Research · Scenario engine · Memory archetype
Chip re-rating, decomposed
A software book is priced on duration — rates and the trusted-growth window dominate. A chip is priced on its earning power through the cycle. The market refuses to capitalize peak earnings, so it puts a low, boom-bust-discounted multiple on normalized earnings. Three things move the price: the normalized earning power (the numerator), the discount rate (the denominator), and the re-rating — the market compressing or widening that cyclical discount as visibility arrives or fear returns. Dial each below. And watch the separate panel that shows why a name on 7× peak earnings is really a 12× normalized stock — the cyclical illusion this engine exists to make legible.
Dial each lever to an exact value and read the precise fair-value change.
Fair value is computed on normalized earnings × the through-cycle multiple — independent of where we sit in the cycle. The price moves on all three axes at once: the interaction term is the compounding residual (each shock lands on a base the others have already moved), so the combined is the product of the parts, not their sum.
Each draw samples the three levers uniformly within their ± ranges and reprices the book on normalized earnings; the histogram is the spread of outcomes, the shaded band is where 90% of outcomes land.
Why spot P/E lies — the cyclical illusion
Fair value sits on normalized earnings, but the headline P/E is computed on spot earnings. Slide the cycle position: near a peak the spot multiple looks cheap (the value trap); in a trough it looks expensive. Nothing about fair value changes — only the lens.
Key readings (Memory archetype — representative HBM/NAND book)
- +41.7% — the calibration anchor: a +250 bps compression of the boom-bust discount, earnings and rates held (the 2023–24 AI/HBM re-rating).
- +70.0% — the full “AI visibility” bull: mid-cycle up 20% and the discount compresses +250 bps.
- −34.3% — “cycle rolls over”: the mid-cycle marked down 15%, the discount widens 200 bps, rates +50.
- −33.3% — a +425 bps rate shock alone: chips bite less than SaaS (−33.3% vs ~−47% for a software book at the same shock).
Chips are not one valuation regime
The semiconductor complex collapses into a handful of cycle/margin/multiple profiles. Memory ships first — the deepest-cyclical, the purest expression of the boom-bust discount. The other cyclical archetypes are scaffolded; two carve-outs trade unlike chips and route elsewhere.
Deepest-cyclical, commodity-ish — values on normalized earnings × a low, boom-bust-discounted multiple. The re-rating poster child.
Fabless logic (GPU/accelerator/SoC) — growth-cyclical at a premium multiple; re-rating turns on "is AI demand peak or secular".
WFE + foundry — capex-cycle-driven, the second derivative of the chip cycle.
Packaging, substrates, materials, consumables — picks-and-shovels, cyclical but steadier, CoWoS/AI-packaging tailwind.
Broad-cyclical analog/power tied to auto + industrial end-markets — a different cycle from AI compute.
Recurring, ~80% margin, low cyclical amplitude — trades like software. Use the SaaS duration engine, not this one.
Grid, thermal, interconnect — industrials riding electrification + data-center capex on a secular-industrial multiple, not the chip cycle.