Actions of micron technology (MU -6.37%), nvidia (NVDA -7.74%) Y advanced micro devices (AMD -8.36%) All fell sharply along with the tech sector on Monday. At 2 pm ET, these shares were down 4.7%, 5.8% and 6.1%, respectively.
Each of these stocks has been delivering great returns and great guidance, so why is this happening?
Last week’s inflation reading was higher than expected, raising fears that the Federal Reserve will have to raise interest rates more aggressively to control prices, which could lead to a recession. Although the chip sector is arguably in its healthiest position relative to its history, its cyclical reputation is causing investors to sell off amid recession fears.
Also, a Micron markdown today doesn’t help.
On Monday, Summit Insights analyst KinNgai Chan downgraded Micron from buy to hold. Micron is one of the most cyclical stocks in the semiconductor sector, as the prices of its memory chips fluctuate with supply and demand in the economy, creating volatility. Recently, he has been providing very strong results and guidance as his administration has outperformed his rivals in execution. However, Chan believes that the good times could be over soon.
He says his recent channel checks revealed persistently weak demand for memory chips for smartphones and PCs. This is not surprising. As the pandemic-era boom in personal computing devices comes to an end with the reopening of the economy, consumers are now spending on experiences, not to mention high food and gas prices straining budgets. domestic. The same thesis led the analysts of piper sandler (PIPR -4.10%) to downgrade Micron to sell last week.
The same fears are likely affecting Nvidia and AMD today; Both companies have exposure to PCs and gaming, two discretionary sectors that could see decline this year amid a slowdown in consumer spending.
However, while fears over consumer electronics sales have been weighing on each of these stocks, these names are also exposed to the data center sector, which has been and continues to be very strong. Even Chan, in his note, pointed to continued strength in the data center, as the transition to the cloud and artificial intelligence (AI) applications continue to grow.
Last quarter, Nvidia saw an 83% increase in its data center segment, with an 88% increase in AMD’s embedded, enterprise and semi-custom segment, which includes its EPYC data center chips. These figures for the data center segment were the strongest for all these companies last quarter.
However, if there is a broader economic slowdown, Chan’s fear is that data center customers could also start to regress at some point. While there is no sign of that now, it would affect the current pillars of strength of these companies.
So whether or not these stocks are now bargains largely depends on the sizeable data center market. But before everyone panics, some analysts remain bullish on that front. UBS (UBS -4.95%) also came out on a note today, reiterating a buy recommendation on Micron, though the firm lowered its price target to $115, down from $120. Even so, it’s still significantly higher than the current price of $59 a share.
UBS points to secular strength in the data center market as new server formats increase this year and require much more memory content. Analysts also noted controlled supply growth from big memory names as capital equipment is in short supply.
Nvidia CEO Jensen Huang also noted strong visibility of data center growth in Nvidia’s recent earnings call, as recent advances in AI have generated high demand. For its part, Micron noted at its recent analyst day that the data center segment was now the largest, outstripping the mobile segment in size and growing the fastest. By 2025, Micron expects data center chips to account for 42% of revenue, up from 30% today, while PC and mobile combined (the segments of concern today) fall from 55% of revenue to 38% for that moment.
Therefore, the big topic to watch is data center investment. If it continues, all three of these stocks look awfully cheap after this sell-off. But if a broader recession topples even the strongest of the secular trends in cloud AI, then there could be another leg down.
Still, while the short term is unclear, in the long term, say five to 10 years, I expect each of these stocks to do very well, due to the growth of cloud-based AI applications as a need. tool for all businesses large and small.