Federal Reserve Chairman Jerome Powell today warned that he plans to maintain tight monetary policy “for some time” even if it inflicts “some pain” on American businesses and consumers. And it appears that was enough to spook growth stock investors on Friday, with semiconductor stocks featuring strongly among the decliners.
As of 2:20 p.m. ET Friday, shares of Nvidia (NVDA -9.23%) reversed course sharply from its surprise post-earnings rise on Thursday, and is now down 8.1%. Following in the footsteps of Nvidia, the shares of its big chipmaker rival Advanced micro-systems (AMD -6.17%) down 5.2%, and Applied materials (AMAT -5.91%)manufacturer of equipment for manufacturing semiconductor chips, down 4.9%.
The Fed Chairman’s comments today appear to be driving much of the market selloff, but Nvidia itself bears some of the blame for stoking pessimism in the space. semiconductors.
While Nvidia closed the day yesterday, at one point Thursday the stock was down as much as 5% in response to news that fiscal second quarter 2023 sales were up just 3% from a year-over-year, missing analysts’ expectations and GAAP earnings per share fell 72% year-over-year to just $0.26.
Commenting on the results on Wednesday evening, CEO Jensen Huang largely blamed “supply chain transitions in a challenging macroeconomic environment” for the disappointing results. But we’ve been dealing with constrained supply chains for a few years now, and until this week, they haven’t slowed Nvidia down much. Rather, what appears to be hurting Nvidia — and what could hurt AMD and Applied Materials next — is a fairly steep drop in demand for semiconductor chips and the prices chipmakers can charge them.
Gross profit margins on Nvidia’s sales simply narrowed in the second quarter — down 2,130 basis points to just 43.5% — as operating costs rose.
Nvidia seems to see this as a temporary phenomenon, predicting that gross margins will recover in the third quarter to 62.4%, close to what they were in the first quarter. Still, revenue appears to be light – $5.9 billion, plus or minus 2%, according to management. It’s approximately $1 billion less than Wall Street predicted, with the gaming and professional visualization segments driving the rest of the activity as data centers and automotive try to pick up the slack.
Here’s the good news: Nvidia attributed much of its weak second-quarter gross margins to the company’s attempt to sell and eliminate excess gaming chip inventory. second quarter and would make Nvidia’s prediction that margins would rebound in the third quarter more reasonable.
Wall Street seems to agree with the logic. Analysts at investment bank Piper Sandler, for example, say Nvidia is swallowing “hard drugs” to ensure that the third quarter marks the revenue trough for the company. And Citigroup predicts that by early next year, we could see growth resume even in the beleaguered gaming segment.
If they’re right about that, then Nvidia’s stock — and competitors like AMD, and companies that need semiconductor demand growth, like Applied Materials — should be able to rebound later this year.
But if Wall Street analysts are wrong about the rebound in semiconductor sales late this year or early next year, I’d feel much more comfortable owning Applied Materials stock. at 13.5x trailing earnings today, than Nvidia or AMD, at 46x and 39x earnings, respectively.
Just in case the worst happens, make sure you have an adequate safety margin to protect yourself.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Applied Materials and Nvidia. The Motley Fool has a disclosure policy.
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