China Stays Bullish on AI Despite Cambricon Sell-Off

Post by : Avinab Raana

Photo : X / PiQ Newswire

Cambricon Faces Outflows Yet Optimism Persists

China’s Cambricon Technologies is bracing for a wave of passive stock outflows triggered by an upcoming index rebalance, yet investors remain defiantly optimistic. Even though Cambricon will temporarily exceed its allowed cap in China’s STAR50 index, prompting funds that track the index to offload up to 8 billion yuan (about $1.1 billion) in shares, the broader Chinese AI stock market continues to attract capital. The moment is being viewed less as a setback and more as a test of conviction in China’s AI momentum. Investors see the reshuffle not as a signal to retreat but as part of normal market mechanics. While the forced selling (passive flows) can pressure stock prices short term, many expect Cambricon, and the entire Chinese AI chip sector, to bounce back fueled by Beijing’s push for tech self-reliance, strong earnings growth, and rising demand for domestic AI infrastructure.

What’s the Cambricon Index Rebalance About

Cambricon’s rise has been dramatic. Its stock price more than doubled in August. That surge pushed its weight in the STAR50 index well past the permitted 10 percent cap for any single stock. The quarterly index review means that funds tracking the index will need to reduce their holdings, triggering substantial passive sell-orders. While such activity can create pressure, it isn’t expected to undercut underlying investor confidence in Cambricon’s long-term prospects.

Cambricon’s valuation has been stretched: its price-to-earnings multiple now is over 500-times trailing profits, a level far above similar AI chipmakers globally—for example, Nvidia’s multiple is roughly ten times lower. The valuation concerns are real, but many analysts argue that Cambricon’s recent earnings jump justifies at least part of the premium.

Strong Revenue Growth Keeps Sentiment Warm

One reason for investor optimism is Cambricon’s explosive revenue growth. In the first half of the current fiscal year, revenue soared from modest levels (tens of millions of yuan) to nearly 3 billion yuan, with profit swinging to nearly 1 billion yuan. The company’s guidance for full‐year revenue is ambitious between 5 billion and 7 billion yuan should momentum continue.

These results provide more than headline noise—they match Beijing’s wider policy push for domestic AI development, including chips, cloud infrastructure, model training, and AI APIs. Investors believe Cambricon is well placed in many of these areas, which reduces risk perception despite the high valuation.

Valuation Risks and Investor Warnings

Despite the strength, some warning signs are unavoidable. The sky-high valuation vastly increases downside risk. If future earnings disappoint, or if competition intensifies more than anticipated, Cambricon may see sharp losses. Analysts caution that even with strong growth, companies rated at such multiples must deliver near-perfect execution.

In particular, investors fear that the forced outflows due to the index rebalance will temporarily push down the stock, perhaps encouraging some weak hands to sell. There is also concern that margin expansion may be harder than anticipated, and that costs especially R&D and manufacturing of AI chips—will rise. For those buying now, the tradeoff is between capturing large upside and taking on high market exposure.

China’s AI Push: Macro Tailwinds

Backing up Cambricon is a national effort. China has doubled down on self-sufficiency in AI technologies amid tech and trade tensions with the U.S. Government support, funding, favourable regulation, subsidies, and national strategies are all tilting in favour of domestic AI and chip innovation.

In many Chinese tech and industrial hubs, demand for AI inference hardware is growing fast. Local cloud providers, government labs, autonomous vehicle sectors, smart devices—all increasing demand for high performance AI chips. Investors believe Cambricon will benefit from that rising tide. The narrative that China’s AI sector is past early stages and entering a self-sustaining growth phase is increasingly accepted.

Active vs Passive Investors: How They Differ

The index rebalance mainly affects passive fund managers those who simply track indices like STAR50. They will be forced to trim Cambricon holdings. But active investors, who pick stocks based on fundamentals, appear less worried. Many say they plan to maintain or even increase holdings in Cambricon, so long as revenue growth, margins, and national policy remain supportive.

