Semiconductor Woes: Will Nvidia Survive the Sell-Off?
19 August 2022 - 4:51PM
Finscreener.org
The Santa-Clara-based chip
manufacturer Nvidia Corporation
(NASDAQ:
NVDA) is one of the
leading companies in the global semiconductor space and is
currently ranked #134 on the Fortune 500 list. The company gained
traction in the past two years thanks to a worldwide semiconductor
shortage amid robust demand for chips.
However, as macroeconomic
headwinds catch up with the semiconductor industry, chip sales are
projected to decline over the next few quarters. Nvidia recently
released a preliminary statement regarding the estimated revenue
shortfall due to declining market demand.
Nvidia warns of weakening market
demand
Demand for personal electronics,
including computers and gaming systems, skyrocketed during the
initial months of the pandemic, spiking global semiconductor
demand. This triggered an immense chip shortage worldwide, with
companies scrambling to invest in chip manufacturing. To that end,
Biden signed the landmark $52.70 billion Chips Act on August
9th.
However, the trend has taken a
sharp turn lately. The demand for personal electronics has been
decelerating as the global economy slows down due to inflationary
pressures and rising interest rates weighing on consumer spending.
According to research firm Gartner, global semiconductor revenues
are expected to grow by only 7% in fiscal 2022, compared to a 26.3%
rise last year.
Regarding this, Richard Gordon,
Practice VP at Gartner, said, “Although chip shortages are abating,
the global semiconductor market is entering a period of weakness,
which will persist through 2023 when semiconductor revenue is
projected to decline 2.5%.”
Prominent chip makers
Intel (NASDAQ:
INTC) and
Micron (NASDAQ:
MU) have also issued a
similar warning recently. In fact, Micron Technology expects
revenues to decline sequentially over several quarters due to a
tepid demand environment.
Deteriorating financials and more
According to preliminary
second-quarter results, Nvidia’s second-quarter revenue is expected
to amount to $6.70 billion, 17.28% below the previous $8.10 billion
outlook. This decline can be attributed to a 33% year-over-year
decline in Gaming revenues and a decline in channel partner
sales.
The company’s total revenue is
expected to increase 3% year-over-year in the about-to-be-reported
quarter.
While Nvidia’s data center
segment revenues are expected to come in at a record $3.81 billion,
it is lower than the company’s initial projections. The weak
performance of this segment is due to global supply chain
disruptions.
Following the release of the
preliminary financial data on August 8th, NVDA
stock plummeted 8% intraday. The stock is down 35.29%
year-to-date.
In its investor presentation in
early 2022, Nvidia outlined the massive potential of its products
and services that have a market opportunity of trillions of
dollars, which looks pretty impressive on paper.
Further, at the end of May, the
company estimated Q2 sales at $8.1 billion. So, the $1.3 billion
shortfall should be extremely scary and drive down projections for
the rest of the year.
Additionally, Nvidia forecast
gross profit to decline by 44% and operating income to slide 64% in
the quarter. So, its operating income would stand at $500 million
in the July quarter.
Does it make sense to buy shares
of a $450 billion company that might generate less than $8 billion
in operating income in the next 12 months?
Is there a silver lining for NVDA stock
investors?
While the industry tailwinds have
sparked a sharp sell-off in NVDA stock, the long-term growth
attributes remain strong. Legendary institutional investor Cathie
Wood bought $65 million worth of NVDA stock following the release
of the preliminary results, making it one of its top 25 most
valuable holdings.
This comes as the US passed the
landmark “Chips+” bill to promote domestic semiconductor
production. While the increasing China-Taiwan tensions have weighed
on the global semiconductor industry as Taiwan houses the largest
semiconductor manufacturing facility in the world, the U.S. is
taking active steps to reduce its reliance on foreign
economies.
Thanks to substantial government
subsidies, Nvidia should be able to maintain its profit margins
despite waning sales.
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