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Why Nvidia, Advanced Micro Devices, Qualcomm fell today

What happened

Actions of nvidia (NVDA -5.60%), advanced micro devices (AMD -8.12%)Y Qualcomm (QCOM -7.79%) they were down sharply again on Thursday, down 5.4%, 8.1% and 7.2%, respectively, at 1:16 p.m. ET.

Obviously, the entire market fell as well, with the tech sector particularly hard hit. There are likely to be a couple of factors driving the sell-off, including rapid fiscal tightening by central banks around the world, which is intensifying investor fears that a recession is looming.

Additionally, an Nvidia insider sold a significant amount of stock earlier this week. That could further dampen sentiment for the chipmaker and the entire industry.

And that

On Wednesday night, Nvidia released a form filed with the SEC showing that the company’s director, Mark Stevens, had sold 227,650 shares over the course of June 13 and 14 for a total of approximately $36 million. This, of course, is not what Nvidia investors want to see, especially when the stock is already down 44% for 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 owns just over 3 million Nvidia shares worth nearly $500 million. As such, those sales amounted to less than 10% of his stake in the company. Pundits sell shares for all sorts of reasons, and Stevens could 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 Nvidia’s problem. The market has actually been in a recession since last Friday’s consumer price index showed that 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 that inflation spread further to the broader services economy.

That prompted the Federal Reserve to raise the fed funds rate by 75 basis points on Wednesday, the biggest single-step increase in that benchmark interest rate since 1994. The Fed is trying to prevent inflation expectations from de-anchoring and raising interest rates slowing down the economy is the main tool you have.

Still, there’s a chance those rate hikes could cause a recession, and intensifying concerns on that front may see investors sell virtually everything, including semiconductor stocks that tend to be sensitive to economic growth. So while Nvidia’s sell-off may seem justified given its high valuation of more than 40x earnings, even AMD and Qualcomm, which have P/E ratios of 30 and 12.3, respectively, were also trading lower. .

All of these companies have reported excellent growth and profitability, and have been best-in-class in their categories for some time. Nvidia is the absolute leader in graphics processing units (GPUs), AMD has been taking market share from Intel (INTC -3.39%) in the central processing unit (CPU) market, and Qualcomm dominates mobile phone modems. The fear is that a broader economic downturn will cause a slowdown or decline in purchases of PCs, which would affect all three companies, and of smartphones, which would particularly affect Qualcomm.

The current beacon of chip strength is the data center market, which has been and continues to be strong. Businesses are still moving their digital operations to the cloud en masse, and AI and automation are helping businesses cut costs. But if the economy goes into recession, even investment in data centers could decline.

Now what

At times like these, it’s important to stick to your long-term investment plan. Are these great stocks of companies you want to own for many years? Also, how are each of these companies running? And are they trading at reasonable valuations?

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

Basically, this sell-off is a market-wide phenomenon and not a company-specific phenomenon, and investors should view it as such. That said, inflation and interest rates will be the short-term wildcards, and stock prices could remain volatile. But trying to guess what the market will do in the short term, day to day, is no way to invest.

If you believe in the long-term prospects of these companies and are investing with a time horizon of many years, or decades, then you shouldn’t worry, because nothing has really changed in their long-term prospects since yesterday or a week ago.

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