Why Nvidia, Micron, Broadcom and other artificial intelligence (AI) and semiconductor stocks collapsed on Tuesday

Some of the biggest drivers of the ongoing market rally that started early last year are advances in artificial intelligence (AI). These next-generation algorithms and the semiconductors that power them could unleash a wave of increased productivity.

The potential to capitalize on these advances has led to rapid adoption of AI, causing semiconductor purchases to skyrocket. However, the chip industry could be among the first to feel the impact of the just-announced dockers’ strike.

With that as a background, AI chip specialist Nvidia (NVDA -3.66%) fell 3.9%, chipmaker for memory and storage Micron technology (MU -3.28%) fell by 3.9%, specialist in semiconductors Broadcom (AVGO -2.92%) fell 3.1%, and database and AI chip maker Oracle (ORCL -1.90%) fell 1.9% as of 2:06 PM ET on Tuesday.

A check of all the usual suspects—financial reports, regulatory filings and changes in analyst price targets—revealed nothing that company-specific news could explain falling stock prices. This suggests that investors were focusing on the work stoppage at some of the largest ports in the US and what that means for the semiconductor industry and the market recovery in general.

Strike while the iron is hot

On Tuesday, the International Longshoremen’s Association (ILA) began its first large-scale strike in almost 50 years. The union said tens of thousands of its members began occupying picket lines at ports along the Atlantic and Gulf coasts as of 12:01 a.m. Tuesday.

The ports on these two coasts are the destination for more than half of the containerized products imported into the country. If the strike continues for more than a few days, it could have a knock-on effect on the supply chain and, by extension, the broader economy.

Delays in the delivery of everyday products could reignite inflation, cause shortages and drive up prices. The longer the strike lasts, the greater the chance of economic unrest.

New York Governor Kathy Hochul said “the food supply is currently safe,” and urged consumers not to stockpile unnecessarily. While shortages of essential goods such as food and household items are still weeks away, other industries could also be affected, including the semiconductor industry.

The accelerated adoption of AI has already left many of the most advanced chips in short supply. As a result, sooner or later a shortage of semiconductors could arise due to the dock workers’ strike.

Years, not weeks or months

What is the potential impact on our quartet of companies? In the short term, disruption to the semiconductor pipeline could slow sales and profit growth. In the long term, however, the impact would be transitory at best.

Many AI and semiconductor stocks have been bid up since early last year as investors feared missing out on the next big trend. If this strike causes a chip shortage, it will likely be short-lived and pent-up demand will remain once the strike is over.

Investors should continue to focus on AI’s long-term opportunities, which will play out over years, not weeks or months. The most advanced semiconductors are needed to power this technology, so the future remains bright for these mainstays of the chip industry.

• Nvidia created the graphics processing units (GPUs) that provide the computing power used in AI systems.
• Broadcom creates many of the semiconductors and enabling technologies used in data centers and cloud computing, where much of AI takes place.
• Oracle is best known for its database and cloud infrastructure services, but it also designs and develops chips used for AI.
• Micron Technology makes flash memory and storage processors, critical components in the GPUs used for AI processing.

Some of these stocks may seem pricey at first glance, but any premium is well deserved. Nvidia, Broadcom, Oracle and Micron are currently selling at 41 times, 35 times, 27 times and 11 times forward earnings, respectively. But given the accelerating adoption of AI and the associated accelerating growth of these companies (all of which provide components critical to the AI ​​revolution), I would rate them all as a Buy.

That said, each of these stocks has elevated volatility, and the potential for supply chain disruption could further exacerbate that situation. Investors are in for a wild ride.