Why Nvidia, Advanced Micro Devices, Qualcomm Fell Today

Why Nvidia, Advanced Micro Devices, Qualcomm Fell Today

Recession fears punished semiconductor stocks, and none were spared, whether growth or value. An Nvidia insider also sold $36 million in stock.

What happened

Shares of Nvidia ( NVDA -6.76%), Advanced Micro Devices ( AMD -9.56%), and Qualcomm ( QCOM -9.09%) were all down big again Thursday, off by 5.4%, 8.1%, and 7.2%, respectively, as of 1:16 p.m. ET.

Obviously, the entire market was down too, and the technology sector was especially hard hit. There are likely a couple of factors driving the sell-off, including the rapid tightening of fiscal policy by central banks worldwide, which is intensifying investors’ fears that a recession is coming.

Additionally, an Nvidia insider sold a significant amount of stock earlier this week. That could be further dampening sentiment for the chipmaker and the whole sector. So what

Late Wednesday, Nvidia released a form filed with the SEC showing that company director Mark Stevens had sold 227,650 shares of stock over the course of June 13 and June 14 for a total of about $36 million. This is, of course, not what Nvidia investors want to see, especially with the stock already down 44% on the year and 54% below its all-time high.

Still, before investors panic and run for the hills, they should note that even after these sales, Stevens still holds just over 3 million shares of Nvidia worth nearly $500 million. As such, those sales amounted to less than 10% of his stake in the company. Insiders sell stock for all kinds of reasons, and Stevens could very well be raising cash to pursue other investment opportunities, as many assets other than Nvidia stock have become quite cheap.

Of course, Thursday’s sell-off wasn’t just an Nvidia problem. The market has really been on a downturn ever since last Friday’s Consumer Price Index report showed inflation in May had been higher than expected. Previously, some economists had thought that inflation might have peaked in March, but the May report showed inflation spreading further into the broader services economy.

That prompted the Federal Reserve to hike the federal funds rate by 75 basis points on Wednesday, the largest single-step increase to that benchmark interest rate since 1994. The Federal Reserve is trying to prevent inflation expectations from becoming unanchored, and raising interest rates to slow the economy is the chief tool available to it.

However, there is a possibility that those rate hikes could cause a recession, and intensifying worries on that front can cause investors to pretty much sell everything, including semiconductor stocks that tend to be sensitive to economic growth. So while Nvidia’s sell-off may seem justified due to its high valuation at over 40 times earnings, even AMD and Qualcomm, which sport price-to-earnings ratios of 30 and 12.3, respectively, were also trading lower.

All of these companies have been reporting excellent growth and profitability, and have been best-in-class in their categories for a while. Nvidia is the outright leader in graphics processing units (GPUs), AMD has been taking market share from Intel ( INTC -4.31%) in the central processing unit (CPU) market, and Qualcomm dominates mobile phone modems. The fear is that a broader economic recession would cause a slowdown or decline in purchases of PCs, which would affect all three companies, and smartphones, which would affect Qualcomm especially.

The current beacon of chip strength is the data center market, which has been and remains strong. Companies are still moving their digital operations to the cloud en masse, and artificial intelligence and automation are helping companies cut costs. But if the economy goes into a recession, even data center investment could slow. Now what

In times like this, it’s important to stick to your long-term investment plan. Are these great companies stocks you wish to own for many years? Also, how are each of these companies executing? And do they trade at reasonable valuations?

While their valuations may be somewhat in question, each of these companies looks well-positioned to thrive in their niches, and each is profitable, which not all tech companies can say. While the semiconductor industry has been cyclical in the past, it also seems to get stronger with every cycle, as more and more chips are going into more and more devices over time. The semiconductor industry is forecast to nearly double its annual revenues by 2030. That would be higher-than-average long-term growth compared to other sectors.

Basically, this sell-off is a marketwide phenomenon and not a company-specific phenomenon, and investors should view it as such. That being said, inflation and interest rates will be the wildcards […]

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