, they're figuring out what their customers need. It's not something more significant or problematic to the AI spend and trade. Well, I think the first thing to look at of the overall supply from that is it's a mixed shift. So we're having the supply dynamic overall doesn't actually change with that. We're just shifting it from product A to product B.

4:48But is it less profitable?

4:50Carol Massar:And does it also say something about AI specifically? Yeah. So the important bit for me or the tell for me in this is that they're acting rationally in a way you would want a company to do is that they're shifting their production to the most to the highest margin, the most profitable part. And this is sort of counter to the narrative we've been having coming out of these memory companies pretty much for this year, where you're having this narrative of this time the cycle is different. This time we're seeing more rational. Whereas actually, when you look at their behavior, they're still trying to maximize profitability.

5:25And then when you try and extrapolate that forward to actual supply, although this headline doesn't change the total amount of supply in the market, you've got to assume that you're going to start seeing increases in supply. And we've already started hearing comments along those levels from all of the memory players, which leads you to believe at some point that supply dynamic shifts from being massively supply constrained to too much supply. And that cyclicality returns to all of these names. And you kind of don't want to be in them at the point that happens. So we're not there yet. But to me, it's sort of the first part of a warning sign.

6:07Wait, this is just when The Wall Street Journal reported that Tim Cook said that Apple is going to raise prices as a result of the higher memory prices. So are we are we did we did we peak in this cycle? No, so I don't think we've hit we've hit that peak yet. I mean, when we can we get to Mike Fon's earnings tomorrow night, I think we're going to get a little bit more color on that. And I imagine they're going to suggest that we're not at that peak point yet. But I think the key point is there is going to be a peak and it does turn at some point. There's sort of been a change in narrative that this is a structural thing and we're going to see peak memory pricing increasing forever.

6:52That's just not going to happen. These are cyclical names. They always have been cyclical and they will be. The length of the cycle might be longer, but it's still a cyclical name. So in the short term, we can see that memory prices and we're hearing it across the board that memory prices are high and have been increasing. And that's why you're getting that headline from Tim Cook. And I expect that we'll hear more. But will that last forever? Is that going to continue to happen? No, at some point it does. It does reverse. I just don't think we're there quite yet. And microphone will give us a little bit more visibility into that tomorrow.

7:26right um that's what i'm looking for across across the board right i gotta tell you in our

7:32Carol Massar:read in this morning um what caught our attentions you talked with members of our print team and you said i would the real test is micron i would watch the rate of change in pricing and any change to capex or bit supply guidance far more closely than the headline beat or miss so it's an important one tomorrow what i want to ask you amanda and i kind of think of our ian king who is kind of our chip god here at Bloomberg, someone who's watched the cycles, reminds us of these cycles that when it comes to semiconductors, demand increases, and then it takes a while for the build, the supplies to meet that demand.

8:08Carol Massar:And then you have oversupply, and then the prices come down. So this is what we're seeing. This is to be expected. We've heard all these companies saying, I need more chips, I need more chips. And so we're starting to get the supply, And that's what we're starting to see. I agree with all of that sentiment. I think that is completely right. And I expect that to play out. I just don't think we're seeing that supply coming online to the extent that is sort of needed to have that play out yet. And I think that's the key word. It's not yet, but it is coming. And I think that's the difference of where we're seeing, you know, Micron as an example, we were at all time highs yesterday.

8:45You look at that, the pullback it's had today. it doesn't even register, almost doesn't register on the chart. It's just that the rise it's had has been so extreme. And that's across the board in that whole semi-landscape. And you're seeing those supply increases come, but it takes a long time to build out that supply. And at the same time, we're still seeing demand increasing. At some point, that reverses. It doesn't feel like we're there quite yet. Amanda, just 30 seconds before we run out of time. After Micron, what's the next big thing that investors need to watch as an indicator of this cycle?

9:20I'm watching for the both Anthropic and OpenAI S1s to come out because that will give us a better idea of this whole AI trade and what the underlying profitability looks like and does it have legs? I think there's going to be a wealth of information in those S1s when we actually get to read them.

9:37Carol Massar:Interesting. You're not the only one waiting to read those. We're all marking our calendars and, you know, whenever they drop. We can discuss it when they come out. We can come back and discuss it then. Hey, we're looking forward to it. Appreciate it. We would love. Amanda, thank you so much. Amanda Lyon, she's head of research at Energy Group Capital. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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12:25Carol Massar:Retail sales data for May that showed that U.S. consumers increased spending in the month across a broad range of retailers despite higher energy gasoline prices. 11 of 13 categories, Tim posted, increases with motor vehicle sales rebounding by 1.2 % and spending at online retailers rising for a fifth straight month. Yeah, safe to say pools are not in their own category. But I think if Mike McKee were here, he would have some sort of statistic that he could rattle off all about the indicator when it comes to pools. There's certainly something that some consumers spend on. An indicator, too, of supply chains, materials, and, of course, labor costs.

12:59Carol Massar:We've got a great guest to talk about this industry. We welcome Sean Gadd. He's president and CEO of the$688 million market cap company, Latham Group. The company's biggest market by revenues by far is the United States, but also sells in Canada, Australia, New Zealand, and elsewhere. He joins us here in studio. Welcome, welcome. Nice to have you here. Great to be here. Thank you for having me. Pools, they sound so simplistic. We get what they are. But tell us about your business and the different product lines. Yeah, absolutely. So Latham is essentially the number one pool manufacturer in the world.

13:31We've got scale in both fiberglass and vinyl pools. And we also sell auto covers, which is a safety device that goes over your pool, protects your investment and also protects the people around the pool and your family. Biggest area of growth for the company right now. What is it? Not geographically, I mean segment wise. Segment wise, we essentially play. There's two parts in which a pool gets in. Someone moves into a home, empty lot, empty space. They want to put a pool in for recreation. That's the number one market. And then there's a secondary market, which is single-family new construction home builders who are using the pool to help offset the interest rates that they're buying down.

