AI Expectations Hit a Fever Pitch

**Tyler Crowe** (0:02)
Meeting lofty AI earnings expectations today on Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel. We're going to talk about defense companies later in the show, talking about some of the big moves that are happening in the industry lately, and as well as hitting legislative questions. But before we get started today, hyperscalers, those builders of AI, they just keep spending more and more, and semiconductor companies are posting record results, but even that doesn't seem to satisfy the market.
Samsung Electronics reported by what I think any measure would be a resoundingly successful quarter. But the stock dropped so much that it caused a circuit breaker suspension of trading on the entire Korean composite stock price index today. Those losses have carried more or less over into the semiconductor space today, as many memory and processing chip manufacturers are down as of this morning. So guys, how on earth did we go from profits up 19 times compared to this time last year at Samsung to stop the entire Korean stock market?

**Matt Frankel** (1:10)
Yeah. So, I mean, a lot to unpack there. So a lot of these stocks were priced for not necessarily perfection, but to report blowout quarter after blowout quarter after blowout quarter. When you expect a blowout and you get, as you called it, a resounding successful quarter, it's enough to make the stock drop.
We've seen this with several recent earnings reports, and not just in the memory space, and several of NVIDIA's reports look fantastic and the stock ends up falling.
In Samsung's case, yes, you're right, they are expecting a roughly 19 times increase in quarterly operating profit. But that's being driven by AI memory demand. Investors seem to be questioning whether or not the AI memory chip rally has gotten ahead of itself. And it's not just Samsung. If you look at Micron, for example, even before today's kind of sympathy drop, it was down by about 30% since earnings. And that was just a couple of weeks ago. So the company also slightly missed revenue guidance. So it's not a flawless quarter. And there's also SK Hynek's US listing that raised billions and billions of dollars of capital. And that could be adding pressure as memory. There's just more memory stock supply in the market right now. The bottom line is you're right, Samsung didn't have a bad quarter by any definition. But the amount of good news that has been priced into these stocks seems to have gone a little bit too far.

**Lou Whiteman** (2:28)
Yeah, on the market, it's halting the market thing. It's important to note that two companies, SK Hynek's and Samsung make up about 53% of the Korean total market index. So this one company can hold to market kind of. But look, even with this, Samsung is up 150% to date. Others are up more. This seems 100% rational to me. The market is forward looking. We're always looking to the future. This is either going to last forever or it's not. And if it's not going to last forever, at some point, you should take profits. I think that's what we're seeing today. I don't think there's really too much to read into it more than that. I think investors are looking at the same world that I think the rest of us are in, saying, look, this has been great. I don't know if it can go on forever. I'm going to look some gains.

**Tyler Crowe** (3:18)
You know, the thing that's hard for me to also rationalize when we're talking about the expectations game of all of this is that even by most standards, this is looking like from a fundamental basis, like you look at the underlying numbers of capital investment and all that stuff, it still looks incredible. It's almost hard to fathom that this can't meet the appetite of what Wall Street is expecting. I mean, Amazon earlier today announced it was raising about $25 billion in debt. And at very favorable rates, I mean, of course, it's Amazon. What else would you expect? This isn't the first company to do it either. I mean, Alphabet has tapped the debt and equity markets this year. And like nearly all hyperscalers from Alphabet to Amazon, Meta, you name it. They don't even raise an eyebrow or even like the CFO doesn't even seem to like lose a bit of sleep when they're increasing their annual capital spending budgets, seemingly every quarter. So like, how do we rationalize these wild stock moves and what we're saying, playing the expectation games when the fundamentals still look surprisingly strong?