Semi Take Another Hit! What’s Next?
The semiconductor sector crashed again yesterday, with $NVIDIA Corp(NVDA)$ plunging another 9.5%, losing $278.9 billion in market value—about the size of an entire $ICBC(01398)$ . This is the biggest drop in U.S. stock market history!
The meltdown is driven by three main issues:
1.SIA Report
The Semiconductor Industry Association (SIA) reported global sales of $51.3 billion for July, up 18.7% year-over-year and 2.7% month-over-month.
While these numbers look strong, analysts think they're below expectations. Morgan Stanley commented that the report shows “nearly all product lines weaker than expected”. They said: “The overall market still looks weak, and while we continue to see a bottoming in analog, discrete and MCU sales in Q2, the recovery will be limited."
Although SIA's data is from July and lags, and Nvidia had strong Q3 guidance, I don’t think this report alone caused the semiconductor crash.
2.Broad Market Drop
The U.S. stock market also tumbled yesterday, with the $NASDAQ(.IXIC)$ dropping 3.26%. The fall was triggered by disappointing August economic data.
The Markit manufacturing PMI came in at 47.9, below the expected 48, and the ISM manufacturing index, although slightly up at 47.2 from July’s 46.8, remains in contraction territory for the fifth consecutive month. This data fueled fears of an economic downturn, spreading panic across various sectors, including semiconductors.
3.Antitrust Investigation
To make matters worse, Bloomberg reported after hours that the U.S. Department of Justice has issued subpoenas to Nvidia and some third parties, seeking evidence of antitrust violations.
Regulators are concerned Nvidia may make it harder for clients to switch to other AI computing vendors and might penalize those not exclusively using its AI chips. This news means a serious escalation in the antitrust probe against Nvidia. After the news, Nvidia’s shares fell an additional 2.4% in after-hours trading.
While the antitrust investigation has worsened Nvidia's drop, it’s not new. Back in June, reports emerged that the DOJ and FTC were investigating several AI giants. The DOJ is leading the probe into Nvidia’s potential antitrust violations, while the FTC is focusing on OpenAI and $Microsoft(MSFT)$ ’s investments and agreements with other AI firms.
Minimal Impact in the Short Term
Given that antitrust investigations can last years, this news is unlikely to have a significant short-term impact on Nvidia.
Overall, the recent semiconductor crash isn’t driven by news, but by the fact that, most semiconductor stocks have hit historical high valuations after a sharp rise.
Take Nvidia, the sector leader. Its price-to-sales ratio is currently at 27.6, a historic peak.
Although Nvidia’s recent earnings and future guidance exceeded analysts’ expectations, the beat was less impressive each quarter. High market expectations and slowing growth triggered profit-taking.
As the king of AI, Nvidia’s slowdown affects the entire sector. Even though Nvidia's performance and valuation are at historic highs, analysts project its annual sales to reach $120 billion. This would bring its price-to-sales ratio down to 22 by the end of the year, which isn’t too high compared to historical levels.
Nvidia's Future Uncertain with Fed Rate Cuts
On the fundamentals, big tech continues to invest heavily in AI GPUs. For instance, $Tesla Motors(TSLA)$ ’s CEO Musk tweeted during the recent drop that their xAI’s super AI training cluster, Colossus, is now online with 100,000 Nvidia H100 chips. He also mentioned plans to add another 100,000 GPUs, including 50,000 of Nvidia’s new H200 chips.
If the fundamentals remain strong, Nvidia’s high valuation risk should gradually decrease over time. The current volatility seems temporary.
However, there’s a worrying trend with the broader U.S. stock market. Considering the current economic data and Fed statements, the probability of a rate cut in September is very high.
Historically, the $S&P 500(.SPX)$ has fallen at the start of each of the Fed’s three previous rate-cutting cycles. In contrast, during the three rate-hiking cycles of the 21st century, the S&P 500 rose each time.
So, a Fed rate cut might put pressure on the stock indices, and without strong news, the semiconductor sector might struggle to perform well.
Finally, sometimes you have to trust the statistics. Historically, the U.S. stock market has averaged a 4.2% drop in September over the past five years, making it the worst month of the year.
Keep fighting, greatness often comes from enduring tough times!
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