Seagate Technology and Western Digital lead US stocks! AI spillover or signs of a bubble?

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As the wave of AI sweeps across the globe, those once-overlooked traditional hardware companies are becoming the brightest stars of the U.S. stock market with astonishing gains. But is this truly a reflection of the "spillover effect" from AI infrastructure development, or is it the last frenzy before the bubble bursts?

Driven by the AI boom, the brightest stars in the U.S. stock market are not the cutting-edge tech companies, but a group of traditional technology enterprises. This year, Seagate Technology surged 156% to become the best-performing stock in the S&P 500 index, rival Western Digital rose 137% to rank third, and Micron Technology secured fifth place with a 93% gain.

According to reports, these "boring" companies, founded before Facebook founder Mark Zuckerberg and OpenAI CEO Sam Altman were born, are benefiting from massive AI infrastructure investments. Large tech firms are pouring tens of billions of dollars each year into semiconductors, networking equipment, and data center power supplies to support training large language models and running AI workloads.

However, Wall Street remains divided on this phenomenon. Bulls believe this showcases the broad business-driving effect of AI compute demand, while bears warn this is the latest sign of a stock market bubble. Jonestrading chief market strategist Michael O'Rourke stated:

"When people start looking for secondary and tertiary trading opportunities, it indicates the market cycle has entered a very late stage."

Traditional Storage Giants Catch the AI Express

Hard drive technology dates back to the 1950s, when the devices weighed over 2,000 pounds and could only store 5 megabytes of data. Today, a PC hard drive can hold up to 2TB and weigh under 1.5 pounds. Seagate and Western Digital are now focusing on developing massive data storage solutions needed to train large language models.

Since the launch of ChatGPT nearly three years ago, investment in AI infrastructure has steadily flowed in. Large tech companies such as Microsoft and Alphabet are investing tens of billions of dollars each year in semiconductors, networking equipment, and data center power, all to train large language models and run AI workloads.

This spending wave has not only propelled Nvidia and TSMC's market capitalizations past one trillion dollars, but has also benefited once low-profile storage device makers. Micron's high-bandwidth DRAM memory has become a core component of AI computing. Despite their technological significance, these companies rarely capture the interest of average investors.

Kim Forrest, founder of Bokeh Capital Partners, said: "When I talk about them on the phone, I can sense people's eyes glaze over. They'd rather talk about flying cars and robot dogs."

Despite stock price surges, these three companies' valuations remain relatively reasonable. At the start of the year, Western Digital's P/E ratio was less than 6; Seagate and Micron's were about 10. Although valuations have risen, they are still below the S&P 500's expected P/E ratio of 23.

Benchmark Co. analyst Mark Miller raised Seagate's target price to a Wall Street-high of $250, still offering over 13% upside from last Friday's $221 closing price. He argues that considering strong product demand prospects, Seagate's valuation level of 20x remains attractive.

Speculation About a Market Bubble Continues to Grow

Wall Street is generally bullish on these three stocks, but their price rises have outpaced analysts' expectations. Seagate is trading more than 20% above its average target price, Western Digital more than 10% above, and Micron just slightly ahead of expectations.

For traders like O'Rourke who experienced the internet bubble, the current situation is worrying. He said:

"Historically, any cyclical business typically peaks at low multiples and bottoms out at negative earnings. The recommended buy timing is when the cycle reverses and the company is losing money; the sell timing is when multiples look healthy."

The AI boom is also causing stock prices in other traditional industries to soar.

Power producer Vistra Corp is up 53% this year, after already soaring 258% in 2024 earlier;

Chipmaker Broadcom's market cap has reached $1.6 trillion;

Oracle, leveraging cloud computing demand, has become the S&P 500’s tenth largest company by market cap. After its earnings release on September 9, its stock price surged 36% in a single day, with its valuation reaching its highest since the internet bubble.

Forrest believes that AI is currently overhyped, just like internet technology, and real-world application cases will develop much more slowly than most expect. She cautioned:

"If you’re buying products specifically for AI or data centers, anything on a steep upward trajectory could end up being a cautionary tale."

Risk Warning and DisclaimerThe market has risks; investment needs to be cautious. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest accordingly at your own risk. ```