The chip and memory stock frenzy

0:00Katie Martin: From globalization to innovation, sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle to further inform your view. Listen to the Flipside on your favorite platform.

0:31Pushkin.

0:34Rob Armstrong: A new divide is opening up in stock markets between tech stocks and, well, other tech stocks. Investors still just cannot get enough of the whole AI thing. Stocks in the ecosystem of semiconductors or chips to their friends are still ripping higher, absolutely killing it. But software stocks have been getting clobbered. What does that tell you? It's that AI will kill at least a large part of the industry that forged it in the first place. There's gratitude for you. Today on the show, chips and dips. We unpack these divergent fortunes and ask, are chips in a bubble or a super cycle? This is Unhedged, your friendly markets and finance podcast from the Financial Times and Pushkin.

1:23Rob Armstrong: I'm Katie Martin, a markets columnist at FT Towers in London, where it is aggressively hot. Joining me all the way from over there in New York City is Rob Armstrong, my partner in crime, on the Unhedged newsletter with his fancy new glasses. Rob, how's it going? You know where else it's hot, Katie, is in the FT Audio Studio in New York.

1:47Katie Martin: I want all our listeners to imagine a large middle-aged man slowly turning into a puddle in here.

1:55Rob Armstrong: A large middle-aged man in quite a small box, actually. Like, you could probably reach each wall, can you?

2:00Katie Martin: Yeah, just about touch the walls. Not quite, but just about. And today I'm a little sweaty.

2:05Rob Armstrong: Okay, that's a pleasant thought for all of us. So, look, what's going on here? Like, yeah, ships are absolutely off to the races, right? Yeah.

2:14Katie Martin: So we all know that there is a mad rush in the United States to build as many data centers as possible, as quickly as possible, so that we can run AI models on them and do all sorts of wonderful, efficient things with those AI models. the bottleneck or one of several bottlenecks to building all those data centers is having enough chips to support them and it's like every kind of chip you need it's not just nvidia's fancy gpus which are the kind of main central brain for training and using an ai it's also old-fashioned CPUs. It is very much memory chips. It's networking chips. It's, you know, it's the whole range.

3:07Katie Martin: And so everything.

3:08Rob Armstrong: All my favorite types of chips.

3:10Katie Martin: Yeah, exactly. Tortilla chips, corn chips, potato chips, through the roof. And so like there's been wild stuff like, you know, Micron, which makes memory chips, just to pick one example out of a hat, is up almost a thousand percent this year.

3:29Rob Armstrong: Shut up. It's impactful. No, it's not.

3:31Katie Martin: Because they just can't. They cannot make. It's not almost a thousand, but it's in the 800s. And they can't make this stuff fast enough.

3:40Rob Armstrong: So this is like the one that's become a trillion dollar company kind of from nowhere.

3:45Katie Martin: It has become a trillion dollar company. And this raises a lot of interesting questions for the following reason, which is that in one very important respect, computer chips are like cows. So follow me here for a second. The hard thing about the beef industry, the cattle industry, is that production follows prices and production leads inevitably to gluts and then to lower prices. So the price of beef goes up. Everybody's like, holy crow, let's make more cows. And so you make loads of cows and that process of making more cows, which involves getting cows together and all this kind of takes several years.

4:39Rob Armstrong: Mommy cow and daddy cow love each other very much.

4:41Katie Martin: And by the time you have more cows ready to be turned into hamburger, the price has changed. And it's similarly in the chip industry, it is cyclical in exactly the same way. Prices rise. People are like, oh, let's add capacity. Let's make as many chips as we can quickly, quickly. This is actually a process that takes a long time. And then by the time all that, all those chips are made, the prices have fallen. You have a huge gut. You don't have a huge gut. That would be the hamburger.

5:13Rob Armstrong: Well, you might do if you eat all the hamburgers. It's true.

5:16Katie Martin: Good point. You have a huge glut. So, you know, it's like the classic cyclical industry where if you look at price charts or revenue charts or whatever, profitability, it's like this sine wave. that rolls through. And so the question confronting us is, are we merely at the top of a chip cycle, an especially big chip cycle, and we're headed for a glut? Or has the world economy changed in a permanent way, such that demand for chips is permanently higher, and the whole industry is going to re-rate for good and things are different now you know this time is different folks look

5:57Rob Armstrong: it's possible and it's not just micron is it like there's all sorts of different stocks in this center sector that have gone absolutely gaga so the the way that we tend to measure this in markets is the philadelphia semiconductor index the philly index to to its friends you wrote about this today didn't you? It's up what percent over the past year?

