Shares of the major semiconductor producers have been heavily pressured even in the face of strong and broad demand for chips.
The shares of Nvidia (NVDA), Advanced Micro Devices (AMD), Micron Technology (MU), Texas Instruments (TXN) and even Intel (INTC) have fallen sharply.
Carmakers, for example, have idled production of certain vehicles due to a lack of chips. Waiting lists to acquire new vehicles have lengthened by many months at almost every producer.
A number of major semiconductor names have pared or lost the gains they acquired in 2021. This year, Nvidia shares have lost 36% of their value, AMD shares have shed 41%, and Micron is down 28%. Qualcomm (QCOM) is down 27%.
The fall is less brutal for Texas Instruments shares, off 10%, and Intel, which has given up 11% since Dec. 31.
The sector's benchmark, the PHLX Semiconductor Index, has fallen 26% since the beginning of the year. It's in bear-market mode now.
How to explain the stock rout, which seems to fly in the face of strong demand from the sector's customers? The direction of the economy holds a hint.
TI's Report Disappointed Investors
Companies in the sector have started to report first-quarter earnings, and the initial one, from Texas Instruments, isn't very reassuring.
TI on April 26 reported a disappointing revenue outlook after China imposed a lockdown to combat a resurgent covid-19 outbreak. The lockdown disrupted its customer factories, the company, known for its analog chips, said.
"This outlook comprehends an impact due to reduced demand from Covid-19 restrictions in China," Texas Instruments said.
Qualcomm, known for its mobile-device chips, is reporting on April 27, and Intel, known for its central processing units, reports on April 28. AMD will report on May 5 and Nvidia on May 25.
Nvidia, AMD and Intel sell graphics processing units and CPUs to gamers. They are also prominent producers of semiconductors and systems for application in cloud servers, self-driving cars, the metaverse, artificial intelligence and more.
Their chips also power most electronic devices, such as smartphones, PCs and other computers.
2018 All Over Again?
Investors wonder whether they'll see the 2018 scenario again.
That year, strong demand for semiconductors led to euphoria among chip stocks. Semiconductor prices jumped because customers wanted to be sure they wouldn't caught short of supply.
But demand then fell as fast as it had risen, leaving chipmakers with full inventories.
Some industry observers predict a repeat of this scenario, especially after semiconductor sales topped $500 billion in 2021 and inventory this year has been lacking.
Micron on March 29 reported strong sales and especially strong demand from the auto industry, but that didn't prevent the stock from falling.
"We maintain appropriate inventories of materials and noble gases; currently do not expect any negative impact to our near-term production volumes because of the Russia-Ukraine war," the company said. "But we do expect an increase in our costs as we secure supply of certain raw materials that could be at risk."
Evercore ISI analyst C.J. Muse wrote in a note that “we are left guessing whether near-term fundamentals matter (they didn’t for Micron) or whether the market will continue to wait for the coming inventory correction,”
“Our sense is violent swings will be the new norm (both up and down) until we gain line of sight to whether we will see a soft or hard landing,” Muse added.
Recession Fears
Demand is likely to be hurt by rising concern about recession and the prospect that consumers will cut spending and reduce purchases, observers say. That's particularly possible since during the pandemic, consumers and companies bulked up on tech tools, particularly PCs.
These sources suggest that these factors portend a downturn in the PC market. In general, many investors are betting on a slowdown in hardware sales in 2022 and 2023.
Nvidia, which generates much of its sales from videogaming rigs, could be particularly hard hit once households pare back purchases.
Investors are also linking Nvidia's future to changes in the ethereum blockchain. Ethereum in June is supposed to be moving to a new version and a new transaction validation mechanism that will change the way the native cryptocurrency of this platform, ether, is minted. The change is likely to reduce the number of GPUs used to create ether, and GPUs are one of Nvidia's cash cows.
