History Says Buying Chip Stocks After a 20% Drawdown Has Usually Worked in This Cycle. Will It Work Again?

Semiconductor investors have been here before. After a scorching run, chip stocks have tumbled again, with memory names sliding more than 20% into bear market territory and the broader group shedding hundreds of billions in value.

In the current artificial intelligence (AI) cycle, that kind of drop has repeatedly turned out to be a tech buying opportunity rather than a warning. The question worth asking now is whether the pattern will hold one more time.

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Why buying the dip has worked so far

Throughout this cycle, sharp sell-offs in chip stocks have tended to reverse quickly. When Broadcom (NASDAQ: AVGO) spooked the market with cautious guidance earlier this year, the sector shed more than $1 trillion in value in a matter of days, then rebounded as investors remembered that AI infrastructure spending was still climbing. The reason the dips kept getting bought is simple: Demand kept reaccelerating faster than supply. Global chip sales hit a record in 2025 and are forecast to jump again in 2026, with AI-related chips accounting for roughly half of the total. As long as data center build-outs stayed hungry and memory stayed in short supply, every pullback looked cheap in hindsight.

Why this time could be different

Here is the sober counterpoint. Semiconductors reside in a highly cyclical corner of the market, and history has shown that not all rebounds are quick or universal. Past downturns have carried the sector down 30%, 50%, even 80% from its highs, and those busts always followed a familiar script: Surging demand invites a wave of new capacity, and eventually supply catches up and prices fall. Warnings that the memory shortage could flip into oversupply by 2027 or 2028 are getting louder. A 20% dip is a gift right up until the cycle turns, at which point the same "buy the dip" instinct becomes a trap.

The takeaway for investors

So will it work again? Near-term, the odds still favor the buyers, because the shortage driving this boom looks set to persist into 2027 and demand shows little sign of cracking. But I would treat "history says buy the dip" as a probability, not a promise. The strategy has worked because we are still inside an up cycle, and the honest truth is that no one rings a bell at the top. For patient investors, adding high-quality chipmakers to this weakness is reasonable, provided you size positions with the knowledge that the eventual downturn, whenever it comes, tends to be far deeper than 20%. Buy the dip if you believe in the cycle, but respect the cycle enough to leave room to be wrong.

Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.