More pain ahead for semiconductors and big tech
Technology and especially semiconductor manufacturers are going through a tough time. This difficult period has recently resulted in turbulent stock market sessions.
The outcome of the last five sessions on Wall Street, for example, has been particularly brutal for both sectors.
Take the manufacturers of microprocessors or chips. Four of the largest US chipmakers by market capitalization – Nvidia (NVDA) – Get the NVIDIA Corporation reportIntel (INTC) – Get the Intel Corporation reportAMD (AMD) – Get the Advanced Micro Devices, Inc. report and micron (MU) – Get the report from Micron Technology, Inc. – together lost nearly $110 billion in market value (share value times total shares outstanding) in one week. But the biggest drop is attributed to Nvidia, the company known for its graphics chips for games and artificial intelligence.
Nvidia sees its market capitalization melt by $89 billion
Nvidia’s market capitalization fell from $665.1 billion on April 1 to $576.1 billion on April 8. As you can see, the company saw its market value melt to some $89 billion in one week. The stock lost 13.45% over this period to close on April 8 at $231.19.
The disappointment is equally significant for AMD, whose stock market value has fallen by just over $10 billion in one week. Shares of the company fell 7.3% in the period to end the April 8 session at $101.
If Intel and Micron are also experiencing setbacks, it is in somewhat lesser proportions. Intel’s market capitalization was wiped out by around $4 billion in one week. The shares slid 2.3% over that period to $47.02.
As for Micron, its stock fell more than 5% in five sessions to $72.14, down 1% per session on average. The company lost just over $4 billion in market capitalization.
The question is why are semiconductor manufacturers struggling?
The answer is simple: if consumers reduce their spending even a little, it could have a significant negative impact on semiconductor manufacturers. In any case, it is a market that is bound to become volatile as fears of recession increase. The likelihood is high to see a drop in demand for consumer products like electronics (smartphones, computers) and home appliances that require chips.
The semiconductor market is cyclical. When the economy is doing well, it is doing well because when consumers are confident, they tend to spend. They make purchases in particular on electronic products. But when in doubt or worried, consumers tend to put off their purchases. In these cases, the first items of expenditure concerned are non-essential and non-priority purchases such as electronic purchases.
Adverse interest rates
In addition, employees return to the office and no longer need to spend on computer equipment at home.
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Semiconductor makers, like technology companies, are also hurting from the Federal Reserve’s monetary policy tightening. Indeed, growth stocks like Nvidia, AMD or Intel can be affected by an aggressive rise in interest rates. These interest rate hikes, intended to curb inflation, can be a blow to growth.
The Fed “will continue to methodically tighten monetary policy through a series of interest rate hikes and beginning to shrink the balance sheet at a rapid pace beginning at our May meeting,” Fed Governor Lael Brainard said recently.
When interest rates are high, borrowing money for technology and semiconductors who want to invest in their businesses becomes too expensive. It therefore affects the future profits of these companies.
Basically, high interest rates mean relatively less profit.
Nvidia, AMD, and Intel sell graphics processing units (GPUs) or hardware components (CPUs) to gamers. They are also known to sell semiconductors and systems to various industries, such as cloud servers, self-driving cars, metaverse, artificial intelligence.
Their chips also powered most electronic devices, such as smartphones and computers.
Big Tech is not spared
However, it is almost the entire technology sector that is suffering.
Apple (AAPL) – Get the Apple Inc. report. the shares have lost 2.42% in one week and are currently trading at $170.09. Microsoft share (MSFT) – Get the Microsoft Corporation report lost 4.02% over the period to $296.97. Alphabet (GOOGL) – Get the Class A report from Alphabet Inc. shares fell nearly 5% to $2,680.21, while Amazon (AMZN) – Get the report from Amazon.com, Inc. fell nearly 6% to $3,089.21. You’re here (TSLA) – Get the Tesla Inc report shares are down 6% in a week at $1,025.49, while Meta Platforms (Facebook) (Facebook) – Get the Class A report from Meta Platforms Inc. shares fell 4.1% to $222.33.
However, one unknown remains: the expenses of companies and cloud players. Companies can allow chipmakers and technology to limit a possible drop in revenue. The demand for semiconductors remains particularly strong in the automotive industry, for example.
“As the impact of digital on lives and businesses has accelerated, semiconductor markets have exploded, with sales rising more than 20% to reach around $600 billion in 2021,” mentioned a report by consulting firm McKinsey. “Overall annual industry growth could average 6-8% per year through 2030.
“The result? A trillion dollar industry by the end of the decade, assuming average price increases of around 2% per year and a return to equilibrium between supply and demand after current volatility,” the report added.