That divergence between passive flows and active conviction is important. Forced selling by passive funds tends to create short-term dips, but long-term active investment can stabilise prices if underlying demand remains strong. Cambricon’s recent bounce after last week’s price drop is seen as evidence that many investors are holding firm.

Market Reactions: Short Term Jitters, Long Term Grit

After the news of the index reweight, Cambricon shares fell about 14% at one point. Profit-taking and concerns over forced sell-orders led to that dip. But the decline was followed by a rebound: in the days after, Cambricon shares recovered about 10%, flirting once again with record highs.

That behaviour suggests the market sees the index rebalance as a manageable headwind rather than a crisis. Investors seem to expect that once passive sellers are done, value-driven momentum, backed by earnings and policy, will carry Cambricon forward.

Comparisons to Global AI Stocks

Cambricon’s valuation remains far higher than many Western peers. For example, while it trades at over 500x trailing earnings, some global AI leaders often trade at significantly lower multiples. However, many investors argue that China has a premium because of its huge potential market, smaller dependence on imports, and government backing.

That said, comparisons are not apples-to-apples. Differences in market risk, regulatory oversight, supply chain quality, IP security, and geopolitical exposure mean that Chinese AI chipmakers like Cambricon carry different risks than U.S. or Taiwanese peers. Investors who are bullish expect China’s AI sector will increasingly match or mitigate those risks.

Key Investors Voice Confidence

Analysts from CLSA, Gavekal Dragonomics, Bosera’s STAR50 fund, and others see this more as a pause than anything else. Many believe that even after outflows forced by the index, Cambricon is likely to remain a key node in China’s AI ecosystem. Some investors even see the forced selling as an opportunity to buy more once valuation pressure subsides.

Many also point to Cambricon’s recent breakthroughs, such as “DeepSeek” or other domestic AI platform projects, and AI tools from Alibaba, Tencent, and Baidu, as reinforcing demand. The faith is built not only on Cambricon itself but on its position in a larger triangle of company, policy, and end market demand.

Bubble Warnings and Execution Uncertainty

Despite the optimism, some investors warn about speculative excess. When a single stock captures this much attention, there is risk of overheating. If earnings growth slows, or if product shipments or margins disappoint, the upside may turn quickly.

Manufacturing, supply chain, chip yield, power usage, and global competition (especially for high-end AI compute) remain pressing risks. Also, regulation both domestic Chinese regulation of tech crackdowns and international pressure—could complicate operations or access to export or technologies.

Broader Implications for China’s Tech Market

Cambricon’s story is emblematic for many Chinese tech growth narratives: rapid ascent under favorable policy, high valuations, risk of forced seller pressure, but strong investor conviction. The resilience of AI sector interest even in face of valuation warnings or index rebalance pressure suggests that many see China’s tech rally as far from over.The broader China AI stock sector, including indices like CSI-AI and STAR50, has outperformed broader indices like CSI-300 or Shanghai Composite by large margins this year. That reflects how richly investors are valuing AI growth, innovation, and policy tailwinds.

What to Watch Next

Investors will be watching CAMBricon’s next earnings releases carefully, especially margin trends, revenue from AI inference or cloud applications, and product roadmap details. Also key is how Beijing continues to support AI infrastructure, regulation, chip export rules, and domestic chip supply. Valuation compression, if it happens, could come via increased competition, regulatory tightening, or disappointing shipments. Observers will also watch how much passive funds really sell, and whether active investors can offset those outflows.

Bullishness Uneclipsed by Rebalance

Despite forced outflows from passive indices, valuation concerns, and inevitable profit-taking, investor sentiment around Cambricon and Chinese AI more broadly remains robust. The index rebalance is being treated by the market as a temporary technical hurdle one unlikely to reverse the broader trend toward AI growth and domestic chipmaking dominance.

Cambricon has become a symbol in China’s AI charge: ambitious, overvalued by some, high risk, high reward. But as long as downstream demand, domestic policy support, and earnings continue to lean positive, investors seem willing to ride this wave. For now, the window remains wide open for those betting on China’s AI future.

Cambricon valuation, Chinese AI rally, Index rebalancing