Chip Stocks Are Tumbling. Is It Time to Sell Cerebras, Broadcom, and Nvidia?

The past month or so has not been kind to many chip stocks. Investors have grown increasingly worried that some have become overvalued and may not be worth holding. That's sent the share prices of Nvidia (NASDAQ: NVDA), Broadcom (NASDAQ: AVGO), and Cerebras (NASDAQ: CBRS) lower over the past several weeks.

But does this volatility among semiconductor stocks really mean you should get out of these three companies?

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A strong IPO isn't saving Cerebras right now

Cerebras just went public a few weeks ago, with an IPO price of $185 and an opening trading price of $350. However, after an initial share price surge, Cerebras' stock has shed about 18% since May 15 (the day after its IPO).

The company designs and manufactures massive wafer-scale chips -- each one about the size of a dinner plate -- that put the equivalent processing power of a cluster of GPUs into one large integrated chip. This new approach to semiconductors has put the company in competition with Nvidia, which (like most other chip companies) turns each silicon wafer it uses into hundreds of smaller processors, rather than one large one.

Cerebras says that its large-wafer technology is more efficient for artificial intelligence (AI) inference, making it a better fit for the next phase of the technology.

Shareholders who are thinking about selling right now may want to reconsider. While the company has its risks -- it's not profitable on a generally accepted accounting principles (GAAP) basis, and its shares are very expensive -- its unique approach to AI processing has quickly gained popularity among AI companies.

Consider that OpenAI says it will spend $20 billion on Cerebras' processors over the next few years, and Amazon is already integrating them into its AWS AI cloud services. Cerebras shares come with a premium price tag right now -- it trades at a price-to-sales (P/S) ratio of 97 compared to the tech sector's average of about 8 -- but having a small position in this novel AI company could pay off if more companies shift to its large wafer tech.

Investor expectations for Broadcom were too high

Broadcom stock has been on a strong run -- it's still up 55% over the past 12 months. But some investors changed their tune about the company after it reported its fiscal second-quarter results at the beginning of June.

Non-GAAP earnings per share of $2.44 beat Wall Street estimates, and AI semiconductor revenue surged by 143% to $10.8 billion. Broadcom's management also reiterated its previous estimate of $100 billion in AI chip sales for the year.

But investors were hoping that management would raise its AI chip guidance. And they didn't like that the company's total sales of $22.2 billion came in slightly below the analysts' consensus estimate of $22.27 billion.

But the sell-off that followed was likely an overreaction. Broadcom's application-specific integrated circuits (ASICs) still play a unique role in AI processing, allowing its customers to design processors to handle precisely the workloads that come from their AI models. Alphabet, Anthropic, OpenAI, and Meta Platforms are some of Broadcom's key customers.

Its semiconductor gross margins are high -- around 70% in the second quarter, which helped drive Broadcom's net income up 88% to $9.3 billion.

What's more, now that the stock has tumbled over the past month, it's carrying less of a premium. Broadcom's stock now trades at a price-to-earnings ratio of about 65, down from around 88 several weeks ago.

With its strong margins, long list of AI clients, and unique AI processors, owning Broadcom still looks like a good long-term bet.

Nvidia is facing increasing competition, but don't count it out just yet

Of course, Nvidia remains a leading semiconductor company, but it, too, is facing some investor skepticism right now.

Large tech companies have committed to investing hundreds of billions of dollars into AI infrastructure annually, and the pace at which they're laying out those funds has been increasing, but some onlookers have grown increasingly concerned that this spending spree could end soon. They're also aware that Advanced Micro Devices, Broadcom, and Cerebras offer AI chip alternatives to Nvidia.

They're not wrong to assume that this torrid spending won't last forever, and some investors have begun selling their shares of Nvidia to lock in their gains.

There's nothing wrong with that strategy, but it could be a mistake to assume Nvidia won't be able to hold on to its dominant position in the AI accelerator space. The company currently has a market share of 88% in data center GPU sales.

Nvidia is also looking toward the future of AI, in which it believes everything from PCs to cars and robots will have some level of autonomy built into them. If that turns out to be the case, then AI processing certainly still has more room to expand, and Nvidia's current lead will only be to its benefit.

And, with a price-to-earnings ratio of just 30 right now, Nvidia's stock is relatively inexpensive compared to many of its peers.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Broadcom, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.