6:19Katie Martin: 160 % in the last 12 months, if I have my numbers correct here. And I mean, an interesting fact about this, and we talk about on this show a lot, what's driving that index, which is basically an index of all the big semiconductor manufacturers, the companies that make equipment that makes semiconductors, which are also all those equipment stocks are going bananas. It's like a kind of big industry bucket. What is driving that index higher is earnings. The valuation of the Philly index, known affectionately as the SOX, has not gone up. Earnings are growing so fast that that is what is pushing this up.

7:04Katie Martin: It's not excitement and exuberance saying, oh, let's pay more for these stocks now. It's just like we're struggling to keep up with the enormous amount of money that is flowing into this industry. Of course, there are stocks that have become very expensive, but there's a lot of others that have not. Micron, you know, it's just the it's PE, its price to earnings ratio hasn't changed. It's just earning a lot more money.

7:28Rob Armstrong: This isn't just a vibes thing. That's what is really important about this. Like sometimes when stocks go absolutely stratospheric, it's because something stupid is going on, like the whole GameStop thing or like some sort of meme stock thing. A bunch of retail traders on Reddit have ganged up and decided to buy some stupid stock for some stupid reason. This is not that. This is real companies making so much money they don't know what to do with it. And they've got a huge backlog of orders that they're struggling to stay on top of. And there's a whole bunch of these companies that are just doing unbelievably well.

8:02Rob Armstrong: Yeah. Which brings us to...

8:04Katie Martin: Wait, wait. Let me just reframe. I think you've made an excellent point. and I'd just reframe it like this. We know that the stocks aren't in a bubble, but the industry might be. In other words, it might be revenues or earnings that are in a bubble. So it may be that the revenues and the earnings back up the stocks, but is the revenue and the earnings sustainable?

8:29Rob Armstrong: Also, chips are unlike cows in several important respects. And one of them is you order a chip, chip version 1.0, right? At the time, it is the world's fanciest chip. And you say, I'm going to have a bunch of these chips and you order them. And then they take ages to arrive because everyone else is ordering the same chips. And so by the time they arrive, the world has moved on to chip 4.0, but you've ordered chip 1.0. So they just, they don't have the same sort of, you know, cows, pretty standard, big ones, small ones, you know, you kind of get what you get with cows, but chips are really different over time.

9:06Katie Martin: I think there's a lot of variety in cows, and I don't know if you've seen Cow 4.0, Katie, but it's an awesome cow.

9:16Rob Armstrong: I grew up on a beef farm, and I've seen a lot of cows.

9:19Katie Martin: Yeah, I'm sure you have.

9:21Rob Armstrong: Like I say, big ones, small ones, different colors. I feel like we're going down a rabbit hole here that we don't need to go down.

9:27Katie Martin: It's actually a cow hole, technically speaking.

9:31Rob Armstrong: The point I want to get to is...

9:33Katie Martin: A serious point, if I might venture, is that there are, in addition to the point you just made about the generations of chips, meaning they obsolesce and you want newer, fancier, faster ones, there is also a very live debate in the industry and among people who are skeptical about how long chips will last in data centers, especially GPUs. Like if you run these things hot, meaning you're running your data center 24 hours a day, how long does a high end NVIDIA GPU last before it turns into a burnt piece of toast?

10:09Rob Armstrong: How many cat videos can it make before it dies?

10:13Katie Martin: Can it make before it dies? There is real demand for this stuff.

10:17Rob Armstrong: Oh, yeah, yeah, yeah.

10:18Katie Martin: Now, maybe it's cat videos and maybe it's businesses. Maybe it's the Pentagon. I don't know. But it's growing. Demand for this stuff is growing. And so I'm disinclined to wave this away as just another hype cycle or just another cycle for the AI industry. I am inclined to believe that something has changed here and that that is going to change the way this industry works. But, you know, I don't have a crystal ball. I don't know the future of the AI industry, but it seems like it has legs right now to me.

10:53Rob Armstrong: I want to get on to one of our favorite things, which is charts on the radio. So you've got chip stocks that are just going absolutely bananas, like up to the moon. The thing that that is happening largely at the expense of is software stocks. which so we saw a real outbreak of this in was it february when suddenly everyone got worried about ai eating software you don't need coders and you don't need code right if if these fancy ai chips can just like enable ai machines to just do it themselves um so this is what's happening now right you've got this real bifurcation between chip stocks up to the moon software stocks getting hammered.

11:39Rob Armstrong: What's going on there?