14:11So higher rates. Yeah, so what they say is they'll come in and they'll say the standard mortgage is at 6.5%, 7%. They'll buy it down to, say, 5%, and then they'll put upgrades in. And one of the upgrades they'll put in is a pool.

14:25Carol Massar:All right, got it. Um, talk to us about the types of pools. You guys have something called the sand state strategy, which in your earnings call show double digit sales gains in fiberglass pools in your priority Florida market. I got to tell you, those of us who grew up near pools, with pools, whatever, I remember mostly either cement or liner pools. Tell us about fiberglass. I'm a boater and fiberglass, man, that is tough stuff. It is tough stuff. So fiberglass makes up 25 % of the U.S. market. It is the growing substrate that goes into pools. So it's been taking share every year. So it's like a formed entity and you just drop it in.

15:06Basically, you dig a hole and drop it straight in. The advantages over cement, which is 50 % of the market, which we're going after, and that happens to be in the sand states, 50 % share, but it takes sort of 90 days to 120 days to put in. For us, once a consumer decides, I want to be in a pool, within six days we're in and out. Six days.

15:31Carol Massar:Yes. Six days. Six days. So tremendous advantage. And then obviously. Tim's like, wait a minute, how big is my backyard? No, no. 100%. And so the opportunity for Latham, the pool company, is a couple of things. One, we've done very well in the Midwest, northeastern Canada where vinyl is a standard vinyl line of pools and fiberglass. When you think about the southern states, the majority of the pools that go in are cement. And really, it's because they haven't seen an alternative. But do consumers think about the actual material or do they say, I want a pool, they call a builder, the builder has the relationship with you, and that's how they get that type of material?

16:11100%. A consumer engages, a dealer or a builder comes into their kitchen table, sells a product. Because we're the incumbent, we're still the unknown. So essentially, we're a new product in the South. And I say a new product, we've been there for a couple of years, but we are in the new end. We're spending and investing a significant amount of marketing in the Southern markets on our San State strategies. And when you think San State strategies, it's basically Florida to Southern California. Okay. But we're taking a very targeted approach on how we get there. So we're looking at neighborhoods.

16:42So right now in Florida, we're looking at neighborhoods that have a higher propensity for pools. That is price of pool, price of house, household income, age of home, and size of the lot. Once we get the right neighborhoods, we're working with dealers to go in there and position fiberglass.

16:59Carol Massar:Sean, I want to ask you, I mean, weather, I think you guys talked about this too on the call. And I think you talked a little bit about some weather, maybe I'm looking for my notes here, but maybe had a little bit of an impact. But I'm just curious, talk to me about weather in general. Cold seasons are the start of like spring cold. Can it kill a quarter or a year for you? And at the same time, climate change where it's getting hotter, you know, perversely, is that kind of a good thing for your business? Yeah, so one, obviously, we're a cyclical business. Most of the pool building occurs during the spring, summer, autumn months.

17:37So it is a cyclical business. Generally, where it's cold is generally our smaller quarter, so it's not going to kill the year. Yeah. And when you think about that first quarter, we basically missed equivalent to one day of shipping. Okay. So it wasn't by any stretch going to impact us to that degree. What I love about going into the southern states is their season's much longer. And so when you think about where it's freezing cold in Connecticut in March, Florida and Texas and Atlanta are ready to go. So as we penetrate further into the southern markets, we'll be able to balance our business in a much more effective way.

18:12What's the typical cost from soup to nuts for a pool? Yeah, so the basic pool, when you think about that, the average in North America, across North America is$95 ,000. But you can get into a pool anything from$70 ,000. And, of course, it can go away up to$200, depending the pool you want and what else you do when you put in the pool, if you do landscaping, kitchens, et cetera.

18:35Carol Massar:Why is it so expensive? It's basically dig a hole. Hey, if it's that easy, Carol, do it yourself. No, I'm just, is it the material cost? Is it labor? It's all of the above. I mean, I think in reality, during COVID, material costs went up. obviously and hasn't corrected. Labor definitely went up and hasn't corrected. We do a lot of the labor in our factories. It's the advantage of being a fiberglass pool. Is everything done in the U.S.? Everything that's supplied to the U.S. is done in the U.S. So fiberglass, because it's quite hard to freight to a house, you need to be close to your market, which is one of our advantages.

19:12And so when you think about that, we have control of the cost, we have control of the product, and we have control of the quality. So it gives us a great pool.

19:19Carol Massar:Before we leave, just got 40 seconds. We're monitoring the president who is on the ground in Pennsylvania. You seem like the right person to ask, but the Washington Monument Reflecting Pool. Why the heck is there algae? Because anybody who's been around a pool, you throw chlorine, you measure things, you can fix this. Yeah, 100%. So it is a water chemistry thing. I kind of wish we were asked to put it in the pool because fiberglass, again, one of the advantages, it's non-porous. So algae doesn't grow in it. But is it just they need chemicals? Predominantly, it needs chemicals. It's not scratches or things.

19:50It should not be that. So it should be pretty easy to do. Relatively easy, yeah. Yeah, you just get the chemicals and test the water, right? There you go. Definitely got to work on water chemistry.

19:59Carol Massar:All right, good stuff. Come back soon. Will do, love to. Thank you. Really enjoyed this. Sean Gad, he's president and CEO of Latham Group, joining us right here in studio. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 p.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App or watch us live on YouTube. Here with an insider's perspective when it comes to AI, and back with us is Catherine Kostareva. She is CEO and managing partner at Creatio. It's a customer relationship management company that sells software that automates workflows using no code and AI tools.