NACHO Is On, But Memory Chipmakers Rally Isnt Over

(Bloomberg Opinion) — The nothing-burger that came out of the Xi-Trump summit drove home a new reality for global investors. The NACHO trade, which stands for “not a chance Hormuz opens,” is on. Prospects of prolonged inflation have risen, sending global bond yields higher and the US dollar stronger.

Thissudden turn of risk sentimentthreatens to knock AI stock frenzy off course. Heading into President Donald Trump’s visit to China, the MSCI World Semiconductor Index had rallied 47% this year, as if an energy shortage caused by the Iran war didn’tmatter at all. Trump said he didn’t push China’s Xi Jinping to pressure ally Tehran to reopen the Strait of Hormuz, disappointing investors who had hoped for a quick resolution over one of oil trade’s most important routes.

Traders are starting to be make comparisonsto 1999. The best one-year rolling performance for the Philadelphia Semiconductor Index during the dot-com bubble was 264%. The same metric stands at 135% now. With borrowing costs spiking and global investors clearing their positions to reduce leverage, the fear is that the AI stock boom will quickly implode into dust.

But for bulls who still believe in an AI-fueled industrial supercycle,Asia’s memory chipmakers remain goodsafe havens. The key reason is earnings.

Asian manufacturers are making the kind of money they’ve never seen before. Samsung Electronics Co. and SK Hynix Inc., which producehigh-bandwidth memory chips to pair with Nvidia Corp.’s graphics processing units, are expected to be among the world’s most profitable companies this year, earning as much as Alphabet Inc. and Microsoft Corp. As a result, the pairare still trading at around sixtimes forward earnings, even though their stock prices have more than doubled this year.

Or how about Japanese flash-storage producer Kioxia Holdings Corp., created in 2018 through a spinoff from itsscandal-ridden parent Toshiba Corp.? This stock has surged by 19-fold over the last year. Its earnings are nothing short of spectacular, too, with the latest quarterly results surpassingToyota Motor Corp.’s. Thecompany is quickly shedding debt and morphing into an undisputed profit center. Management is now considering measures to return money to shareholders,including dividends and stock buybacks.

China’s ChangXin Memory Technologies Inc., or CXMT, paints a similar picture. In the first quarter, revenue jumped by more than 700% while profit rose to over20 billion yuan ($2.9 billion). This report card decisively turned the chipmaker from a loss-making endeavor into a profitable enterprise. CXMT is pursuing a blockbuster public listing in Shanghai.

Granted, the three listed names are also sought after by momentum chasers, who probably used leverage to juice up their returns. The Roundhill Memory ETF, a highly-concentrated thematic play with the two Korean companies making up almost half of the entire portfolio, already has $8.7 billion inflow since its early April launch, making it the fastest-growing ETF ever. Meanwhile,Kioxia has been a favorite among retail day-traders and hedge funds who played offits elevated stock volatility.

But what makes the Asian chipmakers different from, say, US-listed AI-infrastructure darlingssuch as Intel Corp. or Arm Holdings Plc, is timing. While the Asian manufacturers are already booking record profits, the investing world is still debating whetherIntel can break into the foundry manufacturing business, or if Arm can indeed secure enough suppliers to make central processing unit, or CPU, chips itself.

Now, I’m not saying this party will last forever —the dot-com boom certainly didn’t. Memory chip manufacturing is notoriously cyclical, with customers overstocking inthe goodyears and depleting their inventories before placing new orders during a downturn. The biggest danger for the industry is therefore a precipitous drop in demand.And let’s not forget that a big part of the recent rally, underpinned by analysts’ rosyearnings estimates, is ultimately derivedfrom hyperscalers’ bullish outlooks. During this earnings season,the four biggest US tech firms raised their AI spending to as much as $725 billion this year, a jump from an earlier estimate of $650 billionmade before the Iran war began in late February, and a 90% increase from 2025. All bets are off if Big Techscales back thespending sprees. (The next earnings season will kick offin late July.)

Nonetheless, this is a problem all companies onthe AI supply chain have to confront. When the world is this uncertain, and the blockade of a vital passage for global oil supply gets its ownacronym, those who can make money now are the winners.Asia’s industrial supercycle isn’t over yet.