Chip stocks surge 5.2% as Chinese AI fears drive demand rethink

Chip stocks staged their biggest rally in a month as investors recast China's open-source AI models from a threat into a demand driver.

The PHLX Semiconductor Index surged 5.2% on Tuesday, its best session in a month, as Chinese AI models shifted from a perceived threat to a driver of chip demand.

"Last year's DeepSeek selloff created a tremendous opportunity for investors who bought the dip, and we're seeing a similar pattern now," said Nancy Tengler, chief executive officer at Laffer Tengler Investments.

Memory makers led the advance. Micron Technology jumped 12.2%, Sandisk climbed 14.4% and SK Hynix's American depositary receipts rose 13.8%. Storage peers Western Digital and Seagate Technology added 12.5% and 11.1%, respectively. The rally followed a sharp selloff last week that had dragged the PHLX Semiconductor Index into bear market territory, with the index falling more than 20% from its recent high.

Bank of America analyst Vivek Arya said China's open-source models support his bullish thesis on memory, noting that every download of an open-weight model creates a new customer need for memory to run on their hardware. Kimi K3 — Moonshot AI's model with 2.8 trillion parameters, 50 billion of which are active — requires significant memory capacity, and the shift toward open-source AI could sustain demand for high-bandwidth memory through next year.

Chinese companies are charging developers much less than Western companies to access their open models, Arya said in a note, describing the pricing gap as reflective of business-model choices rather than hardware cost differences. While Chinese model makers have reduced compute intensity through efficiency techniques, the models still require the same or more memory as their parameters increase.

Brian Mulberry, chief market strategist at Zacks Investment Management, said chip-stock valuations "have reached a point where you can once again get involved and participate in the upside potential" from expectations for earnings per share growth. He added that earnings results from manufacturers outside of technology are helping boost confidence in chip stocks.

Hendi Susanto, a portfolio manager at Gabelli Funds, said that although memory companies have seen share prices rise significantly in recent months, "the investment case remains compelling," as demand is expected to continue outpacing supply through next year, supporting favorable pricing and strong earnings.

Arya also pushed back against concerns that Chinese memory maker ChangXin Memory Technologies poses a threat to Micron, noting CXMT does not focus on high-bandwidth memory — the segment in highest demand from AI chip makers such as Nvidia. Unlike Micron, SK Hynix and Samsung Electronics — the world's leading producers of DRAM — CXMT's ability to serve U.S. customers also remains unclear, he said.

The debate over Chinese AI models comes as the semiconductor industry reaches a critical juncture. The initial fear that cheaper models would reduce demand for expensive AI hardware has given way to a recognition that broader AI adoption — fueled by lower-cost open-source models — could expand the total addressable market for chips. Every new developer building on open-weight models needs inference hardware, and inference requires memory at scale.

The rally in chip stocks lifted the broader market, with the S&P 500 and Nasdaq Composite both closing higher as investors looked ahead to a busy week of technology earnings, including results from major cloud and semiconductor companies.

This article is for informational purposes only and does not constitute investment advice.