After a 160% jump: Why did chip stocks plummet and is there a buying opportunity?

After a phenomenal jump of more than 160% in less than a year, the Wall Street chip stock index, SOXX, is losing altitude and has already shed a quarter of its value in a month and a half - with its falls weighing on the leading stock market indices.

What is also particularly prominent is the South Korean market. The KOSPI index plunged today (Wednesday) by 6%, after crashing by 11% yesterday (and another almost 6% last Friday). The South Korean market has become largely dependent on just two stocks: the chip and memory companies Samsung and SK Hynix, which are themselves held by a number of holding companies on the Seoul stock exchange. In fact, these two stocks account for about 55%-60% of the entire market capitalization of South Korea - especially when taking into account that SK Hynix is 20.5% held by SK Square and Samsung is held by Samsung Life Insurance and also by Samsung C&T Corporation, which makes the entire index particularly sensitive to the chip sector. Today, SK Hynix wiped out 12% of its value, while Samsung plunged by 8%. From their last peak last month, the former has lost more than half of its value and the latter more than 40%.

Is this a change of direction or just another bump, as happened, for example, at the beginning of 2025, when the Chinese artificial intelligence model DeepSeek brought down the markets, but only for a short time?

What is leading to the manic depression in chip stocks? "It is a combination of concerns about Chinese competition, a slowdown in investments in AI infrastructure, and the geopolitical tension that led to a jump in oil prices," explains Sergey Vaschonok, a senior analyst at Oppenheimer Israel, who notes the tremendous success this week of the IPO of CXMT, the leading memory chip manufacturer in China. The latter soared on its first day of trading on the Shanghai Stock Exchange by 466% to a value of almost 500 billion dollars, becoming the 25th most valuable company in the world, ahead of giants like Mastercard, Costco, Chevron, Coca-Cola, and Oracle.

He also points to "concerns about a future slowdown in investments in AI infrastructure, due to a significant increase in expenses and damage to cash flow, when even a giant like Google presented a negative cash flow in the last quarter as a result. This will probably not happen even in 2027, but investors are looking ahead, especially in light of the high valuation of chip stocks."

Gilad Keizer, manager of foreign stocks at Migdal Insurance and Finance, adds that "there is currently profit-taking and a rotation of investors to other sectors. In the context of Chinese models, the fear is of the erosion of the technological advantage of the leading companies."

Isaac Idelman, an investment manager for foreign stocks at Menora Mivtachim, points to a series of reports that arrived from China and raised the anxiety level again: "The fear in the market is based on a familiar pattern - in the past, China entered various industries, flooded them with cheap products, and significantly harmed competitors. Investors are afraid that a similar scenario may happen in the chip industry as well."

Dr. Ilan Gildin, a partner at Karni Family Office and former chief economist of the Israel Securities Authority, notes that in addition to all these, there is the "American dilemma." According to him, "Apple is exerting pressure to allow the use of cheap Chinese memory chips and is placing the US government before a complex dilemma of lowering costs for technology companies versus protecting local chip manufacturers, such as Micron. This tension creates high regulatory uncertainty. In addition, the sharp falls in the stocks of leading memory manufacturers from South Korea, SK Hynix and Samsung - which account for half of the Korean KOSPI index that lost 11% on Tuesday and a third of its value at the peak in June - reflect a replacement of growth expectations with a repricing of the risk premium in the sector."

"Exaggerated concerns"

The experts are unanimous that investors have nothing to worry about for now. According to Idelman from Menora, "the picture in practice is complex. The company behind the Chinese model has already announced that it does not have enough chips to meet demand, the capabilities reported in the field of chip manufacturing equipment have not yet been verified, and CXMT (the Chinese issuer) is still lagging in the field of HBM memory, one of the key components in artificial intelligence systems. We saw a similar pattern after the appearance of DeepSeek. At first, there was significant concern about Chinese competition, but later the market calmed down when it became clear that the demand for chips and AI infrastructure remained very high, and that there is still a technological gap in key areas.

"In our assessment, the market will again discover that the demand for chips and AI infrastructure continues to exceed supply, and that China is still not advanced enough technologically to take over the market. On a fundamental level, as of now, there has been no material change in the demand picture or in the status of the leading companies in the industry."

Vaschonok from Oppenheimer argues that "the decline in chip stocks, as usual, reflects exaggerated concerns and constitutes profit-taking after a rally of tens and hundreds of percent. The declines create an investment opportunity in chip company stocks, in light of the high growth potential in the future at attractive valuation levels. Nvidia's stock, for example, is currently trading at a P/E ratio of 15 for next year, an undervaluation relative to the general market, its historical valuation, and growth rates."

Keizer from Migdal agrees that "despite the declines, the fundamental data in the industry remain strong, with good financial reports and continued significant investments in AI infrastructure. In our assessment, this is a natural and healthy correction after a period when the industry's stocks led the gains in the markets and became the main trade of the year." Therefore, he is optimistic about chips "in the long term."

The Israeli representatives in this field are the chip manufacturer Tower from Migdal HaEmek, alongside the chip testing companies Nova and Camtek. All three stocks rise and fall together with the sector, with the fluctuations being particularly extreme in the case of Tower. Last month, it became the largest Israeli company on the Tel Aviv Stock Exchange, when it approached a value of 100 billion shekels, but since then it has already wiped out a quarter of its value at the peak.