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Pain or Gain Ahead of Semiconductor ETFs?

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Semiconductor ETFs have jumped past month withVanEck Semiconductor ETF (SMH - Free Report) adding about 25.6%. Nvidia Corp. (NVDA - Free Report) has pioneered the rally with 41.7% gains in the past month. Most recently, Warren Buffett's Stake disclosure helped the space even more.

Warren Buffett’s Berkshire Hathaway Inc. (BRK-B) grabbed a stake of about $5 billion in Taiwan Semiconductor Manufacturing Co. (TSM), as the veteran investor thinks the world’s leading chipmaker has bottomed out after a selloff of more than $250 billion.

Shares of Taiwan Semiconductor Manufacturing Company Limited surged 10.8% on the news and benefitted the entire semiconductor space (read: Should You Buy Taiwan Semiconductor-Heavy ETFs Now?).

But can the rally in the space continue?

Nvidia Q3 Earnings Lag Estimates

Nvidia came out with adjusted quarterly earnings of $0.58 per share, missing the Zacks Consensus Estimate of $0.70 per share. This compares to earnings of $1.17 per share a year ago. This quarterly report represents an earnings surprise of -17.14%.

A quarter ago, it was expected that this maker of graphics chips for gaming and artificial intelligence would post earnings of $0.56 per share when it actually produced earnings of $0.51, delivering a surprise of -8.93%.

Nvidia, which belongs to the Zacks Semiconductor - General industry, posted revenues of $5.93 billion for the quarter ended October 2022, surpassing the Zacks Consensus Estimate by 0.02%. Revenue was down 17% on a year-on-year basis. The company has topped consensus revenue estimates four times over the last four quarters.

Nvidia said it expected about $6 billion in sales in the fourth quarter, lower than Refinitiv consensus estimates of $6.09 billion. Gross margin for the third quarter was down 11.6 percentage points to 53.6%, Nvidia expects gross margin for the current quarter to recover to between 63.2% and 66.0%.

What Are Analysts’ View?

“It’s the worst of all worlds, because the rate of revenue growth is declining, macro fundamentals are deteriorating, and the valuation is still exceptionally high,” said James Abate, chief investment officer at Centre Asset Management, per Bloomberg.

“If we do go into a recession, which I think we will, the next stage will be a deterioration in earnings, and it would not be abnormal to see further weakness in Nvidia,” said the article. Abate owns Nvidia but has been cutting his position in the stock.

Morgan Stanley wrote that the latest industry data revealed weakness across product categories. Texas Instruments Inc., Qualcomm Inc., and Intel Corp. all provided cautious guidance in their results this earnings season.

Against this backdrop, we suggest investors to take a wait-to-see approach when it comes to investing in semiconductor ETFs.

ETFs in Focus

VanEck Semiconductor ETF (SMH - Free Report) – Down 3.60% on Nov 16

iShares Semiconductor ETF (SOXX - Free Report) – Down 4,1% on Nov 16

SPDR S&P Semiconductor ETF (XSD - Free Report) – Down 4.5% on Nov 16

Invesco Dynamic Semiconductors ETF (PSI - Free Report) – Down 4.06% on Nov 16

First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) – Down 4.01% on Nov 16

 


 

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