11:40Katie Martin: Well, the idea, especially with business software, is that with the help of AI, every business will be able to build their own internal software for themselves. And it will be perfectly functional and actually superior to the stuff that comes out of the box from like a Salesforce or an SAP or somebody like this. And so those companies that sell software as a service, which were, you know, five years ago, everybody's favorite stocks, they have gotten absolutely whacked. I should say that not everybody agrees this is true. Like the idea that you're just going to whip up your own, you're going to throw out your SAP implementation and whip up your own inventory management software, you know, just like in an afternoon with a couple of interns does seem a bit far-fetched.

12:37Katie Martin: And there's a lot more to software than just coding. But this worry has gripped markets and it continues to grip markets. So it's chips up software down. And we should note that this has made the market even narrower than it has been up until this point. So I did a little bit of mathematics on the back of the envelope yesterday.

13:00Rob Armstrong: Did you get AI to help you?

13:02Katie Martin: I did not. I did it manually. I used an abacus and a blunt pencil.

13:08Rob Armstrong: A bit of slate.

13:12Katie Martin: But in the last month, chip stocks and memory stocks make up about half of the gains on the S &P 500.

13:21Rob Armstrong: Yeah, it was all good.

13:22Katie Martin: And so, you know, it used to be that it was a kind of a tech market. Now it's within tech. It's a certain sector that is powering things. And I should note there was an excellent article in this week's Economist about how the narrowness that we see in the American stock market is not the end of it. For certain economies, Japan, South Korea, Taiwan, the semiconductor value chain is the part of the economy that's growing. And the rest of their industrial economies are like suffering a terrible China shock. And so if the semiconductor industry globally does a wily coyote and goes flying over the cliff while it's still running, you're not just going to have a problem in the U.S.

14:12Katie Martin: stock market. You're going to have recessions in some pretty big, important economies.

14:17Rob Armstrong: There are other tensions at the heart of this AI trade and this whole AI build out and this super cycle, if it is that. There's a whole bunch of these tensions. One of them is that in order to keep pulling in money, AI companies need to do a couple of things. They need to be able to say to ordinary companies, we can make you really efficient and you don't need humans anymore and you're going to be incredibly productive and amazing. And they also need to say, we're going to charge a fortune for this stuff, right? We reckon ordinary people and companies are all going to pay loads of money to use this AI stuff.

14:53Rob Armstrong: But then they turn around to the general public who are like, wait, so you're saying, first of all, that I'm out of a job. And second of all, I'm going to have to pay loads of money for this technology. How does that make sense? You know, we are seeing scattered in different parts of the world the start of a real backlash to AI. There's lots of parts of the states, for example, where these permits for huge data centers have been given. And the people who live in these places are like, no, I don't want a data center the size of Manhattan to be built next to my house. Thanks very much. And we're seeing like all these commencement speeches at U.S.

15:31Rob Armstrong: universities where, you know, people are giving them giving speeches about how marvelous AI is. And the students are booing them off stage. And, you know, there just seems to be a kind of social and political potential backlash to this stuff that really conflicts with the stock market narrative.

15:50Katie Martin: Katie, what was the name of there was this paper that somebody wrote that started this freak out about AI. The Citrini report. The Citrini report. Now, the Citrini report was a very, very bad piece of economics for the following reason. It envisioned a future in which there was a massive amount of production thanks to super powerful AI making loads and loads and loads of stuff and a future in which everyone was fired. But in a future where everyone is fired or a lot of people are, there can be no – there won't be a lot of consumption because people won't have any money. And it doesn't make sense to posit a future where there's loads and loads of production without loads and loads of consumption.

16:36Katie Martin: because consumption and production have to match. Right? You know what I mean? So, you know, the people who are not worried about the AI future say simply this. The workers, it's not a lump of labor. The workers who are liberated, in quotation marks, from their terrible drudgery jobs, making podcasts or whatever it is, go on to do something else. They're freed up to find some new creative thing to do. The economy changes. And we all adjust. And this, by the way, is what has happened in the past with revolutionary new technologies, internet, personal, computer, telephone, car. Fine. The question I would say about this is the sequencing.

17:22Katie Martin: Like when do the firings happen or the disappearance? Let's call it the disappearance of certain jobs. And when do the new jobs and the new forms of income appear? because if those come in the wrong order, it's going to be an unpleasant decade for some of us. You know what I mean?

17:42Rob Armstrong: We don't know how to do anything else, for example.

17:45Katie Martin: Yeah, no, that's a problem for us.

