Semiconductor Stocks Just Had Their Worst Day in Years. Is the AI Chip Boom Cracking, or Is This a Buying Opportunity?

Friday was brutal for chip stocks. The iShares Semiconductor ETF (NASDAQ: SOXX), a broad gauge of the group, sank about 10% to around $540 -- one of its worst single sessions in years -- as investors fled the corner of the market that has powered much of the artificial intelligence (AI) trade. The tech-heavy Nasdaq Composite fell more than 4% -- its worst day since April 2025, and the selling reached well beyond semiconductors.

Helping put some of the damage to the chip sector into perspective, consider some of the dramatic moves in a few individual names. Marvell Technology tumbled about 17% on Friday, and Micron Technology fell about 13%. Additionally, chipmakers Intel and Advanced Micro Devices each dropped around 11%.

A few overlapping forces were behind the drop. But none of them, on its own, says the AI boom is over. Together, however, they gave investors who had ridden these stocks for enormous gains plenty of reason to lock in some of those gains.

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It started with Broadcom

The spark came from Broadcom (NASDAQ: AVGO). The chip and software company reported fiscal second-quarter results (the period ended May 3) after the close on Wednesday.

But there really wasn't any weakness in the chipmaker's results. In fact, they were staggeringly good, featuring record revenue of about $22.2 billion, up 48% year over year, with AI chip revenue surging 143% to $10.8 billion.

The problem was expectations. Broadcom guided for about $16 billion in AI chip revenue for the current quarter and left its fiscal 2027 AI chip revenue target at $100 billion -- not enough to excite Wall Street.

Shares of Broadcom tumbled about 13% on Thursday and even more on Friday, for a total pullback of about 20%.

The sell-off comes even as CEO Hock Tan described demand for XPUs and networking during the company's fiscal second-quarter earnings call as "simply insatiable," and said AI bookings in the quarter topped $30 billion.

Clearly, expectations these days are through the roof.

The selling accelerated Friday morning after the May jobs report. Employers added 172,000 jobs, about double the pace many had expected, and figures for March and April were revised up by a combined 93,000. And the unemployment rate notably held at 4.3%.

Normally, a strong labor market is good news. But with inflation still elevated, a hot report raised worries that the Federal Reserve could lean toward raising interest rates rather than cutting them. The yield on the 10-year Treasury note jumped to 4.54%, and the odds of a rate hike this year climbed. Higher rates tend to weigh most on pricey growth stocks -- exactly the kind that dominate the chip sector -- because more of their value rests on profits expected far in the future.

Priced for perfection

It's also worth remembering how far these stocks had run. Even after Friday's drop, the iShares Semiconductor ETF has more than doubled over the past year, lifted by relentless enthusiasm for AI infrastructure spending.

When a group climbs that much, the bar for good news rises with it, and results practically have to be flawless to justify the price. Friday fit the pattern: Broadcom's results were excellent by almost any measure, yet not quite excellent enough for a market positioned for perfection. Some profit-taking after a move this size seems less like a verdict on AI than a natural pause after an extraordinary run.

So is the AI chip boom cracking, or is this a chance to buy?

One reason to be upbeat is that last week's news didn't include any reports of the AI boom slowing. Even Broadcom's results highlighted a clear acceleration.

Of course, none of this means Friday's drop created an automatic bargain. A stock that has doubled and then slips 10% is still up substantially. And cheaper isn't the same as cheap. For investors who believe AI infrastructure spending has years of growth left, the pullback could be a reasonable moment to begin building small positions in the highest-quality chipmakers -- slowly, and with the understanding that more volatility may lie ahead. But there's always a chance that this sell-off didn't completely resolve last week. Further, given how high stocks' valuations are right now, patience could prove more valuable than speed.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Broadcom, Intel, Marvell Technology, Micron Technology, and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.