Nvidia weakened, Seoul crashed: What ignited the chip panic

If there is one thing that investors in AI and chip stocks have loved to do over the last two years, it is to panic and trigger a collapse in the stocks of these companies. This is exactly what is happening today (Tuesday), as concerns surrounding chip and AI stocks led to declines in Asian stock markets, led by the Seoul stock exchange, which crashed by 11%. On Wall Street, the concern led to changes at the top of the world's largest market cap companies, as a weakening in Nvidia's stock lowered it to second place in favor of Apple, whose stock is strengthening.

The current panic has several prominent triggers, although no event has occurred that could be considered a seismic shift in the industry. One of them concerns Nvidia itself: the cost of insurance against the company's default recorded its sharpest daily jump since the contracts began to be actively traded, against the backdrop of reports that it is conducting talks on AI infrastructure deals worth more than $750 billion. The fear is that the company is taking on too many obligations; its stock fell yesterday by 5%.

Another trigger is the IPO of the Chinese memory chip manufacturer CXMT, which on its first day of trading on the Shanghai Stock Exchange recorded a jump of 466% and reached a market cap of $484 billion. Among investors, the event is perceived as a harbinger of intensifying competition in the global memory chip industry, where Samsung and SK Hynix are the leading players. Accordingly, Samsung's shares recorded a 13.4% decline today and SK Hynix's fell by 14.7%.

But in this context, the panic is not justified. The demand for memory chips is higher than the production capacity of these companies, and although they are investing huge sums in building new production facilities (this week South Korea announced investments and deals by the two Korean companies totaling $950 billion), these are not expected to start operating before 2027. In addition, CXMT does not have the ability to produce advanced chips of the type required in data centers for AI. Expanding CXMT's production scale will bring significant relief to the consumer market, prevent further price increases, and perhaps even allow companies to roll back some of the increases they have made. These are good news for the entire ecosystem.

However, the current concerns are riding on a series of deep-seated conditions in the AI market. Tech giants like Google, Meta, Amazon, and Microsoft will invest close to $700 billion this year in data centers. In the second quarter, Google moved to a negative cash flow, and CFO Anat Ashkenazi noted that AI investments will reach $195-205 billion this year. Alongside the fact that AI companies have yet to demonstrate a sustainable business model, the entire ecosystem is complicated by circular fundraising and investment deals that encourage instability. If demand hits a ceiling, a destructive spiral could be created where tech giants get hit twice.

Despite these concerns, Nvidia continues to tie itself deeper into other companies, including a quarter-trillion-dollar guarantee for OpenAI and a $5 billion investment in Ilya Sutskever's SSI. In this state of volatility, every event shakes the markets. The good news is that if upcoming reports, especially Nvidia's on August 26, meet market expectations, the pendulum will move in the other direction. The bad news is that the markets are expected to continue to be shaken for some time—at least until the bubble that market participants are so afraid of finally bursts.