Chip Stocks Suffer Meltdown as China Flexes AI, Coca-Cola Pops On Earnings Beat

**Zaid Admani** (0:00)
Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Tuesday, July 28th. In today's episode, we'll break down the global chip sell-off and why Apple just passed Nvidia to become the world's most valuable company again. We'll also tell you about China's progress across the entire AI supply chain and why it's freaking out investors. Then stick around to the end of the show to find out how many Google searches are now answered with AI. We got a great show for you today.
Let's go.
Markets got off to a rocky start this week. Stocks opened in the green yesterday, but the rally fizzled by the end with the NASDAQ closing down 0.2% and the S&P finishing flat. When you look under the surface, there's a split happening between semiconductor stocks and everything else. In fact, most stocks in the S&P 500 actually finished higher yesterday, and the equal weight S&P even closed at record highs. But chip stocks got hammered on Monday. The semiconductor index fell 2.2%, with notable losers being Nvidia, which dropped 5% and lost its title as the world's most valuable company to Apple. And that could be a symbolic changing of the guards because Apple is almost like the anti-AI tech company. Investors call Apple the anti-CAPEX trade. So clearly the market is continuing to rotate out of AI stocks. And this is happening all over the world, by the way. South Korea's COSPI index crashed almost 11% today. And their memory giants like SK Hynex and Samsung each fell 13% because of fears that China's CXMT could challenge them for market share in the memory space down the line. Now, we're going to talk more about CXMT in a bit along with all the other AI news coming out of China that's freaking out investors. US stocks continue to sell off today. We're recording this around market open and there are a ton of red, especially for the chip sector. But there is some good news though. Geopolitical tensions seem to be settling down. The US and Iran have paused the fighting again in the Middle East and oil prices keep falling. Brent crude is now trading around $87 a barrel and the 10 year treasury yield also eased to around 4.6%.
Now, all eyes will turn to the Fed meeting tomorrow. The markets are still pricing in a roughly 40% chance of a rate hike at tomorrow's meeting, which is pretty shocking to me. And it tells you just how unpredictable things are right now. Beyond the Fed meeting, we're also getting earnings from Microsoft and Metta after the bell tomorrow, followed by Amazon and Apple on Thursday. So we are getting into the thick of things this week. We're gonna be staying on top of everything happening. So if you're new here, it's a great time to get subscribed to the podcast and tune in every day to stay in the loop.
Let's run through some headlines. And we're talking China and AI. China's AI industry is having a moment right now, and it continues to rattle chip stocks here in the US. Last week, the headline was Kimi K3, the new open weight AI model from the Chinese startup Moonshot AI. And we talked about that model a lot. It appears to come close to the performance of leading models from companies like OpenAI and Anthropic, but they're able to do it at half the cost. That release shocked the market and reopened the debate over how quickly China is closing the gap with the US when it comes to AI. Well, now we have another major development. This time it involves the machines needed to manufacture AI chips. According to the information, a state-backed Chinese company has begun producing their own immersion DUV lithography machines. Now I'm not going to get too technically here, but lithography machines print the circuit patterns onto silicon wafers, so they are a crucial component to manufacturing chips. Right now, the Dutch company ASML dominates this market, but China has been restricted from buying ASML's most advanced machines because of UX export controls. So for the last couple of years, China has spent a ton of money to build their own lithography machines, and apparently they've made some real progress. The first homegrown machines are shipping to Chinese chip makers sometime this year. So that headline was causing panning across the markets yesterday. ASML stock fell nearly 6% yesterday, and it's down another 5% this morning at the time of this recording. Other chip stocks like Lam Research and Sandisk also got hit hard. But this might be another classic overreaction by the market because China still has a long way to go before they catch ASML. Like for example, this Chinese company is expected to ship about five machines this year and about 20 machines next year. ASML on the other hand, shipped 131 of these systems last year alone. Not to mention these Chinese machines still aren't as good as ASML when it comes to performance and build quality. So yeah, the market's probably overreacting in the near term, but I think the bigger concern is China's big picture ambitions here. And also whether US export controls are working to stop China's advancements in AI. It seems like every time the US government tightens their export controls, China gets even more motivated to make their supply chain self-sufficient and remove foreign bottlenecks. Now these export controls were designed to slow China down, but they're also forcing China to build the exact capabilities the US doesn't want them to have. And we're seeing this happen across the AI supply chain, including memory chips. And that brings me to the other big AI story to come out of China this week, which is that the memory chip maker CXMT went public in Shanghai on Monday, and the stock surged over 450% on its first day of trading. CXMT now is a market cap of nearly half a trillion dollars, making it the second most valuable company in China behind Tencent. Now this might just be a case of Chinese investors jumping in on the AI infrastructure hype just like the rest of the world has, but I think CXMT is worth watching here. Not necessarily as an investment because Americans can't really easily invest in this company, but what it could possibly do to the memory market. See CXMT makes DRAM memory chips, which are used for everything from smartphones to computers. And of course AI servers. This market is currently dominated by three companies, Samsung, SK Hynix and Micron. But CXMT has emerged as the clear number four player and business is booming right now thanks to the memory shortage. There are even reports that Apple is looking at using CXMT chips and devices sold in China and other parts of the world. I mean, this is showing up in their numbers. Revenues last quarter jumped from less than $1 billion a year ago to $7.5 billion this year. And the company swung from a loss last year to a $4.9 billion operating profit in Q1. Now I do want to point out, just like with the lithography machines, CXMT is still behind Samsung, SK Hynix and Micron when it comes to making the most advanced AI memory chips called HBM. But this is partly because of US export controls that block CXMT from buying top tier manufacturing equipment. But one of the companies expected to receive China's new homegrown DUV machines is CXMT. So it's possible in the near future, China could catch up to the rest of the world when it comes to making the best chips, when it comes to making the most memory, and also having the best AI models as well. And I think that's what the market is starting to worry about.