Can record chip stock valuations be justified by current demand?

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Record Chip Stock Valuations Face Scrutiny Amidst AI Demand

While demand for AI hardware has driven record profits for semiconductor companies like TSMC, analysts are raising concerns that current stock valuations may have outpaced this demand. Investors are questioning how much of the anticipated AI growth has already been factored into share prices, suggesting that even strong earnings may not prevent market corrections if expectations have become excessively high.
TSMC Reports Record Profits Driven by AI Hardware Demand

Taiwan Semiconductor Manufacturing Company (TSMC) announced a significant surge in its second-quarter net profit, exceeding 77 per cent and reaching a new record. This performance is attributed to the substantial demand for AI hardware. In conjunction with these strong results, TSMC also revealed plans for an additional US$100 billion investment in Arizona, United States, signalling continued confidence in future growth within the sector.
Analysts Question Extent of AI Demand Priced In

Despite robust earnings and healthy demand, market observers like Stephen Innes of SPI Asset Management note that the Philadelphia Semiconductor Index has seen an approximately 83 per cent rise this year, indicating stretched valuations. Innes points out that while strong earnings can sustain a trade, they cannot entirely prevent a market correction, particularly when an asset becomes widely held. The core of investor concern appears to be not the existence of AI infrastructure demand, but rather the degree to which this demand has already been reflected in current share prices.
Overstretched Expectations Could Lead to Corrections

The sentiment among some market participants is that expectations for the AI sector have been elevated to very high levels. This suggests that even if companies deliver excellent financial results, the market might perceive them as falling short if they do not exceed these lofty expectations. Such a scenario could lead to stock price declines, irrespective of the underlying strength of the company's performance or the demand for its products.

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Can record chip stock valuations be justified by current demand?

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