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Investors Piling into NVIDIA, Chip Stocks Despite Weak Outlook
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The technology sector was the investors’ darling during the pandemic and even a few quarters after that. But difficult comps and weakening demand have taken their toll this year. As a result, the sector trades at 22.0X P/E, quite unthinkable a couple of years ago. But it could be that investors view these valuations as an opportunity because after all, how low could tech valuations go?
If there really is a recession sometime next year, the markets appear to be pricing that in already. And in any case, technology tends to exit a recession faster than most other sectors because companies usually invest in technology to increase their efficiencies and come out stronger. This is good for tech stocks.
NVIDIA’s (NVDA - Free Report) preannouncement in the first week of August disappointed many, and management attributed the revenue miss to a very sharp drop-off in demand that they hadn’t quite anticipated. We already knew that the PC market was softening, and that there were fewer people buying the high-end stuff that NVIDIA sells into.
But what came to light with this announcement was that gaming also suffered big time, possibly because people had already bought a lot while they were stuck in the house and are at this time, more inclined to spend money on away-from-home activity. Inflationary pressures have only exacerbated this trend.
Management has also taken the decision to flush out older channel inventory, which is expected to be complete by the end of the year. And of course, this will impact revenue growth through this year.
And similar to other big players like Microsoft and Advanced Micro Devices catering to this market, data center revenue fell short of expectations. And like the others, in NIVIDIA’s case too, it was because of supply chain issues.
So overall, NVIDIA’s results came in more or less as expected while its weak guidance was adequately explained by management. Therefore, there wasn’t much to react to. And as of this writing, the shares are up over 3%, AMD (AMD - Free Report) and Micron (MU - Free Report) shares are up over 4%, Intel (INTU - Free Report) up about 2.5%, Qualcomm (QCOM - Free Report) up nearly 3%, and so forth. The S&P, Dow and Nasdaq all look set to end the day in the green.
As far as I’m concerned, all this is well and good. But jumping into a stock just because others are doing it doesn’t sound like a very good idea. So if you really want to get into a chip stock, the ones looking good right now are Texas Instruments (TXN - Free Report) , ON Semiconductor (ON - Free Report) and Amtech Systems (ASYS - Free Report) . Vishay Intertechnology (VSH - Free Report) is also worth a closer look, as is Plexus (PLXS - Free Report) , which may not be a semi stock per se but is involved in semiconductor manufacturing.
The reason that these stocks look like safer bets is because their estimates are on the rise, as captured in their Zacks Rank #1 (Strong Buy) or #2 (Buy) ratings. They also belong to attractive industries within the tech sector, which increases their chances of outperformance.
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Investors Piling into NVIDIA, Chip Stocks Despite Weak Outlook
The technology sector was the investors’ darling during the pandemic and even a few quarters after that. But difficult comps and weakening demand have taken their toll this year. As a result, the sector trades at 22.0X P/E, quite unthinkable a couple of years ago. But it could be that investors view these valuations as an opportunity because after all, how low could tech valuations go?
If there really is a recession sometime next year, the markets appear to be pricing that in already. And in any case, technology tends to exit a recession faster than most other sectors because companies usually invest in technology to increase their efficiencies and come out stronger. This is good for tech stocks.
NVIDIA’s (NVDA - Free Report) preannouncement in the first week of August disappointed many, and management attributed the revenue miss to a very sharp drop-off in demand that they hadn’t quite anticipated. We already knew that the PC market was softening, and that there were fewer people buying the high-end stuff that NVIDIA sells into.
But what came to light with this announcement was that gaming also suffered big time, possibly because people had already bought a lot while they were stuck in the house and are at this time, more inclined to spend money on away-from-home activity. Inflationary pressures have only exacerbated this trend.
Management has also taken the decision to flush out older channel inventory, which is expected to be complete by the end of the year. And of course, this will impact revenue growth through this year.
And similar to other big players like Microsoft and Advanced Micro Devices catering to this market, data center revenue fell short of expectations. And like the others, in NIVIDIA’s case too, it was because of supply chain issues.
So overall, NVIDIA’s results came in more or less as expected while its weak guidance was adequately explained by management. Therefore, there wasn’t much to react to. And as of this writing, the shares are up over 3%, AMD (AMD - Free Report) and Micron (MU - Free Report) shares are up over 4%, Intel (INTU - Free Report) up about 2.5%, Qualcomm (QCOM - Free Report) up nearly 3%, and so forth. The S&P, Dow and Nasdaq all look set to end the day in the green.
As far as I’m concerned, all this is well and good. But jumping into a stock just because others are doing it doesn’t sound like a very good idea. So if you really want to get into a chip stock, the ones looking good right now are Texas Instruments (TXN - Free Report) , ON Semiconductor (ON - Free Report) and Amtech Systems (ASYS - Free Report) . Vishay Intertechnology (VSH - Free Report) is also worth a closer look, as is Plexus (PLXS - Free Report) , which may not be a semi stock per se but is involved in semiconductor manufacturing.
The reason that these stocks look like safer bets is because their estimates are on the rise, as captured in their Zacks Rank #1 (Strong Buy) or #2 (Buy) ratings. They also belong to attractive industries within the tech sector, which increases their chances of outperformance.