Shares of Micron technology (MU -5.46%), Nvidia (NVDA -6.82%) and Advanced micro devices (AMD -7.00%) on Monday, they all fell sharply along with the technology sector. At 14:00 ET, these shares fell 4.7%, 5.8% and 6.1% respectively.
Each of these stocks provides great profits and great guidance, so why is this happening?
Last week’s inflation was higher than expected, leading to 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 may be at its strongest against its history, its cyclical reputation has led investors to sell en masse amid fears of a recession.
Also, downgrading Micron today doesn’t help things.
On Monday, analyst KinNgai Chan of Summit Insights downgraded Micron’s rating from buying a hold. Micron is one of the most cyclical stocks in the semiconductor sector, as the prices of memory chips fluctuate depending on supply and demand in the economy, leading to volatility. He has been giving very strong results and guidance lately, as his leadership is ahead of the competition. However, Chan believes that the good times may soon be over.
He says his latest channel checks have revealed a steady weak demand for memory chips for smartphones and computers. This is not surprising. As the pandemic era of personal computing booms ends with the economic recovery, consumers are already spending on experiences – not to mention high food and gas prices biting household budgets. The same thesis led analysts to Piper Sandler (PIPR) -3.14%) to bring down Micron for sale last week.
The same fears probably plague Nvidia and AMD today; both companies are exposed to personal computers and games, two discretionary sectors that may receive a decline this year amid slowing consumer spending.
However, while fears of consumer electronics sales affect each of these stocks, these names are also exposed to the data center sector, which has been very strong and remains so. Even Chan in his note pointed to the continuing strength of the data center as the transition to the cloud and artificial intelligence (AI) applications continues to grow.
In the last quarter, Nvidia noted that Nvidia’s data center segment grew by a staggering 83%, while AMD’s embedded, enterprise and semi-custom segment, which includes EPYC data center chips, grew 88%. These data for the data center segment were the strongest for all these companies in the last quarter.
However, if there is a wider economic slowdown, Chan fears that data center customers may also start withdrawing at some point. Although there are no signs of this now, it would affect the current pillars of power of these companies.
Therefore, whether these shares are now profitable or not depends largely on the crucial data center market. But before everyone panics, some analysts are still optimistic. UBS (UBS -4.36%) also came out with a note today, repeating the rating for the purchase of Micron, although the company lowered its price target to $ 115, from $ 120. However, this is still significantly higher than today’s share price of $ 59.
UBS points to the secular power of the data center market as new server formats increase this year, requiring much more in-memory content. Analysts also noted a controlled increase in the supply of big names in memory, as capital equipment is in short supply.
Nvidia CEO Jensen Huang also noted strong visibility in data center growth in Nvidia’s recent call for profits, as recent steps in AI have led to huge demand. For its part, Micron said in a recent day for analysts that the data center segment is now the largest, surpassing the segment of mobile devices in size and growing faster. By 2025, Micron sees that data center chips will account for 42% of its revenue, up from 30% today, while it sees combined computers and mobile devices (affected segments today) falling from 55% of revenue to 38%. this time.
Therefore, the big topic to look at is investing in data centers. If preserved, these three stocks look terribly cheap after this sale. But if a wider recession knocks down even the strongest global trends in cloud AI, then there may be another leg.
However, while the short-term plan is unclear, in the long run – say, five to 10 years – I expect each of these actions to do very well, due to the growth of cloud-based AI applications as a necessary tool for all large and small businesses .