Nvidia’s rebound hides a harsh reality for chipmakers

(Bloomberg) — US semiconductor stocks have roared again in the past month, and the largest of them — Nvidia Corp. — has led the charge. Even some company bulls say the rally may not have much else going for it.

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Nvidia’s third-quarter results late Wednesday are likely to show demand for electronics is still drying up, with analysts expecting sales to fall 18%. Yet the stock, at 39 times estimated earnings, is still priced in for a much better environment at a time when the global economy appears to be heading towards recession.

“It’s the worst of all worlds, because the revenue growth rate is declining, macroeconomic fundamentals are deteriorating, and valuation is still exceptionally high,” said James Abate, chief investment officer at Center Asset Management. “If we enter a recession, which I think we will, the next stage will be earnings deterioration, and it would not be abnormal to see further Nvidia weakness.”

Abate owns Nvidia but trimmed his position in the stock, which is up nearly 50% from its mid-October low. It’s still down 43% for the year. The stock rose 2.9% on Tuesday, supported by the latest data on producer prices, as well as signs of improving Sino-US relations.

Many investors are betting that this year’s bear market in tech stocks has run its course: Regulatory filings this week showed Warren Buffett’s Berkshire Hathaway Inc. took an approximately $5 billion stake in Taiwan Semiconductor Manufacturing Co ., which makes chips for Nvidia among others.

The bullish case is that the Federal Reserve will slow the pace of interest rate hikes as inflation gradually cools, allowing the economy to avoid a recession. In such a scenario, investors can expect an imminent rebound in tech demand.

Nvidia is a benchmark in all of this because it is the largest constituent of the Philadelphia Stock Exchange Semiconductor Index by market value and a key market leader for data center chips. It has long been a favorite of institutional investors due to its record: In the decade leading up to the peak a year ago, Nvidia shares returned 58% annually, far outpacing Apple Inc., Microsoft Corp. or Amazon. .com Inc.

Yet there is still no evidence that the worst is over. Semiconductor lead times shrank by six days in October, the biggest decline since 2016, as Morgan Stanley wrote that the latest industry data showed weakness across all product categories. Texas Instruments Inc., Qualcomm Inc., and Intel Corp. have all issued cautious forecasts for this earnings season’s results, as did Nvidia last quarter.

Geopolitical concerns also weighed on the stock given US restrictions on China’s access to semiconductor technology, although Nvidia is producing a compliant processor.

Analysts have cut their industry estimates, and Nvidia hasn’t been spared. The median estimate for the company’s 2023 earnings is down 16% over the past three months, while the consensus for revenue is down 11%. Revenue growth is expected to be just positive in 2023.

Yet the stock, at 39 times earnings, is a third more expensive than the average over the past decade and sells for more than double the multiple of the semiconductor index.

Analysts expect Nvidia to return to double-digit growth in 2024. This expected rebound is one reason they remain broadly positive about Nvidia’s long-term outlook. Citigroup Inc. says the stock is “near a low,” with data center sales likely to decline in the first quarter, while Morgan Stanley also sees the business bottoming out.

Some longtime stock bulls, like Abate, are hedging their bets. Funds managed by Cathie Wood’s ARK Investment Management LLC — which have held the shares since the firm began operations in 2014 — have trimmed their stakes in recent weeks.

Technical chart of the day

The Nasdaq 100 index last week posted its biggest weekly gain since November 2020 and the advance makes it look much stronger on a technical level. Nearly half of the index constituents were above their 200-day moving average price on Friday, the highest percentage since March, and up from around 8% at the end of September. Over the past year, an average of 32% of components have been above this carefully monitored technical level.

The best tech stories

  • Amazon.com plans to cut about 10,000 jobs, the largest headcount reduction ever at the e-commerce giant as it prepares for slower growth and a possible recession.

  • Apple is looking to boost Mac sales with a rare promotional deal for small businesses buying computers in bulk, an effort to deal with a slowdown during the holiday quarter.

  • Warren Buffett’s Berkshire Hathaway Inc. has taken an approximately $5 billion stake in Taiwan Semiconductor Manufacturing Co., a sign that the legendary investor thinks the world’s leading chipmaker has bottomed out after a sell-off of more than $250 billion .

  • ASML Holding NV could lead acquisitions to meet growing demand for advanced chips around the world, its chief executive said, braving the broader industry downturn.

  • Twitter Inc. owner Elon Musk, who has described himself as a “free speech absolutist,” has resorted to firing company engineers who publicly criticize him on the social media service.

  • Samsung Electronics Co. said the global technology industry is looking for alternative sources for advanced semiconductors amid rising political risks.

  • A group of small tech companies, which rival Google, Amazon, Apple and Alphabet Inc.’s Meta Platforms Inc., will launch an ad campaign this week urging lawmakers to pass landmark legislation that would curtail the power of the world’s biggest internet giants. country .

  • Sea Ltd. has cut about 7,000 jobs, or about 10% of its workforce, in the past six months as it struggles to stem mounting losses and win back investors, according to a person familiar with the matter.

–With assistance from Subrat Patnaik.

(Open Market Updates.)

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