Why Advanced Micro Devices, Applied Materials and Micron Technology Have Fallen Today

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What happened

Shares of semiconductor favorites Advanced micro-systems (NASDAQ: AMD), Applied materials (NASDAQ: AMAT)and Micron Technology (NASDAQ:MU) plunged on Tuesday after the release of the August consumer price index (CPI), down 7.6%, 5% and 6%, respectively, as of 1:11 p.m. ET.

The synchronous decline was not difficult to understand – this morning’s CPI report came in higher than expected. Given that this year has been so much about inflation and the Federal Reserve’s response to that inflation, it’s no surprise to see these tech stocks falling sharply today.

So what

The semiconductor sector is not as expensive as other parts of the technology sector, such as software or electric vehicles, but it was still heavily affected by today’s news. Rising inflation and interest rates tend to hurt the value of growth stocks in particular, which may explain why AMD, which trades at 34 times earnings, the most expensive of these three. , is the lowest.

However, wouldn’t a warmer-than-expected economy be relatively benign for Applied Materials, which trades at just 12.5 times earnings, and Micron, which trades at just six times earnings?

Unfortunately, rising inflation this morning also increases the risk that the Federal Reserve will have to raise interest rates more aggressively, increasing the likelihood of pushing the economy into a recession. Applied Materials and Micron each have cyclicals, in particular Micron, which produces commodity-like memory chips that fluctuate in price based on supply and demand.

In fact, parts of the semiconductor space already appear to be in recession, especially consumer devices such as personal computers and smartphones. With higher prices for basic necessities like food, electricity and housing, less money is left for discretionary purchases. Since many consumers invested in new PCs, phones and TVs during the pandemic in 2020 and 2021, there is currently a strong hangover in demand for these types of chips.

It’s worth noting that phones and PCs currently make up about half of Micron’s business, and PCs and gaming chips combine to make up more than half of AMD’s business. As the largest semiconductor equipment company, Applied Materials also enjoys broad industry exposure.

This morning’s inflation is unlikely to bring consumer electronics spending back. While gasoline prices fell 10.6% month-over-month, the price of other basic necessities rose. Electricity was up 1.5% month-over-month (15.8% year-over-year), utility gas was up 3.5% month-over-month the next (33% year-over-year), food prices were up 0.8% month-over-month (11.4% year-over-year), and housing costs rose 0.7% month over month (6.2% year over year).

With the consumer pressed for necessities, and likely with a phone or laptop less than three years old, it may be some time before demand for consumer electronics returns.

SMH Data on Year-to-Date Total Returns (Daily) by YCharts

Now what

Semiconductor downturns can be heartbreaking, and the industry has already seen a big one this year, with the VanEck Semiconductor ETF down about 30% over the year. These three stocks have unfortunately been less successful, with each falling between 37% and 42% in 2022.

While today is a bad day and 2022 has been a bad year, I can’t help but think that these prices present a great opportunity for long-term investors. Long-term trends in big data, artificial intelligence, industrial automation, and more autonomous electric vehicles all point to a growing need for semiconductors in this decade. While the consumer side of the semiconductor industry is definitely in a recession, it will eventually stabilize. Additionally, consumer-facing chips are expected to eventually become a smaller part of the chip industry over time as these other higher-growth industrial and enterprise use cases gain market share. .

While semiconductors have a cyclical element, they are also cyclical growth stocks, with higher highs and higher lows over time. Given today’s very low P/E ratios, it may be wise to be a little greedy while others are fearful.

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Billy Duberstein has positions in Applied Materials and Micron Technology and has the following options: $160 short call options in January 2023 on Micron Technology and $45 short put options in September 2022 on Micron Technology. Its clients may hold shares of the companies mentioned. The Motley Fool fills positions and recommends Advanced Micro Devices and Applied Materials. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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