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2 Chip Stocks With Major Red Flags Right Now

Heightened government restrictions and slowing demand have hit the semiconductor industry. And considering bearish investor sentiments, semiconductor stocks NVIDIA Corporation (NVDA) and Advanced Micro Devices (AMD) might be best avoided now. Read more….

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Last month, as tensions escalated between the United States and China over House Speaker Nancy Pelosi’s visit to Taiwan, the United States imposed restrictions on exporting high-end graphics computer chips to Russia, China, and Hong Kong. The restriction could result in losses for the semiconductor industry.

Semiconductor stocks are hit with corporate warnings about slowing demand for chips used in electronic devices. “There’s a palpable fear that the semiconductor cycle has begun to turn negative and demand is slowing,” said Jason Benowitz, a senior fund manager at Roosevelt Investment Group in New York. 

Moreover, bearish investor sentiments in the sector are evident from VanEck Semiconductor ETF’s (SMH) 25.5% decline over the past year, compared to the S&P 500’s 8% decline over the same period.

With the semiconductor industry expected to head into a large downturn in the near term, it might be wise to avoid the semiconductor stocks NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (AMD).

NVIDIA Corporation (NVDA)

NVDA provides graphics, computation, and networking solutions globally. The company’s products are used in gaming, professional visualization, data center, and automotive markets.

Recently, NVDA reported that U.S. officials told to stop exporting two top computing chips for artificial intelligence work to China. This action was driven by security concerns arising from China’s possible military use of the technology. NVDA said it had booked $400 million in sales of the affected chips this quarter to China that could be lost if firms decide not to buy alternative products of the company. 

For the second quarter of fiscal 2023 ended July 31, NVDA’s total operating expenses increased 36.4% year-over-year to $2.42 billion. Its non-GAAP income from operations declined 56.9% from the previous-year quarter to $1.33 billion. 

Its non-GAAP net income for the quarter declined 50.7% year-over-year to $1.29 billion, while the company’s non-GAAP net income per share amounted to $0.51, declining 51% from the previous-year period.

Analysts estimate NVDA’s EPS for the fiscal 2023 third quarter (ending October 2022) to decrease 38.9% year-over-year to $0.71. The revenue is expected to decline 17.1% year-over-year to $5.89 billion for the same period.

The stock has declined 40.7% over the past year and 55.4% year-to-date to close the last trading session at $131.31.

NVDA’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

NVDA is rated a D in Growth, Value, and Stability. It is ranked #79 out of the 94 stocks in the Semiconductor & Wireless Chip industry.

Click here to access the additional POWR Ratings for NVDA (Momentum, Sentiment, and Quality).

Advanced Micro Devices, Inc. (AMD)

AMD operates as a global semiconductor company in two segments: Computing and Graphics; and Enterprise, Embedded, and Semi-Custom. It serves original equipment manufacturers, public cloud service providers, original design manufacturers, independent distributors, online retailers, and add-in-board manufacturers.

Earlier this month, it was reported that AMD had received instructions from U.S. Officials to stop exporting its artificial intelligence chips to China. Although the company said it does not believe the new rules would have a material impact on its business, the restriction might impact its overall sales.

AMD’s operating expenses increased 150.8% year-over-year to $2.51 billion for the fiscal second quarter ended June 25. Its operating income amounted to $526 million, showing a decline of 36.7% year-over-year, while its net income declined 37% year-over-year to $447 million. The company’s EPS decreased 53.4% year-over-year to $0.27 for the same period.

Street expects AMD’s revenue to be $6.71 billion for the third quarter ending September. The consensus EPS is estimated to be $1.05 for the same period.

The stock has declined 26.5% over the past year and 46.5% year-to-date to close the last trading session at $77.03.

AMD’s POWR Ratings reflect its poor prospects. It has an overall D grade, which equates to a Sell in our proprietary rating system. The stock has a D grade for Stability. AMD is ranked #82 in the Semiconductor & Wireless Chip industry.

In addition to the POWR Rating grades we’ve stated above, one can see AMD’s ratings for Growth, Value, Momentum, Sentiment, and Quality here.

NVDA shares were trading at $129.70 per share on Wednesday afternoon, down $1.61 (-1.23%). Year-to-date, NVDA has declined -55.87%, versus a -16.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

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Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor’s degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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