AI stocks melt down again. What’s going on?

(CNN) — Tech stock traders can be an impatient bunch. But lately, they’ve grown seriously ticked off about the high price they’ve paid to get into the AI game without the profit boost they were expecting.

The Nasdaq, a barometer for the tech industry, was set to sink another 1.2% Friday, an overhang from yet another massive sell-off in South Korea, whose Kospi index fell 5.8%. The Nasdaq has ended every day this week in the red and has fallen more than 6% from its all-time high set on June 2.

Investors are right to be cautious: AI stock valuations have been flying high for several years, built mainly on the technology’s promise – not the bottom-line profit growth that fuels most companies’ stock price increases.

It’s not that AI demand is in a slump – quite the opposite. But the industry’s explosive growth has forced companies to spend and borrow tens of billions of dollars to build and develop the technology – without the immediate results to show for it.

It’s not exactly Big Tech’s fault. AI has become an incredibly expensive endeavor. Surging demand for the technology has fueled a data center boom, requiring massive numbers of high-powered chips that semiconductor companies can’t produce quickly enough.

That has sent chip prices through the roof, creating a kind of K-shaped AI industry, setting chipmakers’ stocks on fire – and the tech companies powering the AI models sinking.

Microsoft and Meta are in a bear market after losing a fifth of their value from their peaks. The rest of the so-called Mag 7 tech giants – Amazon, Apple, Google, Nvidia and Tesla – are in correction territory, falling at least 10% from their recent highs.

To illustrate the Tale of Two AI Cities: Apple on Thursday announced it would raise prices for MacBooks and iPads because of the memory shortage, sending its stock tumbling more than 6%. Micron, the memory and storage chipmaker, surged nearly 16% Thursday after reporting stellar earnings the night before – because of the boom in demand for its semiconductors.

Those market dynamics are giving the industry pause. OpenAI is considering delaying its IPO because of the recent market volatility that could make it hard for the company to fetch its desired $1 trillion valuation, the New York Times reported Thursday.

The Kospi, half the value of which is made up of just two tech behemoths (SK Hynix and Samsung), tripped another circuit breaker Friday, leading to a 20-minute trading break. The Kospi, which has risen around 90% this year, has been volatile for quite some time. But this week has been particularly topsy-turvy – sinking 10% Tuesday, rising 5% and 3% Wednesday and Thursday, and then tumbling again Friday.

The tech sector has been fueling the stock market rally over the past several years. Despite its slump, the semiconductor industry has more than made up the difference, growing to 19% of the S&P 500’s value.

But rising bond yields and the potential for the Federal Reserve to hike interest rates in the coming months could hurt the tech sector, which is particularly susceptible to pain from high borrowing rates.

So if the tech queasiness becomes a tech sell-off, the rest of the stock market will need to do the heavy lifting. The good news: Non-tech sectors are all up this week.

And even with its reliance on tech, the S&P 500 is only a little over 3% away from its all-time high.

Meanwhile, tech stock traders are tiptoeing around mouse traps, eager to get through June without losing an appendage.

The-CNN-Wire
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