17:46Rob Armstrong: We barely know how to do this, let's face it. But there's also a big question about how do we as societies distribute the wealth that comes from AI. So it was a really interesting story in the FT this week from South Korea. Samsung Electronics. Over there, workers have approved a landmark profit-sharing agreement that's expected toward employees in the booming memory chip division an average bonus of nearly$400 ,000 each. And it's a way to share the spoils of this AI bonanza. Now, I imagine in Silicon Valley, this is getting a flat. I don't think so, boys and girls. But in other parts of the world, this is a live debate.

18:36Rob Armstrong: Why should all the benefits of AI accrue to some hideous billionaires? And why shouldn't they be spread more fairly around workers and society? I don't have the answer, but I know it's a good question.

18:49Katie Martin: Yeah, it sure is. And, you know, there is, if nothing else, the people running these companies, the OpenAIs and the Anthropics and everyone else, they better think more carefully about their messaging than they have so far. Because, boy, are they falling over their feet right now. And they are not making themselves popular. And they've got to rethink how they're approaching this whole situation.

19:18Rob Armstrong: Yeah, we're great because we're going to fire people is not politically very palatable.

19:24Katie Martin: It's not a winning corporate message. No. Congratulations, you're fired. Yes. Courtesy of Anthropic.

19:31Rob Armstrong: Yeah, be happy about it. Really quickly on that, another thing Anthropic has been doing is it's created this advanced AI model called Mythos that it was going to release out to the general public. And then they realized that this thing was just too powerful. Now, are they tooting their own horn? I don't know. But the idea is that this AI machine is potentially so powerful that it can hack all the banks and bring down the energy systems. And, you know, it could do, in theory, pretty much anything. So instead of releasing it to general release, it's being tested out by a few private sector companies, which I'm not sure I'm hugely a fan of.

20:09Rob Armstrong: But nonetheless, it's not a silly question to ask, is supercharged AI going to cause a mass cyber security event? Is it going to cause a mass hacking? Is it going to cause a financial crisis? This is something that should be not necessarily something you worry about every day, but it should definitely be on your radar screen somewhere. I think the kind of tail risks around this whole economy need serious thought.

20:40Katie Martin: And one, you just mentioned that it takes all kind of digital security and throws it out the window. And that also has to be rebuilt. Our colleague Hack Young wrote a piece yesterday for the newsletter about how the whole supply chain underlying this digital revolution is very concentrated, very interrelated, very geographically concentrated, dominated by monopolies or duopolies. And, you know, one or two links in this thing break and we're going to have a serious economic problem to say nothing of what will happen to markets. So there is I think you're right to point this out. It's there's just a great concentration of low probability, high damage risks.

21:31Rob Armstrong: Yeah.

21:31Katie Martin: That a very concentrated economy brings along with it.

21:35Rob Armstrong: Speaking of which, there was an executive order waiting on Donald Trump's desk to sign, limiting some of the power of AI and asking it to various companies in that space to submit themselves to checks on the security around them. Anyway, Donald Trump decided not to sign it because he quotes, did not like it. So that's that sorted. All right. So good. Shuffle my paper. Wait for the sky to fall in. In the meantime, we're going to be back in just one second with Longshore.

22:15Katie Martin: markets move fast get the insights you need in 10 minutes with barclays brief a podcast from barclays investment bank each week our experts analyze market themes helping you anticipate what's next listen to barclays brief wherever you get your podcasts

22:31Rob Armstrong: okie doke it is time for long short that part of the show where we go long a thing we love or What shorter thing we hate? Rob, what are you saying?

22:40Katie Martin: I'm short world peace. And in particular, peace in the Middle East. I don't know anything more about the situation there than any other reader of the FT does. But you read the coverage and Iran and the U.S. just are miles apart and not getting any closer.

23:03Rob Armstrong: We're just going round and round in circles on this. Yeah, round and round in circles.

23:08Katie Martin: So I'm growing cynical about the prospects for this process. You're growing cynical. I'd be interested to hear from listeners what they think. But, you know, I think the market is too optimistic about this.

23:20Rob Armstrong: Yeah. I am long Johnny Ives' new Ferrari model. Have you seen this? You're long it. Everybody else is short it. Well, do you know what I like about it? First of all, it's just a car. I mean, like, it's fine. People are like up in arms about how hideous it is. And I think it's just a car. I'm not going to buy it. It's like 500 grand or something. But also very, very fast. It goes fast. It's a car. I'm long it because I think some of the online trolling has been extremely amusing. And because I think it looks fine. It's 500 grand's worth of fine.

23:57Katie Martin: My next 500 grand, I'm going to buy you one of those. You're going to look great.

24:00Rob Armstrong: Beautiful. I very much look forward to that. Okay. So listeners, very good news that Rob's going to buy me a car. We are going to be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhears. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.