Why great earnings haven't been good enough for AI hardware stocks
Stocks that had been posting triple-digit returns are sliding on earnings results.
Key takeaways
- AI hardware stocks, from memory chipmakers to factory firms, are seeing prices fall despite strong second-quarter earnings.
- Sky-high expectations and elevated valuations left stocks priced for perfection, analysts say.
- Many of the stocks now look undervalued, according to Morningstar analysts, with AI fundamentals still at play.
AI hardware stocks, having risen two, three, and sometimes more than four times in value this year, have become victims of their own success this earnings season. These stocks enjoyed a record runup through the first half of the year, as investors bet on the physical infrastructure needed to train, run, and store burgeoning AI technology. These range from compute and memory chip firms to semiconductor manufacturers. But despite reporting massive earnings and revenue growth—in many cases surpassing expectations—stock prices have fallen by double-digit percentages.
Take memory chipmaker SanDisk SNDK, the top-performing name in the S&P this year. The company posted a 50% rise in quarterly sales, but its stock fell 13% over two sessions this week after guidance missed lofty expectations. SanDisk, which at one point was up 750% this year, has fallen some 50% from its peak, though it remains 360% higher over the year to date.
Sandisk’s stumble follows a 10% slide for AMD AMD earlier this week, as the chip firm’s second-quarter sales exceeded analyst expectations but its sales outlook failed to impress. AMD remains up 120% in 2026. It’s been a similar story for shares of Taiwan Semiconductor TSM and ASM International ASM. Meanwhile, stocks that missed analyst targets, such as Broadcom AVGO and STMicroelectronics STMPA, were further punished.
The market reaction signifies a new barometer for the booming AI trade. Beating expectations is no longer enough; investors want evidence that growth can continue. “Second-quarter memory earnings were spectacular but still underwhelmed,” says Morningstar senior equity analyst Phelix Lee. “In all regions, expectations were very high and baked in multiyear double-digit growth.”
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Hardware stock earnings fail to match runaway expectations
Many firms entered the second-quarter earnings season following record rallies, with several stocks up triple digits in the first half of 2026. Even after recent selling, shares of Micron, AMD, and STMicro remain up 100% or more for the year, while ASML and ASM are up nearly 60%.
Two of the year’s most notable AI gainers, Samsung 005930 and SK Hynix 000660, were up almost 200% and more than 300%, respectively, in the first half. However, Samsung’s record 1,800% surge in quarterly operating profit failed to boost the stock, and SK Hynix’s modest miss on revenue and profits sparked a nosedive.
Profit-taking and leverage unwinding hit hardware stocks
The share price declines coincided with a wider march out of chip stocks in July, as persistent concerns over AI spending resurfaced, with many investors opting to take profits following the recent runup. Elsewhere, a confluence of factors, including an unwinding of highly leveraged positions and the downfall of AI investment fund Situational Awareness, added to market declines. South Korea’s chip-dominated Kospi plunged 25% in July, tumbling 17% over three days and triggering repeated circuit breakers as leveraged positions were forced to unwind following a fantastical runup. The index went on to surge 18% in the following session.
“In Korea, retail leverage unwinding was a significant factor but not dominant. In the US, the Situation Awareness meltdown contributed to sentiment. Plus, fundamentally, investors were looking for justifications for return on AI investments, including hardware capex. Taiwan is collateral damage if AI capex slows or investor concerns mount,” says Lee.
Charu Chanana, chief investment strategist at Saxo, says strong conviction in the AI trade, combined with heavy concentration and high leverage, exacerbated recent selling. “Even a temporary market correction can quickly spiral into forced selling and heavy losses,” she says.
“These stocks ran up a significant amount in the second quarter, so they all had sky-high expectations. Any slight miss likely caused them to sell off,” says Brian Colello, senior equity analyst at Morningstar.
AI hardware stocks nevertheless remain one of the leading trades of the year. Korea’s KOSPI and the Philadelphia Semiconductor Index, which also shed 25% in July, remain the year’s joint top performers so far, both up around 60%.
Indeed, Morningstar analysts suggest that the recent correction presents a compelling entry point on some names, provided the stocks can continue or exceed their recent growth rates. Many of the sector’s biggest names are 4-star stocks, trading at discounts to their fair value estimates. Those include Nvidia NVDA, ASML, TSMC, ASM International, BE Semiconductors, SK Hynix, Broadcom, and STMicro. Meanwhile, shares of Samsung, AMD, and Micron are seen as fairly valued. “Now that there’s been a valuation reset, stocks could continue climbing if growth continues at a good clip,” says Javier Correonero, senior equity analyst at Morningstar.
This article originally appeared on Morningstar’s US website.
