Apple supplier Foxconn Industrial’s sell-off highlights vulnerability of AI shares frenzy

Wednesday’s sell-off was sparked by speculation that Nvidia had scrapped a lucrative contract with Foxconn for failing to meet the delivery deadline
Feverish demand for shares of AI and related stocks was triggered by the launch of ChatGPT and a slew of similar chatbots in recent months

China stock market

Zhang Shidongin Shanghai

Published: 5:30pm, 20 Apr 2023

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Wednesday’s dramatic sell-off of Foxconn Industrial Internet, the Shanghai-listed unit of iPhone assembler Hon Hai Precision, may be a sign that the recent frenzy for artificial intelligence (AI) shares is on its last legs, according to analysts.

Foxconn Industrial rebounded 10 per cent to 19 yuan on Thursday, recouping the previous day’s 10 per cent slump, which was the maximum daily movement allowed by the stock exchange. Its realised 20-day volatility rose to a record high, according to Bloomberg data.

The sell-off was sparked by speculation in the market that the American graphic-processor maker Nvidia had scrapped a multibillion-dollar contract with Foxconn Industrial for failing to meet the delivery deadline. The company quickly dismissed this as ungrounded in an exchange filing on Thursday.

The rare, wild price swing of Foxconn Industrial, whose shares have been in the doldrums since its Shanghai debut in 2018, underscores how the red-hot AI trade is now becoming vulnerable even to rumour-mongering.

The feverish demand for shares of AI and related stocks was triggered by the launch of ChatGPT and a slew of similar chatbots in recent months.

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A gauge of AI stocks compiled by data provider Shanghai DZH has surged more than 40 per cent this year.

Shares of Foxconn Industrial have more than doubled in 2023 on bets that an acceleration of AI investment globally would boost demand for its products, from servers to cloud computing.

The company supplies components to major tech players such as Apple and Huawei Technologies.

“For the AI trade, it has most probably progressed to the late stage of valuation expansions and its volatility is increasing this month,” said Wang Jun, an analyst at BOC International in Shanghai. “A pullback seems inevitable and the market will be more focused on the earnings visibility in the earnings season.”

Signs of excessive speculation around tech stocks have been visible for months. Transactions of their shares accounted for almost half of the combined daily turnovers of the Shanghai and Shenzhen exchanges in March, and state media including the Economic Daily have called for more regulatory scrutiny to rein in speculative trades.

The mildness of China’s economic recovery has also contributed to the AI stock frenzy, prompting investors to shift away from the so-called reopening trade.

The AI bets are facing other headwinds that could derail the rally. China’s internet regulator this month unveiled a draft framework targeting ChatGPT-like services, banning moves that infringe on personal privacy and intellectual property.

Meanwhile, a slew of major shareholders are taking advantage of the sky-high stock prices to offload their stakes. For example, semiconductor equipment maker Advanced Micro-Fabrication Equipment said this week that two big shareholders planned to sell as many as 12 million shares, or a 2 per cent stake, in the next six months after its Shanghai-listed shares jumped more than 90 per cent this year.

Foxconn Industrial’s share price has now outperformed its 12-month price target for the first time in two years, according to Bloomberg data. Analysts set the share-price estimate at 17.52 yuan, an almost 8 per cent decline from the current level, the data shows.

Taiwanese billionaire Terry Gou Tai-ming’s Hon Hai Precision controls 36.7 per cent of the company through a wholly-owned unit.

The company ratcheted up its expenditure on research in semiconductors, big data and robots last year in a fresh drive for growth. Net income rose 0.3 per cent to 20 billion yuan (US$2.9 billion) in 2022.

“The market has mainly been trading on the AI theme since March but its earnings have yet to be verified,” said Zhang Yusheng, an analyst at Everbright Securities. “Some rotation in the market may be in store after the release of first-quarter results.”

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