Volkswacht Bodensee - Why are tech stocks tanking?

South Korea's Samsung Electronics fell more than 12 percent and Japanese memory chipmaker Kioxia was down 18 percent, while Taiwanese giant TSMC slid 3.0 percent.

The declines followed losses by major US semiconductor stocks, after a report said a company was making specialised ultraviolet etching machines to boost China's chip industry.

Here are the main factors behind the most recent tech rout:

- Chinese chip tech -

Wall Street chip shares sank Monday after tech news outlet The Information reported that a Chinese state-backed company was making immersion deep ultraviolet (DUV) lithography machines.

These systems can etch miniscule circuits onto silicon to create microchips that power AI as well as all sorts of everyday electronics.

DUV is less advanced than so-called extreme ultraviolet (EUV) lithography, a technology mastered only by the Dutch firm ASML.

The sale of ASML's EUV machines to China is banned by US trade restrictions designed to keep American tech in the lead, but China is also reportedly in the early stages of producing its own EUV.

"China's domestic lithography advances bypass Western supply chains entirely, hitting equipment makers hardest," Angela Harmantas at Proactive Investors wrote.

Etching chips with DUV "is slower, lower-yield and more expensive than EUV production, but it is proving sufficient for near-frontier chips, unsettling policymakers and investors who had assumed China faced tighter constraints".

- Overheating concerns -

Harmantas said the declines "also reflect broader valuation concerns" in the technology sector.

AI-related shares have skyrocketed recently, with SK hynix gaining more than 500 percent over the past 12 months, for example.

But that has fuelled concerns over overheating, and questions over when the eye-watering amounts ploughed into developing AI and building new data centres will reap returns.

"High expectations tied to AI infrastructure spending have left sector rallies vulnerable to profit-taking amid shifting macroeconomic conditions," Harmantas said.

Experts have warned that if the AI bubble pops, the fallout could be bigger than anything Wall Street has ever seen.

Analysts also warn of circular financing -- where big tech companies invest in AI startups, which then use that money to buy big tech's own products and services.

- Debt risks -

Around half a year ago, big tech companies were buying back their own shares -- a move that signals excess cash and drives up their stock price.

Now they're taking on debt to fund their AI buildout, in a significant reversal that could prove painful if interest rates are hiked.

"The first leg of the artificial-intelligence boom was financed with cash, confidence and some of the strongest balance sheets in corporate America," wrote Stephen Innes at SPI Asset Management.

But "the AI buildout is climbing onto a steeper section of track just as the gap between capital spending and internal cash generation narrows", he warned.

Innes cited a Goldman Sachs research report predicting that big tech debt issuance would rise from roughly $250 billion in 2026 to around $400 billion next year.

- Earnings season -

Record profits from supply chain giants like TSMC used to boost the stock markets as investors bet big on the expansion of the AI industry.

But this time around, in mid-July, TSMC announced a 77 percent year-on-year net profit surge, only to see its stocks drop the next day.

Results are expected this week and next from the likes of SK hynix, Samsung Electronics and Japanese tech investment vehicle SoftBank Group.

Dilin Wu, research strategist at Pepperstone, told Bloomberg News that "the bar is just extremely high right now" for tech earnings.

"Part of what we’re seeing today is probably traders trimming ahead of results rather than waiting to find out," she said.

H.Gerber--VB