Stock prices adjusted despite good performance of semiconductors… AI demand remains solid Healthcare ETF rises 5.35% in one week... Diversification of investment destinations
Artificial intelligence (AI) semiconductor companies are reporting record performance, but Wall Street's buying trend is expanding to other industries. While semiconductor stocks fell day after day, large pharmaceutical companies rose to reported levels, and distribution companies and small and medium-sized stocks also showed strength. Investors who had focused on the growth potential of AI are now broadening their investment targets by considering companies' profitability and cash generation capabilities.
The growth of the AI industry has not slowed down. TSMC, the world's largest foundry (consignment semiconductor manufacturing) company, saw its net profit increase by 69% in the third quarter compared to the same period last year, and major memory semiconductor companies such as Samsung Electronics, SK Hynix, and Micron are also continuing their growth thanks to increased demand for high-bandwidth memory (HBM) and server DRAM. ASML, a Dutch semiconductor equipment company, has already had customers inquiring about equipment supply for 2029-2030.
#### Semiconductors fell for 7 consecutive days... Large pharmaceutical stocks hit new highs
On the 15th (local time) in the New York Stock Exchange, the healthcare industry rose 1.84%, recording the highest increase among the 11 industries in the Standard & Poor's (S&P) 500 index. XLV, a healthcare industry exchange-traded fund (ETF), rose 5.35% in the past week.
The rise of large pharmaceutical companies was notable. Eli Lilly, which leads the obesity treatment market, rose 3.6% on this day, recording the third highest closing price ever. AbbVie also finished trading at $284.40, close to its all-time high. Gilead Sciences and Amgen also rose 7.7% and 7.0%, respectively, over the past five trading days.
Eli Lilly and AbbVie's strength lies in the sales base they have already secured. Eli Lilly is simultaneously expanding sales of obesity treatments and developing follow-up new drugs, while AbbVie is continuing its growth centered on its flagship immune disease treatment 'Skyrich'. Unlike biotech companies in the development stage, whose corporate value varies greatly depending on clinical results, large pharmaceutical companies that generate sales from existing drugs led the stock price rise.
Even in the same healthcare industry, the differences are clear. XBI, a U.S. biotech ETF, fell 2.8% in the past month. Companies that generate cash from existing products are evaluated relatively better than companies that must raise funds needed to develop new drugs from outside.
Retailer Wal-Mart also showed strong performance due to its price competitiveness and expansion of its online business. Deutsche Bank upgraded its investment opinion to 'buy', predicting that Walmart's market share will increase as inflation continues. The target stock price was also raised from $113 to $136. The growth of highly profitable businesses such as e-commerce, advertising, and membership was also evaluated positively.
The upward trend also spread to small and mid-cap stocks. The S&P 500 equal-weighted index-related ETF rose 1.4% on this day, and the Russell 2000 index, which focuses on small and mid-cap stocks, rose 1.38%. On the other hand, the Nasdaq index, which has a high proportion of large technology stocks, rose only 0.08%. In the U.S. stock market, which has been led by a small number of large technology stocks, the range of rising stocks is expanding.
#### Stock price remains cold despite record-high performance… Eyes focused on AI investment costs
The semiconductor industry itself is still strong. TSMC's net profit in the third quarter was NT$763.1 billion, an increase of 68.7% from the same period last year. Sales increased 50.9% to NT$1.4942 trillion, and the advanced 2-nano process accounted for 8% of total wafer sales. The gross profit margin also reached 66.4%.
Long-term demand for semiconductor production facilities is also solid. ASML predicts that even if it expands production capacity in 2027-2028, it will be difficult to meet all of its customers' equipment demands. It is increasingly likely that the race to secure AI semiconductor production capacity will continue for several years.
However, good performance did not guarantee a rise in stock prices. The Philadelphia Semiconductor Index fell for 7 consecutive trading days on the 15th. Nvidia fell 1.8%, and AI server manufacturers Dell Technologies and Hewlett Packard Enterprise (HPE) fell 6.9% and 7.1%, respectively. TSMC also fell 1.8% in the U.S. stock market even after announcing its highest quarterly net profit ever.
What Wall Street is considering is not just the size of AI investment. Attention is also focused on the financial capacity to cover huge investment costs. Coreweave, an AI cloud company, had operating cash flow of $679 million in the second quarter of this year, but facility investment amounted to $9.4 billion. Recently, as the corporate bond distribution yield exceeded 15%, concerns about the burden of financing have increased.
Unlike TSMC, which maintains high profit margins and expands cutting-edge semiconductor production, AI data center operators must first invest in facilities and equipment and then recover costs over a long period of time. This is why, even within the AI industry, the financial conditions of semiconductor manufacturing companies and infrastructure operating companies are significantly different.
Jed Ellerbrook, portfolio manager at Argent Capital Management, said, "AI-related companies are leading the growth of the U.S. economy and stock market, but investors are showing a cautious and selective attitude, unlike in the past tech stock craze."
The fact that demand for AI semiconductors is solid and whether AI-related stocks will continue to dominate the market are separate issues. Wall Street is examining the financial capacity of AI companies that are continuing to make large-scale investments, while also looking for new growth opportunities in other industries such as pharmaceuticals and distribution.
