Traders betting against semiconductor companies have made about $32 billion in gross paper profits over seven days as the Philadelphia Semiconductor Index (SOXX) fell by more than 12%, according to data from S3 Partners. The selloff has been especially painful for companies that supply equipment used in AI computing facilities, as chip stocks erased roughly $1 trillion in market value.

Short sellers borrow shares and sell them in hopes of buying them back at a lower price. The difference becomes their profit after costs.

The downturn comes after an extraordinary rally earlier this year. Between the end of March and its June peak, the semiconductor index more than doubled in value. That rally added approximately $6.5 trillion to the market capitalization of its constituent companies.

However, investors are now questioning whether AI companies can continue spending enough money to justify those valuations.

Strong Earnings Haven't Protected Chip Stocks from the Selloff

Optical technology supplier Coherent (COHR) has lost nearly 30% during the selloff. Its products use light to transmit information between servers, which helps AI computing facilities process large amounts of data. The decline comes despite strong financial results. Coherent's latest quarterly revenue grew by 34% to $2.05 billion, while its gross profit margin improved to 38.5%.

In total, at least 20 of the semiconductor index's 30 constituents have suffered declines greater than 10%. One major issue is the growing cost of financing AI growth.

For example, AI cloud provider CoreWeave (CRWV) relies heavily on borrowing to purchase expensive computing equipment. Yields on some of its bonds recently approached 15%, which indicates that lenders now demand significantly higher returns to compensate for the risks. That could make future expansion more expensive and potentially reduce equipment orders from chip suppliers.

Meanwhile, CoreWeave short sellers have accumulated more than $1 billion in estimated paper profits this week. However, S3 Partners noted that some short positions are used to hedge convertible bonds rather than represent outright bets against the company's shares.

Is SOXX ETF a Buy, Sell, or Hold?

Turning to Wall Street, analysts have a Strong Buy consensus rating on SOXX ETF based on 27 Buys, two Holds, and one Sell assigned in the past three months, as indicated by the graphic below. Furthermore, the average SOXX price target of $717.58 per share implies 45% upside potential. (See SOXX Stock Forecast).